Doing Business With The Navy

An $88 Billion Market For Marine Suppliers Second In A Series Of Articles — "Selling To The Navy" The dominant role played by commercial shipyards and civilian personnel in the construction of Naval vessels and in the selection and purchase of equipment cannot be overemphasized.

Since the mid-1960's 100% of all new U.S. Navy vessels (and some for Allies) have been constructed in privately owned shipyards (the prime contractors). About 30- to 35% of Navy repair and overhaul work is also accomplished in civilian yards. The Naval Shipyards perform no new construction work.

Last year, the U.S. Navy awarded contracts for construction and conversion of all 32 ships authorized in its ship construction and sealift charter programs.

It was the first time in recent history, and perhaps ever, that all ships authorized in a given year were under contract before the end of that year. Moreover, as Assistant Secretary of the Navy (Shipbuilding and Logistics) George A. Sawyer frequently points out, approximately 80% of the Navy's fiscal year 1983 SCN (shipbuilding and conversion, Navy) budget—over $16 billion, a peacetime record—-had been awarded before the fiscal year was even six months old.

That, too, is believed to be a peacetime record.

The contrast between the Navy's great leap forward and the simultaneous decline of merchant shipbuilding activity is not coincidental, nor does it necessarily reflect a permanent change in the mix of naval and merchant bottoms on the orderbooks of the nation's private shipbuilders.

But it does indicate very strongly what is likely to be, with some slight annual modifications, the business outlook in the U.S.

shipbuilding industry for the next several years at least.

Putting that assessment into perspective are the following facts and statistics garnered from various SCA (Shipbuilders Council of America) reports, the posture testimony of Defense Department and Navy officials before Congress, and the President's budget proposals for fiscal year 1984 (which begins on 1 October 1983) : • The naval and merchant shipbuilding orderbooks both have followed somewhat erratic curves over the past decade. In 1973, 43 merchant vessels (2,013,- 000 gross tons) were ordered from U.S. private shipyards. In that same year only seven USN ships (39,000 light displacement tons) were ordered — most Defense Department funds were still being allocated to the more immediate needs of U.S. ground and air units in Vietnam.

• Merchant ship orders dropped p r e c i p i t o u s l y t h e r e a f t e r and stayed on the order of about 15 ships or so per annum before climbing back to 30 ships (394,- 000 gross tons) ordered in 1978— then dropping again. Contract awards for naval ships went through much the same cycle, hitting a high of 25 ships (119,- 000 tons) in 1978 and a low of 11 ships (101,000 tons) in 1980 before climbing again, during the well-publicized Reagan defense buildup, to 28 ships (97,000 tons) in 1981 and 30 new-construction ships (324,000 tons) ordered in 1982. (Navy and SCA figures differ slightly because of the different measurement indices used, but paint essentially the same picture.) • The naval and merchant construction backlogs — ships under construction or on order — show more consistent trends. The merchant ship backlog as of 1 January 1974 was 97 ships of 4,005,- 000 gross tons. The tonnage backlog had climbed one year later to 5,053,000 tons; the ship backlog had dropped one notch, to 96 ships. The tonnage backlog declined rapidly thereafter, however, skidding to 3,467,000 tons by 1 January 1978, to 2,635,000 tons one year thereafter, to 1,816,000 tons (less than half the 1 January 1974 total) by 1 January 1980, to 937,000 tons (less than one fourth the 1 January 1974 total) a year after that, and sinking to a new low of 416,- 000 tons at the beginning of this year. Merchant ship totals varied somewhat more erratically, but followed the same general downward trend. The naval ship backlog, partly because most naval ships are considerably more complex and thus take longer to build, followed a generally upward trend, climbing from 56 ships (526,000 tons) under construction or on order on 1 January 1974 to almost double that number, 105 ships (738,000 tons) on order as of 1 January 1983.

• Navy shipbuilding is projected to increase steadily for the duration of the current FYDP (five-year defense plan), with 17 new-construction ships and five conversions / reactivations scheduled for FY 1985 funding, and 30 or more ships scheduled for each of the three final "outyears" of the FYDP for a collective total, during the FY 1984-88 time frame, of 123 new-construction ships and 21 conversions/acquisitions/ reactivations. When the present merchant ship backlog is finished, however, there may be no additional orders pending. Because of its ideological antipathy toward subsidies the administration plans to eliminate both construction differential subsidies (CDS) and operating differential subsidies (ODS).

