Defense Logistics Agency: Small Businesses Participate in Reverse Engineering of Spare Parts
Released: 2019-07-31T00:00:00

Letter

Background

DLA’s primary purpose is to meet the logistics requirements of the armed forces for food, clothing, fuel, spare parts, and other items. DLA’s major responsibilities are to buy and distribute about 5 million distinct consumable, expendable, and reparable items. In order to fulfill the logistics requirement of the armed forces, DLA provides more than $35 billion in goods and services annually. As part of its responsibility to provide spare parts, DLA officials stated that three of DLA’s major subordinate commands conduct reverse engineering—Aviation, Land and Maritime, and Troop Support. These commands are directly responsible for meeting the following military services’ needs. Specifically:

Aviation provides aviation weapons systems spare parts, flight safety equipment, maps, environmental products, and industrial plant equipment.

Land and Maritime provides for ground-based and maritime weapons systems spare parts, small arms parts, and fluid handling systems.

Troop Support handles food, textiles, construction material, industrial hardware, and medical supplies and equipment, including pharmaceuticals.

DLA Reverse Engineering Process

Reverse engineering is the process of replicating a design by physically examining and measuring an existing item to develop the technical data necessary to reproduce the item functionally and dimensionally. In other words, it is the process of extracting information about an item from the item itself. According to DLA’s procedure, the intent of reverse engineering is either to develop an approved technical data package—the details needed to duplicate the item such as drawings or specifications, among other things—or approve a new supplier. The technical data package could be used for future competitive procurements when the item is needed for sustainment purposes.

DLA uses reverse engineering for several reasons, such as identifying potential new sources for obsolete parts or those supplied by only one source, increasing competition, and achieving savings. Parts are identified for reverse engineering generally because the government does not have necessary legal rights to the drawings or lacks data needed to facilitate competitive procurements. However, reverse engineering is generally considered the least attractive alternative for replenishing parts because it is expensive and time-consuming. Therefore, according to DLA guidance, before starting reverse engineering DLA personnel should try to buy data from the original equipment manufacturer, previous manufacturing sources, or other data rights holder. DLA personnel also need to consider the costs of acquiring the data rights before initiating reverse engineering. DLA guidance for its reverse engineering processes is the same regardless of the size of the businesses involved.

In order to start a reverse engineering project, DLA has established criteria, such as documenting a business case and showing that the part meets certain yearly purchase thresholds. Specifically, according to DLA guidance, procurements of the part over the past 2 years generally should exceed $10,000 in each year. Additionally, the engineering support activity at a military department (Army, Air Force, or Navy) responsible for the part generally approves a project before reverse engineering can begin. Once reverse engineering is completed, the technical data package must be approved by the appropriate engineering support activity. Figure 1 shows the general process from identifying a part as a potential candidate for reverse engineering to approving a technical data package or a new source of supply, and indicates whether DLA or a contractor is responsible at each step.

DLA has two reverse engineering programs—the Replenishment Parts Purchase or Borrow program, funded by contractors, and the DLA internally funded efforts.

Contractor-Funded Efforts

Through the Replenishment Parts Purchase or Borrow program, contractors reverse engineer a part at their own expense. DLA’s goals for this program are to increase competition and achieve savings. After successful reverse engineering and military approval of a technical data package, the contractor becomes a new source of supply for the part. Contractors may identify parts for reverse engineering—mostly small hardware items and electrical components, such as antennas and cables—from a candidate list on a DLA website or through their own research. To conduct reverse engineering, contractors may purchase or borrow parts under agreement with the government subject to certain conditions, such as the part is not classified or considered a critical part— one that is crucial enough that a failure of that part would result in serious injury or impact the success of a mission—among other things. The government incurs minimum cost, if any, in this program.

DLA-Funded Efforts

The goal of DLA-funded reverse engineering is to develop a technical data package that will be used in future competitive procurements. Typically, DLA funds efforts for parts that are available from only one source, are obsolete, or have limited data rights. These efforts occur in several ways:

DLA engineers conduct the reverse engineering.

DLA funds the efforts through partnerships with other DOD entities.

DLA awards contracts to companies to create drawings of parts that the government can then use in competitive procurements. The government obtains full use of these drawings.

Intellectual Property: Data Rights and Patents

Intellectual property derives from the work of the mind or intellect and is an application, right, or registration relating to property—such as an idea, invention, or process. It includes patents and proprietary information:

Patents—grants an inventor the right to exclude others from making, using, or selling an invention in the United States, typically for a period of 20 years. The holder of a valid patent is the only authorized supplier of the patented item unless another supplier has acquired a license to manufacture and sell the item.

Proprietary information—includes technical data which represents trade secrets usually developed at private expense, such as design, material composition, or manufacturing processes. The owner of a specific item does not make the information available to others without obligations concerning its confidentiality. This confidentiality of proprietary information does not protect it from discovery by reverse engineering.

