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Managing Materials for a Twenty-First Century Military 5 Managing Today’s Materials Supply Chains Military planning scenarios indicate that the dominant security threat is no longer limited to global war demanding national mobilization and the rationing of strategic materials. Instead the U.S. military must also be ready for limited campaigns around the globe. These campaigns are likely to be involve a rapid response by expeditionary military forces that are flexible and can be tailored to different threats across the full spectrum of conflict types. Responses will be characterized by actions around the world carried out by joint, tailored forces engaging multiple asymmetric and irregular threats at a limited scale over durations that may be short (months) or long (years). The rapid development, supply, integration, and application of new technology and materials in weapons and information systems will continue to be important to success. The Department of Defense (DoD) materials management capability needs to be capable of keeping pace with these changes. EVOLUTION OF MILITARY PROCUREMENT The U.S. military services have long been concerned with securing access to technology, resources, and weapons essential to victory in a potential conflict with a capable adversary. While the military’s own internal arsenals were originally charged with both designing and manufacturing weapons for the military, since the 19th century the U.S. defense industrial base has consisted of a mix of public and private enterprise. The arsenals typically subcontracted some or all manufacture of the weapons systems and the parts for them to the private sector, particularly in time of war. At the same time the U.S. Army invested substantial resources in
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Managing Materials for a Twenty-First Century Military developing the technology required to mass produce firearms with interchangeable parts. This effort ultimately played an important role in the development of the American system of manufactures (Hounshell, 1984; Mowery et al., 1998), which fostered the growth of machine tools and trained machinists in the United States and ultimately propelled U.S. manufacturing technology to the fore in the global competition taking place in a variety of commercial industries. In the late 1800s, the U.S. Navy worked closely with the U.S. steel industry to secure access to foreign know-how in high-performance steel, needed to make advanced armor plating for American warships, and underwrote the development of U.S. steelmakers’ capabilities in high-quality steels. During World War I, the Army acted to create an American aircraft industry virtually overnight, where previously there had been none. After the war, the military experimented with a variety of ways to procure successive generations of cutting-edge aircraft as the technology evolved. These experiments ultimately led to the modern U.S. system for procuring high-tech weapons systems. Also during that same war, the Navy had become concerned with the security of the long-distance radio communications that had become essential to command and control in naval warfare. In the 1920s, accordingly, it stepped in to create a pool for all major American radio patents and formed the industrial giant RCA to guarantee that cutting-edge radio technology would remain in U.S. hands. World War II, for the first time perhaps, was a war that was ultimately won by disruptive advances in technology—the first electronic digital computers, radar, and nuclear weapons, among others. The entire scientific enterprise in the United States—in universities, in industries, in research laboratories—was mobilized and harnessed to the war effort. U.S. industrial capabilities were also integrated into the effort—IBM production lines were converted from office equipment to machine guns, Ford manufactured bombers, and Kaiser turned out cargo ships. Total war meant total industrial mobilization, and that lesson was carried to the Cold War that followed. The lessons of wartime mobilization learned during the first half of the twentieth century were honed in the 1950s and 1960s into the modern American system of weapons acquisition. The military services were reorganized into the modern Department of Defense, with a civilian control structure established over all aspects of national security. Civilian control was also firmly asserted over the procurement of major weapons systems during this epoch, and in the early 1960s, under corporate management expert Robert McNamara, the modern mechanisms of long-range planning and budgetary programming were firmly embedded in the culture of the Pentagon, where they continue to hold sway. In modern parlance, “tapered integration” —whereby a firm produces part of its own requirements and buys the rest from outside suppliers—was used to create a mix of internal, government-run production capacity and external, privately run
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Managing Materials for a Twenty-First Century Military production capacity. Over the years, as defense needs grew increasingly complex from a technology standpoint and as confidence in the perceived ability of the government to manage and efficiently coordinate the production of such complex systems on its own diminished, the original arsenal model evolved into a small number of so-called GOGO (government-owned, government-operated) defense manufacturing enterprises, which now account for a small and diminishing portion of defense procurement. More commonly, government-owned, contractor-operated (GOCO) arrangements prevail where substantial government investments in highly specialized facilities with little commercial application are required but private enterprise is perceived to be significantly more efficient. Most frequently, however, defense goods and services are provided by private, often-specialized industrial firms focused on the defense market. The purely private enterprises that make up most of the defense industrial base today can, nonetheless, find their actions greatly influenced by a variety of DOD policy tools, which can shape the supply chain for defense systems in significant ways. EVOLUTION OF THE MILITARY LOGISTICS SYSTEM The unpredictable and varied nature of the threat spectrum facing our nation today requires a more lethal, responsive, and agile military capability. Logistics is central to the military’s ability to respond to a call to action, and the military must adapt. The military logistics system has changed from the Cold War paradigm of supply needs being met by stockpiling massive supplies at successive points along the supply line extending to the battlefront to a just-in-time concept by which the rapid movement of supplies and equipment reduces the need for stockpiles and reserves of supplies but depends instead on detailed and accurate knowledge and prediction of supply and demand (Figure 5-1). Today, military logisticians recognize the need for a new paradigm of combat logistics called “sense and respond” based on real-time information about the supply needs of the warfighter at the frontline. Such a system should rapidly respond to needs, supplying the right things at the right place at the right time across a dispersed battlefield and around the world. This system is based on the most current industrial supply-chain strategies applied to the complex and broad needs of the military supply chain. In pursuit of this new paradigm, the Defense Logistics Agency (DLA) 2007 Strategic Plan has three strategic thrusts (Defense Logistics Agency, 2004): Extend the enterprise. Aligning DLA resources geographically closer to the customer. Connect the warfighter demand with the supply. Establish business process and data links between the military’s requirements for materials and the sources of those materials in the industrial base.
