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United States Government Accountability Office: 


March 2006: 

Highlights of a GAO Forum: 

Managing the Supplier Base in the 21st Century: 





Balancing Acquisition Risks and Rewards: 

Difficulty Managing U.S. Government Policies in an International 
Business Environment: 

Defining a Strategic Supplier Management Policy: 

Managing Multiple Tiers of the Supplier Base: 

Workforce Skills Development and Culture Change: 

Appendix I--Scope and Methodology: 

Appendix II--Forum Participants: 

Appendix III--Forum Agenda: 

Appendix IV--Supplier Base Forum Slide Presentation: 

Appendix V--Summary of Lunch Speaker Remarks: 

Appendix VI--Related GAO Products: 

United States Government Accountability Office: 

Washington, DC 20548: 

March 31, 2006: 

The U.S. industrial base has been instrumental in the U.S. ability to 
provide the warfighter with the best weapons in the world and maintain 
military superiority. The Departments of Defense (DOD), Homeland 
Security and other agencies such the National Aeronautics and Space 
Administration have relied on a common supplier base to meet current 
and future mission requirements. However, due in part to a changing 
acquisition environment, these agencies face challenges to maintain and 
manage suppliers. For example, current and new acquisition efforts are 
expected to be the most expensive and complex ever and are intended to 
fundamentally transform military operations. Yet poor outcomes result 
from many of the government's major system acquisitions. The 
acquisition process slowly delivers systems with cost overruns and 
seemingly defies reform even as the external environment demands an 
agile and flexible process that can quickly deliver cost-effective 
products and services. In addition, DOD and related agencies are 
increasingly purchasing and relying on supplier services to accomplish 
agency missions and DOD is giving contractors increased program 
management responsibilities to develop requirements, design products, 
and select suppliers. At the same time, the government workforce that 
manages and oversees these activities has decreased and may lack 
necessary skills to ensure proper oversight, transparency, and 
accountability in the acquisition process. 

Recognizing that decision makers can greatly benefit from a better 
understanding of the constraints and challenges DOD and related 
agencies face to manage the supplier base, GAO convened a forum on 
October 17, 2005, to identify and discuss key supplier issues. 
Specifically, GAO's Acquisition and Sourcing Management team sponsored 
a 1-day forum where defense policy experts from federal agencies, 
defense industry, nonprofit organizations, and academia shared insights 
into the current supplier base environment. As agreed with the 
participants, our goal was to engage in a dialog on a non-attribution 
basis to reach consensus on the top challenges facing the management of 
the supplier base. Accordingly, participants identified and discussed 
key challenges and opportunities confronting DOD and related agencies' 
management of the supplier base and reached consensus on the top five 
challenges with some potential next steps to address them.[Footnote 1] 
The forum participants expressed a range of views on the challenges 
facing the supplier base. After a lengthy discussion, the following 
were identified as the most significant challenges: 

* balancing acquisition risks and rewards; 

* difficulty managing U.S. government policies in an international 
business environment; 

* defining a strategic supplier management policy; 

* managing multiple tiers of the supplier base; and: 

* workforce skills development and culture change. 

Convening discussions on these issues is just one step toward 
understanding the challenges faced by the supplier community and 
identifying areas where constructive action may be taken. While GAO and 
others have reported in the past on a number of issues raised by the 
participants, the purpose of this report is to set forth issues that 
participants identified during the forum and the actions they proposed 
to improve management of the supplier base, as well as to increase the 
body of knowledge available on these issues. 

The letter provides highlights of the most significant challenges 
discussed by the participants, as well as subsequent comments we 
received from them on a draft summary of the discussion. Appendix I 
describes the scope and methodology used for the forum, appendix II 
provides a list of the forum participants, and appendix III provides 
the forum agenda. Appendix IV contains a set of slides presented by GAO 
at the beginning of the forum. This presentation was designed to 
provide background information to spur the discussion among forum 
participants. Appendix V summarizes remarks made by Eileen Giglio of 
the Defense Acquisition Performance Assessment task force, who was the 
forum's lunch speaker. Appendix VI contains recent GAO reports and 
products related to the forum subject matter. 

For more information about this report, please contact Ann Calvaresi- 
Barr, Director, at 202-512-4841 or Other key 
contributors to this report were John Neumann, William Russell, Terry 
Richardson and Karen Sloan. 

Signed by: 

Katherine Schinasi, Managing Director: 
Acquisition and Sourcing Management: 


In advance of the forum, GAO provided prospective participants the 
following list of trends to provide context for the forum and to 
illuminate thoughts on the top challenges. 

Changing Acquisition Environment: 

Continuing DOD transformation from a platform centric acquisition 
strategy to a more capabilities based, net-centric approach. 

* DOD is shifting policy and acquisition approaches to develop systems 
that are network centric--interdependent components that work together 
in the field--with system architecture needs that are defined early in 
programs. These systems are integrated through information systems, 
relying on software for functionality. New DOD capabilities are often 
required to be interoperable across military services and use software 
solutions such as open architectures that increase company challenges 
to maintain proprietary data and knowledge of software. 

* DOD is experimenting with different ways of managing the acquisition 
of network centric warfare. Missile defense programs employ a "national 
team" approach to define the overall architecture. The Future Combat 
System program represents another approach where the lead systems 
integrator is managing the architecture and the systems that feed into 
it. In still other cases, DOD uses a systems integrator to define the 
architecture but manages the acquisition and integration of individual 
systems into this architecture. 

DOD use of and access to commercial products and technologies for 
systems and programs. 

* DOD has access to more nontraditional suppliers using other 
transactions authority to carry out prototype projects directly 
relevant to weapons or weapon systems, intended to address challenges 
of a shrinking industrial base and new threats. 

* Commercial sector leads innovation in telecommunications, software, 
and information systems, increasing the need for DOD to find means to 
access this technology. 

