Innovation & supply chain leading areas of concern for weakened defense industrial base

Already weakened before the pandemic, a new report from the National Defense Industrial Association (NDIA) finds that the health and readiness of the U.S. defense industrial base — composed of manufacturers, technology innovators, and systems integrators, research organizations, and suppliers — faces particularly large obstacles in the areas of innovation and supply chain. Assessed along eight different metrics, NDIA assigns an overall letter grade indicating the health and readiness of the defense industrial base. This year’s report assigned the final grade of a “C,” which is a passing grade, but leaves much room for improvement.

The first area NDIA identifies as one of concern is innovation, which it says has declined since 2018. The driving factor for this poor innovation score is a drastic decrease in average annual patent applications in both the manufacturing and scientific R&D services industries.

While not enough to outweigh these negative factors, the report also found a few positive areas. One of these positive factors was a rebound in innovation competitiveness, or the U.S. share of global R&D investment, which decreased from 2018 to 2019 but increased in 2020. The report also finds that DoD innovation-based budget obligations, such as the SBIR program and research, development, testing, and evaluation (RDT&E), have continued to increase since 2018.

Supply chain is the other main area in which NDIA finds the defense industrial base to be struggling, driven exclusively by two factors — financial performance and inventory management. Financial performance is based on the weighted average cash conversion cycle and illustrates how well the industry can turn product development into cash receipts. The second source of concern in this area is increasingly inefficient inventory management as measured by the weighted average inventory turnover ratio.

The report can be found here.