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Managing Materials for a Twenty-First Century Military FIGURE 5-1 Logistics transformation. SOURCE: Defense Logistics Agency, 2004, p. 9. Deliver supply chain excellence. Develop end-to-end logistics solutions that strike the targeted balance between effectiveness, agility, reliability, speed, visibility, and cost. Collaborate proactively with national supply-chain partners in developing logistics solutions. DLA’s implementation strategy includes leveraging industry’s capabilities to provide world-class support at the lowest possible cost and adopting and institutionalizing best business practices to improve quality, reduce cycle times and costs, and maintain the integrity of the procurement process. The DLA identifies challenges to this approach, among them that weapons and military systems are changing rapidly with the insertion of high-technology, high-value components; that the industrial base is spread around the globe with fewer U.S. sources for military equipment and supplies; and that “Buy American” legislation limits resort to foreign sources, which may offer higher quality, lower cost products. Today’s modern military logistics system is attempting to integrate responsive and effective supply chain management, and a stockpile is only one of many possible tools for responding to sudden surges in specific requirements or disruptions to vital parts of the supply chain. There are other tools and policy options available to DoD and its suppliers today.
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Managing Materials for a Twenty-First Century Military DEFENSE INDUSTRIAL POLICY AND THE POLICY TOOL CHEST Throughout the Cold War, from the late 1940s to the late 1980s, the lessons of World War II shaped the paradigm for defense industrial policy. The United States was committed to a strategy by which a qualitative technological advantage in the weapons systems it deployed and the number of advanced systems it was able to deploy would guarantee victory in the face of an adversary’s apparent numerical superiority. Put simply, the strategy was to first identify a set of capabilities that were deemed critical to U.S. ability to field qualitatively superior advanced weapons systems in the quantities needed to overcome a numerically superior adversary. The role of defense industrial policy was to do what was needed to ensure that the U.S. defense industrial base could meet the challenges of this strategy. This included being able to surge the production of weapons systems should war break out and to continue to produce these systems in sufficient quantity to replace losses in a sustained conflict. Evolution of Industrial Policy The job of defense industrial policy was to identify vulnerabilities and deficiencies in the supply chain that could hamper the ramping up of the production of weapons systems in wartime and to make sure the country could maintain the flow of these systems off the production lines to sustain U.S. forces in a continuing conflict. That meant ensuring that the inputs needed to field and use these systems— whether technologically sublime, like advanced electronic components, or vital but mundane, like natural rubber and oil—were available in sufficient quantities. To fix potential vulnerabilities in the supply chain, problems had to first be identified. The approach was to posit a warfighting scenario, then calculate what was needed to fight the war, prevail, and reconstitute the peacetime stocks of systems needed after the war was over. The scenario might be a short spasm of nuclear war or it might be a long, sustained conventional war with a large and powerful adversary. In either case, industrial planners in the military services and at DoD had to (1) determine which weapons were likely to be deployed and which were likely to be lost and would require replacement, (2) translate these requirements into requirements for U.S. industry, and (3) ensure that the industrial base was sufficiently robust to meet these requirements. Over the years, tools and techniques for modeling how military scenarios generated industrial requirements evolved and improved. By the end of the twentieth century, it was common to find military planners using simulation models to estimate wartime requirements. These, in turn, were coupled to input-output models developed by economists and used to estimate industrial requirements. These increasingly sophisticated models did not, however, answer the ques-
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Managing Materials for a Twenty-First Century Military tions at the heart of any analysis of supply chain vulnerabilities: Which capabilities were truly critical? What about uniforms and berets? Anchor chain? Should allies’ industrial capabilities be counted as available to U.S. defense production? If so, who should be counted as a firm ally, and who might waver? Were disruptions to transportation and communication likely to endanger availability from allies, and with what degree of risk? How long might a disruption be expected to last? How quickly could new U.S. capabilities be brought online to replace a foreign supply source, and at what cost? What substitutes might be available? If multiple foreign sources of supply were available, did this diversification in supply mitigate the risk of disruption of any single source? When considering the benefits of a diversified supply base, should the diversity be defined in terms of geography? Equivalently, would one foreign-owned source with 10 industrial facilities scattered around the globe be more or less of a risk than 10 foreign companies each operating a single facility in a different country? How “total” should the wartime mobilization be—what civilian production was truly essential and could not be curtailed, and what consumption could be rationed, restricted, or suspended? Questions like these typically do not have simple, well-defined, answers. Typically, the related issues have been analyzed in terms of baseline cases and increasingly stressed scenarios and possible answers to the questions have been evaluated in those terms. Inevitably, qualitative judgments about relative risks in best- and worse-case scenarios ultimately inform these analyses. With the end of the Cold War, the fundamentals of the process described above changed little. Rather, the underlying conflict scenarios used to generate industrial requirements were changed: At first a single major conflict morphed into a series of near-simultaneous lesser conflicts in the 1990s. Then, after 9/11, these threats were joined by a possible asymmetric strike by a nonstate adversary. The qualitative issues discussed above became even more difficult to parse as the single, near-peer, monolithic adversary was transformed in the course of little more than a decade into the larger and more amorphous bundle of lesser state and nonstate actors that dominate the perils of national security planning in the twenty-first century. Today, U.S. defense industrial policy nonetheless remains harnessed to a conceptual framework that was vastly easier to deploy against a single near-peer adversary. Import Restrictions One simple method for mitigating the risks of dependence on vulnerable foreign supplies is to simply bar goods manufactured or sourced outside national boundaries from defense procurement. A variety of authorities allow such restrictions. The so-called Berry Amendment1 requires that all food (except processed or 1 10 U.S.C. 2533a.
