Congress Finally Tackles Strategic Materials Reform

With the 2013 National Defense Authorization Act, Congress has enacted significant reforms to the Defense Department’s acquisition and industrial base policy.

Shortly before World War II, Congress initiated a “strategic materials” program, the National Defense Stockpile, eventually placing it under the General Services Administration. The stockpile’s purpose is to ensure that the U.S. military and the civilian industrial base have a secure supply chain for metals and exotic materials that are necessary to manufacture defense systems.

Congress later created a separate office of manufacturing and industrial base policy within the office of the secretary of defense, which has responsibility for overseeing those companies that manufactured these systems.

But neither Congress nor the Defense Department established a clear chain of command or mechanism for policy coordination between offices. This problem finally has been addressed.

The National Defense Stockpile, now known as the Defense Logistics Agency-Strategic Materials, has found itself torn between its dual statutory mandate to secure both national defense and essential civilian materials. It often battled through multiple layers of Pentagon bureaucracy to warn about supply-chain security concerns.

Office of manufacturing and industrial base policy officials have charged that, from the point of view of program managers and prime contractors, the Defense Department was no longer in a position to drive commercial markets and that the government must accept the reality of a globalized defense supply chain. The paramount goal of this office became to deliver products and services to war fighters at the lowest cost, with lesser regard to supply-chain security or industrial base concerns at the lowest tiers.

With nearer proximity to top Pentagon leadership, the views of this latter office often prevailed.
 
In passing the new defense authorization bill, Congress has directed that the office of manufacturing and industrial base policy give equal weight to both defense contractors and strategic materials suppliers. This establishes a new paradigm in industrial base strategy. The law strikes a balance between the emerging view that the health of the defense industry must be assessed from the “bottom up” — starting with raw materials suppliers — and the department’s more traditional “top down” approach to assessing the health of the defense industry, which focused almost exclusively on the well-being of prime contractors.

To reinforce this balance, the head of the office of manufacturing and industrial base policy and the Defense Logistics Agency-Strategic Materials will now serve as the chair and vice-chair of the Strategic Materials Protection Board, codified at 10 U.S.C. 187. Congress created this inter-service body in 2006 to assess the long-term strategic materials needs of the Defense Department and to assist in planning for continued stable supply.

Reviewing the board’s prior performance, the House of Representatives noted: “The committee expresses concern about the board’s failure to fulfill its statutory obligations.” By restructuring the board, Congress has made clear its expectation that the Defense Department seriously assess its strategic material vulnerabilities.

The defense bill provides a window of transparency into industrial base policy for all participants — small business and multinationals, raw material producers and original equipment manufacturers, prime contractors and major subcontractors. Congress has required the board to meet at least once every two years. Since its founding, it has reportedly met in December 2008 and October 2011. Lawmakers widely criticized the findings of the 2008 meeting for departing from congressional intent and creating an overly restrictive definition of “strategic materials.”

None of the results of the 2011 deliberations have been made public. With the passage of the defense authorization bill, Congress has strengthened the board’s reporting requirements, to include recommendations from the secretary of defense and to be delivered to Congress within 90 days of a meeting.

Lastly, and perhaps most importantly, the Congress has initiated a subtle statutory change to the Strategic Materials Act of 1939 that will give the administrator of the Defense Logistics Agency-Strategic Materials greater ability to anticipate and manage material shortages. In the past, the stockpile administrator only had statutory authority to intervene if there were no U.S. suppliers of a strategic material or if those that remained were nearly insolvent. In other words, no action could be taken unless the defense industry was fully dependent on foreign sources.

Effectively, Defense Logistics Agency-Strategic Materials and its predecessors were statutorily locked into reaction mode, waiting for a crisis to develop and then creating ad hoc solutions on relatively short notice.

The 2013 legislation empowers the Defense Logistics Agency-Strategic Materials to act when the supply chain is limited to a “single point of failure.” This means that the Pentagon now can diagnose industrial base issues earlier and with less disruption, as opposed to having to resort to last minute and potentially costly bailouts or emergency sales of troubled firms.

Over the past several decades, the Defense Department has rightly embraced globalized supply chains to achieve maximum value for taxpayer money. However, the relentless pursuit of the lowest price has sometimes ignored the inherent supply-chain risk created by reliance on potentially unreliable foreign suppliers. This in turn contributed to withering away of key assets of the U.S. defense industrial base. Loss of these domestic suppliers has left the United States dependent on non-allied nations. It ironically also leaves it more vulnerable to paying higher and manipulated prices for these foreign-sourced commodities.

Some of the U.S. military’s most cutting-edge programs rely on materials primarily manufactured in the People’s Republic of China or other nations that have a history of controlling exports of strategic materials to advance their national interests. This is a critical and rapdily growing vulnerability that could have far-reaching consequences.

Serious supply disruptions have already occurred because of inadequate attention to the lower tiers of the supply chain. Examples include Sony withholding cameras for missiles during the Vietnam War, Swatch Group refusing to ship critical parts for smart munitions over Operation Iraqi Freedom, and the reported delay of U.S. military acquisition programs prior to the rare earth supply disruption in late 2010.

Similar disruptions are likely to occur again, but the 112th Congress has now given the Department of Defense essential tools to mitigate a problem that has been longing for a solution.

Jeffery A. Green is a former counsel to the House Armed Services Committee, president of J. A. Green & Co. and executive director of the Strategic Materials Advisory Council.

Topics: Defense Department, Manufacturing