New priorities: Pentagon must avert 'points of failure' in supplier base, says industrial policy chief.

• Author: Erwin, Sandra I.
• Position: Defense Industry

The defense industry will have to shut down unneeded facilities and possibly lay off workers in the coming years, as the Pentagon begins to trim its weapons budget and bring troops back from wars abroad.

But the Pentagon does not want the industry to shrink indiscriminately. With the U.S. military still involved in two major conflicts, the Defense Department must ensure that certain sectors of the supply base remain financially healthy, says the Pentagon's Director of Industrial Policy Brett B. Lambert.

The Pentagon's industrial policy shop is steering in a different direction than previous administrations, Lambert tells National Defense in a recent interview. It does not plan to be an advocate for industry but rather to engage in a closer dialogue with the private sector so the Pentagon is better informed about the financial health of critical suppliers. This will help the Defense Department anticipate "points of failure" in the supplier base and save taxpayer dollars by avoiding costly rescues of failing companies, Lambert says.

"I think we will be more forward leaning. We'll try to get ahead of issues," he says.

When the military budget was headed for a steep downturn after the Cold War, then-Secretary William Perry warned the CEOs of major defense contractors that they needed to consolidate into fewer companies if they wanted to stay in business. The industry subsequently underwent a rapid consolidation during the mid-1990s that created a handful of mega-corporations that to this day dominate the market.

The weapons acquisition budget is again about to enter a downward cycle, but industry consolidation '90s-style is not the solution this time around, Lambert says. One problem with the mergers and acquisitions of the past decade is that the surviving companies grew bigger but did not eliminate enough excess capacity. "We were fairly effective at consolidating companies but not necessarily capabilities and facilities, so taxpayers continue to bear the cost of the underutilization of facilities," says Lambert. "We need to address this."

The Pentagon now is not as concerned with the financial standing of the large top-tier contractors but instead wants to gain a solid grasp of the health of smaller companies in the lower echelons of the supply chain.

"Too often the Defense Department has focused on competition among prime suppliers," Lambert says. "What we are seeing increasingly is that all primes rely on a single source, or point of...