* Commercial firms must consider issues of intellectual property, cost 
data, and complex acquisition rules when providing products and 
services to DOD. 

Shift to purchasing more services for mission performance rather than 
spending on military equipment, supplies, and weapon systems. 

* Over the last decade, DOD has outsourced functions performed by 
military and civilian personnel to commercial services contractors, 
creating new challenges to establish effective oversight of contractor 

Changes in the budget environment. 

* DOD has increased utilization of international cooperative programs 
to develop next generation systems given limited resources. 

* U.S. government funding priorities, such as missile defense programs, 
guide where suppliers can compete for new contracts. 

* Mounting costs for the war on terrorism and military pay and benefits 
force cuts in weapon systems and services contract spending for key 
programs and missions. 

* Striking an affordable balance between current and future needs will 
be an ongoing challenge, particularly with the federal government's 
current and projected fiscal imbalance. 

Changing global threats require new capabilities, technologies, and 
communications as well as different tactics. 

* Global War on Terror is asymmetric in nature and creating demand for 
different systems such as non-lethal weapons that may be based on 
existing commercial products and technologies. 

* Current operations are creating the need to translate technologies 
into fielded systems rapidly. 

* DOD is expanding technology demonstration products and exploring 
alternate approaches for rapidly developing products based on 
commercial technologies. 

Supplier base consolidation. 

* As the defense supplier base has consolidated into a few prime 
contractors, competition has been reduced. As a result, cost 
containment is more difficult. 

* Single source suppliers are more common for components and 

* Key contractors are selling off defense divisions or exiting the 
market altogether. 

* It is becoming more common to end production of a system before DOD 
is ready to acquire the follow-on system. When this happens, component 
and subsystem suppliers disappear from the defense supplier base. 

Globalization of suppliers in the defense industrial base. 

* Intensified debate over the use of domestic vs. foreign suppliers. 

* Challenges and debate related to technology transfer policy, 
procedures, and protections. 

* Uncertainty over ability of the United States to maintain military 
superiority in critical technology areas. 

* Lack of DOD transparency into the supplier base and issues of 
security of supply. 

Forum Discussion: 

The forum was convened as a springboard to enhance constructive 
discussions among the supplier community. Our goal in sponsoring the 
symposium was to have participants discuss the full range of challenges 
facing the supplier base and come to consensus on the top challenges 
that need to be addressed collaboratively and to offer actions to 
address them. 

After introductory remarks, a lengthy discussion ensued of the key 
challenges facing the supplier base. At the close of this discussion, 
participants identified the top supplier challenges that need to be 
addressed. The results are as follows: 

Top Five Supplier Base Challenges Identified by Forum Participants: 

* Balancing Acquisition Risks and Rewards: 

* Difficulty Managing U.S. Government Policies in an International 
Business Environment: 

* Defining a Strategic Supplier Management Policy: 

* Managing Multiple Tiers of the Supplier Base: 

* Workforce Skills Development and Culture Change: 

Balancing Acquisition Risks and Rewards: 

According to forum participants, major actors in the defense supplier 
base--including prime and lower tier contractors--behave according to 
perceived risks of contracting with the government. These risks stem 
from fixed profit margins, uncertain government funding over time, and 
the potentially high costs for navigating the complex federal 
acquisition environment. Participants noted that current DOD 
acquisition policy does not adequately align rewards with market 
maturity, which can discourage suppliers--especially small innovative 
businesses---from adopting risks associated with emerging technology 
markets. Participants also cited challenges to ensuring accountability 
in the acquisition system, which can limit the government's ability to 
balance risks and rewards for suppliers. 

Little Distinction in Rewards for Emerging and Mature Markets, Despite 
Differing Levels of Risk: 

Participants were concerned that the design of the current acquisition 
system creates an imbalance between risks and rewards, regardless of 
the risk level. They described DOD policy as "one size" that does not 
fit all markets given varying levels of maturity within the defense 
environment. Participants provided research as an example, suggesting 
that more reward is needed to support the research marketplace because 
more risk occurs at the leading edge of research. In the past, 
contractors accepted single-digit profits in research and development 
in exchange for double-digit profits in production. However, the 
relative increase in the cost of research and development has depressed 
the profit margin. Despite the growth in research and development 
costs, government procurement policies and strategies have not been 
adjusted to reflect the increase. And while federal acquisition 
regulations acknowledge greater risks for research and development, 
participants felt that this acknowledgement is lost during program 
implementation. If risks outweigh rewards, suppliers may be discouraged 
from participating in DOD and related agency contracts. 

According to participants, second and third-tier contractors 
significantly strengthen the supplier base market and provide supplier 
competition. However, the cumulative effect of insufficient profit 
margins and the challenge of operating in accordance with complex 
federal acquisition regulations discourage small and innovative 
businesses from partnering with the government in emerging markets. As 
an example, participants cited the obstacles DOD and the Department of 
Homeland Security are encountering in their efforts to partner with the 
biotech industry for bio-defense. Biotech companies are finding it 
difficult to adopt profit margin limits, cost accounting standards, and 
other requirements that traditional prime contractors follow. 

Participants noted that the current acquisition environment has 
distorted normal economic incentives. Pervasive fear of failure has 
discouraged government procurement employees from taking the risks 
necessary to maximize quality and minimize cost and has created a 
mindset that considers not failing a measure of success. As an example, 
participants pointed to the considerable press and oversight scrutiny 
procurement staff face if they fail to prevent high supplier profits. 
This emphasis on limiting supplier profit could ultimately result in 
higher costs to the taxpayer if the supplier lacks the incentives to 
deliver the highest quality product or service at the lowest cost. 

Participants also found suppliers have distorted economic incentives 
that contribute to acquisition risks. For example, suppliers tend to 
intentionally underbid for contracts knowing once a program is 
established the government is not likely to terminate it in response to 
cost overruns because of political considerations. 

