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C

Background and History

BACKGROUND

Integrating commercial and military manufacturing is not a new idea. Mobilization of the U.S. commercial industrial base into the “arsenal of democracy” was essential to victory in World War II.

After the war, this capacity reverted to its civilian uses. Through the 1950s, the military became a major driver of technological change in the American economy, spawning industries like commercial aeronautics, semiconductors, and communications satellites (NRC, 1993).

The Cold War era saw the development of a permanent defense industrial base and defense acquisition practices distinctly different from commercial practice. The U.S. military's demand for weapons continued to be strong until the end of the Cold War. The permanent armaments industry met the requirements for military acquisition, despite periodic unease with the cost of weapons and accusations of waste, fraud, and abuse. A complex business relationship evolved between government and contractors; laws and regulations governing the procurement process became increasingly complicated.

The personnel required for contractors to comply with these regulations became a growing cost burden to companies and their government business units (SAIC, 1999). One reaction to the regulations was the separation for accounting purposes of commercial and government business in companies that do both (Gansler, 1995). This separation shields commercial businesses from DOD audits and the possibility of prosecution for irregularities. Auditability has become a first-order driver of defense contractor development and production processes.



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Page 63 C Background and History BACKGROUND Integrating commercial and military manufacturing is not a new idea. Mobilization of the U.S. commercial industrial base into the “arsenal of democracy” was essential to victory in World War II. After the war, this capacity reverted to its civilian uses. Through the 1950s, the military became a major driver of technological change in the American economy, spawning industries like commercial aeronautics, semiconductors, and communications satellites (NRC, 1993). The Cold War era saw the development of a permanent defense industrial base and defense acquisition practices distinctly different from commercial practice. The U.S. military's demand for weapons continued to be strong until the end of the Cold War. The permanent armaments industry met the requirements for military acquisition, despite periodic unease with the cost of weapons and accusations of waste, fraud, and abuse. A complex business relationship evolved between government and contractors; laws and regulations governing the procurement process became increasingly complicated. The personnel required for contractors to comply with these regulations became a growing cost burden to companies and their government business units (SAIC, 1999). One reaction to the regulations was the separation for accounting purposes of commercial and government business in companies that do both (Gansler, 1995). This separation shields commercial businesses from DOD audits and the possibility of prosecution for irregularities. Auditability has become a first-order driver of defense contractor development and production processes.

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Page 64 History of Acquisition Reform Since 1990, a number of trends have combined to begin the process of change in DOD's acquisition practices, including debate over the vision of civil-military integration (CMI). Box D-1 provides a timeline of acquisition reform initiatives in recent years. The first of these trends was reduced budgets for the acquisition of new defense systems, resulting largely from the end of the Cold War. Simultaneously, the capabilities of commercial equipment and its application for military use have Box D-1 Timeline of Acquisition Reform Since 1994 1994 Secretary Perry's Mandate for Change Rapidly acquire commercial products and technology. Introduce reforms to minimize the use of military specifications. Assist in conversion of U.S. defense-unique companies to dual-use (producing for both commercial and military) production. Aid in transfer of military technology to the commercial sector. Preserve defense-unique core capabilities. Adopt business practices characteristic of world-class customers and suppliers and encourage DOD suppliers to do the same. 1994 Federal Acquisition Streamlining Act Permitted purchases of items below $2,500 without competitive quotes or compliance with Buy American Act and certain small business requirements. Exempted commercial product procurements from laws, including submission of cost or pricing data and cost accounting standards (CAS) requirements; established preference for commercial items. 1996 Federal Acquisition Reform Act and Information Technology Management Reform Act (Collectively Known As the Clinger-Cohen Act) Required that agency heads establish a process to select, manage, and control their IT investments. Authorized a test of the use of the Simplified Acquisition Procedures (SAP) for commercial items between the simplified acquisition threshold of $100,000 and $5 million. 1997 Rewrite of DOD 5000 Series of Acquisition Regulations Incorporated new laws and policies in a dramatically shorter document. NOTE: Adapted from < www.dsmc.dsm.mil/jdam/contents/legislation.htm >.

