The 3M and Rockwell Supply Networks
Image Source: Small Wars Journal, May 10, 2019
The COVID-19 pandemic has revealed like no other crisis before it the fragility, vulnerability and threat of what we refer to as the supply chain. If nothing else, the coronavirus has illuminated for most of us just how large China looms in the production of medical equipment and pharmaceuticals we consume.
Who among us has not ordered face masks only to open the box to find a pamphlet of what appear to be certifications written entirely in Chinese? Hospitals across the country have found themselves negotiating blindly with intermediaries promising connections in China who can deliver desperately needed personal protective equipment.
Beyond the threat to U.S. health security, our national security also has been shown to be at risk from climate, weather, and other natural disasters, as well as disruptions caused by labor and political unrest and criminality within the web of connections among vendors behind our weapons systems, military communications, information technology, ordnance, supplies and more.
In analyzing this problem and assessing the threat, it’s useful to re-examine the supply chain metaphor itself. For just as U.S. military strategy was failing against Al Qaeda and other terrorist groups until we dropped the hierarchy metaphor for understanding them, so will dropping the chain imagery enable us to better grasp the extent, shape, and possible solutions to our supply threat.
In both cases, it is the network we must adopt as paradigm, plumb, and combat.
Two studies, one from last year and one from August, make this eminently clear. U.S. Navy Lt. Commander Michael Kidd, who helps manage the Navy account at the Defense Logistics Agency, applied social network theory to lay bare a good part of the supply networks of 3M Corp. and Rockwell Collins, both defense contractors.
In “Social Network Analysis of DoD Supply Chain Vulnerabilities,” Kidd reveals the fallacy in believing that engaging with multiple Tier 1 vendors achieves supplier diversification. In most cases, government buyers focus almost all their attention on first tier suppliers, seeking little data even about second tier suppliers and none for those below them. Added to that is the fact that companies often view the composition and operation of their supply networks as proprietary information they are unwilling to share with any customers, including the Defense Department and civilian agencies.
Kidd used a commercial database to identify the first, second, third and fourth tiers of vendors to 3M and Rockwell, identifying 1,253 sub-vendors. Some of them, e.g. General Electric, are so large that he did not delve into their supply networks. From the rest, he sought to identify network risk—a single company supplying a large number of vendors whose problems or disappearance would ripple across the network—and geographic risk—a network within which companies are located in unstable or potential or actual adversary nations.
What Kidd found was a closely interwoven bird’s nest of interconnection among sub-tiers, becoming more complex the deeper he looked. The 1,253 vendors to the two prime contractors “share relationships at multiple levels within the network and across tiers. The network can better be conceptualized as vendor matricies where the direct vendors of one primary company also supply companies up and down the supply chains of other primary companies, in various tiers,” he discovered.
At the 4th tier, the networks of the two quite different prime contractors intermingle so much it’s hard to tell them apart. Supply diversity diminishes as the number of tiers increases. Kidd examined DLA vendors that support multiple DLA suppliers including 3M and Rockwell and he found that:
- Tech Target Inc – Supports 12
- Amazon.com – Supports 8
- Intest Corporation – Supports 8
- Jive Software – Supports 8
- FLEX Ltd – Supports 7
- Pericom Semiconductor Corp – Supports 7
As for geography, he found no significant clustering of sub-vendors for either company in Russia or Japan. But the impact on 3M and Rockwell, and consequently on DOD, of crises in South Korea or Japan would be greater due to the higher density of sub-vendors in those countries.
Kidd also tested the vulnerability of the two primes to an earthquake in Mexico. He discovered that 3M “has six Mexican vendors at the third and fourth tier. Three support their second-tier vendor, Wabash National Corp, two support their second-tier vendor, Terra Data, and one supports their second-tier vendor, Electronics For Imaging Inc.” Rockwell likely would fare better with just one Mexico-based fourth-tier supplier supporting its second-tier vendor, Iridium Communications Inc.
Meanwhile, the Defense Department recently commissioned Govini, a decision science company supporting the defense industry, to analyze its supply networks to mitigate the effects of the coronavirus, but also to reshore capabilities vulnerable to rival nations, such as single-source, offshore providers of critical items, such as microelectronics, pharmaceuticals and rare earth elements.
Govini examined the supply networks of 1,000 Tier 1 DOD contractors across 100 countries. In “The Challenge of Reshoring the DOD Supply Chain,” Govini found that while 84 percent of the Tier 1s are U.S. companies, 70 percent of suppliers in tiers 2-5 are foreign-owned. The presence of Japanese and South Korean companies in the defense supply network has grown the most since 2014, up 336 percent to 2,588 suppliers from Japan between 2013 to 2019 and rising 1,057 percent to 1,735 from South Korea. The number of Chinese firms in the network rose 356 percent to 2,235.
Beginning at tier 2 of the supply base, U.S. companies make up less than half of the total. Chinese companies emerge in Tier two at 5 percent and increase to 9 percent of Tier 5. Foreign companies including China have the largest presence among 18 critical industries in major diversified chemicals, 85 percent; electronic components, 84 percent; and specialty chemicals, 83 percent.
Chinese companies rival U.S. companies’ share in specialty chemicals, major diversified chemicals, telecommunications equipment, and electronic components. In semiconductors, the number of Chinese companies grew 364 percent between 2010 and 2019, to 65 companies, bringing China’s share of the supply base to 13 percent. The share held by U.S. companies fell from 56 percent to 28 percent, 144 companies in 2019, as foreign firms surged in the industry.
With 655 companies in the defense supply base and a 9 percent share of critical industries, China will not be easy to dislodge, nor its position as a single-source or key supplier of key technologies easy to identify.
Kidd suggests that intelligence agencies and defense logistics organizations undertake study of supply network risks to forestall disruptions and develop alternate sources and to alert prime contractors of key risks in their networks. Deeper research and surveillance of supply networks should be contracted for now due in part to a lack of sufficient expertise within DOD.
Arguably, global supply network surveillance and monitoring should be the province of category and subcategory managers, at least within the categories of government-wide common goods and services now being managed. Those so-called super categories do not include many DOD-specific categories of spending, however, so supply network expertise may need to be developed for them. And beyond intel and logistics staff, contracting and procurement professionals also likely need far greater preparation and skill in parsing supply networks.
OUTSIDE THE BOX BLOG
Thoughtful commentary every week from Anne Laurent and the community about trends, surprises, lessons, and cautions in pursuit of Acquisition Innovation.
Stay up to speed on acquisition innovation here.