Price Markups and Inefficiency in Defense Production

Testimony was given on a draft of a GAO report which was prepared in response to a congressional request to examine the ability of the Defense Industrial Base (DIB) to meet projected defense requirements. Many studies have suggested that the DIB has been experiencing skilled labor and equipment shortages, subcontractor delays, long lead times, high levels of foreign dependency, and problems with proprietary data which have limited the Department of Defense's (DOD) flexibility to adjust to the changing requirements of defense contingency planning. GAO found that current DOD assessment methods are useful for identifying and tracking overall trends; however, data specific to individual weapons systems have been inadequate, despite current DOD initiatives. Therefore, GAO developed a method to study possible production constraints on critical defense items through the levels of suppliers, evaluated the competition for production resources within each firm, and compared the results to future defense production requirements analysis. This method was applied to six high-priority weapons systems currently in production. GAO found that shortages of production machinery present a production constraint on four of the six weapons systems and an increased demand could cause significant production delays. In addition, there is: (1) a serious shortage of special testing equipment, components, and raw materials; (2) a high reliance on foreign sources for many weapon system components and raw materials; (3) a potential shortage of skilled labor; and (4) widespread use of proprietary processes to produce defense components. However, extensive time between ordering and first production did not appear to be a significant constraint on many of the contractors visited. The GAO analysis showed that most current and potential production constraints occur at the lower levels of the DIB. Therefore, GAO found that it is important to: (1) establish a database that identifies trends in past production problems; (2) improve the accuracy and verification of production data; (3) and encourage data coordination between the military services, defense contingency planners, and defense contractors by implementing a method such as the one developed by GAO or creating a central DIB information management system within DOD.