With no end to the Ukraine conflict in sight, industry must expand production in response

It’s now been over a year since Russia invaded Ukraine. Today, NATO members are supporting Ukraine at arm’s length by supplying armaments, but the day-to-day conflict is stuck in a stalemate and expected to last far longer than expected.

As a result, an increased production ramp is needed to provide continued supply of weapons, munitions, and tools that will enable Ukraine to withstand continued attacks. These reinforcements are required at a time when munitions are expended at an order of magnitude higher than was initially thought to be sustainable for any length of time (Figures 1, 2).

The most sought-after weapons include:

• Stinger and Javelin missiles
• 155mm artillery rounds
• Small arms ammunition (both NATO and Soviet-standard calibers)

In recent months, requests have grown more significant for higher-capability weapons, including:

• ATACMS and PATRIOT missiles
• M1A2 Abrams tanks
• F-16s, A-10s, and other aircraft

Mobilizing an already-strained industrial base

Unlike the early stages of World War II, when the Allies engaged in a massive ramp-up of industrial and armaments manufacturing capacity, Ukraine’s present-day allies find themselves constrained by a variety of self-imposed and external limitations. Ukraine’s rate of munitions expenditure and corresponding high demand relative to peacetime levels – paired with preexisting macro supply-chain bottlenecks, labor shortages, and inflation – explain the inability of defense manufacturers to meet projected demand thus far for armaments and material (Figure 3).

To better understand the severity of the situation, consider recent comments indicating Ukraine has burned through five years’ worth of Javelin production and 13 years' worth of Stinger anti-aircraft missiles in under 12 months.

Success hinges on proactivity and multi-tiered planning 

Even before the invasion, the supply chain was recovering slowly from COVID-induced shock. Over the past three-years, the biggest problem cited by OEMs and higher-tier suppliers during earnings calls has been systems and component availability. Today, inflation, labor constraints, and raw material shortages cause long lead times and compound those existing headaches.

Even as the Pentagon continues to increase funding for more armaments to send to Ukraine, increasing production rates for these weapons will be challenging. Some of these armaments haven’t been produced in large quantities in decades.

Taking control of the situation

A successful response starts with proactivity, especially when it comes to variables within your control.

The Pentagon has consistently signaled the upcoming demand, providing adequate runway for manufacturers to address supplier issues ahead of the actual event. To not act now would squander an opportunity, and potentially put future financial results in jeopardy.

There are industry-leading practices that can aid in bolstering a fragile supply chain that is thinly spread. Here are a few to consider:

1. Develop or expand on-site presence with troubled or critical-path suppliers

Many A&D suppliers are relatively small and can genuinely benefit from on-site technical assistance provided by their larger customers. Embedding personnel at a supplier provides much deeper, earlier insight into impending problems, and signals the criticality of a supplier delivering on time. Mutual technical collaboration and assistance can lead to earlier discovery and resolution of problems, earlier notification to the customer, and enhanced trust.

2. Let suppliers utilize their customers’ infrastructure 

Larger customers often have capabilities and scale that their suppliers may lack. Customers can let their suppliers utilize this infrastructure, including unused floor space, test equipment, excess inventory, and shared services.

3. Conduct or update critical paths and mitigations

Programs too often discover their critical path by belatedly uncovering which part from a supplier is going to be delayed the most, and then waiting for those critical components to arrive. Instead, manufacturers should proactively map out their critical paths and mitigate associated risks.

For example, if a supplier is deemed high risk:

• Identify a potential secondary source
• Explore whether the part can be built in-house on a parallel track
• Consider alternate design approaches that would remove the need for the components in question

Additionally, a problematic small supplier with critical technologies or components could potentially be acquired early in a program. Mitigation may initially be costly, but it can benefit the program, company, and customer down the road. By buying down risk rather than suffering the impact of late deliveries at a juncture when it is too late to mitigate, the costs may be lower than the financial and reputational impact that significant delays on major programs can have over the long term.

4. Assess the make-buy tradeoff

Most ordnance manufacturers understandably have a natural inclination to make or engineer everything they possibly can in-house. However, in many cases, an honest assessment of internal vs. external engineering capabilities may indicate that outsiders can provide technical services that are qualitatively superior, or lower cost. Most A&D companies historically have not balanced this trade-off with success. Part of this evaluation may also involve lending experienced engineers to troubled suppliers – keeping them on payroll but deploying them to a critical external need until critical issues are resolved.

5. Evaluate suppliers’ own supply chains and value streams

Many of the problems encountered by suppliers stem from a lower-tiered supplier’s bottleneck. Applying the strategies discussed above can require a partnership model where the supplier, along with its own suppliers and assistance available from OEMs, gets help managing their own supply chain in ways they would be unable to alone. This includes utilizing processes like value stream mapping or footprint optimization to remove critical bottlenecks and slowdowns.

Time for proactivity, intervention, and partnership

As Russia continues to prosecute a protracted, high-intensity land war in Europe, Western suppliers face the certain prospect of a significant supply chain ramp in order to aid Ukraine. General global tensions continue to simmer, and regrettably there is the potential that one, or more, has the potential to evolve into wider conflict in the next decade. This will test the ability of Western A&D manufacturers to rise to the challenge in the interests of global security.

The immediate task of helping Ukraine will require continued commitment to intervention, manifesting itself in significant levels of financial assistance, and underpinned by a global supply chain built on partnership and proactivity.

Read the PDF version here.

For a deeper discussion about this topic, contact: 

Eric Bernardini
Partner & Managing Director
ebernardini@alixpartners.com

David Wireman
Partner & Managing Director
dwireman@alixpartners.com