Participants were also concerned that as markets develop, late comers 
and smaller companies are forced out in favor of larger, more 
established firms. In addition, participants found that DOD was not 
effectively providing companies with opportunities to compete for 
contracts once programs had started. They suggested methods such as 
spiral development,[Footnote 2] which seek to keep a platform 
technologically and operationally up to date while it's being built, to 
increase competition opportunities, reduce risk, remove barriers to 
competition and innovation, and ultimately provide the government with 
better acquisition options. 

Lack of Transparency and Accountability in Current Acquisition 
Environment Could Undermine Efforts to Balance Risks and Rewards: 

Although participants agreed that the existing acquisition system 
creates an imbalance between risks and rewards, they noted that a lack 
of accountability could thwart efforts to reform the system. 
Participants have observed that accountability for DOD's acquisitions 
occurs at the higher levels of the organization and is too diffuse to 
easily hold people accountable. The accountability chain from the 
executive level to the program manager is also blurry, and 
responsibility cannot be adequately determined. 

According to participants, the accountability chain becomes clearer at 
the program management level, but participants warned that focusing 
accountability at this level can be risky. Program managers often lack 
complete authority over the project, are under funded, or encounter 
unstable program funding and must accept bad acquisition choices from 
officials throughout the organization. High turnover rates of DOD 
program managers can also undermine accountability because a manager's 
actions cannot be readily linked to program performance. 

Participants were also concerned that the federal government may be 
outsourcing program management and other inherently governmental 
functions without oversight. For example, DOD and related agencies have 
provided contractors with more authority to achieve program goals 
through the lead system integrator process. However, participants noted 
it is unclear how oversight and accountability concepts are 
incorporated to the contractor's expanded role. 

Actions to Address Better Balance between Acquisition Risks and 

To encourage innovation, spur competition, and provide the government 
with better acquisition options, forum participants recommended the 
following actions: 

* Develop a flexible acquisition strategy for innovative products and 
services. This policy should differentiate between emerging and mature 
markets and provide rewards that incentivize companies engaging in 
research and development efforts to take more risks. Since profit is 
the prime motivation for companies, participants suggested that DOD set 
up incentives that meet the best interests of industry based on the 
maturity of the market and government based on the need for the 
technology and best value for cost. For example, the government could 
allow higher profits to companies that pursue technologies in emerging 
markets that require more risk to develop. In the participants' view, 
this would provide more incentives for companies to conduct basic 
research. One participant suggested that research and development 
should be a stand-alone business that is profitable for companies. Some 
participants suggested that the Department of Homeland Security might 
offer a good environment for experimentation and reform of old 
government acquisition strategies and practices. 

* Use market maturity to guide expectations regarding competition. For 
instance, in mature markets, a small number of suppliers is typical 
because of obstacles to overcome barriers to entry, such as the 
significant cost required to establish business infrastructure. By 
contrast, in emerging markets DOD and related agencies should expect 
multiple competitors and align incentives to best achieve market 

* Target investments into needed emerging technologies and maintain 
open and honest dialogues with companies that produce such 
technologies. An industry participant offered that DOD and other 
stakeholders could target investment in areas of needed technology and 
may consider competing technology to provide incentives to the supplier 
base. One participant offered that partnerships between government and 
industry can help balance risks and rewards. Contractors, congressional 
staff, and program officials need to seek stakeholder agreement. One 
participant added that a non-partisan committee comprised of defense 
experts would be helpful to identify critical technology areas to 
pursue or preserve. 

* Develop a small business strategy to provide funds for small 
businesses rather than prime contractors. These investments should be 
targeted where technologies are needed. Participants stressed that a 
key to this strategy is monitoring the actual dollars that go to small 
businesses rather than percentages of individual contracts set aside 
for small businesses. Participants explained that by taking a different 
approach to monitoring small business funds, DOD and related agencies 
can adjust strategies to attract innovative companies and positively 
influence company make or buy decisions. 

* Tailor government strategies for acquisition. Participants suggested 
policies to get small innovative companies to join the defense 
industrial base that correspond with acquisition cycle milestones. For 
instance, DOD could improve use of spiral development, which allows 
suppliers entry into existing programs by incorporating new 
technologies into platforms once designed or in production. Spiral 
development could help to minimize risk and establish relationships 
with new innovative small businesses. One participant explained that, 
while past contractor performance needs to be relevant, it should not 
be a barrier to compete for defense contracts. However, some 
participants expressed a personal frustration with using cost as a 
primary driver for selecting contracts. Instead, participates suggested 
that the government should use past performance as the primary 
selection criterion to help ensure that poor performing suppliers are 
not re-employed simply by underbidding other suppliers. As a result, if 
a supplier fails to perform well, it should have to pay some price to 
enable it to compete in the future. 

* Calibrate the acquisition system to accommodate the mutual interest 
of both the government and industry through the use of multiyear 
funding. Participants explained that under multiyear contracts, 
contractors share risk with the government. For example, when the C-17 
and F-18 programs converted to multiyear funding, each contractor 
received money in advance and shared risk with the government. These 
efforts contribute to agreement between parties in the beginning of the 
acquisition process to reduce unexpected outcomes. 

* Consider contractor capabilities to maintain multiple sources. As 
part of the acquisition framework, the government could identify 
opportunities and use tools to cultivate suppliers and consider 
partnering opportunities to develop flexible capabilities. Components 
of a framework might include greater use of competitive sourcing and 
other measures such as best practices to increase innovation, 
efficiency, and effectiveness. It may also be useful to broaden the 
system to allow each military department to look beyond its individual 
programs to identify suppliers in other military service programs 
capable of providing similar capabilities in order to maintain multiple 

To improve accountability and oversight, participants recommended that 
the following actions be taken: 

* Establish clear lines of authority. 

* Provide more transparency over the outsourcing of inherently 
governmental functions. Greater transparency is needed in program 
management, accountability, and oversight responsibilities. 

