Conclusions and Overall Recommendations
DoD can increase the integration of its supply chain by addressing shortfalls in policy, enabling mechanisms, and workforce knowledge. Policy creates the foundation upon which to build an integrated supply chain design and the structure within which to work, with enabling mechanisms and workforce knowledge holding it together in the way intended. Fundamental to
achieving supply chain integration and pursuing actions consistent with total supply chain optimization as opposed to process or functional optimization is always thinking about doing so, whether in management of the supply chain and its personnel, policy development, process design, and everyday decisionmaking. This starts with ensuring workforce members understand how they affect the rest of the supply chain through a clear DoD supply chain framework— such as the one laid out in this report, receive feedback on their effects on other processes and their effects on the total supply chain, and have the tools to make integrated supply
chain decisions. This supply chain framework should be incorporated into DoD supply chain materiel management policy.
DoD has several opportunities to increase supply chain integration with the benefits of
improved performance and efficiency. To reduce costs, the most important is increased attention to supplier lead times and order quantities, which can be through increased integration with suppliers. In conjunction, the role of procurement personnel in driving inventory must be recognized to a greater degree. The Office of the Secretary of Defense should launch a new initiative to determine how purchasing and supply management practices could be improved to achieve lead time and order quantity reductions. Related to this is ensuring a tight integration among demand, supply, and repair planning for reparable items to ensure the total supply
of unserviceable items in the ―closed loop‖ reparable system is kept to the minimum necessary to support readiness. In 2012, ASD(L&MR) launched two studies to take on these issues with one focusing on improving consumable supply chain management in DLA and one focusing on reparable item management across the services.
Another opportunity is an increased focus on stock positioning, to include improved incorporation of stock positioning in policy and the broad adoption of stock positioning xviii Integrating the Department of Defense Supply Chain
metrics. Improved stock positioning is at the heart of a number of important DoD supply
chain initiatives such as Strategic Network Optimization, Distribution Process Owner Strategic Opportunities supply alignment, and the Base Realignment and Closure (BRAC) 2005-
based transition to DLA ownership and management of retail stock in support of maintenance depots. It also has an important interplay and potential for leverage with a scheduled truck network improvement effort based upon the scheduled truck chapter in this report. Yet despite the frequency with which stock positioning is the crux of improvement initiatives, emphasis remains limited as reflected in metrics and the lack of goals for stock positioning.10
Related to all of these is ensuring that organizations have the breadth of budgets that give them the degrees of freedom to pursue the course of action that will optimize the supply chain and are correspondingly responsible for budgets that they drive the consumption of. A review of supply chain organizational budget categories and the effects that each organization has
on costs should be conducted to determine where there is misalignment, with changes made accordingly. Aligning budget authority and organizational effects should also be part of the design process when standing up new organizations or changing organizational designs. Finally, progress toward supply chain integration could accelerate with improved end-toend information sharing, to include outside of DoD to the supply base. This includes ensuring each organization knows what information it produces—and more importantly, could produce that it is not—that would be valuable to its upstream and downstream partners. It also
includes ensuring that organizations develop capabilities to utilize this information to the full potential.
Overall Contract Spending
Top Line DoD Contract Spending, 1990–2011
Figure 2-1 presents total DoD spending from 1990 to 2011 as well as total dollars spent on defense contracts. Contract spending is tracked in FY 2011 dollar amounts by the lower portions of the bars,
corresponding with the left-hand y-axis, and as a percentage of total DoD outlays by the line at the top of
the graph, corresponding with the right-hand y-axis. The upper portions of the bars represent noncontract
DoD spending in FY 2011 dollar amounts, including funding for personnel, organic construction, and
maintenance, etc.
