GOVERNMENT CONTRACTING INSIGHTS DEFENSE DEPARTMENT

2024 NDAA Maintains Focus on Supply Chain

2/1/2024
By Stephanie Barna, Alex Hastings and Daniel Raddenbach

The fiscal year 2024 National Defense Authorization Act includes numerous supply chain and stockpile management provisions aimed at reducing vulnerabilities in Defense Department supply chain networks.

Of note, this year’s NDAA seeks to address China’s and Russia’s continued dominance in the global supply chain for many critical materials and rare earth elements.

Supply chain- and stockpile-related measures in the act could present significant opportunities for contractors, but Congress’s focus on increasing supply chain visibility could also herald new rounds of compliance and reporting requirements attached to federal procurements in three key areas.

First, the 2024 NDAA focuses on building supply chain resilience for critical industries, such as semiconductors and pharmaceuticals/therapeutics. To this end, Congress has directed the department to report on efforts to on-shore and secure semiconductor production.

For instance, the House Armed Services Committee Report directs the department to brief Congress on plans to incentivize domestic production of printed circuit boards and substrates, either through direct investment or other authorities.

The House and Senate Armed Services Committee Reports also require the department to examine efforts to leverage new semiconductor technologies, including chiplet-based system-in-package architecture and magnetoresistive random-access memory.

Additionally, the NDAA requires the department to establish a pilot program to enable collaboration between the National Security Agency’s Cybersecurity Collaboration Center and U.S. semiconductor manufacturers to improve the cybersecurity of semiconductor design and manufacturing processes.

In addition to semiconductors, the Biden administration identified pharmaceuticals and active pharmaceutical ingredients, or APIs, as a critical product area in the February 2021 Executive Order on America’s Supply Chains. As of 2019, almost 75 percent of APIs were manufactured outside the United States, with China holding a dominant global market share of production. Congress remains focused on shoring up supply chain vulnerabilities and stockpile deficits, which could result in opportunities for industry to provide domestic sources of key pharmaceuticals and APIs.

Key topics addressed in the NDAA and accompanying reports include establishing a military pharmaceutical and medical device vulnerability working group and utilizing Defense Department funding to support research and development for manufacturing and scaling domestic production of APIs and key starting ingredients.

Second, the act seeks to overhaul portions of Defense Department systems for managing and tracking supply chains and the National Defense Stockpile, signaling that Congress is committed to proactive mitigation of supply chain risks. The legislation is particularly focused on the National Defense Stockpile, a Defense Department-managed reserve of raw materials needed to manufacture essential defense items.

The activities resulting from this year’s NDAA could lead to opportunities for members of industry to partner with the department to provide innovative supply chain solutions. The key topics addressed by the legislation include procedures for replenishing defense stockpiles — an issue made more apparent by shortages related in part to U.S. aid to Ukraine — and a pilot program that would employ a combination of government and commercial tools to analyze the supply chains of as many as five weapons platforms.

Finally, the NDAA includes provisions related to assessing and securing supply chains and the National Defense Stockpile specifically as to critical minerals and rare earth elements. The Biden administration has identified critical minerals, including rare earth minerals, as “key inputs” in many modern technologies essential to both U.S. defense and commercial sector production. At present, the United States relies on foreign nations — many of which are not allied and few of which adhere to fair labor and environmental protection standards — to meet its demand for these resources.

This year’s NDAA requires deliberate action by the department to reduce reliance on non-allied nations for critical minerals and rare earth elements and establish a robust network of domestic, allied and partner nation suppliers.

The key provisions in the law include a multi-year procurement authority for rare earth elements and magnets processed in the United States.

The NDAA also requires the department to develop a strategy to ensure that by 2035 its supply chains do not rely on critical minerals mined or processed in “covered countries,” including China, North Korea, Russia or Iran.

As part of the strategy, the department must identify potential partnerships with U.S. allies and partners to reduce dependence on critical minerals from covered countries. Additionally, the NDAA directs the secretary of defense, in his role as the National Defense Stockpile Manager, to develop “reliable sources” of strategic and critical materials and to contract with these “reliable sources” for purchase of these materials.

In closing, the 2024 NDAA reflects continued bipartisan focus on mitigating supply chain vulnerabilities and stockpile shortfalls and suggests that the Defense Department will be keenly focused on reporting on and implementing an array of supply chain initiatives in the coming year.

This activity presents opportunities for contractors, but it also indicates that contractors and their supply chains may be under greater scrutiny going forward. For contractors and industry generally, understanding where and how enhanced monitoring, reporting and certification requirements may be required is likely to become essential to effective supply chain planning. ND

Stephanie Barna and Alex Hastings are of counsel and Daniel Raddenbach is an associate at Covington and Burling LLP. Of counsel Michele Pearce also contributed to this article.

Topics: Defense Department

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