WASHINGTON — More than a year and a half after the COVID-19 pandemic began to rock supply chains around the world, the defense industry is still wrestling with its fallout — and figuring out how to move forward amid the turmoil.
From massive deliveries of steel and aluminum needed to build the military’s newest ships and aircraft to landing gear brakes to items as small as semiconductors, supply chain shortages or delays have upended the plans of defense firms of all sizes.
Much of the nation’s broader attention on supply chains has focused on the rising costs of feeding a family or worried parents scrambling to order presents well before Christmas to ensure Santa will have something to leave under the tree.
But those in the defense industry are increasingly making clear the challenges they’re facing — and Pentagon officials are taking notice and considering what this means for their own logistics.
Supply chain woes sparked by the pandemic were a recurring theme during recent contractor earnings calls. One major defense firm after another pointed to the problems they faced, in some cases as an explanation for lower-than-expected sales.
These issues dealt a significant blow to the aerospace and defense industry, according to the Aerospace Industries Association. In 2020, the industry as a whole lost more than 87,000 jobs, or about 4% of the 2019 headcount, according to AIA’s facts and figures report released in September.
And 64 percent of those losses — or at least 55,700 jobs — were due to the supply chain problems that particularly ensnared small and medium-sized businesses nationwide, John Luddy, AIA’s vice president for national security policy, said in a statement to Defense News.
Supply chains problems can stem from a variety of issues, such as a lack of raw materials to make vital parts; bottlenecks when trying to transport finished items, like a shortage of shipping containers; backlogged ports without enough people to unload shipments; or a dearth of trucks available to drive them across the country. Financing challenges also dealt another blow to those small firms, AIA said.
“Because end-use manufacturers rely on the vital components and products those [small and medium-sized aerospace and defense] companies produce, such as bolts, wiring, hoses and electronics, those losses in employees, revenue and products had serious ripple effects throughout the rest of the A&D industry,” Luddy said.
Some firms have seen COVID-driven workforce problems contribute to supply chain issues. Before the vaccines, this was typically driven by the need to maintain social distancing and a workforce concerned about contracting the dangerous virus. Now, controversies involving vaccine mandates are throwing a new curveball into companies’ efforts to remain fully staffed.
Small companies with slimmer profit margins have found weathering supply chain upheavals particularly challenging, said ML Mackey, chair of the small business division for the National Defense Industrial Association and chief executive of the defense IT contractor Beacon Interactive Systems.
“When something hits us, the waves are much harder,” Mackey said in a Nov. 19 interview. “A big ship can handle the waves, but a canoe, it’s bobbled around.”
Those small firms tend to be “niche” companies that specialize in one component or a handful, Mackey said. Those parts, while niche, can be critical for the military to keep planes, weapons systems or other pieces of equipment operational, she said.
But when those small businesses encounter turmoil — from workforce challenges or programming inconsistency from the Pentagon, which is relying on continuing resolutions until formal spending bills are passed — the upheaval throws a wrench in the broader supply chains they feed.
“Our bottoms are closer to the bottom line,” Mackey said. “There’s no extra in our game. … It’s not that [small businesses] need it to be easy, it just has to be consistent so we know how to engage and compete effectively.”
For want of a nail
Multiple defense firms contacted by Defense News declined to elaborate on their supply chain issues, instead pointing to statements made by executives during earnings calls or in other public forums.
But even those limited statements speak volumes about how supply chain issues have tested the defense industry.
John Mollard, acting chief financial officer for Lockheed Martin, said in an Oct. 26 call larger-than-expected supply chain problems in its aeronautics division — particularly in F-35 production — as well as in its missiles and fire control and space divisions, spanning multiple suppliers, reduced sales in the third quarter. Mollard said these disruptions “underscore the fact that many of our suppliers are still dealing with the financial stress caused by the global pandemic.”
He said dual-use suppliers — those who make parts used by both the military and civilian aerospace sectors — accounted for much of the supply chain challenges Lockheed faced.