Between 2001 and 2011, dollars obligated to contract awards by DoD more than doubled, and contract spending outpaced growth in other DoD outlays.1 This growth was predominantly in products
and services, which experienced a 21-year compound annual growth rate (CAGR) of 8.4 percent and 9.4
percent, respectively, compared to the R&D category’s 5.4 percent annual growth. Contract spending
relative to DoD outlays reversed sharply beginning in 2008, but largely as a result of other DoD outlays
increasing rapidly rather than of the comparatively small but sustained decline in contract spending. In
terms of average annual growth, the increase in DoD contract spending since 1990 far outpaced that of
other DoD outlays. Between 1990 and 2011, other outlays grew by only 0.2 percent per year, while
contract spending grew by 4.0 percent. This difference was also striking during the post-9/11 period. Over
the last 11 years, contract spending grew by 7.4 percent annually, while other outlays increased at 4.4
percent per year.
In the years 2008 to 2011 there was a profound shift in DoD contract spending. While absolute
obligations for defense services contracts declined by $25 billion and dropped from percent of total
DoD acquisition outlays to 55 percent, noncontract defense spending increased by $71 billion and increased from 36 percent of DoD acquisition outlays to 45 percent. Therefore, as DoD contracts spending decreased at an annual average of 2.1 percent in total value, its noncontract acquisitions increased by an 11.1 percent CAGR for the same period.
Given that there was no significant change in overall DoD contract spending between 2010 and 2011, it is possible that an equilibrium in the ratio between DoD contracts spending and other spending
has been reached. This kind of steady relationship for DoD spending, split between contracts and other
accounts, has not been seen since the years 1995 to 2001, although the current level of spending and
percentage of contract spending was much higher in 2010 to 2011 than in those years. However, anticipated reductions in defense spending beginning in 2012 will likely affect all DoD outlays in the
coming years.
DoD Contract Obligations by Category in Percentage Terms, 1990–2011
Assembled from the previous three figures, the lines in Figure 2-5 track the changes in the composition of
DoD contract obligations among products, services, and R&D contract dollars. Each line tracks the
percentage of total DoD contract dollars awarded in each category in the period 1990 to 2011. Comparing the relative levels of defense obligations in each of the three categories, clear shifts in priorities are evident following the end of the Cold War and following U.S. troop withdrawal from Iraq.
These shifts are most pronounced in contract obligations for products and services. Reductions in both
military and civilian personnel after the Cold War led to an increase in outsourcing to continue providing
many services, while obligations for products decreased with the smaller force structure. The relative
shares of product and services obligations converged in 1998 and 1999, with the former decreasing and
the latter increasing. After this point, products edged up over services, and the gap widened with the
initiation of Operation Iraqi Freedom in 2003. The relative shares of services and products appeared to
begin converging again after 2008, as absolute levels of obligations declined sharply for products while
obligations for services remained relatively stable. However, FY 2011, the most recent fiscal year, saw a
sharp increase in product obligations (mostly by the Navy) and a small decrease in services obligations
that widened this gap.
The data for recent years show the degree to which operations in Afghanistan and Iraq
independently influenced DoD obligations. While contract dollars for products decreased significantly
during U.S. troop withdrawal from Iraq in 2009 and 2010, the sudden increase in 2011 may be a one-time
adjustment or may mark the end of the resulting ―peace dividend.‖ Obligations for services, however,
declined more slowly than that on products after 2009 and continued to decrease in 2011. A similar trend
was seen post–Cold War/post–Gulf War, as products obligations decreased at an average of 1.3 percent
annually while services obligations increased by 3.3 percent from 1990 to 2000. One explanation might
be that in the wake of major operations, obligations for products decreases more abruptly while obligations for services declines more slowly. This is due, perhaps, to the longer-term nature of demand
for services contracts, as opposed to contracts for products (e.g., fuel, munitions), which are more easily
terminated (or not renewed) at the end of a conflict, when demand also ends or is reduced.