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Managing Materials for a Twenty-First Century Military manufactured food), clothing (except chemical warfare protection suits), a variety of specific textile products, and hand and measuring tools purchased by DoD be grown, processed, and manufactured in the United States. (Domestic procurement requirements for specialty metals and authority for waivers in exceptional cases were moved out of the Berry Amendment and into a separate title of U.S. law in the FY 2007 Defense Authorization Act—see discussion of Materials Protection Board, below.) It is far from clear that Berry Amendment commodities were selected on the basis of an analysis of supply chain vulnerabilities and a potential risk to national security. The Buy American Act, which dates back to the 1930s, basically mandates that all federal procurement—not just that by DoD—give preference to domestically manufactured or produced goods and services. A series of complex waivers and exemptions, however, allows federal agencies to waive this requirement in particular circumstances—for example, if the good is not available domestically in sufficient quantity, or at a reasonable cost, or if it comes from a sanctioned free trade area, like NAFTA or the Caribbean Basin Economic Recovery area, or if it is included in a sanctioned trade agreement, like that on civil aircraft. Most important, perhaps, DoD is granted substantial discretion to purchase foreign goods when doing so is in the interest of national security. DoD has concluded so-called reciprocal procurement memoranda with a variety of foreign nations, granting exemptions from the Buy American Act to these countries in the public interest. DoD can also grant individual exemptions for specific purchases from foreign countries and has done so in the past. Under Section 232 of the Trade Expansion Act of 1962 (similar authorities existed under earlier legislation as well), the Department of Commerce (DoC) can recommend that the President adjust imports if they are deemed detrimental to national security.2 DoC is required to consult with DoD, and in practice, DoD’s evaluation has played a central role in recommendations to the President. Over the last couple of decades, Section 232 investigations have considered imports of iron ore and semifinished steel, petroleum, integrated circuit ceramic packages, gears, uranium, plastic injection molding machinery, and antifriction bearings. Restrictive measures of this sort have implications for procurement costs that may not be attractive. By nature, they are not very flexible tools for managing supply chain risks, although discretion for waiver almost always exists if officials are willing to invest significant political capital in exercising this discretion. Import restrictions, if exercised, may also create undesired obstacles to U.S. exports when copied, or retaliated against, abroad. They can, however, reduce dependence on foreign supplies at reasonable cost, but only if they are imposed some time before a crisis. 2 For further information, see a 2004 report from the DoC at https://www.bis.doc.gov/DefenseIndustrialBasePrograms/OSIES/2-3-2-Reports/232-pamphlet.pdf. Accessed August 2007.
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Managing Materials for a Twenty-First Century Military Industrial Subsidy Under Title III of the Defense Production Act of 1950, DoD is authorized to buy products, possibly at above-market prices, or pay for production facilities as needed for national security purposes. Most recently, this program was used to subsidize the creation of a primary beryllium processing facility in the United States in 2006 (see discussion of beryllium in Appendix F). The Strategic and Critical Materials Stockpile Act creates the authority to expend proceeds from the stockpile on facilities for refreshing, refining, or transforming strategic and critical materials. To the best of this committee’s knowledge, this authority was utilized only once, in the 1980s (see section “Cold War Years” in Appendix A). Technology Promotion Investing in new technology is a routine DoD function, and R&D programs administered by the military services, the Defense Advanced Research Projects Agency (DARPA), and joint defense organizations like the Missile Defense Agency (MDA) are commonly used to find technological solutions to defense problems. Some of these R&D initiatives have been in materials—composite materials, high-strength steel, ceramics—and could be applied to issues like creating substitutes for scarce materials or reducing the amounts of scarce materials in the formulation of defense systems components through new designs. Indeed, there are many examples of R&D initiatives being used to deal with resource scarcities in response to a security threat (development of synthetic rubber and of synthetic fuels and biofuels as a replacement for jet fuel). If a vital manufactured material is a defense concern, and the material is protected by a patent monopoly in the hands of an insecure or uncertain source, there is ample authority under the World Trade Organization and U.S. patent law to require a compulsory license be issued to a U.S. producer. However, access to the actual technology—as opposed to the legal right to use the technology—assumes that the technology is available from friendly sources; if it is not, some technology investment may be required to create the needed access. Restrictions on Foreign Investment Under Title VII of the Defense Production Act, the U.S. government may review the proposed acquisition of U.S. companies by foreign nationals and may block such mergers or require divestiture of sensitive activities if they are deemed to be a security concern (U.S. Department of the Treasury, 2006). This authority has been and continues to be used to preserve U.S. control of activities and technologies that concern national security. Some of these interventions have been where