In order to share technical data, for example, to issue a solicitation for competitive procurement of an item, DLA needs to have sufficient data rights. Data rights are the government’s contractual license rights for technical data—recorded physical and material characteristics, such as item specifications, engineering drawings, or operating and maintenance manuals. If the government is entitled to and acquires unlimited data rights, it is allowed to use, reproduce, or disclose that technical data.

When the government acquires limited rights the government may only use the data internally, such as for the operation of equipment, but may not disclose technical data for the purpose of procuring an item from another contractor. DLA procedures indicate the government should consider the cost of acquiring the data rights before initiating reverse engineering.

Reverse Engineered Spare Parts Resulted in Some Lowered Prices and Increased Supplier Opportunities for Small Businesses

Number of Reverse Engineered Spare Parts

DLA’s Aviation, Land and Maritime, and Troop Support major subordinate commands initiated over 1,600 reverse engineering projects during fiscal years 2015 through 2018, according to DLA data. Table 1 describes the number of projects initiated in each fiscal year by DLA’s Aviation, Land and Maritime, and Troop Support for both the contractor- and DLA-funded efforts.

Nearly two-thirds of all reverse engineer projects involved parts in the following five categories. 1. Hardware and abrasives. For example, screws, nuts, washers, and keys. 2. Vehicular equipment components. For example, floor mats, vehicle door hinges, and tailgates. 3. Electrical and electronic equipment components. For example, pressure switches, electrical assemblies, and antennae. 4. Electric wire, and power and distribution equipment. For example, batteries, wiring harnesses, and special purpose cable assemblies. 5. Aerospace craft components and accessories. For example, insulation blankets, filters, and door handles.

Figure 2 shows examples of items in these categories.

Some Reverse Engineering Projects Resulted in Lowered Prices

Some of DLA’s projects resulted in lower prices for the reverse engineered parts in subsequent procurements. According to DLA data, the agency saved at least $22 million from reverse engineering projects initiated from fiscal years 2015 through 2018 as a result of lower prices paid. For example, in one project we reviewed, a small business successfully reverse engineered a retaining ring, which assists in securing parts in an aircraft engine, purchased by Troop Support and became a new approved source of supply. A subsequent purchase of this part resulted in a unit price that was almost $70 lower per unit compared to the most recent purchase before reverse engineering. We found that Troop Support saved over $11,000 through this project.

We found that 141—or less than 10 percent—of all projects initiated from fiscal years 2015 through 2018 were successfully completed. Table 2 describes the number of projects that were completed, in-process, and canceled as of December 2018, according to DLA.

DLA officials told us that less than 10 percent of projects have been completed for several reasons. DLA officials stated that the engineering support activities at the military services sometimes take a long time to respond to requests for approval, which adds time to reverse engineering projects. For contractor-funded projects under the Replenishment Parts Purchase or Borrow program, reasons include the following:

DLA officials explained that contractors sometimes decide not to complete reverse engineering because the contractors determine the effort would be more labor intensive than originally anticipated or their priorities shift.

DLA officials also stated that DLA does not necessarily hear back from a contractor after it purchases a part to begin the reverse engineering process.

Representatives from contractors we spoke with told us that they experience delays in obtaining responses from DLA and military service engineers regarding approvals for their projects.

In addition, DLA officials explained that the completion rate for DLA- funded projects is low for the following reasons:

More urgent priorities arise after a project begins. Personnel who work on reverse engineering typically have other duties in addition to these efforts and if more urgent priorities emerge after a reverse engineering project has started, the effort may need to be postponed or abandoned to attend to the more pressing priority.

The need no longer exists for some parts that were identified as reverse engineering candidates.

Most Businesses Conducting Reverse Engineering Were Small Businesses

We found that DLA’s reverse engineering programs created opportunities for contractors—particularly small businesses—to become new suppliers. According to DLA data, 124 contractors participated—or had the opportunity to become new sources of supply for parts—in the contractor- funded reverse engineering program from fiscal years 2015 through 2018. Of these, we determined that 103 were small businesses. In addition, while DLA performed reverse engineering work for most of the DLA- funded projects, DLA awarded contracts to 6 companies to conduct reverse engineering, all of which were small businesses.

Roughly one-third of the 124 contractors worked on only one spare part during the time frame we reviewed, while the others initiated reverse engineering for multiple parts. For example, one small business requested to reverse engineer more than 50 parts during fiscal years 2015 through 2018. A representative for this contractor told us they use a business analytics system that queries publicly available information in order to identify opportunities for reverse engineering.

While most companies conducting reverse engineering were small businesses, almost half the contractors that supplied parts prior to reverse engineering were not small businesses. Specifically, for fiscal years 2015 through 2018, DLA identified 74 contractors whose parts had been successfully reverse engineered, of which we determined that 34 were not small businesses and 26 were.