DoD Contract Obligations by Component, 1990–2011
In Figure 3-1, the total DoD contract obligations for each year, presented in the aggregate in Figure 2-1,
are broken down by each military department’s share of the total. The Army, Navy, and Air Force are
individually presented, and the remaining DoD components are combined into the category of Other DoD
and their obligations are aggregated.
In the past decade, trends in contract obligations by the key DoD components are visibly tied to operations in Iraq and Afghanistan. Until 2002, each of these components’ contract obligations was
relatively flat. This changed rapidly after 9/11, with the greatest increases occurring in the Army: 139
percent total growth from 2002 to 2010 at an annual rate of 7 percent. Growth in the Other DoD category
(111 percent total increase from 2002 to 2010) was driven primarily by the Defense Logistics Agency
(DLA) and, to a lesser extent, by the Tricare Management Agency (TMA). Obligations by the Navy grew
somewhat more slowly, rising 54 percent from 2002 to 2010, followed by the Air Force at 14
percent
growth during this period.
From 2008 to 2011, due to the drawdown in Iraq and increased fiscal austerity measures, the
relative component shares of DoD contract obligations underwent a major shift. This affected the Army
most of all, and its overall contract obligations decreased at an average of 7.7 percent per year between
2008 and 2011. Air Force obligations decreased only slightly at 0.5 percent per year on average, while
Navy contract obligations increased by 1.5 percent annually. The category of Other DoD grew in value by
a yearly average of 2.5 percent during the past three years, largely driven by obligations by the U.S.
Transportation Command (USTRANSCOM), TMA, and the Defense Information System Agency (DISA).
Share of DoD Total Contract Obligations by Component, 1990–2011
To show the relative shares of total DoD contract obligations by the individual DoD departments from
1990 to 2010, the percentage lines from the previous four figures are grouped together in Figure 3-9. All
values represented in the graph are expressed in percentage of total DoD contract obligations for each year.
Driven by operations in Iraq and Afghanistan, the Army’s contract obligations grew rapidly post- 2001 to claim the largest share of defense contract dollars (40 percent at its peak in 2008 compared to 27
percent in 2001). However, with U.S. troops withdrawn from Iraq, the Army’s share plunged from 38
percent in 2010 to 34 percent in 2011. The Navy’s share of defense contract dollars held mostly steady
after 2004 at 25 percent, following a long decline from 1990 levels. In the last two years observed, Navy
contract obligations surged from 24 percent to 28 percent due to both decreasing Army obligations and a
surge in Navy contract obligations. In an unprecedented occurrence, the Air Force dropped to the lowest
share of defense contract obligations in 2008 at nearly 17 percent and, after a rise to 18 percent in 2009
and 2010, returned to 17 percent in 2011. However, this share does not reflect the Air Force’s contract
obligations for classified projects. Furthermore, the decline in Air Force and Navy shares of DoD contract
dollars obligated was absolute gains observed in both of these accounts over the past decade. Meanwhile,
the collective share of the category of all Other DoD entities rose to its highest point at 21 percent of DoD
contract obligations in 2011, surpassing its previous peak in 2006.
Defense Contract Obligations by Competition, 1990–2011
To determine levels of competitiveness in contract awards, this report uses FPDS data on the number of
offers received from distinct entities before a contract is awarded. Contracts awarded after receiving
multiple offers are deemed the most competitive, followed by those awarded after a single offer and
contracts awarded under no competition. Note that in Figure 4-1 below, unlabeled contracts are those that
are either unlabeled in FPDS or those that were determined by CSIS analysis to be erroneously labeled
(for example, if the contract is designated as competed and there are zero bidders, or if it is designated as
noncompeted and there are several bidders). In keeping with previous CSIS reports, classification does
not include the Fair Opportunity / Limited Sources column. Due to contradictions between that column
and the Extent Completed column, IDV contracts may be classified differently in this report than in
government publications.
In Figure 4-1, total DoD contract obligations (presented earlier in Figure 2-1) are broken into four broad categories: competition with multiple offers, competition with a single offer, no competition, and
unlabeled contracts.
