A $25 million program designed to help small and medium-sized companies conduct
electronic business with the Defense Department, in the future, could contribute
to Pentagon efforts to manage its unwieldy network of suppliers.
The program, however, is targeted for cutbacks because Pentagon officials believe
the private sector should pick up a share of the costs.
The program funds the so-called electronic commerce resource centers (ECRC),
which provide, free of charge, assistance to government contractors on how to
transition from traditional paper-based transactions to electronic commerce
and data exchange. There are 17 centers in the United States. They are managed
by the Defense Logistics Agency, but the operations of each center are outsourced
to contractors.
The program came about after President Clinton issued a memorandum in 1993,
urging the government to boost efforts in electronic commerce. The centers were
conceived as venues for small business to learn how to conduct business electronically.
"We teach them about how the government works," said F. Deane Erwin,
program manager of the ECRC in Fairfax, Va. He is employed by Dimensions International,
in Alexandria, Va. The company operates the center under a five-year contract.
If the government decides, for example, that all invoicing will be done electronically,
"we can teach contractors how to implement that program," Erwin said
in an interview.
There are no prerequisites to get ECRC assistance, he explained. "No qualifications
are needed," he said. "The sense was that small businesses may or
may not have the $400, up to $1,000 that a class similar to what we provide
might cost." The Fairfax ECRC, for example, helps businesses seek contract
opportunities with the federal government. But it also works with large firms
to help them work more efficiently with their subcontractors.
When the Defense Department implemented an Internet-based "central registration
for contractors," Erwin said, the ECRC helped many firms sign up for the
program.
Recently, however, the Defense Department has decided that ECRCs should shift
their focus toward new priorities, such as the management of Pentagon supply
chains. These are composed of multiple tiers of subcontractors that supply a
prime contractor.
Pentagon officials also want the private sector to pick up a share of the cost
of maintaining the ECRCs.
During the past several years, the ECRC funding provided by the Defense Department
has declined from about $50 million to $34 million last year. The Pentagon requested
$25 million for fiscal 2001.
Johnnie E. Wilson, retired Army four-star general and now president and chief
operating officer of Dimensions International, believes that the reason for
the cutbacks is a desire by the Defense Department to reassign some of the ECRC
dollars to other priorities.
"A couple of years ago, the effort to make small businesses electronic
commerce-compliant was a major factor" in the ECRC program, he said in
an interview. But during the past two years, "the pendulum has swung,"
said Wilson.
The Pentagon wants ECRCs, in the future, to begin focusing on the supply chain,
he said. This chain has thousands of vendors that provide equipment and services
directly to the government and to the Pentagon's prime contractors. Supply chain
analysis today is a major trend in manufacturing production because much of
the value added in the production process comes from the suppliers.
The thinking at the Pentagon today, said Wilson, is that "we need to redirect
the energies of the ECRCs more toward supply chain management and make ECRCs
financially self-sufficient."
Defense Department officials, however, claim they are doing what Congress told
them to do.
Louis A. Kratz, assistant deputy undersecretary of defense for logistics architecture,
told National Defense that the ECRC cost-sharing plan was requested by Congress
in fiscal 1998. "They asked us to develop plans that would lead to self-sufficiency
by the centers," he said.
The Defense Department, said Kratz, "has rebutted by saying [the congressional
proposal] is not in the department's best interest ... [But] we do agree that
some burden sharing is appropriate."
One of the most prominent supporters of the ECRC program on Capitol Hill is
Rep. John P. Murtha. The largest ECRC is located in his home state of Pennsylvania.
"I am unaware of any serious effort on the part of the Defense Department
to eliminate the ECRC program," Murtha said in response to questions from
National Defense. "As far as restructuring goes, I am never against taking
a look at programs to see if modifications can be made to improve them,"
Murtha said. "It is healthy for all programs to undergo a thorough review
from time to time.
"If the Department can show me that it can retool the ECRC program to
do a better job of integrating small- and medium- sized businesses into their
emerging electronic commerce system, I would support it," he added. "On
the other hand, I would have difficulty with any proposal to downsize this program
for purely short-term budgetary reasons."
Murtha noted that the ECRC program has received widespread support in Congress
because lawmakers generally favor efforts that "help small- and medium-sized
businesses keep up with the large, well-financed contractors."
Congress, he said, "is not going to allow the small businessperson's role
to be further diminished in providing goods and services to the Defense Department
... If anything, this role should be strengthened."
The ECRC program, said Murtha, should be viewed as a way of "leveling
the playing field between big and small contractors when it comes to gaining
access to the defense market." The center in Johnstown, Pa., he said, has
helped "thousands of small and medium businesses in Pennsylvania, New York,
Maryland, and West Virginia."
Kratz, meanwhile, conceded that budget cutbacks for ECRCs reflect a "desire
on the part of the department to have industry share in the financial support
of ECRCs."
Supply Chain
Financial issues notwithstanding, Kratz said, the Pentagon believes it would
make sense for ECRCs to focus more on the "integrated supply chain,"
rather than only on electronic commerce, because "EC is one of the key
enablers of the integrated supply chain." In many commercial industries
and retail organizations, customers and suppliers are interconnected, so inventories
can be tracked and response time for deliveries is shortened. That is how the
Pentagon would like to operate in the future.
"When you get into the aerospace and weapons industry, that sector has
not been really active in electronic commerce and integrated supply chain ...
So we have a little catch-up to do," said Kratz.
"We view the ECRC program as a valuable tool to work with our original
equipment manufacturers and our second- and third-tier suppliers, and help the
department move toward integrated supply chain," said Kratz.
Currently, the Defense Department buys equipment and parts from multiple vendors,
he explained, and "we do the integration to meet war-fighter needs."