In general, representatives at the small businesses we spoke with stated that the reverse engineering programs help small businesses. For example, representatives of one contractor that requested to reverse engineer a part told us that DLA’s reverse engineering program as a whole benefits small businesses because most of the parts being reverse engineered are originally from other than small businesses, and the program is a path that allows small businesses to become approved suppliers. In addition, representatives from one contractor that reverse engineered multiple projects stated that working with DLA has allowed their business to establish past performance ratings, which will help in future government procurements.

Officials from DLA competition advocate and small business offices stated that reverse engineering is generally beneficial for small businesses. They stated that small businesses have not registered complaints about DLA’s reverse engineering program. Rather, small businesses seek opportunities for additional business with DLA, which reverse engineering can help provide. In addition, industry associations we spoke with stated that reverse engineering is a way to involve small business. They stated that reverse engineering projects provide small businesses opportunities to become qualified suppliers and compete for future DLA contracts.

DLA Processes Generally Safeguard Intellectual Property in Reverse Engineering Efforts

We found that DLA has processes to protect intellectual property, such as patented designs and proprietary information during reverse engineering. Of the 10 small businesses we spoke with that were involved with our 19 selected projects, none of the representatives identified concerns with DLA’s practices for protecting intellectual property. Although DLA’s standard operating procedure applies to both DLA-funded efforts and contractor-funded efforts, the provisions that safeguard against patent infringement are specific to the contractor-funded program. According to these provisions, patented materials should not be approved or shared for reverse engineering.

Aviation and Land and Maritime officials stated that they physically review parts for patent marks before reverse engineering can take place for contractor-funded efforts under the Replenishment Parts Purchase or Borrow program. However, Troop Support officials said they do not check for patents under this program because they are supplying parts for legacy systems—systems that are typically 20 years or older—which means any potential patents would have expired. They also stated that they conducted reverse engineering to a limited extent through the Replenishment Parts Purchase or Borrow program. We found Troop Support initiated 30 of the 617 Replenishment Parts Purchase or Borrow efforts from fiscal years 2015 through 2018.

For DLA-funded efforts, Aviation and Land and Maritime officials stated that they physically review parts for patents, and the project is stopped if one is found. For example, officials from Land and Maritime canceled a project for an eye guard because officials found drawings marked with a patent number. The officials could not determine if the patent had expired so they canceled the project. Aviation officials also stated that they rarely encounter patent markings; they have seen four or five in the last 2 years. Troop Support officials stated they do not check for patent markings and they rely on the engineering support activities to check for patents. Figure 3 shows an example of a patent marking.

DLA’s guidance for reverse engineering also does not allow the release of limited rights data for the contractor-funded projects under the Replenishment Parts Purchase or Borrow program. DLA officials at all three major subordinate commands told us that they do not release drawings that have limited data rights to contractors conducting reverse engineering under this program. DLA guidance does not cover whether data can be used under DLA-funded efforts. Officials at Aviation, Land and Maritime, and Troop Support all stated that proprietary or limited release drawings or technical data related to the part cannot be used by engineers who work on reverse engineering efforts. Aviation officials noted that the tracking system records those who have seen propriety drawings, and this information is used to ensure that these individuals do not work on reverse engineering projects related to those drawings. Land and Maritime officials stated that the tracking system used for reverse engineering projects also identifies drawings marked as proprietary and controls who has access to drawings.

In general, the small businesses we met with did not express any concerns about how DLA handles intellectual property. We spoke with four small businesses that supplied parts that had been reverse engineered by other businesses. Representatives of these four small businesses confirmed that they did not hold patents on the parts that were reverse engineered. Further, the small businesses that conducted reverse engineering stated that DLA adequately protected intellectual property. In one case, a representative from a small business that participates in the Replenishment Parts Purchase or Borrow program stated that DLA has never released a part that had controlled data to them and DLA takes protection of proprietary data seriously. Another contractor who performs DLA funded reverse engineering efforts stated drawings are not released and sometimes the function of the part is not even shared with contractors.

DLA command officials stated they had not heard of any concerns from small businesses about their intellectual property being used inappropriately. In addition, officials from the DLA small business office stated they had not heard concerns from any small businesses. Further, one official from the small business office noted that the parts DLA purchases are not new innovations and so do not necessarily have protected intellectual property. Competition advocates stated they received no complaints from small businesses. The industry associations we met with asked their small business membership if there were any specific concerns regarding DLA’s protection of intellectual property. Officials from the Aerospace Industries Association, the National Defense Industrial Association, and the National Association of Manufacturers stated there were no complaints from the small businesses represented by their groups about the businesses’ experiences working with DLA.

Agency Comments

We provided a draft of this report to DOD for review. DOD had no comments.

We are sending copies of this report to the Secretary of Defense; the Director, Defense Logistics Agency; appropriate congressional committees; and other interested parties. This report will also be available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or by e-mail at makm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Penny Berrier, Assistant Director; Brandon Booth, Alexandra Dew Silva, Stephanie Gustafson, Victoria Klepacz, Jean McSween, Ralph Roffo, Roxanna Sun, Anne Louise Taylor, and Alyssa Weir made key contributions to this report.