Competition in DoD contracting was stable between 1990 and 1996, with between 42 and 47
percent of obligations going to contracts that were competed and received multiple offers, and between 34
and 38 percent going to contracts that were not competed. From 1997 through 2001, the shares for both
competition with multiple offers and no competition increased by approximately 5 percent; this was
primarily a result of a decrease in unlabeled contracts. As a result, this change may merely reflect better
reporting rather than a change in contracting practice. Also notable is the period from 1997 to 2000, when
contracts labeled ―No Competition‖ (Unlabeled Exception) represented the vast majority of No Competition contract value; this data deficiency was corrected starting in 2001.
From 2000 through 2011, DoD contract dollars awarded with no competition and with
competition with multiple offers have both increased at a 7 percent annual growth rate. The share of
contracts that had no competition declined from a high of 41.5 percent in 2001 to 36.9 percent in 2010,
but increased again to 39.6 percent in 2011. Meanwhile, competition with multiple offers, which accounted for 50 percent of contract value in 2010, fell to 48.6 percent in 2011.
Competitively awarded contracts receiving only a single offer increased from $9 billion in 2000 to $44 billion in 2011. This is down from $48 billion in 2010, but overall, competitions receiving only a
single offer have increased at a 15.1 percent annual growth rate since 2000. Looking at the 2008 to 2011
downturn period, however, competition with a single offer declined at nearly two and a half times the rate
of competition with multiple offers (-4.4 percent versus -1.8 percent annual growth, respectively). Nonetheless, competition with a single offer accounted for 11.7 percent of contract dollars in 2011, which
should be of concern to those in and out of government advocating for greater use of competition. Factors
contributing to this trend might include:
s, or such that one
company has a significant and obvious advantage;
-heritage defense contractors;
scares away potential competitors.
Defense Contract Obligations by Funding Mechanism, 1990–2011
Figure 4-2 presents trends in the choice of funding mechanism for DoD contract dollars. Funding mechanisms, or the conditions under which the government pays its obligations, are divided here into the
following categories: cost reimbursement, fixed price, time and materials (a form of cost based contract
distinguishable from cost reimbursement by the responsibilities assumed by the customer and the contractor), and ―combination‖ (a mix of cost and fixed price).
The 1990s saw a significant increase in the use of cost reimbursement contracts, at the expense of fixed price contracts. Cost reimbursement contracts, which accounted for only 18.4 percent of DoD
contract dollars in 1990, rose to a high of 34.7 percent in 1998, while fixed price contracts, which accounted for 74.3 percent of DoD contract dollars in 1990, dropped to 58.7 percent in 1998. This trend
began to reverse itself in 1999, but the shares of fixed price and cost reimbursement contracts have not
returned to their 1990 levels.
The data for 2000 to 2011 reveal additional interesting trends. Fixed price contracts grew at an
8.2 percent annual growth rate for 2000 to 2011, compared to 7 percent for cost reimbursement. For the
years 2008 to 2011, the change is even more pronounced: the total value of fixed price contracts decreased slightly (-0.5 percent annual growth rate), compared to a 4.9 percent annual growth rate for cost
reimbursement contracts. This change is driven by a $2 billion decrease in fixed price contract value
between 2010 and 2011, in parallel to a $3 billion increase in cost reimbursement contract value. Within the fixed price category, there was an $11 billion decline in basic Fixed price, along with increases of $6 billion and $2 billion in Fixed price Incentive and Fixed price with Economic Price Adjustment. In the cost reimbursement category, Cost Plus Award Fee contracting declined by $7 billion
between 2000 and 2011, countered by increases of $6 billion and $3 billion in Cost Plus Fixed Fee and
Cost Plus Incentive, respectively. The increased use of incentive fees is consistent with recent government-wide contracting policy, but the relative shift from fixed price to cost plus is not. While contracts labeled Combination, which include elements of both cost-based and fixed price contracts, declined significantly in 2009 and 2010, their value nearly doubled between 2010 and 2011,
from $6.3 billion to $11.4 billion. This is of concern because with combination contracts, it is impossible
to determine how many dollars are awarded on a fixed price or cost basis. For example, in the $11.4
billion awarded in 2011, it is possible that $9 billion was awarded on a cost basis and $2.4 billion was
awarded on a fixed price basis, which would significantly affect the trend lines for the two categories.