The synergistic effect of these sudden and very large changes has been to persuade the nation's private shipbuilders, and their second- and third-tier subcontractors and suppliers, that those in the past may have shied away from doing business with the Navy had best get into this growing market area as early as possible.

But "doing business with the Navy" is somewhat complicated.

It involves, almost always, a lot of paperwork. It means, much of the time, having to suffer through and put up with contract delays, material and paperwork inspections, and specification changes.

It necessitates, for those who are serious about it, learning a new bureaucratic language (the aforementioned FYDP and SCN as well as such arcane terms as SLEP, DSARC, and SRA) as well as new ways of doing business.

And it mandates, for those who are both serious about it and interested in making a reasonable profit, considerable hard work, meticulous attention to detail, extraordinary stamina, and, perhaps, a modicum of good luck.

Once one gets past the language and regulations barriers, however, the problems are not as formidable as they appear. A more difficult obstacle for some vendors, in fact, is the psychological high hurdle facing any company trying to break into a seemingly overcrowded field in which the prime contractors already have developed close and cordial working relationships with other suppliers and subcontractors.

That obstacle, however, is — like the others—more imaginary than real.

It is appropriate at this point to emphasize a fact important to all suppliers. Many of the individuals influential in, or directly responsible for, the selection and procurement of products and service for Navy work are the same people who must be contacted when a commercial ship is involved. The country's largest and best known private shipbuilders have been engaged in both naval and commercial shipbuilding and repair work for generations.

Since the mid 1960's, 100% of all new U.S. Navy vessels (and some for Allies) have been constructed in privately owned shipyards (the prime contractors).

About 30- to 35% of Navy repair and overhaul work is also accomplished in civilian yards. The Naval Shipyards perform no new construction work.

Almost all, if not all, of the nation's leading naval architectural firms (private corporations) have been engaged, to a great degree, in naval work for decades.

Most of the individuals (civilians) in both the shipbuilding and design areas who have been responsible for the selection and purchase of equipment and services for private shipbuilding projects are the same private individuals now responsible where naval work is concerned.

The truth is, any company that can help a private shipbuilder build ships for the Navy better, or faster, or at lower cost (or any combination thereof) should have no difficulty finding work. And the field is not really as overcrowded as it seems. The lack of vendors and subcontractors at the second-, third-, and lower-tier levels is, in fact, one of the Defense Department's major concerns, and was depressingly well substantiated in a special Congressional report released in early 1981. Following are a few excerpts from that report: "The Defense Science Board Task Force [which was conducting a parallel study of its own on "Industrial Responsiveness"] found evidence that the defense industrial base is shrinking. In one of the programs the task force examined, there was a reduction in one year of 1,500 suppliers from the 6,000 that had participated in that program the previous year. In another program, the Task Force found that the number of bids on a given program declined by 40 percent from one year to the next.

". . . Harry Gray, Chairman and Chief Executive Officer, United Technologies Corp., testified [before the Defense Industrial Base Panel] that 'The supplier network that forms the base of our country's defense industry is shrinking at an alarming rate.

Since 1967, the number of companies involved in aerospace production has declined by more than 40 percent. In 1967, there were approximately 6,000 companies in the industry. Today there are only about 3,500.' Mr.

Gray noted further that, of those 3,500 contractors, there has been a turnover of some 1,500 during the last two years. . . .

"Dale Church, Deputy Under Secretary for Defense Acquisition Policy, characterized the defense industrial base as 'unbalanced.' While the prime contractors in the base generally have sufficient or excess production capacity, Mr. Church pointed out that there are . . . 'very serious deficiencies at the first, second, third and so on and so forth, tiers of subcontractors down to the vendor levels who are vendoring components into the [system].'" The C o n g r e s s i o n a l Panel chaired by then-Representative Richard H. Ichord (D-Mo.), who has since retired, had much more to say about other aspects of the defense industrial base that the committee believed pose serious threats to national security and to the nation's ability in time of crisis to build the weapons of war and ancillary equipment needed for a sustained conflict. The nation is too dependent on overseas sources of raw materials, the panel said. There is not only a shortage of reliable subcontractors, there is also a very severe shortage "of the skills needed by the defense industry." Lead times for military equipment, components, and spare parts "have increased significantly" in recent years.

