GSA Expo 2009

Industrial Analysis: An Integral Part of Acquisition

Strategy

Roudy Romulusroudy.romulus@dcma.milEconomist Defense Contract Management Agency

The Agenda

What is industrial analysis?

Why it is an integral part of any major acquisition strategy?

Department of Defense Industrial Analysis – case studies

Domestic Automotive Industry and DoD Ground Systems Sector Mine Resistant Ambush Protected Vehicle Steel and Specialty Metals Pricing Trends Economic, Industry and Financial Monitoring

Department of Defense’s acquisition policies for an effective industrial base

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Industrial Analysis

Governing Doctrines United States Code: Title 10 - Sub-title A - Part IV - Service, Supply, &

Procurement

Chapter 144 - Major Defense Acquisition Programs• Sec. 2440 Technology and Industrial Base Plans

Chapter 148 - National Defense Technology and Industrial Base, Defense Reinvestment, and Defense Conversion; Subchapter II - Policies and Planning

• Sec. 2503 National Defense Program for Analysis of the Technology and Industrial Base• Sec. 2504 Annual Report to Congress -

• http://www.acq.osd.mil/ip/docs/annual_ind_cap_rpt_to_congress-2009.pdf• Sec. 2505 National Technology and Industrial Base; Periodic Defense Capability Assessment

DoD Directive 5000.60 – Defense Industrial Capabilities Assessments

DoD Instruction 5000.2 – Operation of the Defense Acquisition Systems

DoD 5000.60-H – Assessing Defense Industrial Capabilities

“DoD-wide industrial assessments evaluate and address changes and issues in key system, subsystem, component, and/or material providers that supply many programs, and affect competition, innovation, and product availability.” - Office of the Deputy Undersecretary of Defense (Industrial Policy)

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Industrial Analysis – cont.

The DoD Industrial Analysis Community Deputy Undersecretary of Defense (Industrial Policy) Defense Contract Management Agency

DCMA Industrial Analysis Center

Army, Navy, Air Force Offices of:• Acquisition, Logistics, Technology, Research and Science.

Army, Navy, Air Force Materiel Commands

Defense Logistics Agency

Manufacturing Industrial Analysis

Service Provider Industrial Analysis

Software Engineering Industrial Analysis

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Defense Contract Management Agency

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Industrial Analysis: An Integral Part of Any Major Acquisition Strategy

Industrial Base

Issues

RDT & EPhase

Contract AwardPhase

Low Rate Production

Phase

Full Rate Production

Phase

OperationsPhase

CompetitionCompetitionAnalysisAnalysis

InnovationInnovationAnalysisAnalysis

Product Product AvailabilityAvailabilityAnalysisAnalysis

… to the battlefield.

How do we go from the drawing board…

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Industrial Analysis within Acquisition Strategy

Manufacturing Readiness Assessment

Assess Manufacturing & Technology Risk

Technology Readiness Assessment

Assess Industrial Capability Risk

Industrial Capability Assessment

Depot Source of Repair

Surge Analysis

TRL 1 & 2 TRL 3 TRL 4 TRL 5 TRL 6 TRL 7 TRL 8 TRL 9

A B C IOC FOC

Ideas Concept Solution Product Maintenance

Technology Development

Engineering & Manf. Development

Production & Deployment

Operations & SupportMat’l Solution Analysis

Pre-Concept

MRL 1 & 2 MRL 3 MRL 4 MRL 5 MRL 6 MRL 7 MRL 8 MRL 9 MRL 10

Defense Infrastructure Protection

Surge Analysis

Other Acquisition and Procurement Impact Analytics

The IBA community analyze risks and issue options and recommendations…

…by writing assessments and other analytical reports.

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Automotive Industry and DoD Ground Systems

Tasking from DUSD(IP) - Feb. 2006 “Mitigate risk to defense programs by conducting an industrial capability

assessment on the Domestic Automotive Industry.” “How much and where are the exposure and connectivity of defense programs”

Research Process Identified five prime integrators, identified their critical suppliers, sent out

questionnaires, walk the plant floors, analyze the marketplace, interview company officers, identify manufacturing trends

Issues & Findings - Jan. 2007 DoD Ground Systems Sector is more connected to the Trucking and Heavy

Equipment Sector and has limited exposure to the Big Three Supplier Base. Military Engines EPA National Security Exemption Erosion of critical skill sets and reduction in training – (i.e., welders, co-ops) Obsolescence Management issues Confliction of two policy goals, ITAR and COTS

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Automotive Industry and DoD Ground Systems – cont.

Update - Nov. 2008 “Pentagon officials and defense analysts last week said the potential collapse of a

U.S. automaker would little affect the American military” – John T. Bennett and Antonie Boessenkool, Nov. 24,2008, “DoD Insulated From U.S. Automakers’ Woes”, Defense News

Update - June 2009 General Motors declares bankruptcy and announce trade debt to the following

creditors:

Tier 1 Creditor Amount of Claim DoD Workload?

