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It’s no surprise that an overwhelming share of the Pentagon’s prime contracts are with American firms. In recent years, DoD has been paying more attention to the soundness of those companies’ suppliers. A new analysis by Govini – based in part on work the company has been doing for DoD – finds the department has a tough road ahead when it comes to deciding which parts of the supply chain to invest in. Tara Murphy Dougherty is Govini’s CEO. She talked with Federal News Network’s Jared Serbu on the Federal Drive with Tom Temin about the analysis, which looked at the supply base of more than 1,000 of DoD’s Tier 1 vendors.

Interview transcript:

Jared Serbu: I’d like, actually to start with some methodology stuff, if you don’t mind, to the extent you can do it without giving away any of Govini’s proprietary secrets. I really am interested in the methodology used here because I think it’s an impressive feat to be able to look five tiers down into the department’s subprime supplier base. I’m not even sure DoD can do that with any real fidelity. So, say a few words, if you would, about the detective work that went into this analysis and what kind of data you looked at.

Tara Murphy Dougherty: Absolutely. Thanks for it. And DoD is endeavoring to do more of this, which is a big part of the reason that they let our contracts last December. Large IDIQ’s, that’s DoD-wide, specifically for the purposes of taking methodologies such as decision science, which is how Govini tackles these problems, and bringing those two issues and priorities such as supply chain security. So what decision science means, and the way in which we’re leveraging this is really ushering the department into the next phase of using data for decision-making. I actually think they’ve made tremendous progress over the past 10 years in doing exactly that. And what the next phase needs to be is the application of data at scale for decision-making, including at the highest levels, where previously DoD leaders didn’t have direct access to data. Their staffs were dealing with limited data that had been culled down through the departmental process to specific insights or analysis based on samples. What you can really do with advanced data science and with machine learning is actually, even in those highest levels where decisions need to be made really rapidly, you can do that with massive, massive datasets. So for Govini and supply chain analysis, we actually look at five tiers, we look at 10 tiers, we go all the way down to the original raw sources. And the way we’re able to do that is through our own dataset, which we have maintained for a decade at this point, and machine learning in order to parse through structured data as well as personally structured and completely unstructured. What that gives from an insight perspective, or, to more directly come back to your question around methodology–that allows us to say we can take that haystack and get right to the needles. We don’t have to know what the needle is that we’re looking for and run that down through a manual research effort.

Jared Serbu: That’s interesting. OK. So turning specifically to the reshoring challenge, as you found, tier one is overwhelmingly dominated by the U.S. That is not a surprise, I don’t think. But the presence of foreign companies seems to go up, the lower down in the supply chain, you look. So talk a bit about your findings in those lower tiers: two through five.

Tara Murphy Dougherty: Yes. Two through five are a fascinating picture. And in particular, the jump that you see between tier one and tier two with respect to the presence of foreign companies, it’s shocking. So by tier two, that period, tier two to tier five, foreign companies actually make up an average of 70% of the suppliers that were reflected in the sample that we pulled for DoD. The likelihood that you’re going to get an increasing diversity of countries represented as you go farther and farther down the supply chain certainly is validated by these numbers.

Jared Serbu: Yeah, I think it’s important to point out for people that the numbers that you’re looking at here are numbers of suppliers, not dollar values of transactions. So you can’t exactly see the total influence of foreign companies in these lower tiers yet. Is that something you plan to look at?

Tara Murphy Dougherty: We certainly could slice and dice it by dollars. You’re right. We looked at count of companies here. One thing that’s interesting about the supply chain and supply chain vulnerability issue is the fact that consequence of foreign involvement or presence in the supply chain doesn’t necessarily correlate with size of contract or the portion of a program they might own. It might be really about what’s the type of technology that the foreign companies are supplying within an overall program or major weapon system. So if you look at, particularly, numbers associated with packaged software and IT services, for example, you see a pretty significant presence of foreign companies in those supply chains. And yet, those are really critical components when you think about the potential vulnerability of someone if they wanted to take some sort of action that’s counter to our national security interest.

Jared Serbu: Yeah. And the country we’re talking about really matters, too. Like if we’re getting most of our office supplies or pharmaceuticals in those lower tiers from Western Europe, that’s probably not a big deal. But as you say, China is the big concern here and China’s footprint has been increasing.

Tara Murphy Dougherty: Absolutely. Yes. And what we saw in 2013 to 2014 was a significant change in the trend where you really had a dramatic increase in foreign suppliers. But that increase was primarily driven by the greater presence of companies based in Japan and South Korea, a great example of two allied partners of the United States not significantly worried about parts or pieces or office supplies coming from there. China, on the other hand, an entirely different story. And so our analysis did parse out that Chinese presence, and even those numbers were pretty shocking. We found that from 2010 to 2019, the number of Chinese suppliers specifically in the department supplier base for the sample we assessed had increased by 420% over that time period. So there are clearly reasons that American companies are looking ashore and looking to China, as we well know, for parts or manufacturing options. The question the department needs to grapple with is what’s the associated security risk with that and is it so dramatic in some of these industries as Undersecretary Lord has highlighted that we need to think about clawing that activity back to the United States.

Jared Serbu: Yeah. And assessing that security risk, I think, is partly answered by the question of whether or not a China-based company is the sole supplier for a particular critical thing. You didn’t do that analysis here. And I guess I’m just wondering, how hard would it be to start answering those kinds of questions about sole-source suppliers way down in the supply chain? As a practical matter, are they answerable questions for DoD?

Tara Murphy Dougherty: They are answerable. You’ve got to be able to really dive into the data. There are aspects that would be relatively straightforward to surface such as if a company is receiving a sole-source contract. That will certainly point you toward a strong dependency that the department has on that particular supplier or company. What it won’t tell you is information about the alternatives. And the way that the Govini dataset–that’s actually a perfect example of how the Govini dataset links what DoD is doing from an activity or an award or an execution perspective to broader information about commercial markets. So we’re doing more work with DoD who’s interested in not just the companies they’re working with today, but who else is out there. And it takes a couple of different angles. In some cases like supply chain security, they’re asking the question more and more how do we ensure that there’s redundancy or alternative suppliers for particular parts or goods, or things that are being manufactured? In other cases, it’s questions around working with the most innovative companies in the American technology industry and bringing in non-traditional defense contractors who can help us focus on and ensure that we’re capturing the best of what is out there from an emerging tech perspective.

Jared Serbu: Just to wrap up here. I guess another thing that jumps out at me looking at the white paper you put out, is when you look at company count, because again, we’re just looking at company count here, the China company count is not enormous in any particular sector. But I guess the concern would be when the number of companies in a particular sector is kind of close to or bigger than the number of US companies in that sector and we’ve got a few of those, don’t we?

Tara Murphy Dougherty: We do. You know, the Department of Defense is really focused on microelectronics, pharmaceuticals and rare earth elements right now, for good reason. I pointed out that the IT aspect of supply chain security also is deserving of increased attention. So that combination of heavy reliance, an area that is particularly vulnerable to some sort of foreign intervention, if it were implants and electronic devices, but also things like theft of IP, or even gaining manufacturing knowhow, which almost veers into the reverse of deemed exports, all of those are ways in which we should be thinking about how a variety of different industries are particularly susceptible here or might be more concerning rather than others.

Tom Temin: Tara Murphy Dougherty, Govini’s Chief Executive Officer, speaking with Federal News Network’s Jared Serbu.

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