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Managing Materials for a Twenty-First Century Military the supply chain for strategically significant components and materials was the issue. In some cases, the mere initiation of an investigation has dissuaded a foreign investor, and the formal inquiry was terminated before an actual decision had been made. According to a 2006 Congressional Research Service report, since 1988 the Committee on Foreign Investment in the United States (CFIUS) has received more than 1,500 notifications and conducted a full investigation of 25 of them. Of the 25 cases, 13 were withdrawn upon notice that CFIUS would conduct a full review and 12 of the remaining cases were sent to the President. Of these 12 transactions, one was prohibited. The transaction that was prohibited by the President involved the acquisition in 1990 of Mamco Manufacturing Company by the China National Aero-Technology Import and Export Corporation (CATIC).3 This tool has historically been used only with the greatest reluctance and caution. Frequent use could encourage other nations to intervene on proposed U.S. investments abroad more often and on similar grounds, which could ultimately greatly harm U.S. economic interests by impeding attempts to secure U.S. supply chains by investing overseas in foreign sources of supply. Direct Allocation of Production Under Title I of the Defense Production Act, DoC, acting in coordination with DoD, can move orders for goods and services ahead of civilian orders in production queues when required for national security. The Defense Priorities and Allocations System (DPAS) administered by DoC can issue ratings for orders to prime contractors that give them production priority over nonrated orders. Further, prime contractors receiving rated orders are obliged to pass these to their subcontractors, ensuring that needed materials and components produced by the subcontractor are also given priority over other competing demands. Legal authority for this system stops at U.S. border, making the legal situation for foreign subcontractors in receipt of a rated order from a U.S. prime contractor rather murky. A foreign subcontractor doing business in the United States clearly has some incentive to cooperate with the system. But what happens if there are conflicting demands on the foreign contractor from its own legal framework or national government? How such conflicts might be solved is unclear and even friendly governments have, on occasion, declined to require a contractor to cooperate with the U.S. DoD. Indeed, there are even cases where an ally’s interpretation of its own export control laws has hindered U.S. military access to a foreign-produced input.4 3 Mamco manufactured metal parts for civilian aircraft, primarily for Boeing of Seattle, including tail and wing assemblies and small parts like brackets (Jackson, 2006). 4 See OTA (1991, pp. 119-120) on dual-use electronic components and NRC (1995, p. 4) on rocket engines and flat-panel displays.
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Managing Materials for a Twenty-First Century Military Here, globalization has definitely reduced the domain where U.S. policy for securing the defense supply chain holds sway. Relationships and Diplomacy Finally, the formation of political alliances and blocs—for example, NATO, the Waasenaar Group, the International Energy Agency, and other groupings—can influence the actions of other governments with respect to imports, exports, and other forms of cooperation relevant to supply chains for military critical items. Similar, though less formal, cooperative arrangements can also be found in the private sector, which frequently relies on relationships, information gathering, technology, and position within the industry to compel or influence links with their chains of supply. SUPPLY CHAIN TOOLS AND VULNERABILITIES In the face of increasing globalization and industrial consolidation (such as the mining industry examples discussed elsewhere in this report), companies are implementing supply chain management techniques to improve their performance and minimize their liabilities. Supply chains have become increasingly complex, with supplier and vendor networks stretching around the world. Diversification of suppliers can reduce risk by introducing redundancy, while increased reliance on outsourced operations can increase risk. Private corporations have adopted a range of strategies to give them the flexibility to offset these risks, including detailed risk analyses and contingency sourcing plans. Some of these techniques include developing multiple sources or deep supplier partnerships and investing to develop recycling as a source of supply or to develop substitute materials. Transportation becomes a critical factor in global supply chains, and the use of short-term reserves or inventories is sometimes appropriate to mitigate the effects of temporary supply disruptions. In the United States, better supply chain management has succeeded in reducing inventory costs from 6.1 percent of GDP in 1984 to 3.1 percent in 2005 and logistics costs from 13.4 percent to 9.5 percent in the same period. Figure 5-2 shows the ratio of the value of private sector inventories to private sector final sales over the first quarter of 1972 to the first quarter of 2007. The ratio of private nonfarm inventories to final sales of goods and services fell from about 3.5 in 1981 to about 2.3 in 2006, a decline of about 34 percent. It is worth noting that private inventory to sales ratios have remained roughly constant since the last quarter of 2001 (after September 11) and may have even risen slightly, after a long decline. This suggests that the post-9/11 perception of risk attributable to the disruption of global supply chains may actually have affected business behavior.