This category bears watching in FY 2012 to see if this rise was a one-year anomaly or the start of a trend.
Defense Contract Obligations by Vehicle, 1990–2011
In Figure 4-3, total DoD contract obligations are broken out by contract vehicles. The Indefinite Delivery
Vehicles (IDV) category is further broken out into Federal Supply Schedule (FSS), Multiple Award
Independent Delivery Contracts (IDCs), and Single Award IDCs. Purchase Orders and Definitive Contracts form separate categories.
The key trend for DoD contract vehicles in the 1990s was the rapid decline in the use of purchase orders. Claiming a 36 to 40 percent share of total DoD contract value from 1990 to 1994, purchase orders
fell to below 23 percent in 1995 and 1996 and to below 1.5 percent in 1997. Since then, purchase orders
have not exceeded 3 percent of total DoD contract value. In 1997, definitive contracts accounted
for over
two-thirds of overall DoD contract value, with IDVs (primarily Single Award IDCs) taking up most of the
remainder. The share going to definitive contracts declined for the rest of the 1990s, but remained over 61
percent in 1999.
From 2000 onward, IDVs gradually overtook definitive contracts as the majority of DoD contract value. Definitive contracts and IDVs held 59.3 and 38.9 percent shares, respectively, of overall DoD
contract value in 2000, compared to 42.1 percent for definitive contracts and 55.1 percent for IDVs in
2010. This trend reversed somewhat in 2011, as the share of overall DoD contract value going to IDVs
dropped to 52.4 percent, while the share going to definitive contracts rose to 44.8 percent. This change
was driven by an increase of $9 billion in definitive contracts in 2011, along with a $10 billion drop in
IDVs. Specifically, a $14 billion drop in Single Award IDC was paralleled by a $4 billion rise in FSS
contracts.
In the years 2000 to 2011, definitive contracts had a 4.7 percent annual growth rate, compared to 10.4 percent for IDVs. Within IDVs, Multiple Award IDCs grew the fastest (14.4 percent annual growth
rate), followed by Single Award IDCs (9.5 percent annual growth rate) and FSS contracts (7.8 percent
annual growth rate). For 2008 to 2011, overall IDVs (-3.0 percent annual growth rate) declined at almost
twice the rate of definitive contracts (-1.7 percent annual growth rate). This change was driven by a large
decrease in Single Award IDC value (-7.4 percent annual growth), along with a significant slowing of the
growth in Multiple Award IDCs (7.0 percent annual growth rate).
Top 20 DoD Contractors, 2001 and 2011
DoD relies heavily on the private sector for the equipment and services needed to meet national security
requirements. Firms supporting DoD vary significantly, ranging from large publicly traded firms to small
privately held companies; from firms that generate a significant share of their revenue from DoD contract
work to companies whose share of revenue from defense contracts is but a fraction of overall operations.
As the security environment changes over time, so does the composition of firms contracting with
DoD.
This chapter surveys the industrial base supporting DoD over the past 10 years. The focus is on the top 20
DoD contractors (i.e., those taking the largest shares of total DoD contract dollars) and on the breakdown
of the industrial base into small, medium, and large companies.
In 2001 DoD contract obligations reached some $181 billion awarded to some 46,000 contractors. In 2011, DoD contract awards totaled $375 billion and included slightly over 110,000 contractors. Table
5-1 shows the top 20 DoD contractors for 2001 and 2011. The top 5 contractors are identified in a separate cadre. Values are expressed in millions of FY 2011 dollars.