In the future, he said, the Pentagon would prefer for its prime contractors
to handle that operation. "Today, we manage largely inventory," said
Kratz. "We take the items from 80,000 different suppliers, we put them
in our warehouses, and when a fighting unit needs an item, we box them up and
ship them."
In the future, he said, "as opposed to us boxing and shipping the equipment,
we would prefer that industry do that." For that reason, DLA is shifting
toward so-called prime vendor contracts, which are not awarded for a particular
item but for broad orders that include a multitude of products and services
that the contractor has to provide within a specified time.
Pilot Programs
"We have 30 pilot programs running" in this arena, said Kratz. As
examples, he cited an Air Force-Boeing program to maintain the fleet of C-17
heavy-lift cargo aircraft and a similar Air Force-Lockheed Martin project to
extend the operational life of the F-117 stealth fighter jet. "We are trying
to shift the burden from us to the larger industrial partners," he said.
Supply chain management, explained Erwin, is about "having the technical
data necessary so that, if a company goes out of business, I can transfer the
information to another company."
Corporate mergers and acquisitions also complicate the equation because, if
a company buys other companies, it ends up with multiple supply chains. That
is where electronic commerce becomes an important tool.
The giant retailer Sears, for example, has 3,800 small businesses as part of
its supplier chain. And they all must be electronic commerce-compliant, in order
to avoid paying a penalty fee, said Erwin.
The ECRCs would become "key enablers" in achieving an integrated
supply chain, said Kratz, because it is electronic commerce that makes it possible
to establish virtual links between primes and subcontractors. "Although
we've been working on it for quite a while, from a technology point of view,
it's just been in the last two years-with the explosion of the World Wide Web
and the tools associated with it-that we've really had the technical capability
to do it."
One recent project by the Fairfax ECRC exemplifies the Pentagon's new vision
for the centers. And it also helps explain why officials may be inclined to
ask industry to foot a share of the bill.
The center recently conducted a statistical analysis of about 3,000 subcontractors
of Newport News Shipbuilding, in Newport News, Va. The shipyard makes nuclear-powered
aircraft carriers and submarines for the U.S. Navy. Last fiscal year, it was
the Pentagon's 22nd largest prime contractor, with $535 million in awards.
"The Navy came to us and asked us to help Newport News understand how
Newport News does business and what needs to change, so its suppliers can do
business more effectively," said Wilson.
Erwin described the project as a "customer database that completely describes
the Newport News Shipbuilding supply chain." It was constructed over a
two-year period, he said.
This study, in many ways, reflects the changing nature of the defense contracting
business, Kratz suggested. ECRCs were not designed to work for large prime contractors,
but the shipyard study exemplifies why more of this sort of work will be needed
in the future, he said.
"ECRCs originally were set up to work with small and medium-sized businesses.
But as we move toward an integrated supply chain, we would expect ECRCs would
migrate to work across the supply chain to include large businesses and third-party
logistics providers," he explained. Kratz denied, however, that plans to
seek industry funding for the ECRCs were prompted by the Newport News study.
"We believe that as long as industry is gaining some benefit, then industry
should be willing to participate in the funding," he said.
The shipyard supplier base study sought to help "reduce costs and cycle
times for a major defense supply chain," said a slide briefing by the ECRC.
Other goals cited in the briefing included:
- Creating a "cooperative atmosphere" between the prime and its suppliers,
- Fostering a "model of engaging in supply chains" which can be replicated,
- Helping the shipyard increase the percentage of suppliers who are equipped to
do business electronically. Less than half of the suppliers currently are able
to conduct electronic transactions, such as exchanging drawings or technical
data. But only 14 percent of these companies occasionally perform electronic
exchanges.
Kenny Roberts, manager of e-business at Newport News Shipbuilding, said the
company was not "surprised by anything [in the study] about our suppliers."
In an interview, he explained that the data provided by the ECRC essentially
was information the company already knew about, but, "We liked the way
they presented the information ... They have a very good statistician who presented
the data in a very easy format for us to use graphically," said Roberts,
"[But] we didn't see anything special."
There are numerous e-business initiatives underway at the shipyard, said Roberts.
"We want our suppliers to be able to deal with us using electronic mechanisms
through the Internet."
Some of this work is supported with corporate funds but other efforts are shared
with the Defense Advanced Research Projects Agency, which participates in a
program with the shipyard aimed at improving "shipbuilding efficiency through
e-business," explained Roberts.
E-business, for example, has helped shrink a purchasing cycle from 60 days
to three days, he added.
When asked whether Newport News would agree to a cost-sharing agreement with
the Defense Department to support the ECRCs, company spokeswoman Jerry Fuller
Dickseski said she could not comment because the government had not contacted
the shipyard about this initiative. "We have to have more detail before
we can say if we are interested," she said.
Kratz said the Pentagon's motives behind this plan are more than just financial.
"I am not really looking for monetary payoff," said Kratz. "My
focus is on improved customer service. We would like to improve efficiency in
logistics operations and confidence in the overall supply system. But we are
not focused on a particular dollar bogey."
He wants to see ECRCs working to "ensure that our small and medium-sized
providers actively participate within the changing market structure of integrated
supply chain."
The centers, he explained, will not abandon their work on electronic commerce.
"We are asking them to focus across the entire supply chain and recognize
that small and medium businesses will be doing business with us increasingly
through third-party providers and original equipment manufacturers, not directly
with us as they have in the past. That is a very important part of the ECRC
program."
The timeline for transitioning ECRC from a 100 percent government-funded operation
to a cost-shared venture with industry is to be worked out in the near future,
said Kratz. "We should have [the schedule] by this summer."