Chair OAKAR. We were talking about subcontractors. Mr. DONNELLY. That's correct. When I say subcommittee, I think we mean the same thing, that these are plants that are down from the classic prime contractor level, the next tier down. We are beginning to look-it is difficult for us to do this because we have to work through the prime, but we are finding ways to do IMIP projects at the vendor level. Chair OAKAR. I only have two more questions. In the procurement area what procedure is followed to designate a defense item for domestic source procurement only? Anybody else who wants to contribute an answer to in on this one is fine. Conversely what is the procedure for obtaining foreign items? How do you arrive at those conclusions in terms of procurement? Mr. DONNELLY. We are arriving at them better now than we were a year ago, and certainly the interest of this committee has helped spur us along on that. Chair OAKAR. I am trying to give you an extra shove today, you know. Mr. DONNELLY. It has been very successful. The process for the procurement restriction involves the Military Departments taking a look at the war-time requirements and war-time supply, and where the war-time requirement vastly outstrips what we believe the capability of U.S. industry is, then we can take steps to procure that item domestically. That is done to a large degree on the ammunition production base and, in some cases, forgings and castings, some subcontracted items that are a part of that. Chair OAKAR. Who makes the recommendations and what is the procedure? You know, we are delighted to see Secretary Cheney be named, a former colleague, very capable individual. Does it come from the top, or who makes those decisions? Mr. DONNELLY. Secretary Cheney could. It is his store. But generally the decisions are made by the Military Departments at Secretarial level rather than the Office of the Secretary of Defense. We occasionally do some of that at the OSD level, but primarily it is within the Services. The basic authority for most of that work is under the Competition and Contracting Act, which says, you know, thou shalt compete, period, worldwide; but that we can make an exception to full and open competition to preserve a mobilization base, and then the law, the way it is implemented, allows a civilian service secretary to make that exception to full and open competition. Chair OAKAR. Well, you know, I am sure you have read the record in terms of our hearings in the last session, and we had testimony as to very astute, critical decisions that were made that were respected and so on relative to procurement practices, even when it was foreign sources. Then we had testimony that was demeaned by individuals who said, well, we all wanted to go to Germany on a little trip and tour one of the plants, and so that was the way we decided to give them a contract. So we had the whole full gamut of decision-making relative to this committee. I am sure it has probably been going on for a long time. I think that I would like you to be more detailed for the record on that question that I just asked you, OK? [The procedure for designating defense items for domestic procurement can be found in the appendix.] Chair OAKAR. I think that is very, very critical. Now my final question for the entire panel is this. We all want to do the right thing. I was fascinated by a brief article on the front page of the Defense Daily yesterday, the Joint Chiefs of Staff issued-this is just yesterday-their latest net assessment on defense production. They said the capabilities of surge to expand production for major weapons system is limited. Further, the article said, while the United States will show modest improvements in some areas of sustainability through fiscal year 1996, in 1996 shortfalls will persist and in some cases worsen, re-supply remains of vital concern because the U.S. industrial base is not equipped for surge production and sea lines of communications are vulnerable to interdiction. Have all of you studied this most recent report? In light of this warning from the Joint Chiefs, which makes me very uncomfortable, I would appreciate your comments on that report and how your testimony parallels that report or complements it. Mr. DONNELLY. Let me start off by saying that I haven't read the report. I did assist some of the JCS staff in the preparation of the report. The report is correct in its statement that we would be unable to surge production of major weapons and equipment. If I can define surge quickly for the subcommittee, a technical definition. Production surge is our ability to rapidly increase production on an existing weapon and existing plant on the order of maybe doubling or tripling production within 6 months of a decision to do so. It would vary by what weapon we are talking about. But the key to this production surge means within an existing facility. It doesn't mean conversion of industry. It means a rapid increase in production. In order to rapidly increase production, it requires usually two component parts. One, it requires that there be an inventory of the long lead time items necessary for that weapon to be available to its manufacturer right away. That is called rolling inventory. Second, there is often the need for a few more additional pieces of the special test equipment that is needed to test the item as it is being manufactured. Test equipment is very expensive. We tend to run that 24 hours a day because it is expensive. We would have to buy more to reach the ramp-up rate. The reason why we can't surge many of the items this afternoon is that, one, we have been unable to make the investments in the rolling inventory of long lead time items and keep that rolling inventory at