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Page 65accelerated, especially in electronics. These trends, as well as changes in the nation's defense strategy, have caused uncertainty over which weapons to buy and interest in broadening the existing stand-alone defense industrial base. SUMMARY OF EARLIER STUDIES Since the late 1980s, studies have discussed commercial-military integration, also known as civil-military integration, and described its anticipated benefits (both terms are known by the acronym CMI. 1 ) The studies were prepared by organizations such as the Defense Science Board (DOD, 1989), the Office of Technology Assessment (OTA, 1994, 1995a, and 1995b) and the General Accounting Office (GAO, 1998). The DSB study, which focused on semiconductor devices, noted that “despite overwhelming verbal support, movement towards greater use of commercial products and practices has been slow.” The transmittal letter included in that report recommended the use of open systems architecture, which would allow increased use of commercial hardware and software and the corresponding industrial base while demonstrating the ability to use commercial subsystems and nongovernment standards as well as their benefits. It also recommended the use of demonstration programs to test the ability to buy commercial products and services using commercial practices. The 1994 OTA study Assessing the Potential for Civil-Military Integration: Technologies, Processes, and Practices noted that Congress had long been interested in CMI. This interest was evident as early as 1984, when the Defense Procurement Reform Act mandated that DOD use “standard or commercial parts” when developing or buying military-unique products whenever technically or economically feasible. The 1994 OTA study also noted that the 1990, 1991, and 1993 Defense Authorization acts all contained language promoting CMI. Based on analysis of previous studies, the 1994 study suggested that military and commercial manufacturing had become segregated for a number of reasons: Acquisition laws, regulations, and culture; Military specifications and standards; Militarily unique technologies or products; Commercially uneconomical orders; Emphasis on performance rather than costs; and Classified technologies. 1The committee chose to use the acronym ICMM, for integration of commercial and military manufacturing, rather than the acronym CMI, for civil-military integration or commercial-military integration. The committee believes that ICMM emphasizes manufacturing and the optimum use of the commercial industrial base. However, this appendix uses the acronym CMI where it was used by earlier studies.

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Page 66 It also noted that the structure of acquisition laws and regulations and the culture resulting from them provide few incentives to integrate. OTA also found, however, that technological developments had reinforced the trend toward integration of the commercial and military technological and industrial bases. While it noted that some case studies cited the potential for cost savings of 20 to 60 percent, it believed that savings were difficult to quantify and that it was unlikely that such savings were possible across the entire industrial base. Finally, OTA believed that the most important contribution of CMI might not be in savings, but rather in preserving the ability to support national security objectives in the face of spending reductions. The OTA (1995a) study Assessing the Potential for Civil-Military Integration: Selected Case Studies stated as follows: “Despite several previous initiatives to promote integration, much of the DTIB [Defense Technology and Industrial Base] remains isolated. Still, significant CMI [Civil-Military Integration] currently exists.” OTA noted that it believed CMI was more likely at the lower industrial tiers than at the prime contractor level, where components are combined to produce military-unique systems. OTA stated that technology trends had blurred differences between commercial and military technology in its three case studies: flat-panel displays, polymeric composites, and shipbuilding. Finally, this OTA study concluded that both increased access to commercial technology and reduced system cost were likely results of CMI, but that both benefits were difficult to quantify. Sources outside government also recognize the potential of ICMM. The 1999 NRC study Defense Manufacturing in 2010 and Beyond: Meeting the Changing Needs of National Defense focused on leveraging advances in commercial manufacturing in its recommendations. The study identified the challenges of using commercial manufacturing capacity, including the use of and design for commercial processes, the incorporation of COTS parts and subsystems into military equipment, reforms in acquisition procedures to accommodate commercial practices, and incentives for commercial industry to manufacture defense parts. It identified nontechnical barriers, such as accounting practices and acquisition regulations, as the most serious impediment to achieving this challenge. The current study pursues these challenges in greater depth. Given the limited progress in CMI despite the long interest in the area, Gansler (1995) states that “perhaps no point…should be more heavily emphasized than the extreme difficulty that will be faced in attempting to implement the changes required for civil/military integration.” He identified the primary causes of this difficulty as (1) the complex nature of overcoming the status quo and the investment of careers in working within the current system and (2) the differences between commercial and military procurement systems brought about by an inherent distrust of defense contractor motives.

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Page 67 The 1993 Defense Science Board study (DOD, 1993) addressed that difficulty in attempting to implement change in defense acquisition. It emphasizes that what needs to be done is well documented, and that the focus should be on implementation methods. The present NRC study took a similar approach, focusing on implementation.