* Provide for timely oversight. 

* Balance oversight with mechanisms to achieve government goals. Create 
acquisition strategies that increase accountability in the supplier 
base while enabling the government to develop mutually beneficial 
partnerships with contractors to produce higher quality products and 
lower costs. For example, industry associations could create common 
government and industry accountability processes. 

* Establish metrics that assess capabilities delivered and management 
of cost, schedule, and performance issues. While earned value 
management techniques are valuable, other techniques are needed to 
assess program progress. Additional metrics would help DOD and related 
agencies to better evaluate contractor performance when considering the 
award of new contracts. 

Difficulty Managing U.S. Government Policies in an International 
Business Environment: 

According to forum participants, the U.S. government has not struck an 
appropriate balance between the globalizing U.S. supplier base and 
protecting U.S.-based companies and technologies. Participants 
explained that DOD and other agencies have not clearly identified 
industries and technologies to protect. In addition, participants noted 
that DOD has not determined the effectiveness of existing protectionist 
legislation in maintaining the industrial base. Moreover, participants 
noted that the United States may overly restrict technology transfers 
to allies and discourage global suppliers from participating in the 
U.S. supplier base. 

Balancing Globalization while Protecting U.S. Economic Interests: 

The concern among participants is that the government's protectionist 
tendencies are preventing DOD and other agencies from taking advantage 
of global suppliers that can yield greater quality items at lower costs 
than domestic suppliers and, as a result, help strengthen the U.S. 
supplier base. Foreign suppliers have an interest in participating in 
the U.S. industrial base since the U.S. defense budget is by far the 
largest in the world. However, some participants noted that by limiting 
access to foreign suppliers, the U.S. government may be driving 
international suppliers away and creating disincentives for foreign 
governments to use U.S. suppliers. For example, one participant noted 
that U.S. foreign sales help keep the industrial base viable by 
allowing companies to continue to sell items once the U.S. military has 
completed its purchases--as is the case with the F-16. Without foreign 
military sales, F-16 production lines would have shut down. One 
participant asserted that defense spending for economic reasons was put 
in place to maintain a viable domestic industrial base, while others 
questioned whether such policies make sense today or are best suited to 
develop markets for the supplier base. 

Participants also noted that U.S. decisions and legislation on 
industries to protect are not always based on the best research or on 
complete and accurate information to understand the impact of actions. 
One participant indicated that domestic source restrictions such as the 
Berry Amendment have created additional barriers to DOD and related 
agencies use of commercial firms. Second, evaluating the effectiveness 
of the government's policies to protect industry is difficult as DOD 
has not been able to articulate the causes and effects of these 
policies. Finally, current policy makes it difficult to determine how 
to define a domestic company. As an example, one participant pointed 
out that his company is American-owned, but a significant portion of 
the company's engineers are located in foreign countries. In some 
cases, communications and operations have been hampered by U.S. export 
controls, which place limits on the types of information that can be 
shared between U.S.-based and foreign-based engineers, regardless of 
whether they are employed by the same company. 

Challenges in Identifying Industries and Technologies to Protect: 

Participants focused on the negative effects of imposing national goals 
in an international economy, citing two areas--technology transfers and 
reliance on foreign industry. A key concern cited by participants is 
where to draw the line between technologies that should be protected 
and technologies that can be exported. One participant observed that 
the United States restricts technology transfers even with our close 
allies, which can hamper cooperation in coalition warfare and limit the 
compatibility of military capabilities. In addition to technology 
transfer concerns, participants agreed that the U.S. government must 
develop policies to prevent it from becoming vulnerable to foreign 
governments. However, they also believe that the government must accept 
a level of dependency on foreign industry, given an increasingly global 
economy in which the United States does not possess a competitive 
advantage on all the goods and materials that it needs. Several 
participants suggested that the U.S. government has not decided what 
its strategic national and industry resources should be and that 
efforts to do so can be affected by the political environment. As a 
result, the United States may lack information needed to inform 
decisions on which industries to protect and what technology may be 

Actions to Encourage Globalization While Protecting Sensitive 

To encourage globalization and expand the supplier base while 
protecting sensitive technologies, forum participants recommended the 
following actions: 

* Focus on keeping U.S. products competitive globally instead of 
maintaining and protecting the U.S. industrial base. By tapping into 
foreign suppliers, participants felt that the United States might open 
new avenues for domestic suppliers. One participant noted that many 
other countries have protected their industrial base, but have failed 
at keeping their products competitive in the global market. The key, 
participants thought, is to protect the dynamism of the system, not a 
particular product, company, or industry. One way would be to take a 
venture capitalist approach to invest in the industrial base and 
provide an environment in which companies can compete and access new 
markets. These efforts would need to be based in research to avoid 
unintended consequences and would require more dialogue to inform and 
educate decision makers, such as Congress, on restrictions pertaining 
to technology transfers. 

* Adjust the export control paradigm to reflect differing national 
security relationships. At a minimum, the structure should treat close 
allies differently, with greater dialogue between Congress and provider 
countries. There should be a system in place that capitalizes on the 
coordination and cooperation between trusted allies, enabling foreign 
suppliers from such nations to add a competitive dimension to the 
supplier base from which the government draws. One participant added 
that the United States can learn from the export control programs of 
other countries that have similar characteristics but different laws. 

* Better identify the risks of foreign dependency. Reliance on a 
foreign source does not necessarily result in vulnerability for the 
United States. The United States could balance risks by focusing on key 
allies that it could rely on under most conceivable circumstances. 