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Managing Materials for a Twenty-First Century Military FIGURE 5-2 Ratio of the value of private sector inventories to private sector final sales from the first quarter of 1972 to the first quarter of 2007. Data are from taken the national income accounts published every year by the Bureau of Economic Analysis. The committee is unaware of any DoD-wide estimate of the value of inventories of goods held by DoD and its contractors that could be compared to DoD procurement to arrive at a comparable inventory/sales ratio. The closest analogue that is available in the national income accounts would be to divide purchases of intermediate durable goods for production of defense goods and services, by the value of final finished investment in defense equipment and software. (There was a high degree of variance in the 1970s, when the Vietnam war was winding down.) Interestingly, this value declined over time much as did private sector inventories— from about 0.63 in 1981 to about 0.44 in 2006, for a decline of about 30 percent. Supply Chain Tools for NDS-Related Scenarios Corporations have a variety of tools to manage their supply-chain liabilities (Box 5-1). While these tools may be used in different ways in the commercial and
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Managing Materials for a Twenty-First Century Military BOX 5-2 Risk of Disruptions to the Supply Chain The supply chain manager has to consider where the potential threats are in the supply chain that could impede the production or movement of critical materials and components. This is particularly true if a given supply chain is dependent on a single U.S. source for a specific part of the supply chain. Examining the types of disruptions that could occur, the threats can be classified under three categories—physical disruption, political/social disruption, and market disruption. Physical Threats to Production and Transport Military attack on the U.S. homeland—conventional, weapons of mass destruction (WMD), electromagnetic pulse, and so on; Military conflict involving attacks on foreign sources, production, and infrastructure; Naval conflict and maritime attack on sea lanes and ports; Terrorist attacks and sabotage (conventional and WMD); and Natural disasters (hurricanes, tornados, storms, earthquakes, floods, fire). Political/Social Threats to Production and Transport Export controls (embargoes, reallocations, restrictions, and taxes) by foreign governments with anti-U.S. strategic interests; Political turmoil and social unrest in foreign countries; Labor action and strikes, foreign and domestic; Epidemic diseases in foreign countries; U.S. import controls; and Government prohibitions against use. Market Threats Higher prices and delayed delivery due to market imbalances such as increased demand and reduced supply; Foreign ownership that has monopolistic control of sources and/or transport and that disfavors U.S. purchases; and U.S. industrial restructuring and consolidation, resulting in a cutback to a single source or no domestic source whatsoever. Supply chains also have other vulnerabilities such as human error, a lack of preparedness or training, inadequate manangement of the supply chain for a critical material, inflexibility, and fragility. military attack. Today’s global market for minerals, materials, and manufactured products means that the United States is more dependent on foreign sources along the full length of the supply chain. Today, ore, processed materials, and even finished components may be produced overseas for U.S. military markets. This increase in foreign dependence makes the United States more vulnerable to disruptions of the
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Managing Materials for a Twenty-First Century Military foreign production of these materials and their transport. Increased inventories could be a hedge against disruptions to the supply of critical defense materials but would run counter to the pressure on companies to reduce inventories. The committee recognizes that the supply chain for each material has its own particular vulnerabilities. In some cases, the U.S. portion of the supply chain dominates and there is little or no foreign sourcing. In other cases, there may be few (or no) U.S. links in the chain and near-total dependence on offshore links. Manufacturers and purchasers of end items manage this supply chain for best value, producing or assuring the supply of goods and components of the right quality, at the right price, and on the right delivery terms in a changing, dynamic market. Such lean and agile supply chains depend on reliable, secure, and efficient production, communication, transport and distribution. Supply chains are vulnerable to disruption if a critical supply node or link fails and goods cannot be moved forward. At worst, disruptions stop delivery. At best, they cause short delays and increase direct costs. Table 5-1 shows the different threats against the nodes and links of a typical supply chain. With a greater dependence on foreign sources and less on domestic sources, the full range of physical, political, social, and market threats against foreign and domestic sources produces a much more vulnerable supply chain. Also, political vulnerabilities are a much more important disruptive factor today. The effect of lean operations can be seen by looking at what happened to the movement of goods across the border with Canada after the tragic events of September 11, 2001. With the closure of the border in the aftermath of the terrorist attacks, auto industry operations were forced to shut down as far away as Tennessee due to a shortage of supplies (Andrea and Smith, 2002). How a single source could significantly disrupt supply became clear in July 1993, when a fire in a single Sumitomo epoxy resin plant knocked out 60 percent of the global supply of high-grade resins used to package integrated circuits. Prices for memory chips doubled within a few weeks (McCausland, 1993; Robertson and Levine, 1993). Industry accounts at the time quoted Robert Costello, former Deputy Undersecretary of Defense, previously the leader of a Pentagon campaign to decrease U.S. supply chain vulnerability: “U.S. dependency only becomes a momentary issue when something happens. Everyone gets very excited, but as time goes on, they forget about it, and nothing is done until the next crisis comes along” (Robertson and Levine, 1993). On the transportation side, a critical vulnerability is the concentration of ocean shipment through a limited number of major U.S. (and foreign) ports. For example, the Los Angeles port terminal handled 190 million revenue tons of cargo, 8.5 million TEU containers, and 2,900 ships in 2006. A terrorist attack and closure of the terminal would have a catastrophic impact on U.S. trade and the domestic economy.
