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The Defense Production Act — and How to Work With It

Sept. 15, 2020
The DPA is much more than a supply-chain tactic, and manufacturers that understand it and use it effectively can prosper.

Manufactured goods like ventilators and masks were suddenly in high demand in April, because of the global COVID-19 pandemic. To meet the need, the U.S. government invoked the Defense Production Act. Those items are required urgently and in large volume, and as a result the direction of production for many manufacturers changed dramatically. Following here is a summary of what the act entails and how agile manufacturing organizations can turn challenge into opportunity.

For decades the Defense Production Act (DPA) has played a critical role in manufacturing programs. When the United States entered the Korean War in 1950, the federal government implemented the DPA to enable prioritization of the production of materials, equipment, and technologies needed for the war effort.

Since then the act has been employed several times. I had first-hand experience of this as U.S. Air Force major during the Afghanistan and Iraq War, when the Act was used to rapidly expand our reconnaissance fleet. The General Atomics Predator unmanned aerial vehicle was used extensively for surveillance, but the production capacity for those drones could not keep pace with the military demand. Under DPA guidelines, General Atomics licensed the technology for the drone to the government so other manufacturers could begin producing it.

The DPA not only makes worrying shortages of high-demand items more manageable, but also gives manufacturers an incentive to prioritize this production — and can even offer financial support to scale- up production quickly. Let’s explore the details of the act, what it means for manufacturers, and the critical factors manufacturing organizations should weigh before committing to rated orders.

The DPA has its roots in providing military equipment where it’s needed most.  Not only can the DPA make more vital materiel readily available, it also can democratize participation in defense projects across other vendors. In the example above, the Air Force Research Laboratory, which executes the DPA Title III program, partnered with Lockheed Martin, Northrop Grumman, and Raytheon. The partnership saw General Atomics’ technology being leveraged on other aircrafts, including early tests on a US Air Force C-130 and King Air aircraft.

Participating in prioritized orders through the DPA can be testing because it necessitates significant logistical capabilities; first to complete the project-based work, and then to document you are meeting orders to the satisfaction of the federal government. But the DPA, when used to meet emergent needs such as we face now, can introduce new vendors into the DoD supply chain and often inject new intellectual property and product opportunities into these businesses.

The DPA also has been used several times recently:
  To accelerate to market protective devices against improvised exploding devices (IEDs) in 2006;
  For mine-resistant ambush protected vehicles (MRAPs) in 2007;
  To increase production of intelligence, surveillance, and reconnaissance technology in 2008;
  To provide night-vision technology for use in Afghanistan in 2010;
  For submarine environmental control refurbishment in 2012;
  In 2013, the Army requested DPA, on behalf of a supplier of 120-mm Enhanced Mortar Targeting Systems (EMTAS.)

But the DPA is about a bigger picture: supporting national needs in emergencies. All of these examples highlight how the DPA has been used for the benefit of military and defense systems, but the application of the act was expanded in 2003 to make it applicable to “critical infrastructure protection and restoration.” Since then it has been used to mitigate the emergence of floods, earthquakes, and hurricanes.

In cases where required for the defense of the homeland in numerous circumstances, the DPA currently enables the President of the United States to:
  Require people and businesses to prioritize and accept contracts for materials and services as necessary to promote the national defense.
  Incentivize the domestic industrial base to expand the production and supply of critical materials and goods. Authorized incentives include loans, loan guarantees, direct purchases and purchase commitments, and the authority to procure and install equipment in private industrial facilities.

Do not underestimate DPA rules and regulations. As noted, manufacturers completing work under the DPA not only can get involved in government programs they previously did not have access to, but they also may receive help with capital expenditures and operating expenditures. However, manufacturers must be mindful of the priority ratings that come with each of these contracts. The Defense Priorities and Allocations System (DPAS) is a ranking system used in the supply chain for these critical projects.

Each DPAS order will have a rating (DX or DO) and required delivery date. On these orders, manufacturers must comply with the various provisions of the DPAS, found in 15 CFR Part 700.

Of the priority ratings, DX is the highest and requires presidential approval. The secretary of Defense, meanwhile, must approve the DO rating. Usually though, DPAS functions more like a classification system, with for instance, A1 for aircraft, A3 for ships and other designations that do not really impact priority but rather describe where the materiel resides.

Whether you are a primary contractor working directly for a branch of the military, a subcontractor working for a prime, or a second- or third-tier contractor or vendor, there are four main provisions of DPAS that require your attention:
  Mandatory Acceptance – which means a contractor, subcontractor or supplier shall accept a rated order when they make the item, normal terms of sale apply and they can meet the delivery dates.
  Mandatory Extension – which means a manufacturer or contractor must communicate the DPAS rating to their suppliers.
  Priority Scheduling – so activities including the acquisition of all needed production items can satisfy the delivery requirements of each rated order.
  Customer Notification – which requires a rated order be accepted or rejected, in writing, within 15 working days for DO-rated orders and 10 days for DX-rated orders.

Manufacturers who excel will reap long-term rewards. DPAS has consequences for both capital acquisition and support of assets once they are deployed, and the government measures how responsive a vendor is when they receive rated orders. This also can represent an opportunity for vendors who can guarantee and then document that they are responding quickly to orders and meeting delivery requirements.

The more rapidly and reliably your operation completes this task, the more favorably the Defense Contract Management Agency (DCMA), which is responsible for ensuring the rating system is followed, will look upon you. In fact, DCMA has a grading system, and as vendors and contractors perform well, and are responsive and accurate in adhering to the DPAS rating requirements, those vendors will be first in line for future opportunities based on the grading structure.

Currently, most companies serving the defense sector have limited ability to actively manage deliverables. The exception to this rule would be a major original equipment manufacturer (OEM) or Tier One defense contractor. These tend to be large companies that have sufficiently sophisticated systems to track parts, availability, and deliverability in great detail, at least within their own organization. The OEM’s middle-market vendors may struggle with this level of documentation.

Many DPAS orders also involve mission-critical equipment, requiring a serialized structure for every bolt, nut, and component, along with a record of the provenance and origins of materials, parts, and purchased components.

Failure to perform will be punished, so be prepared for the task at hand. Businesses that accept DPAS-rated orders for the first time will need to prepare for these requirements, but this can have the additional benefit of enhancing systems and processes and making them more competitive on private-sector, non-rated orders.

But before undertaking work through the DPA, manufacturers should think carefully about whether or not they have or can invest in the rigorous processes and systems necessary to meet the timeline for deliverables, and to ensure they are at least accepting or declining orders in a timely fashion. There will be very little room for error; your organization should either commit to and aggressively participate in DPAS, or take a back seat. The program relies on both the carrot to incentivize program compliance, as well as the stick to dissuade vendors from under-delivering. The maximum penalty provided by the Defense Production Act is a $10,000 fine, or one year in prison, or both.

Businesses that satisfy DPA demands will be set for long-term success. The DPA and DPAS rating system creates new potential avenues for manufacturers to explore. However, with poor performance leading to hefty penalties, the ability to adapt business processes and increase production ahead of taking on rated orders is paramount. Those who satisfy rated orders successfully will see short-term financial gains, but also will position themselves well to fulfill government orders in the long term.

Matt Medley is the senior product manager for IFS North America, with expertise in direct leadership roles, management consulting, change management, product and program management, and business process improvement.