* Create a strategy that brings the defense community together to 
define and determine key technologies and capabilities to focus on and 
then collectively take action in those areas. This effort would include 
assessing risks and imposing technology transfer controls where 

* Change the acquisition culture to embrace a global export environment 
and approach the global marketplace more optimistically. A government 
participant stated that, if an ultimate goal is to expand the supplier 
base, the government and suppliers will need to tear down barriers and 
reach beyond their traditional domestic partners to access the global 
supplier market. Spend analyses could help identify where industry 
could achieve more efficiencies by relying on a global industrial base, 
including Canada and the United Kingdom. 

* Adjust policies to reflect the ambiguous nationality of emerging 
multinational companies. One participant mentioned that BAE North 
America is a good example of a defense company that is United Kingdom- 
owned but has major operations in the United States. Given the 
company's operations in both countries, efforts to comply with export 
control restrictions and other technology transfer issues can be 
burdensome and complicated. 

Defining a Strategic Supplier Management Policy: 

The third challenge identified by forum participants is the lack of a 
strategic policy to manage suppliers. Participants characterized DOD's 
current policy as a default position that is based on thousands of 
individual contracts and, as such, lacks a comprehensive framework to 
identify and achieve goals. In addition, participants explained that 
current policy does not distinguish between purchasing goods and 
services. Participants also noted DOD difficulties in encouraging 
companies to conduct research and development and cited a lack of 
consensus on what markets to develop. Additional challenges cited 
include providing clear requirements to suppliers and maintaining 
competition in the supplier base. 

With its significant buying power--particularly in the aerospace and 
defense markets--the U.S. government has the ability to shape markets 
based on the way it spends money and awards contracts. Participants 
agreed that, with this power, the government has a responsibility to 
define a supplier management policy that provides suppliers with a 
roadmap for future needs. As regulator, buyer, and financier for 
suppliers, the government needs to set out a framework, but some 
participants noted that the often fragmented U.S. policymaking and 
procurement processes challenge efforts to develop an effective 
supplier policy. For example, one participant noted that the government 
is too focused on restricting industry profit rather than formulating 
innovative ways to expand the supplier base. 

In discussing DOD and related agency supplier management policy, 
participants were concerned that the current acquisition process is 
primarily geared toward acquiring goods not services, despite the 
differences between acquiring goods and services and the increase in 
services contracting. One participant also noted that policymakers are 
not providing coherent policy signals to reflect important trends, such 
as increased buying of services and increased wartime spending. For 
example, policymakers have emphasized buying commercial-off-the-shelf 
goods but have not similarly addressed service trends. 

A lack of consensus on what markets to develop creates challenges in 
defining a coherent supplier management policy. According to 
participants, Congress and DOD lack mechanisms to achieve consensus on 
what markets to develop to best meet supplier needs. DOD policy fails 
to consider the significant differences between mature technology 
markets and research and development markets in managing suppliers. DOD 
and related agencies have not focused on reducing the barriers that 
prevent lower-tier suppliers from entering the defense supplier base, 
such as export controls, the cost of federal acquisition regulation 
legal expertise, and government cost accounting standards. As an 
example, one participant pointed to the difficulty a large defense 
supplier had in complying with federal cost accounting standards. 
Ultimately, the company divided its accounting systems--one for its 
government clients and one for its private-sector clients--to comply 
with federal standards. Participants were concerned that the burden of 
such a restructuring could prevent small businesses from entering the 
defense market. Even if small businesses could weather such burdens, 
smaller companies tend to be edged out by larger, more established 
firms as markets develop. 

Changes in weapon program requirements also present another significant 
barrier for suppliers. Participants noted that changing requirements 
hamper the ability of small businesses to meet DOD needs. In addition, 
without clear and stable requirements, DOD and related agencies may not 
achieve commonalities across related systems. 

Actions to Develop a Sound Supplier Management Policy: 

To develop a supplier management policy, forum participants recommended 
the following actions: 

* Develop a single, broad, goal-based supplier management policy. This 
policy should: (1) clearly identify the investments the government 
wants to target and what is to be achieved; (2) include a vetting 
process to identify key technologies to develop; and (3) address 
differences between managing various types of markets, such as products 
versus services, and mature technologies versus research and 
development. Participants agreed that ensuring that the policy is 
broadly defined and goal-based is imperative to avoid limiting options. 

* Provide adequate incentives to experiment with policy alternatives. 
One participant suggested that policymakers work through a range of 
relevant agencies such as the Department of Homeland Security to 
develop supplier management policy rather than forcing policy through 

* Instill discipline to DOD's requirements generation process to ensure 
that requirements are properly defined so that contractors can execute 
requirements. Participants observed that DOD's committee on jointness 
is supposed to be rationalizing requirements, but suggested that the 
process could be improved. One participant added that prime contractors 
could get more involved in DOD's Small Business Innovative Research 
program to aid in requirements definition and management. 

Managing Multiple Tiers of the Supplier Base: 

The fourth challenge identified by forum participants is for DOD and 
relevant agencies to better manage the multiple tiers of the supplier 
base. Participants noted that the current lack of visibility into the 
supply chain complicates efforts to maintain a strong supplier base. 

Participants highlighted the need for greater visibility into the 
supply chain to monitor lower tier suppliers--where most technological 
innovation takes place. According to one participant, an estimated 
280,000 companies comprise the government's industrial base, but the 
focus of defense acquisition policy is on a handful of prime 
contractors. Another participant noted that a lack of data prevents 
prime contractors--a key ally in managing the supplier chain--from 
diversifying and developing lower tiers to maintain competition. 
Another participant suggested the need for variability in the supply 
chain, however without more information on lower tier suppliers, 
variability would be difficult to monitor. 

Finally, participants discussed the importance of promoting competition 
in managing multiple tiers of the supplier base. Participants noted 
that competition drives quality and innovation. However, participants 
have found that while the government acknowledges that the market 
should be as competitive as possible, it has not established an 
overarching framework that outlines competition goals making it 
difficult to achieve robust competition. A significant problem arises 
in sole sourcing when there is no viable alternative to compete and 
drive up innovation and quality, and drive down cost. Other 
participants noted that joint ventures between prime contractors can 
limit competition and increase risks that the government will purchase 
redundant systems. While the government has taken some action toward 
improving competition through legislative measures, it has not devised 
a policy framework centered on supplier competition. For instance, one 
participant questioned whether the government needs to develop two 
missile defense systems to ensure competition or does it simply need a 
better way to drive competition. 