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Managing Materials for a Twenty-First Century Military TABLE 5-1 Threats and Vulnerabilities Matrix for a Global Supply Chain Type of Threat Mining, Processing, and Component Producers Shipping Terminals Transport Mode Offshore U.S. Foreign U.S. Ocean Bulk International Air/Sea Foreign U.S. Domestic Physical Local military attack x x x x Naval attack x x x Terrorism/sabotage/accident x x x x x x x Natural disaster x x x x x x x Political/social Export control/restrictions x Political turmoil x x x x Labor strikes x x x x x x x x Epidemic disease x x x x x U.S. import controls x x x Market Higher prices and delays x x x x Foreign ownership/monopoly x x x x x x x x Domestic restructuring x
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Managing Materials for a Twenty-First Century Military In summary, each supply chain has different vulnerabilities that can be assessed by answering three questions: What can go wrong? How likely is it that the negative event will happen? How serious are the consequences of the negative event? The vulnerabilities of a given supply chain must be evaluated in terms of their time and cost consequences and the probability of their occurrence. Vulnerability will be low if a commodity or component is available from multiple sources through redundant distribution channels. On the other hand, if it is available from only one or two production sites or if one company or country has dominant market share and control, its supply chain may be very vulnerable to disruption. A vulnerability assessment will show where the most likely and most damaging disruptions could occur along a particular supply chain. High-cost, high-probability threats must be planned for, and preventive plans and actions should be taken to decrease their impact and to improve reliability. Specific actions will balance risks and costs to provide a flexible and robust supply chain. In the final analysis, supply chain vulnerability assessment is about the detailed and methodical identification and assessment of risks and the development of mitigation strategies. Risk identification and mitigation must be accompanied by a dispassionate and well-founded analysis of the types of potential disruption, the probability of occurrence, and the downside risk should such a disruption materialize. Specific examples of disruptions to materials supply chains are presented in Table 5-2. OTHER MODELS FOR STOCKPILE POLICY The committee concludes its consideration of policy tools and supply-chain management tools by briefly describing other U.S. models for stockpiles of materials and other usables. (These stockpiles are discussed in more detail in Appendix E.) These other models provide insights into how government can assure the supply of a particular item or commodity. Of most interest to the committee’s work is an examination of how the stockpiled usables are released and managed. First established in 1999, the Strategic National Stockpile (SNS) program contains large quantities of medicine and medical supplies to protect the U.S. public in the event of a public health emergency—for example, terrorist attack, a flu outbreak, or an earthquake. The SNS is designed to deliver medicines within 12 hours to any state in the United States once federal and local authorities agree that local supplies have run out. To receive SNS assets, the governor of an affected state or someone designated by the governor can request their release. Once the request has been made, the Director of the Center for Disease Control and Prevention has the authority, in consultation with the Surgeon General and the Secretary of Health and Human Services, to order the deployment of the SNS. His or her decision to do so
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Managing Materials for a Twenty-First Century Military TABLE 5-2 Recent Supply Disruptions Year Material Major Source Problem Effect 1978 Cobalt Congo Rebels invaded copper-cobalt mining region in Congo. Rapid rise in price. 1993-1994 Antimony China Flooding was alleged reason though some industry sources believe Chinese suppliers withheld material to increase price. Price per pound rose from $0.80 to $2.28 in 1995 and from $1.61 in 2005 to $2.25 in 2006. 1994 Titanium (rutile). Key in producing titanium metal. Sierra Leone has one of the largest deposits of rutile. Production suspended when rebels invaded mining sites. Global shortage. 2001 Tantalite. Used for capacitors. Closure of facility in Australia for long-term maintenance. Shortage, price rise, and smuggling from central Africa. 2005 Tungsten China dominates supply and restricts amount produced and exported. Exports reduced due to alleged inadequate supplies within China, the largest consumer. Steep price increase. 2005-2006 Rhenium. 65 percent goes to aerospace (jet engine blades and rocket nozzles). 75 percent from two companies—Molymet in Chile (50 percent) and Redmet in Kazakhstan (25 percent). Redmet exports blocked due to dispute over debt with copper company that supplies Redmet. Price rose from $1,000/kg to $6,000/kg. Known future production increases are already sold. SOURCE: USGS Minerals Management Service. may be based on evidence of an overt release of a biological or chemical agent or some other emergency that might adversely affect the public’s health. Medical materiel stocked in the SNS program is rotated and kept within potency shelf-life limits by means of quarterly checks to ensure quality, annual inventory of all items, and inspections of environmental conditions, security, and overall integrity of packaging. One noteworthy aspect of the SNS is vendor-managed inventory (VMI). VMI supplies are stored by the pharmaceutical vendors rather than by the government in its warehouses until an incident requires the
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Managing Materials for a Twenty-First Century Military shipment of pharmaceuticals or other medical supplies beyond those held by the stockpile program. VMI supplies arrive within 24 to 36 hours of their being requested. The Strategic Petroleum Reserve (SPR), established in 1975 following the 1973-1974 oil embargo, is the world’s largest supply of emergency crude oil. The federally owned oil stocks are stored in huge underground salt caverns along the coastline of the Gulf of Mexico. At the time or writing, the SPR can hold 727 million barrels.5 Decisions to withdraw crude oil from the SPR are made by the President under the authorities of the Energy Policy and Conservation Act. In the event of an energy emergency, SPR oil would be distributed by competitive sale. It takes 13 days from the time of the Presidential decision for the oil to enter the commercial market. The President can order a full drawdown of the reserve to counter a “severe energy supply interruption” or a limited drawdown. In addition, the Secretary of Energy is authorized to carry out test drawdowns and distribution of crude oil from the reserve. The SPR has been used under emergency circumstances only twice (during Operation Desert Storm6 in 1991 and after Hurricane Katrina7 in 2005). DOE has the authority to exchange oil from the reserve, and these exchanges have been used to replace less suitable grades of crude oil with higher-quality crudes. Interestingly, DOE may also release supplies for limited, short-duration assistance to petroleum companies to resolve oil delivery problems. For instance on June 21, 2006, the Calcasieu ship channel was closed to maritime traffic owing to the release of a mixture of storm water and oil near Lake Charles, Louisiana, cutting off supplies to refiners in the area. Deliveries to the Conoco Philips and Citgo refineries in the area were disrupted. To avert the temporary shutdown of both refineries, the SPR agreed to loan 750,000 barrels of sour crude. The loaned amount was repaid in early October 2006.8 A little known government stockpile is the federal helium reserve, which contains more than 1 billion cubic feet of helium gas stored at the Cliffside storage facility in Texas. The Helium Privatization Act of 1996 directed the U.S. Department of the Interior to commence the sale of 85 percent of the Federal Helium Reserve by 2015. Sales from the helium reserve commenced in 2003 and at the time of writing of this report, about one third of the reserve had been sold in five sales 5 For information on the current SPR inventory, see http://www.spr.doe.gov/dir/dir.html. Accessed May 2007. 6 For further information see http://www.fossil.energy.gov/programs/reserves/spr/spr-drawdown.html#desertstorm. Accessed May 2007. 7 For further information see http://www.fossil.energy.gov/programs/reserves/spr/spr-drawdown.html#katrina_sale. Accessed July 2007. 8 For further information see http://www.fossil.energy.gov/programs/reserves/spr/spr-drawdown.html. Accessed, July 2007.
