Ellen Lord, undersecretary for acquisition and sustainment, at the Pentagon.

WASHINGTON: The COVID-19 pandemic’s impacts on the US economy are likely to create long-term problems for DoD’s ability to keep weapons flowing, experts say.

DoD should plan to deal with suppliers suffering from increasing trade flow disruptions, such as container ships piling up unopened at US docks. Domestic and foreign travel/trade restrictions are also blocking and slowing a wide variety of goods from crossing US borders, especially from key partners Canada and Mexico.

Such effects will be felt most strongly by DoD’s second-, third- and fourth-tier suppliers who sell primarily to the civil and consumer markets, the ones whose military sales represent only a small piece of their revenue streams, experts said yesterday during a webinar sponsored by the Center for Strategic and International Security (CSIS).

“We see that defense firms are operating, and they still have pretty strong demand from their customer, the Department of Defense,” Andrew Hunter, director of the Defense-Industrial Initiatives program at the Center for Strategic and International Studies (CSIS), said in a webinar yesterday. “So, in that respect, it’s kind of a good news story compared to other parts of the economy.”

He noted that in part this is because DoD “is doing quite a bit” to use its power of the purse to bolster industry. For example, he said, under guidance issued by Kim Herrington, director of defense contracting and pricing, the Pentagon has accelerated progress payments, especially for small businesses. In other cases, he added, the services have moved up planned orders — as the Navy did with some shipbuilding contracts.

Data from the Defense Contract Management Agency (DCMA) shows that 106 out of 10,509 primary Pentagon contractors had to close. Of those, 68 companies have subsequently reopened, Hunter said. On the subcontractor side, 427 of the 11,413 subcontractors DCMA tracks closed initially, but 147 now have reopened.

But, while DoD work is going on, Hunter said, DoD acquisition czar Ellen Lord last week stated that she is seeing about a three-month delay in programs across the board — something that will come back to haunt DoD in the future as costs rise.

“There’s a slowdown in work, and that’s going to have significant cost consequences down the road. In fact, Secretary Lord indicated that DoD is currently working with OMB on a request to Congress as part of future stimulus legislation for billions of dollars in additional funds to offset these COVID related costs in the acquisition programs that are currently being incurred,” he said.

Hunter, echoed by Mackenzie Eaglen of the American Enterprise Institute (AEI), warned that what is happening with the defense industry per se isn’t the whole story, because of the diversity of the supply chain.

“The other part of the story is the spillover impact from commercial supply chains, which are tightly interlinked with many defense supply chains across many product categories,” Hunter explained, especially as the commercial side of most suppliuers’ business dwarfs the military side.

Eaglen, in her presentation, noted that Lord and other DoD leaders have expressed concern in particular about the health of small businesses and subcontractors.

According to a survey of 770 small businesses in the defense sector by the National Defense Industrial Association (NDIA) released on April 23, the biggest problems involve impacts on revenue expectations, meeting contract obligations and access to capital.

Cash flow is another problem. The NDIA survey found:

  • “60% of respondents said the crisis has interfered with their cash flow; 67% of companies with less than $999,999 in annual revenue have seen a cash-flow disruption.
  • Factoring into cash-flow problems: cuts to billable hours, delayed payments from prime contractors and government customers, a lack of telework options or schedule flexibility in contracts, and shelter-in-place orders that prevent employees from working.
  • 60% of respondents expect to have long-term financial and cash-flow issues stemming from the crisis.”

‘Heat Map’ of infrastructure susceptible to COVID-19 impacts at critical DoD facilities. Source: Govini

Of particular concern to DoD is the commercial aviation sector, given that airline travel has plunged 60 percent, as well as the automotive sector, Hunter said.

“The impact of the COVID crisis in the aviation sector has been really nothing short of catastrophic,” he stressed. “At this point, it’s very challenging for those companies to stay in business.”

Trade disruptions, such as ships piling up in ports and full warehouses that can’t be emptied could have negative impacts on DoD’s supply chain in the coming months, Hunter said.

Source: CSIS

Problems caused by delivery hold-ups are exacerbated by the demands of just-in-time delivery, meaning many industries do not maintain large stockpiles of goods, Hunter said. This also applies to goods produced and consumed primarily in the United States, he noted.

“It’s kind of amusing to me, but one of the best examples of this is the toilet paper issue,” Hunter said. “Most of the toilet paper in the US is produced in the US. We’re having a hard time getting ahold of it because the production capacity was really just designed to handle the steady state [of delivery], and we’re not at that point right now. And I think a lot of industries are suffering a similar dynamic.”

Eaglen said the problems of trade flow and production might lead DoD and the Congress to rethink the need for certain critical goods to be stockpiled. She added that if stockpile options are chosen, it also is necessary to ensure better management to ensure the contents remain usable and are updated when necessary.

On the whole, Eaglen and Hunter praised DoD for the assistance it is giving to the industrial base, both at the Pentagon level via Lord’s office and via the individual services.

Source: AEI

For example, Eaglen said, the Pentagon has increased progress payments to both prime contractors and small businesses — with Herrington recently announcing $3 billion in payments to primes. DCMA also announced on April 20 that it has modified 1,500 contracts to help vendors file invoices to obtain the increased progress payments, she said.

Eaglen said the individual services are increasing the rate of their obligations to small businesses, setting up acquisition task forces to work with industry, and reducing withholds to contract awards.

However, it remains to be seen how well the interventions by DoD and the Congress will be able  to keep the industrial base — particularly at the lower levels of the supply chain — afloat.

Hunter believes the coronavirus crisis is likely to kick into high gear another wave of defense industry consolidation. In particular, he said, the shakedown most probably will be centralized around big defense contractors attempting to become more proficient at software development — either through building internal capacities, or more likely, seeking to eat up software-centric suppliers.