What was perhaps the most serious charge of all: "The Department of Defense has neither an on-going program nor an adequate plan to address the defense industrial base preparedness issue ; Department of Defense inaction in enhancing industrial base preparedness—coupled with instability within the five-year defense program, weapon system procurement stretchouts, inadequate budgeting, and inflation— has contributed to the deterioration of the U.S. defense industrial base, and, as a consequence, jeopardizes the national security.

. . . These [problems] are a monumental challenge to the Congress, the Department of Defense, the defense industry, and the civilian economy." The Ichord panel was not, unfortunately, overstating either the dimensions of the problem or the size and nature of the "monumental challenge" facing the U.S. defense establishment as a whole. The then-incoming Reagan Administration, already committed to rebuilding and modernizing the armed forces—and, although it was less emphasized in the campaign literature, to a rebuilding of the defense industrial base as well—partially responded to the challenge first by consciously structuring its defense budget proposals to provide some much-needed immediate funding to companies already doing business with the Defense Department, and then by instituting a number of management changes designed both to make defense business more profitable and to entice more companies into the defense field.

The key word, not too surprisingly, is "profitable" — but it shouldn't be interpreted as a giveaway to business, as is sometimes alleged. The whole program is based on common sense, and on the recognition that: (1) Companies that don't make a profit don't stay in business; (2) With fewer companies in business there is less competition (no competition in some key areas) ; and (3) With less competition prices are likely to increase, which means the Defense Department's budget increases also.

All of which means that, with proper management, defense business that is "profitable" to the contractors, subcontractors, vendors, etc., is also profitable to the Department of Defense — and, therefore, to the American taxpayer as well.

Application of this principle has been demonstrated a number of times already in the shipbuilding program. Without going into all of the contractual specifics— which are somewhat complicated —the Navy has shifted from the previous system of awarding rigidly defined contracts with every cost and schedule milestone spelled out in infinite detail to a more flexible system which rewards efficiency and good management— primarily by returning to the builder a pro-rated share of any cost reductions achieved.

The result has been numerous ships delivered not only under budget but ahead of schedule.

(There are other factors involved, but Navy officials and prime contractors seem to agree that the "profit-sharing" system has been a major factor in the recent improvement in delivery schedules.) The same common sense principles apply to the Navy's—and,/ or the prime contractors'—dealings with suppliers, vendors, and subcontractors. Referring back to the "better, faster, lower cost" rule of thumb, it's safe to say, in general (there are a number of exceptions), that the following types of materials, products, systems and subsystems, and services have an excellent chance of breaking into the defense market: —An item equal in quality but lower in cost than a similar item already in the defense system.

—An item of about the same cost, or even higher in cost, but of higher quality.

—An item perhaps equal in cost and in quality, but which can be delivered earlier. (Delivery costs, incidentally, are often a major part of total costs; for that reason alone an East Coast shipyard, for example buying major components from West Coast suppliers would undoubtedly give East Coast suppliers of the same or similar products a sympathetic hearing.) The "quality" factor is worth expanding upon, in terms of what in Defense Department jargon is known as "the ilities" •— durability, reliability, and maintainability, specifically. A piece of equipment that lasts longer, all else taken equal, has a big edge on the same piece of equipment, built by another manufacturer, that is less durable or, and this is sometimes forgotten, less able to take the stress of high seas, sudden changes in motion, and / or environmental extremes to which so much military equipment is subjected.

Similarly, a system or subsystem that seldom if ever malfunctions is almost sure to win in a competition—again, all else taken equal—against a less reliable system/subsystem. It has happened (far too many times) that a computer or radar or anchor windlass or main engine has had to be put in a shutdown condition because of a blown fuse or faulty gauge or malfunction of some other very minor component or subsystem. It's the old "for want of a nail" syndrome.

A main engine shutdown means the ship can't get underway. In the stern language of Navy "op orders" that means "mission not accomplished." In wartime it can also mean lives needlessly lost.

It is for that reason, it might be noted, that the Navy's own ship designers and decisionmakers insist not only on reliability but on backup systems ("redundancy" is the term now in vogue).

Finally, maintainability: a system easy to maintain means higher reliability. It also means fewer manhours devoted to maintenance.

The savings that result over a ship's, or system's, operational lifetime will be significant, often amounting to more than the initial acquisition cost.