Actions to Better Manage the Multiple Tiers of the Supplier Base: 

To help small innovative businesses enter and thrive in a multi-tier 
market and stimulate competition, forum participants recommended the 
following actions: 

* Increase government visibility into lower tier suppliers--increase 
investment in them and decrease barriers to their participation in 
government contracts. Participants observed that a first step could be 
to identify the total number of companies in the defense industrial 
base. Participants suggested that DOD develop a reporting system for 
the multiple tiers of the supplier base. Other participants suggested 
the need for the Office of the Secretary of Defense to fund a study on 
the supplier base and provide seed money to small companies to innovate 
and join government procurement. 

* Pool federal and state funds for small businesses to invest in new 
technologies. This effort would provide a valuable source of 
technological innovation for the government and an opportunity for 
economic gains by small businesses. 

* Increase and maintain competition to keep companies viable. To 
increase competition, participants suggested the government compete 
different products that meet similar needs or compete shares of a 
project's total cost, such as logistics--which is a large portion of 
DOD's acquisition, technology, and logistics budget. To maintain 
competition, the government could provide a certain level of business 
to the competitors of the contract winner. Awards to losing suppliers 
could include research and development investments or a contract for 
another product. The government should also encourage prime contractors 
to diversify their suppliers and promote competition. 

Workforce Skills Development and Culture Change: 

The fifth challenge identified by forum participants concerns the need 
to further develop the skills of the acquisition workforce to address 
today's acquisition challenges. Participants agreed that the 
acquisition workforce is not equipped to manage in a new acquisition 
environment. Participants cautioned, however, that implementing reforms 
would be difficult because the acquisition workforce culture is 
resistant to change. 

Workforce Not Equipped to Manage in New Acquisition Environment: 

The federal government is increasingly outsourcing the production of 
goods and delivery of services to attempt to take advantage of the 
efficiency, effectiveness, and innovation achieved by private companies 
competing in a free market. As the government continues to rely on the 
private sector to conduct its business, the federal acquisition 
workforce must be able to make business judgments and apply critical 
thinking to each contract. The acquisition workforce, however, has not 
been structured or trained to work in a business environment. To 
competently negotiate contracts, the workforce must obtain an 
understanding of global trends and greater business acumen to make 
business judgments rather than relying on acquisition rules and 

Participants have observed that the current federal acquisition 
workforce significantly lacks the new business skills needed to act as 
contract managers and not as contract processors. Until recently, DOD 
acquisition professionals were not required to have an undergraduate 
degree. Acquisition professionals who buy services suffer from an even 
greater skill gap, due to the emphasis DOD has placed on training staff 
to purchase major goods, such as weapons or vehicles, and the 
increasing sophistication of the services that the government procures. 
One participant described the government contractor of "old times" as 
someone who worked on five different platforms and was highly skilled. 
Now, the government wants someone with business acumen and who is adept 
at risk management. One participant observed that we need to rethink 
who is put into key leadership positions and what traits they need to 
have and suggested these skills might be business-related. Other 
participants stated that there needs to be a shift in talents and 
skills sought toward partnering with and managing private-sector firms. 

Changing Current Workforce Culture Is Difficult: 

Given the rule-bound culture surrounding federal government 
acquisitions, forum participants warned that reform would not be easy. 
According to participants, the combination of penalties for acquisition 
failures along with defining program success as not failing has 
contributed to a risk-averse culture that is less focused on outcomes. 
The danger, participants pointed out, is that risk aversion leads to 
distorted economic reasoning, causing acquisition officials to seek the 
lowest profit providers even if they do not provide the lowest cost 
commensurate with quality. Participants added that with years of 
operating in a risk-averse environment, program managers and government 
acquisition officials do not feel empowered to take risks and are 
resistant to change. 

Some participants suggested that DOD's risk-averse culture has been 
molded by out-of-date acquisition training. Currently, acquisition 
officers and enlisted personnel are taught to identify and avoid risk. 
Moreover, acquisition workforce numbers have been reduced with a trade- 
off occurring between technical and labor experts. Together, these 
factors create significant challenges in creating an environment that 
encourages innovation. 

Actions to Develop Workforce Skills and Effect Reforms: 

To ensure the federal acquisition workforce has the right skills to 
partner with the private sector and to bring about a culture change, 
forum participants recommended the following actions: 

* Devote attention to identifying and developing the capabilities of 
the acquisition workforce. 

* Rotate acquisition professionals from the private-sector into the 
public sector. Public-sector professionals working with private-sector 
professionals can learn more efficient buying practices and serve as 
change agents for the rest of the procurement workforce. 

* Employ acquisition strategies that promote innovation rather than 
risk-averse approaches currently used. Developing a better 
understanding of profit, the time value of money, and the interface of 
government and industry can help the acquisition workforce to manage 
programs rather than avoid failure. In addition, increasing pressure 
should be applied to acquisition staff to allow integration of new 
technologies into programs. 

[End of section] 

Appendix I: Scope and Methodology: 

We identified and invited 15 experts to participate in a day-long 
Supplier Base Forum on October 17, 2005. Fourteen attended the meeting. 