Renco Group $37 million Yes - HMMWV

Magna Drive $27 million Yes - less than 1%

TRW Automotive $28 million Yes - less than 1%

Arcelor Mittal $10 million Yes - major DoD steel supplier

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Mine Resistant Ambush Protected Vehicle

MRAP Prime Integrators

Diesel EngineTransmissionTransfer CaseTransfer Case Bearings

Powertrain

AxlesWheels, RimsWheels, Run FlatTires

Suspension

Wiring Harness Alternator/Vltg Regulator

Electrical

Air Conditioner

Control SystemsStructuralStructural

Armor Components, KitsArmor Components, FabrAuto & Chassis Intg.Armored GlassArmored Steel

Critical Subcontractors

The Tasking – “I request that the Defense Contract Management Agency’s Industrial Analysis Center perform an ICA on the MRAP prime contractors and their critical subcontractors to determine their production capacity and delivery capabilities in support of program requirements”

– Deputy Under Secretary of Defense (Industrial Policy) – Feb 2007

The Joint Requirements Oversight Council requested the procurement of…Nov ‘06 4,000 vehicles Feb ’07 8,000 vehiclesJune’07 16,000 vehicles

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Analysis:Validation

Integration

Interpretation

Data:

9 Primes63 Suppliers

Mitigation:

Analyzed alternate suppliers capacities and capabilities

Capital investment

Updated Specifications

Adjusted Acquisition Strategy

Risk: Armor Plate, Armor Kits, Capsule Manufacturing, Automotive and Chassis Integration, Tires, Axles, Transfer Cases, Bearings, and Final Vehicle Assembly

Quantitative ComparativeTrend

Mine Resistant Ambush Protected Vehicle Summary

Make Presentation

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Mine Resistant Ambush Protected VehicleNotional Supply Commonality Matrix*

Components Prime #1 Prime #2 Prime #3 Prime #4 Prime #5

Diesel Engines ButterflyEngines

AlanEngines

ButterflyEngines

ButterflyEngines

FederalEngines

Transmission AlyssaTrans.

AlyssaTrans.

AlyssaTrans.

AlyssaTrans.

AlyssaTrans.

Transfer case AlyssaTrans.

FrankTransfer Co.

NormanTransferCo.

FrankTransferCo.

NormanTransferCo.

Axles MonitorCorp.

RoseAxles

RoseAxles

RoseAxles

GeneralAxles

Suspension Acme Co. OmegaCorp.

ManchuriaLtd.

LMNON.A.

RemusMotors

Rune Flat Wheels

PaleyIndustries

FrazierAutomotive

PaleyIndustries

PaleyIndustries

PaleyIndustries

Alternators Y.A.Newman

Y.A.Newman

Y.A.Newman

Y.ANewman

Y.A.Newman

* Company names have been altered to protect proprietary information12

MRAP Vehicle Production RatesPrime Contractor Estimated Capacity

-

300

600

900

1,200

1,500

1,800

2,100

Feb-07 Mar-07

Apr-07

May-07

Jun-07 Jul-07 Aug-07

Sep-07 Oct-07 Nov-07

Dec-07

Jan-08 Feb-08 Mar-08

Veh

icles

0

300

600

900

1200

1500

1800

2100

Mine Resistant Ambush Protected Vehicle

Major Choke Points Automotive Assy & Chassis Integration

Major issue: The stress of the initial requirement of 4,000 vehicles to over 15,000 vehicles caused the supply base to plan production beyond their initial production capacity and capabilities. Certain lead times and learning curves could not keep pace with DoD’s requirements level in a 12 month time frame.

Solution: Prioritize MRAP vehicle requirements by placing the program “first in line”, throughout the supply chain. Advance funding to purchase equipments, materials and labor. Revise the 12 month time frame to 16 months. Seek out more non-traditional DoD firms to enter the Ground Vehicles / MRAP industrial base.

Tires Major issue: Not enough tire molds for

MRAP tires. Solution: Advance funding to Michelin -

the DoD tire supplier - to buy more tire molds. Seek out Goodyear to enter the MRAP industrial base.

Vehicle Requirements vs. CapacityDoD wanted vehicle production to ramp up to 1,200 vehicles in ten months. However, the “Status Quo” suggested that Industry can only ramp up to 977.

Tires

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Mine Resistant Ambush Protected Vehicle

MRAP Vehicle Major Choke Points

Quench and Tempered Steel

Major Issue – Demand greater than Supply. Five heat treating lines in North America, with only two major lines dedicated to DoD programs. Moreover DoD armored steel must follow a certain process of heat treating that is very time consuming.

Solutions - Set up a DPAS PAIR Task Force Relax the strict heat treating process to

reduce TAKT time. Quantified and prioritized total DoD

armor steel requirements. Place a D/X rating on the MRAP program. Request a Special Waiver to purchase

armor steel from outside North America. Seek out Non-heat treating manufacturers

(i.e., specialty steel manufacturers) - whose products have the same or stronger ballistic properties.

