We go into panic mode, we increase production, and then when the crisis [is] passed, we just go back to minimal production again.
- Bill LaPlante, U.S. Undersecretary of Defense for Acquisition and Sustainment (Source, WSJ)
Episode Summary
NATO was formed in 1949, in the aftermath of World War II, to ensure peace in Europe. Under article 5 of the treaty, an attack on one member nation is considered an attack on all – and therefore a military response is required. Since 2006, NATO countries have committed to spend a minimum of 2 percent of their GDP on the military – a promise most have not upheld.
Now there is a proposal to standardize military equipment across countries. The hope is that this will make battlefield coordination easier and simpler. In practice, however, it would lead to far more negative consequences – cancelled contracts, broken supplier relationships, and unhealthy national interdependencies – than they realize.
In this episode of Dial P, Kelly Barner reviews the classic dilemma presented by multi-stakeholder strategic sourcing projects and the unintended consequences they can have:
– You don’t get something for nothing… what would NATO have to trade to get military standardization?
– What are the geopolitical implications of causing over concentration in the global industrial military complex?
– How detrimental is it to this effort that so many of NATO’s members do not live up to their spending commitments?
Episode Transcript
Intro/Outro (00:01):
Welcome to Dial P for procurement, A show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers, and thought leaders. Give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement.
Kelly Barner (00:31):
If you’re a return Dial P listener, you know that I am always calling for input. I will give absolutely anyone’s idea a try. In fact, audience directed episodes have been some of the best episodes of Dial P we’ve produced so far, and I’m lucky to say that I have a lot of good friends in this listening audience. One of them happens to be Mr. Scott Luton from Supply Chain. Now the group that I think of is Dial P’S mothership. Now Scott likes to catch up on the Wall Street Journal on the weekends, and that’s how it’s happened that on October 23rd I got a photo of an article titled NATO Aims to Better Align Arms Purchases in Response to Russian hostility with a simple note, neat possible dial piece story. Scott was absolutely right, and as I read and researched, it dawned on me that some of the most common sourcing and procurement challenges are just as much of a problem in the highest stake situations in the world, including international military defense alliances.
Kelly Barner (01:40):
In this episode of Dial P inspired by that article, I’ll review how NATO is trying to change the way its member countries arm themselves going forward, the challenges of having accurate demand forecasts and the many complexities of the buyer’s journey. And finally, why having production capabilities in one area is tightly linked to all of the other capabilities within a given country or industry. But before I go any further, let me introduce myself. I’m Kelly Barner. I’m the co-founder and managing director of Buyer’s Meeting Point. I’m a partner at Art of Procurement and I’m your host for Dial P here on supply Chain. Now, I’m constantly scanning the news for complex articles to discuss things that are interesting, but which may escape people’s notice. And based on some of the stories you’ve all sent me this year, you do the same and you catch things that I miss.
Kelly Barner (02:46):
If you ever have an idea for an episode, all you have to do is connect with me on LinkedIn and send through your idea. It is that simple. Dial P releases a new podcast episode or interview every Thursday. So be on the lookout for future episodes and don’t forget to go back and check out some of our past episodes as well. Before we get back to today’s topic, I have a quick favor to ask. I genuinely hope you find value in the time we’re about to spend together. An awful lot of work goes into making sure that you do, and so I would ask, please find a way to engage. Give us a review on iTunes, offer up some stars on another listening platform. Share this post wherever you found it, like or comment on LinkedIn or Twitter. Maybe there is just one colleague you know that needs to listen to this episode.
Kelly Barner (03:42):
Send them the link. As always, I am so grateful for your interest and attention to what we’re building here at Dial P. We have important work to do. Now let me start this week’s story with a brief review of NATO itself. The North Atlantic Treaty organization was formed in 1949 and the years following World War II to bind North American and European countries together in the effort to preserve peace in Europe. Under Article five of the treaty, an attack on one country is to be received as an attack on all and the member countries are therefore obligated to join in the military response if anyone is attacked in order to effectively uphold that agreement. In 2006, the members made a commitment to spend a minimum of 2% of their national GDP on their military. Spoiler alert, they didn’t do it. Now, as of today, there are 30 members of nato, and fairly soon there will be 32.
Kelly Barner (04:50):
Finland and Sweden are going through the process of joining a process that requires all of the member states to vote in favor. Just as important is the detail that the Ukraine is not a member of nato, which is why when they were invaded by Russia, countries sent armaments, countries sent support, but we did not attack Russia back. Ukraine has flirted with the idea of joining NATO in the past and for various reasons they never actually followed through. After Russia invaded, President Linsky requested a fast track admission, but given the reality and the consequences of Article five, there is very little appetite right now to bring them in his members. That would quite literally lead us straight to World War iii. Now, I mentioned earlier that most of the NATO members do not meet that threshold for minimum military spending. And it’s interesting because when you look at the countries that meet the requirements and the countries that don’t, there’s a pretty clear split between eastern and Western Europe.