We conducted extensive literature and internet searches and attended 
conferences of subject matter interest to identify potential experts to 
participate in the forum. Based on these sources as well as meetings 
with subject matter experts on defense supplier issues from GAO, we 
determined that participants should be drawn from eight areas: prime 
defense contractors, second and third tier suppliers, industry groups, 
non-profit organizations, academia, relevant government agencies, non- 
traditional suppliers, and international defense suppliers. We 
generated a potential participant list and considered types and levels 
of experience, as well as whether the participant was recognized in the 
professional community or had professional affiliations. We then 
examined the preliminary list of potential participants and selected a 
number of experts with recognition in the professional community, 
published work relevant to defense supplier issues, current or past 
employment with a defense supplier, relevant government agency, or 
commercial experience with a global supplier base. We subsequently 
condensed our list and made final selections by giving consideration to 
potential participants who had multiple areas of expertise to 

The overall purpose of this forum was to gain insight into key 
challenges confronting DOD and related agencies to manage the supplier 
base and to reach consensus among a diverse group of experts regarding 
the top challenges and potential next steps to manage them. 

A nominal group approach was used to identify and develop consensus on 
the most important challenges. Time was allocated on the agenda for the 
group, as a whole, to identify and discuss key supplier challenges in 
general with no limit as to the number or types of challenges. More 
than 60 items were discussed. Forum participants collapsed these items 
into eight separate challenges. To identify and develop consensus about 
which were the most important challenges, each participant individually 
ranked the five most important challenges from this final list of 

Based on the rank order, each selection was weighted. Specifically, the 
most important challenge received 5 points, the second most important 
received 4 points, the third most important received 3 points, the 
fourth most important received 2 points, and the fifth most important 
received 1 point. 

Points were summed, and through this consensus-building process the 
list of eight challenges was numerically rank ordered from the most 
important to the least important. A natural break occurred between the 
fourth and fifth item. Members were given an opportunity to reflect on 
the final outcome. All participants thought the final result captured 
the top challenges. 

[End of section] 

Appendix II: Forum Participants: 

Jeff Bialos: 

Partner, Sutherland, Asbill, and Brennan; Executive Director, Program 
on Transatlantic Security and Industry at the Center for Transatlantic 
Relations, School for Advanced International Studies, Johns-Hopkins 

Pierre Chao: 

Senior Fellow, Director, Defense Industrial Initiatives, Center for 
Strategic and International Studies: 

David Chesebrough: 

President, Association for Enterprise Integration: 

Alan Chvotkin: 

Senior Vice President and Counsel, Professional Services Council: 

Vice Adm. Joe Dyer (USN ret.) 

Executive Vice President, General Manager, Government and Industry 
Division, iRobot: 

Daniel Else: 

Analyst in National Defense, Foreign Affairs, Defense, and Trade 
Division, Congressional Research Service: 

Hon. Jacques Gansler: 

Vice President Research, Director, Center for Public Policy and Private 
Enterprise, University of Maryland: 

Bob Gower: 

Vice President, Supplier Management Operations, Boeing Integrated 
Defense Systems: 

John N. Hatch: 

Corporate Vice President, Global Supply Chain Management, Lockheed 

John Kraynak: 

Director Strategic Sourcing, BAE Systems North America: 

Terry Little: 

Executive Director, Missile Defense Agency: 

Sydney Pope: 

Industry Analyst, Office of Deputy Undersecretary of Defense for 
Industrial Policy: 

Al Sligh: 

Director Strategic Sourcing, Department of Homeland Security: 

Jennifer Stewart: 

Director General, Defense Procurement, Embassy of Canada: 

[End of section] 

Appendix III--Forum Agenda: 

8:30am: 9:00am; Check-In/Coffee: Welcome---Katherine Schinasi, Managing 
Director, Acquisition and Sourcing Management Team. 

Check-In/Coffee: 8:30am9:30am: Introductions and Forum Ground Rules-- 
Ann Calvaresi-Barr, Director ASM. 

8:30am: 9:30am; Check-In/Coffee: Panel Discussion of Key Challenges-- 
identify key supplier challenges. 

8:30am: 10:45am; Check-In/Coffee: Break. 

8:30am: 11:00am; Check-In/Coffee: Panel Discussion--discussion 
continued, refinement of issues, reach consensus of top challenges 

8:30am: 12:15pm; Check-In/Coffee: Lunch, Guest Speaker: Ms. Eileen 
Giglio, Deputy Director, Defense Acquisition Performance Assessment 
Project, Department of Defense. 

8:30am: 1:30pm; Check-In/Coffee: Panel Discussion---results of top 
challenges and identification of next steps; ASM Directors join panel. 

8:30am: 3:00pm; Check-In/Coffee: Adjournment. 

[End of table] 

[End of section] 

Appendix IV: Supplier Base Forum Slide Presentation: 


Managing the Supplier Base in the 21st Century: 

October 17, 2005: 

Acquisition Environment: 
Budgetary Constraints: 

Spending as a Share of GDP: 

[See PDF for image] 

[End of figure] 

Composition of Federal Spending: 

[See PDF for image] 

[End of figure] 

GAO's Acquisition and Sourcing Management Team: 

* ASM's mission is to help make the government as effective as possible 
in acquiring the goods and services it needs to carry out government 
operations, meet national security needs, and fulfill social and policy 

* To succeed in our mission, we focus our work with the aim of: 

* Improving the government's ability to acquire sophisticated weaponry, 
space systems, and other goods and services in a globalized economy; 

* Minimizing contracting risks faced by government agencies; 

* Improving DOD access to efficient suppliers with technologically 
superior products; 

* Enhancing the efficiency of government operations. 

Selected Issues from GAO's High Risk List 2005: 

* DOD Weapon Systems Acquisition - 1990 
* NASA Contract Management - 1990: 
* DOD Contract Management - 1992: 
* Management of Interagency Contracting - 2005: 

21st Century Challenges: 


National defense: 

* Do we need new ways to identify and protect critical technologies? 

* What is the appropriate role for contractors, especially in forward 
deployed and conflict areas? 


* Should the government's approach to using the private sector be 
modified to improve results and reduce costs? 

Supplier Environment? 

Business of government increasingly performed by private sector.  

