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IMMEDIATE RELEASE

Release No: 220-97
May 06, 1997

DOD TAKES ACTIONS TO ADDRESS DEFENSE INDUSTRY VERTICAL INTEGRATION

Undersecretary of Defense for Acquisition and Technology Paul G. Kaminski today announced a series of actions the Department is taking to ensure that defense industry vertical integration does not harm defense products. These actions, Kaminski noted, implement the recommendations of the Defense Science Board Task Force's Report on Vertical Integration and Supplier Decisions.

The Department's actions will improve its ability to recognize and address problems that may arise from vertical integration in the future. As a result of industry consolidation, major firms who build defense weapon systems have acquired the capabilities to produce primary subsystems and components that go into those platforms. This means the firms are more vertically integrated.

These actions, will give us an early warning system and enable us to get ahead of potential problems with vertical integration. They are an important addition to our ability to be smart, effective, well-informed buyers. This keeps us on course to ensure our continued access to competitive, innovative subsystems and components that help provide the Department's leading edge in purchasing our weapon systems, said Kaminski.

The DSB Task Force found the DoD's process to review proposed industry mergers and acquisitions is working well. In working with the antitrust enforcement agencies, the Task Force said, DoD is effectively identifying vertical integration concerns. However, they found the DoD is not as well postured in its ongoing acquisition program management to recognize when vertical integration might create a potential problem.

While little evidence was found that firms are using their increased vertical integration to harm defense products or other firms today, the DSB Task Force cautioned the DoD that vertical integration may cause problems in the future. A potentially static defense business climate, with few new programs and a concentrated industry, may in the future encourage firms to use internal vertical capabilities to their advantage and to other firms' disadvantage in the process. Over time, the DSB Task Force found, such actions could reduce competition and innovation for important defense subtier products.

Kaminski directed actions in DoD acquisition program management in three areas. They include:

Increasing visibility by monitoring selected, important subtier supplier product and technology areas. This includes DoD- wide monitoring by Deputy Undersecretary for Industrial Affairs and Installations John B. Goodman, as well as scrutiny by individual acquisition program managers of their contractors' choices of suppliers and teams.

Fostering competition at prime contractor and subtier supplier levels. Vigorous best value competition at the prime level stimulates competition at the subtier level. In devising its acquisition program strategies, the Department will consider alternatives such as using open systems architectures, promoting leader/follower productions, funding a program risk reduction period to encourage more entrants, and elevating critical subtier product areas in source selection reviews.

Improving the knowledge of Department managers about industry, so they can be smart, effective arms-length buyers. The curricula at defense schools and the credentials of DoD's acquisition managers will be expanded to emphasize industrial and business knowledge.

Kaminski also directed that a program funding element be established to support the Deputy Undersecretary of Defense for Industrial Affairs and Installations as he manages the overall implementation of these new actions.

The DSB study, chartered by Kaminski last year, included industry and antitrust analysts, representatives of industry, and representatives of the antitrust enforcement agencies.

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