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Managing Materials for a Twenty-First Century Military on the open market. A fifth sale is planned in the fall of 2007, but this time against the backdrop of a helium shortage (Spivey, 2007). No releases other than the sales have been made in recent years. Although not a stockpile per se, one U.S. government program—the Civilian Reserve Air Fleet (CRAF)—seeks to maintain surge capacity for military crises and gives private industry an interesting role. CRAF involves commitments by U.S. airlines (both passenger and cargo carriers) to provide airlift capacity (cargo, passenger, and medevac services) to the U.S. military on relatively short notice (24 to 48 hours). Carriers are required to convert their aircraft to meet specific military requirements within the surge period and place them under the temporary command of the Air Force Air Mobility Command. Air carriers participating in CRAF do not receive any direct payments for maintaining aircraft that can be converted on short notice to meet military requirements. Instead, their participation is rewarded by eligibility for peacetime military air transportation contracts. CRAF has been activated only twice in the program’s 54-year history, in the 1991 Desert Storm action (August 1990-May 1991) and during the U.S. military action in Iraq (February-June 2003). The CRAF model has important lessons for materials stockpiling. Military procurement contracts could be structured to reward contractors who maintain larger inventories of critical materials and/or components. Language could be included within procurement contracts that establishes supply-availability targets (for example, 30 days) for key materials that are deemed essential to a particular weapons system or program. Such private-stockpile targets would require appropriate compensation arrangements. MATERIALS STOCKPILES IN OTHER COUNTRIES The committee was able to gather information on two foreign-held materials stockpiles, one in Japan and one in China. Japanese Stockpile The Japanese government has maintained a materials stockpile since 1983. At present, seven materials are stockpiled: nickel, chromium, tungsten, cobalt, molybdenum, managanese, and vanadium. The government-managed stockpile seeks to maintain an amount equal to 42 days’ consumption as its contribution to an overall goal of 60 days’ consumption. An explicit component of Japanese stock-piling policy is the encouragement of private firms to maintain stockpiles equal to 18 days’ national consumption of these materials. According to briefings provided to the committee, the choice of these seven materials for the Japanese stockpile was based on their criticality to Japan’s steel
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Managing Materials for a Twenty-First Century Military industry, which loomed much larger within the Japanese economy in 1983 than it does today. Like the U.S. stockpile, Japan’s stockpile is based very much on perceptions of economic vulnerability at a particular (distant) point in time. Briefings to the committee indicated that the composition of the stockpile is now being reviewed. Japan’s government manages its stockpile so as to avoid supply and price disruptions for these commodities. Briefings to the committee indicated that sales of materials from the stockpile can be triggered if their price rises above the average during the preceding 5 years. Three releases of nickel from Japan’s stockpile occurred during 2006. The agency in charge of the stockpile (Japan Oil, Gas, and Metals National Corporation, JOGMEC) can undertake a release from the stockpile unilaterally, without having to seek the permission of its parent agency (METI) or the Japanese national legislature.9 Chinese Stockpile Information about China’s strategic commodities stockpile(s) is sketchy.10 Recent shortages have led Beijing to reconsider its stockpile policy, levels, and processes and to expand its existing stockpile administration. China’s mineral reserves are reported as holding copper, iron ore, bauxite, and manganese and, more recently, rare earths, chromium, and aluminum. Energy reserves include uranium, coal, oil/petroleum, and natural gas. Section 3 of China’s latest 15-year development plan (Chinese National Development and Reform Commission, 2007) calls for strengthening the management of mineral resources. It says the country’s strategy should be to improve the system for stockpiling important resources, enhance the national stockpile of important mineral products, and adjust the structure and layout of the stockpile. Combine the national stockpile and users’ stockpile, and impose a requirement for compulsory reserves at firms consuming a lot of resources. The main point is that China sees a growing need to enhance and increase its stockpiles in critical or strategic materials. This plus the growing involvement of China and some other developing countries in the world’s stock markets could impact U.S. decisions on stockpiling. Even if these are temporary effects, they can still disrupt the system in place. 9 For more information on JOGMEC, see http://www.jogmec.go.jp/english/index.html. Accessed November 2007. 10 For information on China’s stockpile, see the following sources: China Daily (2002, 2007); Chinese Commission of Science (2006); Energy Bulletin (2006); Kosich (2006); Mulveron (2006); Oster et al. (2007); Pillsbury (2000); Teo and Neely (2007); U.S. Geological Survey (2007).