For example, he said, a company that makes landing gear brakes for both military and commercial aircraft saw a cash flow crunch as the pandemic kneecapped the commercial air sector.
Lockheed has taken steps to help its suppliers stay afloat, Mollard said, including by accelerating billions in payments to the companies that make up its supply chain.
And, he said, Lockheed plans to keep steering these payments to suppliers hit by the pandemic — particularly small and medium-sized businesses — through the end of 2022, to make sure they can continue operating. Lockheed originally thought it would be able to cease those accelerated payments after this year, Mollard said.
“While it’s voluntary, it’s not 100% altruistic,” he acknowledged. “We need our supply chain to be successful for us to be successful.”
Greg Hayes, Raytheon Technologies’ chief executive, said in an Oct. 26 call his company took a $275 million sales hit due to a combination of supply chain issues and not having enough employees to do the work. Hayes said the “people part” accounted for about a third of that $275 million loss, meaning supply chain issues cost the company some $180 million.
Hayes said the supply chain problems aren’t stemming from a single supplier, but pointed instead to widespread challenges obtaining components and raw materials.
“Think about aluminum prices going up, think about all of the steel, all of the basic raw materials, lead times pushing out, and it’s just harder to get material in the door on time,” Hayes said.
Although Raytheon has benefited from long-term agreements for raw materials, he said, lead times on some of them have doubled. Hayes said Raytheon has an adequate supply of computer chips — but executives are still keeping a close eye to make sure they don’t fall short.
Hayes said the labor shortage problem is likely to continue into the new year. The vaccine mandate could also put more pressure on the supply chain in the short term, he said. In the long term, however, he said broader vaccinations could restore people’s confidence in the safety of air travel and hasten the industry’s recovery.
Chris Kubasik, the chief executive of L3Harris Technologies, said in the company’s Oct. 29 earnings call that electronic component shortages in recent months dealt it a blow — particularly in its communication systems division, as well as intelligence, surveillance and reconnaissance aircraft — and led it to slightly trim its sales growth expectations.
“No company is immune, including L3Harris, to global supply chain pressures,” Kubasik said.
He said he expects supply chain issues to continue well into 2022, with recovery beginning in the latter half of the year.
But L3 has also sought to find workarounds. Jay Malave, L3′s chief financial officer, said the company has looked for alternative sources and parts and even redesigned some of its electronic components.
Shipbuilders have also strained at times to keep the supplies needed for new ships flowing. Thomas Stiehle, chief financial officer for Huntington Ingalls Industries, said in a Nov. 5 earnings call that copper cabling was one example of a material putting pressure on suppliers.
“We’re a little light on material, specifically at Ingalls” Shipbuilding in Pascagoula, Mississippi, Stiehle said. “When we’re talking about shipbuilding, the material lag-behind [cost] roughly about $40 million in the quarter. And as we look forward into [the fourth quarter], that could persist.”
Dirk Lesko, president of General Dynamics Bath Iron Works in Maine, told Defense News the supply chain issues are occurring across a variety of industries and vendors.
“It’s kind of unpredictable,” Lesko said. “And it’s for everything, simple and complex things that we buy.”
Lt. Gen. Clinton Hinote, the Air Force’s deputy chief of staff for strategy, integration and requirements, said in a Nov. 16 online panel the military is seeing the same supply chain issues as the civilian world. If a major conflict were to break out, the military’s fragile logistics infrastructure could prove to be a vulnerability, Hinote said.
“We certainly see the problems in the civilian supply chain right now,” Hinote said. “Those also manifest themselves in military supply chains. In many ways, those supply chains are brittle, and we could make decisions to make those more resilient and less brittle.”
Megan Eckstein contributed to this report.
Stephen Losey is the air warfare reporter at Defense News. He previously reported for Military.com, covering the Pentagon, special operations and air warfare. Before that, he covered U.S. Air Force leadership, personnel and operations for Air Force Times.