Smaller government workforce to manage and oversee government 

Shift to purchasing more services for mission performance rather than 
spending on equipment and supplies.  

National Security Dynamics: 

* Global threats and global suppliers: 
* Traditional supplier base consolidation: 
* Relevance of commercial products and technologies: 

[End of slide presentation] 

[End of section] 

Appendix V: Summary of Lunch Speaker Remarks: 

Eileen Giglio, Deputy Director of the Defense Acquisition Performance 
Assessment (DAPA) project, provided an overview of the challenges 
identified in its work and began her comments by noting the similarity 
of issues raised at the forum with findings identified in the DAPA 
effort. She noted that acquisition processes have significant 
shortcomings leading to loss of confidence by Congress and the defense 
community. She summarized a few of the problems as: increased cost 
overruns, failure to establish acquisition priorities and trade-offs, 
undefined operational requirements and performance characteristics, 
untested and undetermined technology risks, and a lack of centralized 
responsibility and empowered authorities. 

Based on the work to date of the DAPA project, she outlined where 
constructive actions may be taken to address acquisition problems. 
First, she highlighted the budget process and asked what can be done 
differently to make the process more lean and simple. In terms of 
requirements, she noted that DOD needs to recover stability and focus 
on realistic capabilities and expectations in step with technological 
developments. Her last point centered on the acquisition process and 
suggested the need for reforms that will resolve cost and schedule 
overruns and achieve transparency and predictability in the process. 
She also suggested that DOD apply lessons learned from past acquisition 
reviews to adapt to changing environments and adjust its acquisition 
organization. Other points included: 

Workforce - Recover workforce expertise and establish accountability. 

Industry - Enhance the relationship between the Department and Industry 
partners to build trust and reduce risk. 

Leadership - Simplify the lines of authority, incentivize performance 
and require accountability across the acquisition community. 

Ms. Giglio concluded her remarks by noting that effective change will 
only result from an ongoing cooperative effort between the government, 
industry, and Congress. 

[End of section] 

Appendix VI--Related GAO Products: 

Joint Strike Fighter: Management of the Technology Transfer Process. 
GAO-06-364. Washington D.C.: March 14, 2006. 

Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees 
Regardless of Acquisition Outcomes. GAO-06-66. Washington, D.C.: 
December 19, 2005. 

Defense Procurement: Air Force Did Not Fully Evaluate Options in 
Waiving Berry Amendment for Selected Aircraft. GAO-05-957. Washington 
D.C.: September 23, 2005. Defense Ammunition: DOD Meeting Small and 
Medium Caliber Ammunition Needs, but Additional Actions Are Necessary. 
GAO-05-687. Washington D.C.: July 27, 2005. 

Industrial Security: DOD Cannot Ensure Its Oversight of Contractors 
under Foreign Influence Is Sufficient. GAO-05-681. Washington D.C.: 
July 15, 2005. 

Defense Microelectronics: DOD-Funded Facilities Involved in Research 
Prototyping or Production. GAO-05-278. Washington D.C.: March 11, 2005. 

Defense Trade: Arms Export Control System in the Post-9/11 Environment. 
GAO-05-234. Washington D.C.: February 16, 2005. 

Federal Procurement: International Agreements Result in Waivers of Some 
U.S. Domestic Source Restrictions. GAO-05-188. Washington D.C.: January 
26, 2005. 

Industrial Security: DOD Cannot Provide Adequate Assurances That Its 
Oversight Ensures the Protection of Classified Information. GAO-04-332. 
Washington D.C.: March 3, 2004. 

Joint Strike Fighter Acquisition: Cooperative Program Needs Greater 
Oversight to Ensure Goals Are Met. GAO-03-775. Washington D.C.: July 
21, 2003. 

Best Practices: Setting Requirements Differently Could Reduce Weapon 
Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 
11, 2003. 

Defense Acquisitions: DOD Has Implemented Section 845 Recommendations 
but Reporting Can Be Enhanced. GAO-03-150. Washington D.C.: October 9, 

Export Controls: Processes for Determining Proper Control of Defense- 
Related Items Need Improvement. GAO-02-996. Washington D.C.: September 
20, 2002. 

Defense Trade: Mitigating National Security Concerns under Exon-Florio 
Could Be Improved. GAO-02-736. Washington D.C.: September 12, 2002. 
Best Practices: Capturing Design and Manufacturing Knowledge Early 
Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 

Defense Acquisitions: DOD Faces Challenges in Implementing Best 
Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. 

Best Practices: Better Matching of Needs and Resources Will Lead to 
Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 

Best Practices: A More Constructive Test Approach Is Key to Better 
Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 

Defense Acquisition: Employing Best Practices Can Shape Better Weapon 
System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. 

Best Practices: DOD Training Can Do More to Help Weapon System Program 
Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 
16, 1999. 

Best Practices: Better Management of Technology Development Can Improve 
Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 

Defense Acquisitions: Best Commercial Practices Can Improve Program 
Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999. 

Defense Acquisition: Improved Program Outcomes Are Possible. GAO/T- 
NSIAD-98-123. Washington, D.C.: March 17, 1998. 

Best Practices: DOD Can Help Suppliers Contribute More to Weapon System 
Programs. GAO/NSIAD-98-87. Washington, D.C.: March 17, 1998. Defense 
Trade: Weaknesses Exist in DOD Foreign Subcontract Data. GAO/NSIAD-99- 
8. Washington D.C.: November 13, 1998. 


[1] Participants used a consensus-building tool called Nominal Group 
Technique to identify the top five challenges as an aggregation of the 
group's judgment. 

[2] A spiral development program is defined in section 803 of the 
Defense Authorization Act for Fiscal Year 2003 as a research and 
development program conducted in discrete phases or blocks, each of 
which will result in the development of fieldable prototypes and will 
not proceed into acquisition until specific performance parameters, 
including measurable exit criteria, have been met. 

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