And that, of course, is another reason for the high cost of today's ships, aircraft, and weapon systems. Designers and engineers are deliberately "front-loading" the system to make it more reliable and easier to maintain from the beginning. The price is, in most cases, a higher initial acquisition cost, but the reward is lower life-cycle costs—and equipment which is readily available if and when needed in time of war or other national emergency.

Assuming a company's product meets one, all, or some combination of the preceding, the next question is this: How does the company bring its product to the attention of the Navy and/or prime contractor?

Happily, the answer is relatively simple (although some of the follow-on details can become complicated).

There is a basic "how to" book, "Selling to the Military," published p e r i o d i c a l ly (every three or four years) which: (1) spells out, among other things, "How to get started"; (2) provides sources of information on defense procurement as well as additional information applicable to and necessary for "socially and economically disadvantaged small business firms"; and (3) includes a current list of "Major Buying Offices" of the Defense Logistics Agency and the Departments of the Army, Navy, and Air Force. There is also the "Navy Small and Dis- advantaged Business Personnel Directory" which is broken down into several helpful categories: general contracting assistance; s u b c o n t r a c t i n g opportunities; R&D (research and development) contract information; technology transfer assistance; potential Navy contractor program; and acquisition, research, and development information. (The latest updates of both publications have recently been released; for information on how to obtain these publications, write Navy Books, MARITIME REPORTER / Engineering News, 107 East 31 Street, New York, NY 10016.

At the end of this article is the current list, by state, of the Navy's small and disadvantaged business subcontracting specialists.

Companies ready to take the plunge will find out that, as always in dealing with the government, there are forms to be filled out. The subcontracting specialists have the forms available and will be helpful both in filling them out and in explaining the intricacies of what are called MilSpecs (Military Specifications).

Attention to MilSpecs is often the difference between losing and winning, insofar as competition for Defense Department business is concerned.

Copies of the latest revisions of the two most important forms for companies making their initial entry into the defense field, Standard Form 129 and DD (Defense Department) Form 558-1, also are included in "Selling to the Military," and should be filled out very carefully. Standard Form 129, "Bidder's Mailing List Application" in everyday English, has spaces for the usual routine information — company name, address, type of business, etc. -— as well as for such other non-routine information as average number of employees, average annual sales, net worth, floor space, and other data relevant to a company's qualification as a "Small Business Concern." The same information, and more, is required on DD Form 558-1, "Bidder's Mailing List Application Supplement." The reason such information is needed, and should willingly be provided, is also spelled out in "Selling to the Military": "DoD [Department of Defense] contracts which exceed $1,000,- 000, in the case of a contract for the construction of any public facility, or $500,000 in the case of all other contracts, and offers [sicl subcontracting possibilities, require that large business firms submit a subcontracting plan which becomes part of the contract and includes percentage goals for the utilization as subcontractors of small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals. Such contractors are required to designate a Small and Disadvantaged Business Liaison Officer who administers the company's subcontracting programs.

These programs are designed to assist small and disadvantaged business firms by affording them the opportunity to participate in Defense work as subcontractors." Another point worth emphasizing: "Selling to the Military" means just that — selling products or services directly to the Army, Navy, Air Force or one of the so-called Defense agencies (Defense Logistics Agency, Defense Communications Agency, Defense Advanced Research Projects Agency, etc.). And the individual services and Defense agencies do directly and collectively buy, each year, literally billions of dollars worth of goods and services from private indus- try. They also design, develop, and in some instances produce some items—certain types of munitions, and various highly classified communications systems, for example—on their own.

But, as the Ichord report points out, the U.S. defense industrial base "is almost totally owned and operated by the private sector.

There are only 83 government - owned facilities within a base which is made up, at any one time, of 25,000 to 30,000 prime contractors and upwards of 50,000 subcontractors." There is a clear and important distinction, therefore, between what is known as GFE (government- furnished equipment) and CFE (contractor-furnished equipment).

When the Navy awards a contract to a private shipbuilder (the prime contractor) for construction of, say, a nuclearpowered aircraft carrier it will normally specify in minute detail what systems, subsystems, and equipment items will be built or purchased by the prime contractor (the private yard) (CFE) and what will be built or, much more likely, purchased by the government and provided to the prime contractor (GFE). Very close Navy/contractor coordination on installation of GFE items is of course mandatory.

