Supply Chain – Our Greatest Direct Cost

Abstract

The Department of Defense (DoD) spends a lot of appropriated dollars and relies heavily on prime contractors to procure the goods and services needed to support our national defense. Prime contractors have been traditionally known as vertically integrated manufacturers, meaning they tightly control operations by taking ownership of many stages of the production process. However, there is now a perceived shift to horizontal integration, where they are relying more and more on subcontractors and suppliers for essential components and materials. If the perceived shift is significant enough, it raises important questions about transparency and the DoD’s ability to effectively negotiate fair and reasonable contracts when they lack privity with key subcontractors. Through analysis of Cost and Software Data Reports and Defense Pricing, Contracting, and Acquisition Policy (DPCAP) Sole Source Peer Review data, this research confirms that direct material and subcontractor costs have increased as a percentage of total contract expenditures. While there may be ongoing efforts to optimize and potentially consolidate oversight functions within the DoD, addressing the challenges stemming from increasing reliance on subcontractors remains crucial. To address the identified challenges, policy recommendations will be made to include strengthening DoD oversight in a manner that complements ongoing optimization efforts, expanding the Industrial Base Analysis & Sustainment (IBAS) program, and implementing a Small Business Innovation Research (SBIR) Subcontractor Fast Track initiative.