Defense Supply Chain In The Budget-Cutting Cross Hairs
U.S. defense spending has gone through a series of “boom and bust” cycles since the Korean War began in 1950. The typical way that downturns in defense spending are addressed is by reducing procurement, cutting personnel and eliminating or not modernizing infrastructure. Already the knives are out for virtually every significant modernization program. The consequence of this approach as demonstrated by military crisis after military crisis is a military that has problems with equipment, training and infrastructure.
As DoD confronts the need to find significant budgetary savings, there are signs that this time may be different and that the Pentagon may be approaching this downturn in a smarter fashion. In a series of public statements, Under Secretary of Defense for Acquisition, Technology and Logistics Ashton Carter has focused on a part of the defense budget that often escapes notice and, hence, its proper share of cuts. This is the supply chain. As reported in Defense News, according to Dr. Carter, for every $.30 DoD spends developing and acquiring weapon systems, it spends $.70 maintaining it. For every $.45 DoD spends on weapons, it spends $.55 on services. Overall, the Pentagon spends $200 billion per year on logistics. In a statement reminiscent of the old Willie Sutton quote regarding why people rob banks, Dr. Carter stated that:
"These are the parts of the defense budget that are … below the water line, but they're very substantial. As we look into our budget circumstance and the future, it would be irresponsible for those of us who are in managerial roles in the Department of Defense, not to be looking … where the money is." (emphasis added).
Dr. Carter and the Pentagon face an enormous challenge in squeezing savings out of the supply chain. One problem is that the lack of adequate modernization of defense capabilities during the last buildup means that the military has a massive overhang of aging and even obsolescing equipment that must continue to be maintained and even modernized at increasing expense. So the costs to keep the current force running will inevitably increase.
Another problem is that DoD will have to undo the damage done by its ill-considered program of insourcing maintenance and sustainment work performed by the private sector. The insourcing campaign ran afoul of a DoD hiring freeze, inadequate accounting of public sector costs and the reality that without the incentive created by the profit motive or the threat of a BRAC the public sector cannot be relied on to perform as efficiently as the private sector. Now, the Pentagon is walking back this policy but not nearly quickly enough.
Nor is DoD doing what it should to expand the use of long-term performance-based logistics contracts for major weapons systems. The reality is that the Pentagon’s approach to logistics is appropriate to a different age and a different kind of military. When systems remain in service for 30, 40 and even 50 years a sustainment model based on short-term contracts and fee for parts and services is ridiculous. The Pentagon would be well advised to consider the wisdom of the U.K. Ministry of Defence’s approach to long-term logistics. Unlike the U.S. penchant for short-term contracts and a churning of support contractors, the MoD recently signed a 25 year contract with Boeing to provide total sustainment of the U.K.’s fleet of Chinook helicopters.
The reality is that under former Defense Secretary Robert Gates DoD reduced future acquisition spending by some $300 billion. The low hanging fruit from this portion of the defense budget has been harvested. Further major reductions in the acquisition accounts will strike not fat, but muscle and bone. The Pentagon knows it will have to look elsewhere to find significant savings without risking the nation’s security.
The message from the Under Secretary is clear. In the looming defense spending downturn the supply chain and its participants, both private and public sector, will be in the cross hairs.