The shipyard, as prime contractor, has the authority to choose one supplier over another where contractor furnished equipment (CFE) is concerned.

For example, the total contract price for the two carriers, CVN 72 and 73, is approximately $6.7 billion. Government Furnished Equipment (GFE) is not included in this figure.

Of the $6.7 billion, approximately $2.2 billion will be used for normal shipyard operating expenses such as salaries, etc.

Therefore, the shipyard, a private company staffed and managed by civilians, has the discretionary authority to spend in the neighborhood of about $4.5 billion with sub-contractors and suppliers.

The dominant role played by commercial shipyards and civilian personnel in the construction of Naval vessels and in the selection and purchase of equipment cannot be overemphasized.

The subcontracting specialists listed in the Navy's Small and Disadvantaged Business Personnel Directory have two principal functions: "to administer Government contracts"; and "to aid and assist businessmen who may be interested in subcontracting opportunities." They carry out the latter function mostly by facilitating access to prime contractors, maintaining information on recent prime contracts awarded, and keeping abreast of the various systems, subsystems, and equipment items prime contractors are most likely to buy from subcontractors.

The would-be subcontractor can help his own cause immensely by following the advice in the "How to get started" section to: • "Learn your customer's needs as well as his buying policies and practices." • "Follow leads on where buying is done, and search out selling opportunities in all segments of the Defense organization." "Selling to the Military" doesn't leave it at that, but provides some additional helpful informa- BECAUSE YOU CAN'T AFFORD THE PRICE OF ANYTHING LESS.

WABCO fluid power AN AMERICAN-STANDARD COMPANY tion, as follows, on the best source of official information on the aforesaid "leads" and "selling opportunities": "The 'Commerce Business Daily,' published by the Department of Commerce, is a valuable source of information to businessmen in identifying products and services which individual procurement offices currently plan t o buy. This publication provides i n f o r m a t i o n on the f o l l o w i n g: • Current Defense Department proposed procurements estimated t o exceed $10,000, and civilian agency procurements expected to exceed $5,000.

• Recent contract awards, valued in excess of $100,000, which provide opportunities for subcontracting.

. . .

• Surplus sales information and other information helpful to businessmen who seek to participate in Federal procurement act i v i t i e s ." The "Commerce Business Daily" is published Monday through Friday. Annual subscription is $175.00 (first class), or $100.00 (second class). To order, send check or money order (Visa and Master Charge also are acceptable) to the Superintendent of Documents, Government Printing Office, Washington, D.C. 20402.

The " D a i l y " also is available f or inspection at each of the Defense Department's own buying offices and activities and at field offices of the Small Business Administration, Department of Commerce, and General Services Ad- ministration. Many local chambers of commerce also maintain files of the "Daily." So far, so good. The would-be contractor knows he has a good product, he's read the "Daily" and contacted the subcontracting specialist, and filled out all the necessary forms. What else is there to do?

In some cases, nothing—or, at least, very little. If the product offered really is exceptionally superior the Navy and/or prime contractor will almost literally take the subcontractor by the hand and lead him through the regulatory thicket that still, despite some recent improvements, surrounds the government procurement process.

In most cases, however, the subcontractor will be pretty much on his own. He'll have to learn the new language—enough of it to get by, anyway—-and familiar- ize himself with acronyms such as the previously mentioned: SLEP (service life extension program, a term used to describe the stem-to-stern extended overhaul which puts new life into old ships and stretches their operational lifetimes 15 years or so) ; DSARC (Defense Systems Acquisition Review Council, the Pentagon's upper echelon procurement hierarchy which gives the "go" or "no go" signals on major systems at various "milestone" points in the procurement cycle of each individual system) ; and SRA (selected restricted availabilities—" quick fix" ship overhauls which the Navy has been recently ordering in lieu of regular overhauls of longer duration).

He also will have to learn how to qualify his product in accordance with the "MilSpec" (military specification) guidelines.

It's not all that difficult, really.

But it is, particularly for those not familiar with the system, often confusing and sometimes extremely frustrating.

Those who are familiar with the system, however, capsulize the confusion and frustration with an old Washington story: "Question: What is an elephant?

"Answer: "A mouse built to military specifications." This is the second in a series of MARITIME REPORTER/Navy articles. Future articles will discuss such subjects as doing business ivith prime contractors, the Coast Guard's shipbuilding program, the Military Sealift Command, and related topics.