the plant. And, two, we have not been able to make all the investments we want to in special tooling and special test equipment. But that is why, to take us back to the special graduated mobilization response we were talking about earlier, when we begin to see deterioration of relationships militarily worldwide, that is one of the first things you do is say, OK, now let's go out and acquire the long lead time items and put them in the factory so that the company can draw from them immediately if this thing is going to get worse, and let's put a little bit more in our budget to buy another piece of electronic test equipment. So we know we want surge in many areas. But we know how to Chair OAKAR. Well, does that incorporate using foreign suppliers? Is it easier to get it from them than the U.S. suppliers? Mr. DONNELLY. Not necessarily. You know, Madam Chair, the problem I am having, and it is only a technical problem, I apologize for this, but if we don't make the investments in rolling inventory, long lead time items or if industry doesn't make it on its own, if we try to establish a second source some place else, even in Europe, let's say, and in the United States and some place else, let's say three sources, you then have three sources unable to surge. It is those investments that have to be made at the front end that will allow that plant to kick off. It is not a question so much of foreign dependency and foreign sourcing. It is have we taken those preparedness measures early enough to make a difference? We know which ones they are. Some of them cost money, some are almost a freebie. Let me just give you one more personal observation. The rolling inventory concept, meaning let's go buy some of the long lead time items for that weapon, the pieces of it are put in the plant, if we don't have to surge, we use those up at the end of production. So it is basically a freebie. It doesn't cost money. It is an acquisition strategy, and that is why we are saying to program managers, OK, you guys, start thinking about how you would ramp up this, buy it as efficiently as possible, of course, but what are the steps you can take now in designing the acquisition strategy that would let us increase production in a hurry. Chair OAKAR. And to assist you in the bill we have a section that relates to small businesses and, more specialized companies relative to modernizing equipment, and this bill doesn't cost an added nickel, you know. Anybody else want to on that report. We are going to try to submit that for the record as well. Does anybody else want to comment on the Joint Chiefs' assessment? Ms. MCENTEE. We have not seen it, but we will be happy to look at it and comment for the record. We work very closely with the Joint Chiefs on several studies, so we are very anxious to take a look at it. Chair OAKAR. Mr. Woloshyn, what about you? Mr. WOLOSHYN. We haven't seen the report either, Madam Chair. Chair OAKAR. Well, I am really glad everybody is prepared today. That is an important report. Don't you think it is kind of unusual that you wouldn't have read the report? Mr. WOLOSHYN. I am not sure how recent the report is. Did you mention the recency of it? [The information referred to above can be found in the appendix.] Chair OAKAR. It came out yesterday. It was on the front page of the Defense Daily. I would imagine it has been around, circulating throughout your departments, for a little while anyway. I am glad they have read it, otherwise I wouldn't have known about it perhaps. But, in any event, I think it is wonderful to see any movement-I have to say this, Mr. Donnelly. Obviously there is a little bit of movement in terms of amending the Defense Production Act. I mean, you, yourself, acknowledged that there are sections you would change and so on, but the fact is that those are very, very superficial changes, and there is no meat or teeth to it. I am convinced that all of you know that this is a serious problem, and nobody wants to acknowledge or gear up for it because we tend to do things in the short term around this place, and it is very unfortunate. This committee, I just want you to know this, is going to put your feet to the fire because we are not satisfied with your recommendations. It is at least some movement, but based on the Costello report, I don't see how-your own report, let alone all the hearings we have had and so on, I do not see how you could not at least want to see some changes. We are willing to compromise with the administration if it is possible, but if it is not, we are just going to try our best to do what we think is the best thing for the American people and our country, so we have a little time to work it out. We have worked very, very hard on this issue, and a number of other committees are sort of interlocked in this area as well. I think the responsibility of renewing and strengthening the Defense Production Act is probably more important today than it has ever been, and renewing it in the proper manner. We are looking forward to hearing from our colleagues on the Senate side who have their staffs here and so on. We are delighted that they are focusing on some of the things we have done and look forward to working with the Senators on both sides of the aisle on this question as well. So we hope you know how serious the committee is relative to marking up the bill. I thank you for appearing today. Please be advised that any comments that you might want to add or report you might want to give for the record or expand on responses that were incomplete that you would want to submit to for our record, it will be open. We thank you for appearing today. The hearing is adjourned. [Whereupon, at 11:50 a.m., the hearing was adjourned subject to |