Kelly Barner (06:01):
Eastern European countries are far more likely to hit that threshold. After all, they’re so much closer to Russia that the threat of military action probably feels a little bit more real than it does in the West. Now, unfortunately, the countries in the west also happen to have, in most cases a larger gdp, and so it’s not as simple as one country, one 2%. Those two percents all add up to very different amounts of money. In 2014, only three countries were meeting that 2% threshold estimates for 2021 and 2022 were eight countries and nine countries respectively. So even if those estimates hold and play out, we’re still talking about less than one third of NATO members paying to meet the commitment they agreed to. And 2014 was an important year. That was the year that Russia annexed Crimea. So NATO members watched this happen and you almost heard the resounding uhoh, This is real.
Kelly Barner (07:11):
There could be war in Europe, and they instantly enthusiastically committed to get caught up on their spending. But then you know how it is, you get busy, you kind of forget the urgency fades and the moment passes. Fast forward to 2021, Russia aids the Ukraine and NATO’s members said, Oh, I knew there was something I meant to do. I meant to spend that money on my military, and everyone once again enthusiastically recommitted to spending 2% of their GDP on their militaries by 2024. Now, I don’t mean to be alarmist, but 2022 is pretty much over one year passes in a flash when it comes to military spending and production. And so that 2024 goal is not as far away as it seems, and it’s actually likely to take them a lot longer than that to achieve what they want despite country level enthusiasm. Defense contractors say that all of these loud national promises that have been made are just starting to materialize as orders.
Kelly Barner (08:27):
They say it may take years for all of the orders to be placed, let alone delivered against. Now, here’s a specific example that hits really close to home. Since January of 2021, the United States has pledged $17.5 billion in military assistance for Ukraine, but the Pentagon has only placed $3 billion in new orders, and it’s been almost two years. $3 billion is still a lot of money, but it’s only 17% of what’s been promised. And even once it’s promised, it takes a very long time to get the production machine in motion. So talk continues to be cheap, and in the case of military spending, it may be the only cheap item in the store. So let’s talk about what makes this article a classic illustration of strategic sourcing challenges. Let’s think about just the current NATO member nations. So we’re not gonna worry about any new joining members and we’re not gonna worry about Ukraine for just a moment.
Kelly Barner (09:38):
Every single one of them may be using different weapons systems, different ammunition, and it does make it very hard to work together on the battlefield. Parts are not interchangeable. People don’t know how to operate and repair each other’s systems, and yet if NATO is ever called to follow the agreement of nato, they are going to have to coordinate. The article that Scott sent me talks about a current proposal at NATO for the member nations to standardize their weapons systems in ammunition so they can coordinate interchange parts and supplies and overall become more efficient as a group. So it sounds like a good idea. Now I’m gonna be honest, if that sounds like a great idea, maybe you’ve never led a sourcing project where you are trying to get a group of budget holders or category owners to agree to pick the same supplier or provider.
Kelly Barner (10:39):
It makes herding cats look like child’s play. I can think of two examples from my own career where I had to figure this out. In one case, it was a number of companies, each of whom had a different pest control provider, and they were trying to agree to consolidate with the same company making matters more complicated. One of them handled all of their pest control in house by a group of guys that had worked the job for decades. And so they weren’t just saying goodbye to a provider, they were actually laying off longtime employees. In another case, I was helping a group of business units try to consolidate and standardize how they manage their uniforms. You can buy them, you can rent them if they’re rented, usually there’s a cleaning service which is viewed as an HR benefit. These are very delicate changes that you have to make.
Kelly Barner (11:35):
And to be honest, if they’re doing a good job, the representative of each company or each business unit has a responsibility to advocate for the people that they represent. In a way, you’re going to have disagreement by design. Now, let me apply that complexity to what NATO is talking about, and I’m gonna stay simple because armaments are not my area of specialty. Let’s say I’m leading a NATO sourcing project to buy submarines. I’m gonna sit down one member from each of the 30 memo nations at my table and ask them, Who do you currently buy your submarines from? Or at the United States, who do you buy submarines from? Oh, general dynamics. Okay, very nice. Canada, you’re next. How about you? This inr? Okay, I’m gonna note that down in my spreadsheet. How about you France? Where do you like to get your submarines from? Naval Group?
Kelly Barner (12:32):
Okay, got it. The way this tends to play out, especially in matters of national defense, is that if a country can, it will buy things from a company located within its borders. So as much as we can all agree that standardizing purchases is a good idea, and certainly there would be advantages on the battlefield, which one of those countries wants to go to the company located within their borders, where citizens, and let’s be honest, voters may end up losing their jobs over the decision and say, Sorry guys. We all have decided to buy our submarines from Canada going forward. And the fact of the matter is, if we really are going to standardize things across those 30 NATO member countries, all of the countries except one is going to have to go home and have that conversation. So you can quickly see where this is a good idea with super complicated execution.