DoD Q &T Steel Requirements

Global Capacity

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Steel and Specialty Metals Pricing Trends

Metals Price Index (w/ DoD Procurement Deflator in 2009 US$)

0

100

200

300

400

500

600

700

800

Month/Year

Pri

ce In

dex

Base =

Jan

2003

Aluminum Copper Nickel Titanium Stainless Steel Carbon Steel

The following workers must maintain awareness of increasing steel and specialty metals pricing trends:

Cost AnalystsProgram ManagersLogisticians

China's Impact on Metals Growth

65%57%

93% 93%

71%

0%

20%

40%

60%

80%

100%

Steel Aluminium Copper Zinc Nickel

% o

f tot

al g

row

th

China Rest of World

“The Pentagon is monitoring the markets and reported the dip in metal prices ….but a top defense official …said…that no one at the Pentagon has flagged the potential to get a better deal because no one has the experience to do so. At one point in time, we did have those kinds of capabilities,” said Shay Assad, the pentagon’s director of defense procurement and acquisition policy. “But during the 1990s, the pentagon’s contacting work force was scaled back...that kind of capability does not exist within the department today.” – Jen DiMascio, May 7, 2009, “Pentagon misses out on big savings”, The Politico

Source: American Metal Market and Macquarie Capital Group

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Economic, Industry and Financial Monitoring

U.S Defense Industry Prime Contractor Outlook

Sector 1993 2009 2020

Aircraft Fixed Wing

7 3 3

AircraftRotary Wing

4 4 2

AircraftUAVs

9 6 6

Missiles 13 3 2

VehiclesGround Combat

4 2 3

VehiclesTactical Wheeled

5 4 4

The Defense Industry does not operate in isolation. It is a dynamic industry that reacts and responds to economic, industrial, financial and public policy matters. Industrial Analysis requires the constant monitoring and analysis of those dynamics, so that the Defense Department continues to pursuit the most efficient programs.

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Economic, Industry and Financial Monitoring

Capacity Utilization

5560657075808590

1Q-03

2Q-03

3Q-03

4Q-03

1Q-04

2Q-04

3Q-04

4Q-04

1Q-05

2Q-05

3Q-05

4Q-05

1Q-06

2Q-06

3Q-06

4Q-06

1Q-07

2Q-07

3Q-07

4Q-07

1Q-08

2Q-08

3Q-08

4Q-08

Quarter - Year

Utiliz

atio

n Ra

te

NAICS 331 - Primary metalsNAICS 332 - Fabricated metals productsNAICS 333 - Machinery, except electricalNAICS 336 (4-9) - Aerospace and miscellaneous transportationNAICS 336 (1-3) - Motor vehicles and parts

Industrial Analysis requires the monitoring of Capacity Utilization – at the macroeconomic level thru the company level.

Capacity Utilization is an attempt to capture the concept of sustainable maximum output – the greatest level of output a plant can maintain within the framework of a realistic work schedule, after factoring in normal downtime and assuming sufficient availability of inputs to operate the capital in place.

Source: U.S. Federal Reserve

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DoD’s Acquisition Policies for an Effective Reliable and Resilient Defense Industrial Base

When the Department has to deal with shortcomings in the industrial base, it has a wide variety of tools with which to promote competition, innovation, and product availability:

1. Directly fund innovation in its science and technology accounts, and encourage industry to do the same via their independent research and development accounts.

2. Induce innovation by employing acquisition strategies that encourage competition at all levels of contract performance.

3. Use contract provisions to preclude the ability of contractors to favor in-house capabilities or long-term teammate products over more innovative solutions available elsewhere.

4. Block exclusive contractor teaming arrangements that effectively reduce the number of suppliers in a given market, especially if the teammates are dominant in a particular market sector.

5. Establish restrictions within the Defense Federal Acquisition Regulation Supplement (DFARS) on the use of foreign products for certain defense applications, when necessary to ensure the survival of domestic suppliers required to sustain military readiness

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Industrial Analysis Summary

“The leaders who, for many years, have been at the head of the French armies have formed a government. This government, alleging the defeat of our armies, has made contact with the enemy in order to stop the fighting. It is true, we were, we are, overwhelmed by the mechanical, ground and air forces of the enemy. Infinitely more than their number, it is the tanks, the airplanes, the tactics of the Germans which are causing us to retreat. It was the tanks, the airplanes, the tactics of the Germans that surprised our leaders to the point of bringing them to where they are today. "But has the last word been said? Must hope disappear? Is defeat final? No! "Believe me, I who am speaking to you with full knowledge of the facts, and who tells you that nothing is lost for France. The same means that overcame us can bring us victory one day. For France is not alone! She is not alone! She is not alone! She has a vast Empire behind her. She can align with the British Empire that holds the sea and continues the fight. She can, like England, use without limit the immense industry of the United States.”

- General Charles De Gaulle, June 18, 1940BBC Radio Appeal to France

“…this is London calling.”

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