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Managing Materials for a Twenty-First Century Military CONCLUSIONS When the NDS was begun, military suppliers were the fabricators of weapons, munitions, and supplies and worked mainly with raw materials from stock. From a supply-chain perspective, bulk materials were relatively near the manufacturing process. Today’s suppliers of weapons and munitions to the military are increasingly integrators of systems, as opposed to fabricators, and the supply chain that feeds the integrator has become a network of many interconnected suppliers and manufacturers. Dealing with risk in the supply chain and defining and assessing the magnitude of the risk arising from any possible supply chain disruption has become more complex and requires a much more sophisticated analysis capability than the present approach to modeling materials requirements. As shown above, a range of policy tools can affect industrial supply chains. Holding a stockpile might be one of many ways to manage the supply of materials for defense, perhaps a tool of last resort. It is a tool that other governments are using but that industry uses only when absolutely necessary. Planning and then building a robust supply chain can mitigate the risk of surges in requirements, unexpected shortfalls in inputs, and the rapid and effective insertion of new materials and manufacturing methods. The challenge is to anticipate and plan for volatility of demand that could adversely impact the supply chain. Our national strategic objective regarding critical defense materials is to ensure the timely availability of the materials to defend our country and its citizens from adversaries. DoD has to be able to actively manage and plan for critical materials shortfalls that could seriously disrupt the military supply chain. The task becomes more complex as new materials and technology are developed and eventually introduced into military systems and old materials become obsolete and noncritical. Vulnerabilities in the supply chain represent risks to the ability of the military to respond. More detailed analysis of the supply chain for each military system would help to identify risks to mobilization. There are at least three complementary ways to mitigate risks: (1) assess the risks in order to make better informed decisions on ensuring them (for example, deciding if stocks need to be held); (2) spot vulnerabilities in the supply chain and redesign it to eliminate or mitigate them before disruptions occur; and (3) design and manage the supply chain to be more resilient to disruption. Weaknesses in the supply chain may not always be self-evident a priori; they often reveal themselves only when a system is exercised, such as in wartime. One way to learn about supply chain risks is to analyze supply chain disruptions to gain insight into causal factors or systemic issues. Supply choke points or surge demand response issues may point to the need for holding greater inventory at various stages of the supply process. In deciding if a stockpile is the most appropriate tool for assuring the supply of a particular material, it will be important to take into account (1) the quality of
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Managing Materials for a Twenty-First Century Military the material, how it may degrade, and if its usefulness could diminish over time; (2) how long it would take to get a material to where it is needed; and (3) the total costs of supplying, storing, and maintaining the material. In addition, the management of any system for supplying critical materials must be dynamic and based on knowing which materials are needed, how much of each, and whether substitutes are available. Assuring the supply of a material might also rely on more than one policy tool simultaneously or sequentially depending on the circumstance. Different tools can provide redundancy to better assure supply. REFERENCES Andrea, D.J., and B.C. Smith. 2002. The Canada-U.S. Border: An Automotive Case Study. Ann Arbor, Mich.: Altarum Institute, Center for Automotive Research. Available at http://www.cargroup.org/pdfs/The%20CanadaU.S.%20Border.pdf. Accessed, June 2007. China Daily. 2002. China plans oil stockpile. China Daily, September 18, 2002. China Daily. 2007. China plans strategic reserve of natural uranium. China Daily, April 14, 2007. Chinese Commission of Science, Technology, and Industry for National Defense. 2006. 11th Five-Year Plan for Nuclear Energy Development. Chinese National Development and Reform Commission. 2007. Outline of the 11th Five-Year Plan for the National Economic and Social Development of the People’s Republic of China. Available at http://en.ndrc.gov.cn/hot/t20060529_71334.htm. Accessed July 2007. Defense Logistics Agency. 2004. Strategic Plan: FY07-FY13. Available at http://www.oft.osd.mil/library/library_files/document_383_ElementsOfTransformation_LR.pdf. Accessed June 2007. Department of the Treasury (DoT). 2006. Exon-Florio Provision. Available at http://www.treas.gov/offices/international-affairs/exon-florio/. Accessed July 2007. Energy Bulletin. 2006. China Unveils New Plan to Lift Reserves of Strategic Metals. Available at http://www.energybulletin.net/26139.html. Accessed July 2007. Hounshell, David A. 1984. From the American System to Mass Production 1800-1932. Baltimore, Md.: The Johns Hopkins University Press. Jackson, James K. 2006. The Exon-Florio National Security Test for Foreign Investment. CRS Report RS22197. Updated February 23. Kosich, Dorothy. 2006. While Base Metals Supplies Are Thin, the World Isn’t Running Out. Available at http://www.mineweb.co.za/mineweb/view/mineweb/en/page15830?oid=7947&sn=Daily%20news%20Detail. Accessed July 2007. McCausland, Richard. 1993. Shortage Fears Prod Doubling of DRAM tags-DRAM prices. Available at http://findarticles.com/p/articles/mi_m0EKF/is_n1973_v39/ai_14072811/pg_1. Accessed July 2007. Mentzer, J.T. 2001. Supply Chain Management. Thousand Oaks, Calif.: SAGE Publications. Mowery, David C., and Nathan Rosenberg. 1998. Paths of Innovation: Technological Change in 20th Century America. New York, N.Y.: Cambridge University Press. Müller, Daniel B., Tao Wang, Benjamin Duval, and T.E. Graedel. 2006. Exploring the engine of anthropogenic iron cycles. Proceedings of the National Academy of Sciences of the United States of America 103 (44):16111-16116. Mulveron, James. 2006. Dilemmas and Imperatives of Beijing’s Strategic Energy Dependence: The PLA Perspective (interim report). Paper read at Conference on Maritime Implications of China’s Energy Strategy, Newport, R.I. National Research Council (NRC). 1995. Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force. Washington, D.C.: National Academy Press. Office of Technology Assessment (OTA). 1991. Global Arms Trade: Commerce in Advanced Military Technology and Weapons.
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