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1 THE COMPETITION FOR MANUFACTURING SUPREMACY This nation's defense is threatened by a weakening industrial base. The current problems of weapons with uneven quality and reliability, long delivery cycles, dependence on foreign suppliers for critical components, and, most visibly, high costs are all symptoms of the deteriorating manufacturing capabilities of U.S. suppliers. In attempting to meet the demanding and increasingly sophisticated performance requirements of weapon systems, the country is spending more and producing less. The Department of Defense (DOD) has sought innovation in the design and performance of weapon systems while largely ignoring the production processes needed to make those systems. As a result, obsolete manufacturing processes are being used to build ever more sophisticated weapon systems, leading to sharply rising costs of weapon systems, shrinking numbers of units affordable to DOD, and unreliable performance of those that are acquired. More serious has been the declining competitive strength of the defense industrial base. The steel, machine tool, and shipbuilding industries--all essential to winning World War II--have severely declined in the face of the current global economic competition. Further. the United States is gradually losing its competitive edge in other industries that are currently vital to defense. Even high-technology industries such as electronics, semiconductors, and aerospace are challenged. Unless the defense industrial base renews its focus on innovation in manufacturing processes and equipment, more industries will fall further behind in the competition for manufac- turing supremacy. 4

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THE ROLE OF DOD IN THAT COMPETITION The defense industrial base ranges across a broad spectrum of industries, and comprises approximately ~O,OOO prime contractors and 100,000 vendors and suppliers. While the entire U.S. industrial base--including producers of commercial as well as defense products--faces many common manufacturing problems, this report focuses on the segment that manufactures materiel purchased by DOD. The Department of Defense has a critical need and responsibility to address the manufacturing technology problems that arise within the defense industrial base. DOD can spur major improvements in the health and perfor- mance of industry by investing in longer-range, high- risk,3 innovative projects that, if successful, would yield major advances in manufacturing technology in areas of strategic importance. Neither DOD nor defense contractors have been investing adeq4ately in manufacturing process and equipment technol- ogy. The defense industrial base lacks incentives for such investment under current procurement procedures, and many federal policymakers concerned with defense do not recognize the need to invest in advanced manufacturing technology. Without adequate manufacturing processes, even skilled and motivated workers and managers can neither turn out high-quality products nor meet demanding schedules. The importance of production technology becomes clear during wartime, when the objective is to produce the largest number of acceptable quality weapons as quickly as possible. During peacetime, the value of production technology has been less obvious. Even in peacetime, however, the United States needs to get significantly greater value for its defense expenditures. Leading-edge manufacturing technology offers an opportunity to improve the availability, affordability, and performance of weapon systems. THE NEED FOR THE MANTECH PROGRAM Within DOD, the Manufacturing Technology OCR for page 4
6 The committee's phase I reports argued that research and development in manufacturing equipment and process technology are vital to the welfare of the nation. Further, because government procurement policies and regulations have disincentives that deter contractors from investing in developing innovative manufacturing technology, DOD needs to take an active role to promote the development of manufacturing technology for weapon systems. The report also recommended that DOD directly fund manufacturing technology development, via the ManTech program, in areas that: can solve generic problems, require long lead times, have the potential for substantial improvements in the manufacturing system, ant are beyond the normal risk of business. The committee concluded, however, that significant changes were needed to improve the effectiveness of the ManTech program. Thus, phase II of the study focused on develop- ing recommendations for enhancing the program. A NEW MANTECH PROGRAM The ManTech program we recommend differs substantially from the DOD program of the past decade. Basic changes in the ManTech program, initiated by the Office of the Secretary of Defense (OSD), can make it an effective part of the competition for manufacturing supremacy. Because of differences among the three services' programs, the services will require different amounts of change. The present Air Force program comes closest to the program we recommend. The Defense Logistics Agency's ManTech program is too new to have been included in our analysis, but our recommendations apply to them as well as to the services. As we will describe in the next three chapters, an effective ManTech program must begin with the selection by OSD, in cooperation with the services, of the critical manufacturing capabilities on which to focus attention and funding. ManTech program managers can then translate DOD's strategic needs into specific technologies needed to support future generations of weapon systems. OSD should also be responsible for assessing the plans (but not the individual projects) of the services ant allocating funds for ManTech activities.

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7 The ManTech program should strive to support innovative generic process technologies that are required for future weapon systems. To convey to the defense community the long-term, strategic policy orientation of the program, a new name, such as the Advanced Manufacturing Technology program, may be required. A primary outcome of the program should be to demon- strate the feasibility of new, critical process technolo- gies that will permit future production of affordable, high-performance products. In the long run, lower costs are also likely to occur. However, because of the time lags between project initiation and ultimate operation, the impact of product design change decisions, and inadequate accounting systems, such cost reductions will be difficult to document. The new ManTech program cannot address all of the manufacturing problems faced by the 130,000 DOD suppliers. A much more comprehensive DOD manufacturing policy is required to accomplish not only longer-range advances in manufacturing technology but also widespread application of leading-edge technology and improvement of existing production facilities. The new ManTech program can provide only the first part of such a policy: to develop new manufacturing capability. Many of the low-risk, less generic projects that are currently funded by the ManTech program are worthwhile but outside the scope of the new ManTech program. Even with an extremely successful new ManTech program, weapon systems will continue to face short-run manufacturing problems when entering production. Projects that address such problems should be directed by individual weapon systems program managers. The new ManTech program will get maximum leverage from its investments by: focusing on generic issues in which the potential impact across contractors is high, and using the funds as seed money to stimulate further investment by defense contractors. NOTES 1. According to The President's Commission on Industrial Competitiveness, the United States has lost market share in 7 out of 10 high-technology sectors. (Global Competition: The New Reality, January 1985, p. 13.)

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8 2. Information obtained from Richard Donnelly, Director, Industrial Resources, Office of the Under Secretary of Defense (Research and Engineering). 3. High-risk projects involve economic or technical risk. Companies are less likely to support a project that requires a mayor investment in time, expertise, and equipment if technical success is uncertain. If the costs of research and development cannot be recovered within a specified time, then investment is minimal-- if it occurs at all. 4. Japan, France, West Germany, and Great Britain have had higher capital investment as a percentage of out- put in manufacturing than the United States, at least since 1965. See, for example, Manufacturing Studies Board, Toward a New Era in U.S. Manufacturing (Wash- ington, D.C.: National Academy Press, 1986), p. 16. As in our initial report, the processes and equipment used in production are referred to as manufacturing technology (with lower case m and t). The DOD program studied is referred to as the Manufacturing Technology or ManTech program (with upper case M and T). 6. Independent research and development (IR&D), materials R&D, Title III, and facilities grants all include some expenditures for manufacturing technology. Only the ManTech program has the upgrading of manufacturing technology as its raison d'etre. 7. National Research Council, Manufacturing Studies Board, The Role of the Department of Defense in Supporting Manufacturing Technology Development (Washington, D.C.: National Academy Press, 1986) . 8. The recent change in law to allow multi-year contracts under some circumstances increases the incentive to invest in manufacturing technology. The disincentive of renegotiating contracts to reduce profits that re- sult from increased efficiency, however, still applies to most contracts. Further, the continuing separation of design from production contracts severely limits opportunities to design products that take advantage of advanced manufacturing technology. On balance, the disincentives still overwhelm the incentives to invest in process technology.