Procurement and the chain of supply: A general framework

As noted in the Introduction, procurement is another word for describing the activity of purchasing or acquisition, and defence procurement refers to these activities in relation to providing a country’s national security. Defence procurement and the defence industry policy associated with it thus operate in the broad context of defence production and this chapter offers a framework for considering the relationships involved. In the next section, ‘Defence products and capabilities’, we present a bedrock model of the production of national security (defence) that focuses on the process that progressively converts intermediate inputs into final products. This section is primarily concerned with what is produced as a basis for understanding what is procured and with what implications for industry suppliers. The production of national security occurs within what we call the defence production chain which describes the physical process of national security production. To stylise the production process, we assume ‘Defence’ (the National Defence Organisation, NDO) to be the ‘producer’ of national security. In most countries, the NDO combines military and civilian elements as administrative and logistic capability involves the employment of civilian public servants as opposed to the military (in-uniform) public servants who are either drafted as conscripts or employed under military-specific contractual arrangements. The NDO is a component of Government; the latter is ultimately respon-sible for the provision of national security and the allocation of resources to the NDO to carry out its tasks. However, the NDO may not produce all national security, some of which may be ‘imported’ from allies (see below) or produced by other government agencies (e.g., homeland security) and, increasingly, by private security firms.1 The distinctions between the publicly and privately produced activities and combat-related and other support operations have, however, become increasingly blurred. Such complications are initially ignored in our stylised representation, or model, of the defence production chain but will be considered later in the book. In the stylised model, the capital inputs and consumables needed to pro-duce national security are sourced from Industry, which in some cases may be located partly or wholly within the organisational boundaries of Defence itself (see below). Similarly, some (or all) capital inputs and consumables maybe imported from other nations. Human resources are obtained from domestic Households (either by conscription or through labour markets). They can also be imported in the sense that members of the defence force may be hired through international labour markets (e.g., the French Foreign Legion). This admittedly stylised setting is useful for considering a number of concepts fundamental for the discussion of defence procurement. To respond to military contingencies, Defence must develop and draw onits military capabilities, that is, acquire the assets and know-how needed to undertake the activities required by Government under various military and civilian contingencies. Military capability calls for human and non-human (materiel) inputs, technical war-fighting knowledge and organisational structures. Defence procurement is about acquiring the non-human, physical elements of capability, the inputs needed to form new or to modify/sustain existing elements of military capability. These products may include simple civilian consumables and durable goods (e.g., photocopying paper and office furniture) and complex civilian capital goods (such as airliners and super-fast computers); simple military equipment (such as handguns) and complex military systems (e.g., fighter planes and command and control networks); and civil and military equipment services (for example, services provided by leased military aircraft or equipment maintenance provided by contractors). The following section, ‘Value creation’, introduces the notion of value intothe analysis and discusses how the defence production chain may also be interpreted as a chain of value creation and value adding. Next, in ‘Actors and decision-makers’, we revisit the defence value-addingchain to examine the organisational decision-takers driving the production process. Given our focus on defence procurement and industry, we are mostly interested in the upstream suppliers of military materiel and those elements of Defence involved in forming military capabilities. In this context, the defence value-adding chain can be represented as the defence supply chain – the emphasis shifts from what is produced to who is doing it. The NDO may take different organisational forms depending, for example,on whether its combat arm is structured as a single organisational entity or fragmented into Services and on how military and civil elements work together. The relationship with Government is particularly important as the NDO is a government agency dedicated to the production of national security. In this book, we are primarily concerned with the procurement-related tasks of the organisation. There may be a single, specialised unit within Defence responsible for all defence procurement – the Defence Procurement Agency (DPA). Or, procurement activities may be dispersed between operational elements such as the Services, or centralised within a specialised but organisationally detached agency. In the latter case, the detached agency may be Defencespecific (as in Australia) or it may act as a procurement agent for a number of government departments, including Defence as, for example, in Canada. The procurement agency places orders with industry suppliers at home andabroad. The success (or otherwise) of the DPA in meeting the requirements ofthe Services depends on the efficiency and effectiveness of Industry and the relationships between industry suppliers and procurement personnel. Capital equipment and consumables may be produced in-house (e.g., in shipyards and arsenals owned and operated by Defence) or sourced from outside Defence. Thus, Industry, an upstream producer of intermediate inputs into the formation of military capabilities, may take many organisational forms: from complete integration of upstream industrial support into the NDO’s organisational structure, to defence-focused private contractors (domestic and foreign), to private and public firms for whom Defence is one of many customers. In the final section, ‘Supply chain links and relationships’, we focus on howentities involved in the production of defence are linked and interact with each other. We note first that when the interface between the DPA and Industry is market-mediated, the relationship between buyer and supplier is influenced by industry structure. A supplier of a product for which no close substitutes are available, and facing no threat from potential industry rivals, is potentially in a strong position to use its market (monopoly) power to demand higher prices, determine quality standards, or allow delivery schedules to slip. However, when the DPA deals with many sellers of close substitutes, it may rely on competition between sellers to ensure that prices charged are reasonable and product quality and the timeliness of deliveries are not compromised. Also, when the DPA is a very large or the only (monopsony) buyer of a product, it is potentially in a strong position to impose its terms on the supplier(s). In this section we also outline the nature of transactions associated with theacquisition of goods and services by the NDO from Industry, that is, how procurements are arranged and executed:the nature of the business deal involved in the transaction, its scope, scale and timeframe, the nature of exchange involved (e.g., goods-for-money or barter), and the associated consideration (price);the contract determining rights and obligations of the parties in the context of the transaction;the relationship between the parties following the signing of the contract.

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