Kelly Barner (13:34):
And then circling back, remember that most of the countries are not living up to their spending commitments and purchases keep getting delayed. So now you’re doing a little bit of more mental math and you’re saying, not only do I have to go home and deliver this bad news, I’m gonna take a short term political hit, maybe catch some really bad headlines in the news in exchange for a benefit that may never materialize. When we think about any one of these companies, there’s a whole ecosystem that surrounds them that each country has national interest in preserving. So if you have a submarine manufacturer within your borders, there are going to be schools that educate people. There are going to be firms that specialize in servicing and upgrading and providing maintenance, and so you’re not probably just standardizing your equipment for the sake of NATO related activities.
Kelly Barner (14:38):
That whole ecosystem is going to force you to standardize around all of your military activity. So if you’re going to make the commitment and go down the road with Canadian or French submarines instead of United States, it doesn’t really matter if you’re putting them in the Pacific Ocean or the Atlantic within the military. You want things to be relatively standardized. And so now the need to standardize within NATO is expanding out to what gets standardized globally. Now, the Center for Strategic and Industrial Studies has a very interesting article related to this point. They talk about the decrease in manufacturing in armament spending compared to the increase investment in related technology, especially within Western countries. They point out that as the military goes, so goes the whole supporting supply chain. If the United States completely stops making submarines, because we all agree to allow France or Canada to be in charge of that, we lose the knowledge base and think about the geopolitical complexities.
Kelly Barner (15:47):
Now we’re dependent on Canada. Now we’re dependent on France if we ever want to have submarines, and we also know that because we’ve been lucky enough to enjoy decades of peace. In Europe, military production has been on a downward trajectory. Now with Russia’s invasion of Ukraine, companies are spinning their wheels and trying to ramp production back up as quickly as they can, but how will that align with the actual orders that are placed and what will the delivery timeline look like? We also know, and this is a huge conversation in North America and in Western Europe, that manufacturing capabilities have been in question as well. Now, the good news here is that manufacturing does tend to be somewhat transferable when you think about the Defense Production Act. Even in response to Covid, the federal government was able to go to Ford and say, Ford, we need you to stop making cars and trucks and we need you to make ventilators.
Kelly Barner (16:50):
And they were able to do that from both a production and a talent standpoint. But so much of our manufacturing capability and knowhow has been outsourced to China that we may have actually created dependencies from a manufacturing standpoint that will impact how successful we can be in an arms race. And certainly as we’ve seen with Russia and Ukraine, we cannot count on China to come down on our side. Now, the other classic lesson that procurement professionals have learned along the way is that while consolidation and standardization seem to and in truth do offer a number of benefits, they also carry their own risks. They’re great for economies of scale, having fewer suppliers to manage, fewer contracts to oversee and more standardization, but they’re bad for innovation, they’re bad for the sake of risk mitigation, and they’re bad for having options. Whether you need a plan B or whether it’s the next time the contract is coming up for renewal and you’d like to see a little bit of competition, procurement learned this the hard way When too many companies, by most of their volume, from too few suppliers, not only do you have less innovation and less competition, you also lose perspective on the risk that exists deeper into that supply chain.
Kelly Barner (18:16):
So your suppliers, suppliers, now, you’re dependent on one very large supplier to manage all of that for you. If NATO succeeds in this standardization effort, they may be creating a very real problem for themselves down the road without even realizing it. Then again, if past history is any indication, this is going to be a big deal focus problem until NATO gets distracted by something else, and it’s not what we ultimately all have seen and need to understand about supply chains, whether it’s b2c, b2b, or military. They are far more complex and far more connected within themselves and to the surrounding capabilities than most people realize. You don’t get something for nothing, and there are plenty of things that NATO would have to trade in order to achieve standardization. They need to be very careful about that decision making process and make sure it works out for them in the big picture.
Kelly Barner (19:16):
And from a risk perspective, how might it complicate our geopolitics if 90% of all submarines come from one country? If you’re not sure about the answer to that question, listen to the Dial P episode about baby formula. It’s pretty eye opening. Now, that’s my point of view about what’s going on here, but I would like to know what you think. What are the concerns? If this was your sourcing project for submarines, how would you handle it? And honestly, do you think it’s going to matter? Will NATO actually make the purchase? Until next time, I’m Kelly Barner, your host of Dial P for procurement here on supply chain now. Thank you so much for listening and have a great rest of your day.
Intro/Outro (20:04):
Thank you for joining us for this episode of Dial P for procurement, and for being an active part of the supply chain Now community. Please check out all of our shows and events@supplychainnow.com. Make sure you follow Dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of Dial P four, Procurement.
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