Fresh strategy needed to preserve industrial base: defense industry.

• Author: Church, Dale W.

It has been reported that more than 50 percent of the critical companies in the Joint Munitions Command's conventional munitions minimum sustaining rate (MSR) database are considered to be in financial distress. This is defined as where the return on investment for a company's facility is below the minimum needed to remain financially viable.

Future projections show the situation is worsening as the government is forced to buy smaller quantities because of reduced budgets. In addition, reduced budgets mean sacrifices will have to be made to modernization. In order to offset this, it would be wise to keep some critical capabilities alive by sponsoring prototype competitions for advanced design and development.

The problem is caused by insufficient annual orders for specific products to maintain a profitable facility. This is obvious at the prime-contract level, but it is often even more prevalent and not apparent at lower tiers in the supply chain. Profitable production requires a constant flow of work matched to the size of the facility. Temporarily closing production can cause a facility to take months, if not years, to restore production and, even then facilities often have to overcome significant problems before reaching efficient levels of output.

Conventional munitions design, development and production need highly skilled managers, scientists and workers. It often requires years of training and experience to understand the nuances of energetics and its artisan skills. The acquisition strategy must be designed to provide sufficient incentives to keep the facilities operating as efficiently as possible at less than optimum levels of production.

The conventional munitions industrial base includes production facilities known as government owned government operated (GOGO), government owned contractor operated (GOCO) and contractor owned contractor operated (COCO).

The GOGOs are not operated on a profit-and-loss basis, and their continuance is supported by the political concerns of those who represent the community in which they are located. They need to be consolidated or closed where they do not constitute a single point of failure.

Government owned contractor operated facilities are run under contract provisions that do require attention to efficiencies but are not operated as a facility on a profit-and-loss basis. However, the contracts are competed, and contractors can and do lose money if not bid with sufficient margin. These...