COVID-19 exposes weaknesses of defense supply chain and compels Pentagon to act financially

Following the news that the Department of Defense (DoD) intends to grant US$3bn in early invoice payments to defense industry;

Nicolas Jouan, Aerospace and Defense Analyst at GlobalData, a leading data and analytics company, offers his view on the Pentagon’s decision;

“As part of the announcement, it came to light that most programs will undergo at least three months of delay, and that the aerospace sector was the most impacted. These delays are problematic for prime contractors such as Boeing, which had to temporarily close its facilities at Puget Sound (WA), assembling P-8 and KC-46, and Ridley Park (PA), which produces H-47 and V-22.

“The issue reverberates down the supply chain with small subcontractors reliant on prime contractors, squeezing their margins and poorly equipped to deal directly with the DoD acquisition process.

“Lockheed Martin reacted early to help its suppliers to face the crisis. The company announced two successive accelerated payment checks of US$53m each on 27 March and 3 April as part of its larger COVID-19 response strategy. Lockheed Martin, whose net sales for Q1 2020 managed to grow by 9.1% Y-o-Y, can afford to inject fresh cash in its supply chain. But other prime contractors across the board have tended to suffer from the pandemic.

“Anxiety towards lower tiers of the US defense supply chain predates COVID-19 disruptions. The DoD launched the Trusted Capital Marketplace in 2019 to provide investments to innovative companies in reaction to the low survivability rate of small and medium enterprises trying to do business in defense. The US$3bn will help to face the short-term impact of COVID-19, but might not resolve more fundamental sustainability issues.”

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