1. GSA Expo 2009 Industrial Analysis: An Integral Part of Acquisition Strategy Roudy Romulus roudy.romulus@dcma.mil Economist Defense Contract Management Agency

2. 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 Defenses acquisition policies for an effective industrial base 2

3. 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) 3

4. 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 4

5. Defense Contract Management Agency 5

6. Industrial Analysis: An Integral Part of Any Major Acquisition Strategy Industrial Base Issues RDT & E Phase Contract Award Phase Low Rate Production Phase Full Rate Production Phase Operations PhaseCompetitionAnalysis InnovationAnalysis Product Availability Analysis … to the battlefield. How do we go from the drawing board… 6

7. 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 & 2TRL 3TRL 4TRL 5TRL 6TRL 7TRL 8TRL 9 ABC IOCFOC Ideas ConceptSolutionProductMaintenance Technology Development Engineering & Manf. Development Production & Deployment Operations & Support Matl Solution Analysis Pre-Concept MRL 1 & 2MRL 3MRL 4MRL 5MRL 6MRL 7MRL 8MRL 9MRL 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. 7

8. 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 8

9. 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 CreditorAmount of ClaimDoD 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 9

10. Mine Resistant Ambush Protected Vehicle MRAP Prime Integrators Diesel Engine Transmission Transfer Case Transfer Case Bearings Powertrain Axles Wheels, Rims Wheels, Run Flat Tires Suspension Wiring Harness Alternator/Vltg Regulator Electrical Air Conditioner Control Systems Structural Armor Components, Kits Armor Components, Fabr Auto & Chassis Intg. Armored Glass Armored Steel Critical Subcontractors The Tasking – I request that the Defense Contract Management Agencys 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 064,000 vehicles Feb 078,000 vehicles June0716,000 vehicles 10

11. Analysis: Validation Integration Interpretation Data: 9 Primes 63 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 Comparative Trend Mine Resistant Ambush Protected Vehicle Summary Make Presentation 11

12. Mine Resistant Ambush Protected Vehicle Notional Supply Commonality Matrix* Components Prime #1Prime #2Prime #3Prime #4Prime #5 Diesel EnginesButterfly Engines Alan Engines Butterfly Engines Butterfly Engines Federal Engines TransmissionAlyssa Trans. Alyssa Trans. Alyssa Trans. Alyssa Trans. Alyssa Trans. Transfer caseAlyssa Trans. Frank Transfer Co. Norman Transfer Co. Frank Transfer Co. Norman Transfer Co. AxlesMonitor Corp. Rose Axles Rose Axles Rose Axles General Axles SuspensionAcme Co.Omega Corp. Manchuria Ltd. LMNO N.A. Remus Motors Rune Flat Wheels Paley Industries Frazier Automotive Paley Industries Paley Industries Paley Industries AlternatorsY.A. Newman Y.A. Newman Y.A. Newman Y.A Newman Y.A. Newman * Company names have been altered to protect proprietary information 12

13. 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 DoDs 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. Capacity DoD 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 13

14. 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 14

15. Steel and Specialty Metals Pricing Trends The following workers must maintain awareness of increasing steel and specialty metals pricing trends: Cost Analysts Program Managers Logisticians 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 pentagons director of defense procurement and acquisition policy. But during the 1990s, the pentagons 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 15

16. Economic, Industry and Financial Monitoring U.S Defense Industry Prime Contractor Outlook Sector199320092020 Aircraft Fixed Wing 733 Aircraft Rotary Wing 442 Aircraft UAVs 966 Missiles 1332 Vehicles Ground Combat 423 Vehicles Tactical Wheeled 544 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. 16

17. Economic, Industry and Financial Monitoring 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 17

18. DoDs 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 18

19. 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, 1940 BBC Radio Appeal to France …this is London calling. 19