In an article from Federal News Radio, it was reported that the Defense Contract Management Agency (DCMA) is seeking to improve and standardize decision making among its geographically dispersed network of buyers, as well as better manage the performance of defense sub-contractors and second-tier suppliers. Both efforts are part of a larger, Department of Defense (DoD)-wide procurement initiative known as “Better Buying Power,” and they are instructive for how private enterprise procurement teams can improve their operations, as well.
After many years of deterioration, the DCMA is seeking to rebuild standard pricing information and processes for items that it purchases on behalf of the DoD that are commercial, military, and “commercial-of-a-type” that will allow contracting and purchasing officers around the world to purchase items for the military along a standard cost structure. Currently, DCMA buyers can independently categorize and purchase items for the DoD, but these can vary wildly from buyer to buyer and from location to location – even for the same product or service.
As part of an effort to standardize and centralize this information, the DCMA is hiring 50 staff members to act as specialists for what items are considered purely commercial, purely military, or fall into a gray area where commercial items were modified to suit a military purpose. The differences translate into higher cost for military and commercial-of-a-type items, as they must meet higher standards and undergo more stringent oversight. Commercial items that are missclassified as military or commercial-of-a-type could unnecessarily cost taxpayers millions of dollars.
The DCMA is also moving forward with a plan to strengthen its supplier management practices, particularly at the sub-contractor level where the government has traditionally lacked much leverage or visibility. Details of the plan are hazy, but weak supplier management and a lack of visibility at the sub-contractor level have allowed too much financial and regulatory risk to seep into the military’s contracting process. Lieutenant General Wendy Masiello, DCMA’s Director, cites counterfeit components, missed delivery of products and services, and cost overruns as examples of why the DCMA cannot rely solely on its prime contractors and tier-one suppliers to provide oversight.
To incentivize more effective supplier performance management at the sub-contractor level, where an estimated 60%-70% of contracting dollars end up, the DCMA is considering “ranking and rewarding” those prime contractors and suppliers that over-perform on their commitments. DCMA would leverage the DoD’s Contractor Performance Assessment Reporting system (CPAR) to provide the data it would use to assess its suppliers and their suppliers’ performance – which the Navy began doing and the Army and Air Force following suit.
What can the Private Sector Learn and Apply from the DCMA’s Initiatives?
Standardizing product classifications, costs, and pricing information, and then centralizing all of this information so that a global team of supply managers can consistently leverage it when making purchases are best practices and vital parts to a health procurement operation. Failing to standardize and centralize classifications results in, at best, much rework being performed, and at worst, costly discrepancies between one buyer’s decision and other’s that over time can amount to hundreds of thousands or millions of dollars in unnecessary spending. Standardizing and centralizing product and pricing information is not only more efficient, it is cost effective.
Gaining greater visibility into second-tier suppliers and ensuring that prime contractors are holding their subs accountable is another important lesson that the private sector can learn from the government. With sub-contractors and second-tier suppliers making up such a large part of the value chain in the global economy (and with such a large percentage of contracting dollars flowing to them for their efforts), it is very reasonable for the government (and industry) to want to know how their sausages are made.
It may not be pretty, but in such a heavily regulated industry like defense contracting (and others, like consumer packaged goods, medical devices, or pharmaceuticals), many enterprises live and die by federal or regulatory compliance. If their first or second-tier suppliers are not compliant, or are causing them to be non-compliant, it can spell disaster for an enterprise. As a result, enterprises – whether they are in the public or private sector – need to have greater visibility at this level. And if they need to reward performance to reduce regulatory risk, so be it.