Three Supply Chain Takeaways from the National Defense Industrial Strategy

Readers may have heard about the Department of Defense’s recent publication of a new National Defense Industrial Strategy (NDIS) and wondered about its implications. The strategy is 60 pages long, meaning there are many aspects of it which will apply to certain types of industry partners, but not to others. Today’s post takes a look at the NDIS and picks out a few key points concerning supply chain resiliency that industry partners should know, and offers some opinions about the potential impact on the federal market.

Supply chain disruptions, including key raw and manufactured material shortages, have caused the DOD significant difficulties in recent years. In an effort to mitigate these challenges, the DOD is taking steps to ensure that the Defense Industrial Base (DIB) “can securely produce the products, services, and technologies needed now and in the future at speed, scale, and cost.”

Incentivizing Industry to Improve Resiliency by Investing in Extra Capacity

The NDIS claims that encouraging suppliers to build substantial spare production capacity will require coordinated action from industry, Congress, the DOD, and other federal departments and agencies. Incentives for industry provided by Congress can include allocating additional funding for contracts, implementing tax incentives, regulatory relief, and the use of long-term contracts. The DOD itself intends to establish risk-sharing mechanisms and technology-sharing structures to jointly fund, develop, and secure spare production capacity. In addition, the DOD plans to provide oversight authority to ensure successful development and sustainment follow-through.

Analyst Comment: These suggestions may not be sufficient to achieve DOD’s intended goal. In the first place, building extra productive capacity requires up front investment, and industry partners will only make such investments if they can be sure of their profitability. Investing in capital infrastructure is also getting more expensive thanks to continuing inflation challenges and growing regulatory burdens. The bottom line is that any incentives offered by the DOD had better be big and juicy, because doing business with the federal government is getting harder and becoming more expensive every year.

Managing Inventory and Stockpile Planning to Decrease Near-Term Risk

The DOD has faced key shortages of both raw materials and critical parts. It will therefore expand its stockpiling and inventory planning for critical parts, finished goods, and commodities needed to meet production requirements for conducting sustained campaigns against adversaries.

Analyst Comment: This goal has stronger legs because DOD can guide its own inventory growth. China, however, continues to control key raw materials required for high-tech production. The U.S. can search for new sources, but there is no guarantee they will be found, and it is certainly likely that producing them will be expensive. Domestic producers of key minerals should inquire at the DOD, however, in case there are financial incentives available to help ramp up production.

Diversify Supplier Base and Invest in New Production Methods

Lastly, the DOD understands that “commercial entities now make significant investments in advancing capabilities in critical technology areas such as artificial intelligence, advanced computing, and biomanufacturing. Many of the companies or organizations engaged in these areas are not traditionally considered part of the defense industrial base.” In an effort to increase their participation in producing for the DOD, the department will deepen its relationship with particularly small businesses that are underrepresented in the DIB, such as woman owned small businesses and businesses owned by service disabled veterans.

Analyst Comment: If yours is a small business from any socioeconomic category seeking to work with the DOD. Reach out to the Office of Small Business Programs. There may be financial incentives available to your company.