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Home News Archive Just How Important is Supply Chain Management to Operational Success?

Just How Important is Supply Chain Management to Operational Success?

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We have tooted horns and bloviated ‘til the bovines come home, but we’re afraid the message is not getting out. Listen, folks: Whether you call it Supply Chain Management, supplier management, or subcontractor management, it is the key to success. Period.

Your preoccupation with internal matters, your management metrics that focus only on internal issues (such as headcount), your application of Lean and Six Sigma solely to your own production line, your attempts to control cost growth by forcing suppliers into firm fixed-price development contracts or into making huge program “investments”—these actions betray a management naïveté, an erroneous impression that the management approach that worked to put a man on the Moon is the same approach that will lead to successful program execution in the 21st century.

Newsflash: it will not.

Program management in the 21st century looks completely different from how it looked 40 years ago. And nowadays it’s all about managing a large team to a successful outcome. It’s all about supplier management.

But don’t take our word for it. Look at the evidence and draw your own conclusion. Here are two recent news stories that show the pros and cons of revamping one’s approach to managing subcontractors.

In the first story, the Pentagon’s Missile Defense Agency has decided to “withhold” a $400 million Terminal High-Altitude Area Defense (THAAD) production contract from Lockheed Martin until it can prove it has solved quality and reliability problems associated with the “optical block switch” designed and manufactured by one of its subcontractors. According to this Wall Street Journal article—

Production of the missile, Gen. O'Reilly said, is ‘badly needed’ so the Army's first THAAD unit, stationed at Fort Bliss, Texas, can fully train on its equipment. But he said he would not approve a $400 million-plus production contract unless the company fixed the flaws and the safety device passed new qualification tests within the next 30 days.

I am holding their [the contractor's] feet to the fire,’ Gen. O'Reilly said. ‘I will not move forward until they satisfy all the quality requirements and all the production start-up requirements.’

According to Gen. O'Reilly, Lockheed offered a warranty over the part, called an optical block switch. If production is approved and new problems are discovered, the company will be liable for any extra costs stemming from production delays, he said.

This GlobalSecurityNewswire article reported LMCO’s reaction as follows—

The company suggested it could assume additional financial responsibility to secure the contract, Reuters reported. The firm proposed underwriting potential expenses that could result from halting and resuming the manufacturing process as the faulty switch is addressed. Approval of the component is expected next February.

We have taken responsibility for delivering the successful optical block switch solution as promised,’ [LMCO Spokesperson] Amerine stated by e-mail.

This article at SpaceNews fills in some of the gaps—

Dallas-based Lockheed Martin Missiles and Fire Control is the prime contractor for the MDA’s Terminal High Altitude Area Defense (THAAD) system, designed to destroy ballistic missiles in and above the Earth’s atmosphere.

Lockheed is under contract to deliver 50 THAAD interceptors and was expected to receive a production order for 48 more. However, an optical safety switch built by one of Lockheed’s subcontractors, Moog Inc., has repeatedly failed in testing, resulting in a production delay of at least six months, U.S. Army Lt. Gen. Patrick O’Reilly, the MDA’s director, told reporters at the Space and Missile Defense Conference here.

It’s very frustrating. After 10 years of development of this version of THAAD we’re down to one small component,’ O’Reilly said. ‘I’m sure half of the Lockheed workforce would like to personally rebuild it themselves.’ …

A redesigned safety switch has been built and is undergoing qualification testing, O’Reilly said. Though testing of the redesigned safety switch will not be fully complete until next February, the MDA and Lockheed have come to an unconventional arrangement in order to minimize the delay. If the first three new safety switches pass preliminary testing in September, MDA will allow Lockheed Martin to enter production in exchange for a warranty on all of the interceptors built under this contract, O’Reilly said.

To wrap this story up, we want to quote an August 19, 2010 story from the Aerospace Daily & Defense Report entitled, “MDA Contractor Woes Continue with Faulty Thaad Part.” It reported—

O’Reilly said he notified Lockheed Martin of the problem a year ago; the company offered other solutions that also failed to quality. Now the focus is on a redesign … As prime contractor, Lockheed is responsible for the quality of parts used in its systems, even if they come from a supplier such as Moog. Lockheed also offered to pay for any ‘financial setbacks’ that the program could encounter in the future as a result of problems with the optical block switch.

Let’s reprint one phrase from the foregoing for emphasis: “As prime contractor, Lockheed is responsible ….”

Yes, indeed.

Program quality and execution risk cannot be transferred to suppliers. The prime contractor is responsible to the customer for the program. Period. If your attorney counsels otherwise, you should hire another attorney. If your subcontract manager or buyer or procurement specialist tells you that cost or schedule or quality or performance risk has been controlled by pushing it downwards in the supply chain, you should put a better support team in place.

Because you cannot build a wall between team members on a program; you cannot say, “This is your responsibility and this is my responsibility.” You cannot transfer risk; the most you can do is to share it. The more that design information and risk information is shared, and communicated, and managed as a team, the better the outcome. When you treat your suppliers as individual entities that succeed, or fail, on their own, then you will always suboptimize your outcome. That is axiomatic. It is a nearly inviolate law of 21st century program management.

As Lockheed Martin learned to its chagrin.

On a more positive note, Raytheon may be getting the message. We recently reported that Raytheon won the Small Diameter Bomb Increment II (GBU-53/B) competition against the odds-on favorite team of industry giants, Boeing and Lockheed Martin. After receiving its debriefing, the losing team declined not to protest the award—which is a rarity these days. Clearly, Raytheon’s technical approach and pricing gave them such a competitive advantage that the award decision was unimpeachable. Raytheon’s winning approach is worth studying.

Several articles indicated that Raytheon’s decision to use an uncooled infrared seeker was a key technical and cost differentiator. As DefenseIndustryDaily reported—

Uncooled infrared involves a performance hit over cooled infrared designs, in exchange for snap-attack capability, better reliability, and lower production and maintenance costs. Raytheon could work to adapt the IIR seeker in their AGM-154 JSOW as a starting point, and they did eventually produce a version that fit SDB-II, was cheaper to manufacture, and more than met government requirements.

But perhaps more importantly, DID reported that “Raytheon executives said that they also took a somewhat different supply-chain approach to the SDB-II.” According to the article—

[Raytheon picked] suppliers early and then work[ed] directly with them to improve productivity at every step. While Raytheon prototyped their final assembly line, and began using lean production techniques to reduce the amount of ‘touch labor’ and improve productivity, they brought in suppliers to do the same thing. For instance, Celestica engineers were embedded with the team, in order to run their own producibility tools on circuit card designs and refine them to improve yield and costs. Rockwell Collins, who makes the datalink, did the same thing. This is not uncommon in general manufacturing, but defense manufacturing has traditionally been more stovepiped.

Raytheon’s initial team during development will be about 300, but this is expected to drop below 50 for production phase – in part because Raytheon has already used lean techniques, and focused from the beginning on creating a design that was simpler to manufacture.

Raytheon’s suppliers included General Dynamics OTS, Klune Industries, Rockwell Collins, Raytheon Dene, Goodrich, and Cobham. As the article above notes, Raytheon invested in its supply chain and worked with its suppliers in a partnership to develop common processes and align approaches.

This is how it is done, folks. This is how you build a program team that shares risks and responsibilities, as opposed to an adversarial team where the overall program objectives are subliminated to the needs of the individual business entity.

(Boeing 787 team, are you listening?)




Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.