'Virtual supply chains' could help bridge manufacturing gaps.

AuthorZylstra, Steven G.
PositionIndustry Forum

The Defense Department has immediate needs for thousands of products for which no domestic supplier can be found. Further, about a third of spare-parts shortages for Navy and Air Force aircraft and engines are attributed to "manufacturing issues."

Because America's manufacturers do not fully meet the need, defense agencies and their prime contractors are turning to foreign manufacturers to fill the gap. As natural a step as this may seem in today's global economy, it has left the U.S. reliant on nations that could suspend production or cancel delivery as the result of policy disputes.

To understand the current situation, it is helpful to explore both ends of the manufacturing supply chain the defense prime contractors and original equipment manufacturers (OEMs) at the ordering and receiving end, and the smaller manufacturers who traditionally have served as their vendors at the supply end.

For the last two decades, OEMs have been withdrawing--sometimes gradually, sometimes precipitously--from much of the direct manufacturing aspect of their industries. Prior to that, large manufacturers preferred to fabricate and assemble most elements of their products internally.

The automotive industry pioneered the shift to outsourcing functions, with vendors responsible for production and delivery of most components. The development and refinement of electronic commerce provided an important impetus for the new approach, as it gave faster tools for communication and collaboration to OEMs, and some of their main tier-one vendors.

It has taken the better part of 20 years, but the new model, with its promise of more efficient resource allocation, has become the rule rather than the exception. It is now the norm in defense industries as well. OEMs remain responsible for the broad design of their products, for research and development for final assembly. They are system architects ,and system integrators. But once they hand off the specs to their vendors, smaller companies manage most of the manufacturing. So it is fairly easy to see why the country's largest manufacturers alone cannot meet America's defense needs: They no longer are primarily direct manufacturers.

At the other end of the equation, small and mid-sized manufacturers have been under prolonged pressure from the primes and OEMS in their quest for better prices and fewer vendors to enhance efficiency.

Small manufacturers--those that employ fewer than 500 people--represent 90 percent of firms...

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