Total contract awards for the top 20 DoD contractors increased from $77 billion in 2001 to $163 billion in 2011. While contract revenue for the top 20 companies more than doubled, their share of the
total DoD contract awards remained constant at 43 percent in 2001 and 2011. The share of the next top 15
contractors increased from 13 percent of total DoD awards in 2001 to 17 percent of the total in 2011.
The composition and ranking of the top 5 DoD contractors remained nearly intact. The only
noticeable change between 2001 and 2011 is the result of an acquisition: in late 2001 Northrop Grumman
(seventh) acquired Newport News Shipbuilding (third). The combined company, Northrop Grumman
Corporation, became the third-largest defense contractor, a rank it held until early 2010. In 2011 Northrop
Grumman spun off its shipbuilding business, the combined Newport News and Gulf Cost Shipbuilding,
into a new company, Huntington Ingalls Industries (HII). Following the spinoff, Northrop Grumman
dropped to fifth place on the top 20 list.
A more substantial shift in the composition and market share over the past 10 years occurred among companies ranked 6 to 20. The number and market share of health care contractors, which increased from two in 2001 to three in 2011, and their market share rose from 1 percent to over 3 percent
of total DoD contract awards. In absolute terms, contract values for health care firms more than tripled, in
real terms, between 2001 and 2011. If the top three health care firms in 2011 were combined, their dollar
awards would total over $9 billion, and they would be ranked sixth on the list. This highlights the sharp
growth in DoD health care expenses from an industrial base perspective. It also illustrates a key challenge
for defense policymakers grappling with a defense budget drawdown: spiraling health care costs. The data seem to refute that the same defense firms are gaining an ever-larger share of the
market. In the past decade, the top 5 defense contractors actually lost market share, and of the firms in
places 6 to 20, defense contract dollars went to different contractors over time.
Defense Contract Obligations by Contractor Size, 2000–2011
Figure 5-1 illustrates the changes in distribution of all DoD contract dollars across contractors classified
by their relative sizes: small, medium, and large. In this report, any organization designated as small by
the FPDS database—according to the criteria established by the federal government—was categorized as
such. The threshold for a company to be considered ―large‖ is $3 billion in total annual revenue. To
provide greater granularity in this analysis, the large category is further broken out into the ―Big 6‖
contractors (Lockheed, Boeing, General Dynamics, Raytheon, Northrop Grumman, and BAE Systems)
and the rest of the large (greater than $3 billion in total annual revenue) contractors. Companies not
designated as either small or large are considered ―medium.‖ Contracts awarded to subsidiaries are rolled
into their parent contractors’ data; thus, those contractors are not distinguished separately. This breakdown is not meant to reflect the federal standard for small business set asides and varies from those
rules in two critical ways. First, if FPDS reports that a small business has been acquired by a large business, CSIS classifies dollars obligated to that company as going to a larger contractor. Second, this
report includes all contracts and does not exclude waived contracts (e.g., overseas contracts). A continuing area of concern for policymakers is the market share captured by small, medium, and large companies. In DoD contracting, a combination of growth in the market share of large contractors and small-business set-aside programs put pressure on mid-tier contractors, who have lost
significant market share from a high of 35.6 percent in 2001 to a low of 25.4 percent in 2011. During the
2008 to 2011 period, the contract value awarded to mid-tier firms has declined (-4.5 percent annual
growth rate) faster than the value awarded to all other contractor size categories. The Big 6 have also
shown the most significant fluctuation in market share during the current downturn; from 29 percent in
2008, the share of contract value going to the Big 6 declined to 26.7 percent in 2010, with the gains split
between other large contractors and small contractors. This trend was reversed somewhat in 2011,
with
the share of DoD contract dollars awarded to the Big 6 increasing to 28.5 percent.
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