The Department of Defense (DOD) continues to state a need to more quickly modernize weapons for the armed forces. It has a budget of over $40 billion for fiscal year 1998 to acquire and upgrade weapons and may not receive substantially more than that in future years unless savings materialize in other budget areas. Therefore, it must find new ways to modernize more economically. DOD has an opportunity to incorporate commercial supplier practices into the process it uses to acquire weapon systems. In doing so, DOD may be able to respond more quickly to technological changes with shorter cycle times, reduce costs, and improve weapon system quality. The term “supplier” refers to a firm that provides goods or services that comprise part of a final product being made by another firm. For example, a tire manufacturer would be considered a supplier to an automobile manufacturer. In this case, the automobile manufacturer would be viewed as the “customer” by the tire supplier. On a complex product such as an aircraft or a weapon system, suppliers can number in the thousands and are categorized into different levels or tiers. The term “subcontractor” is also used to refer to a supplier. In the case of a military aircraft, the firm responsible for putting the complete aircraft together and delivering it to DOD, the final customer, is referred to as the prime contractor. Although the prime contractor may make some of the aircraft itself, it may buy major subsystems, such as engines, landing gear, and navigation equipment, from other firms. The firms supplying these items and other products to the prime contractor comprise the first tier of suppliers. Each of these firms, in turn, makes significant products for which it depends on suppliers. For example, the engine manufacturer buys major engine components from its own suppliers; thus, it is a supplier to the aircraft manufacturer and a customer to the engine component suppliers. The major engine component suppliers would comprise the second tier. The firms that they buy parts from would comprise the third tier. These tiers continue down to basic piece parts, such as rivets, bolts, common computer chips, and raw materials. Some firms are suppliers for one product and prime contractors for others. Although the smaller firms tend to be found among the lower tiers on complex products, in the upper tiers it is possible for a supplier on a given product to be a larger firm than the firm assembling the complete product. For example, it is possible for a large firm like Lockheed Martin, a manufacturer of major military and commercial end items, to supply components for a smaller firm’s product. Suppliers are typically responsible for the majority of a complex product’s content, whether the item is military or commercial. Generally speaking, suppliers account for 50 to 80 percent of a major item’s value. For DOD, this means that a large part of the money spent on building a new weapon system may actually be paid to suppliers. Perhaps more importantly, much of the technical innovation that is incorporated into a new weapon comes from the suppliers. According to the Aerospace Industries Association,much of the technical innovation comes from the suppliers at the lower tiers. Studies of agile manufacturing techniques reinforce that much of a company’s competitive edge will depend on its supply chain. Many leading companies recognize they must encourage the best suppliers to view them as valued, preferred customers. Being a good customer may be a necessity because the supplier can be less dependent on the customer company than vice versa. Suppliers are becoming increasingly powerful in dealing with customers because of their size or almost sole-source relationships. Some suppliers can choose their customers or be inflexible about the product they are willing to supply. Such is also the case for DOD, as evidenced by the recent withdrawal of many integrated circuit manufacturers from the military market. We have reported that companies have become increasingly aware that they cannot do everything on their own. Therefore, companies are rethinking their business relationships, such as developing closer relationships with strategic suppliers. Companies have found that cooperative business relationships improve their abilities to respond to a changing economic environment by allowing them to focus on their core businesses and reduce costs in their business processes. For example, since 65 percent of its automobiles is made by suppliers, Ford Motor Company realized that to reduce costs and improve quality, it would have to improve its relationships with suppliers. In addition to lower product and administrative costs, exemplary supplier relationship practices can translate to significant company benefits such as higher supplier quality levels, greater productivity, faster product design and delivery times, and better supplier engineering and technological contributions, as the following examples show. Texas Instruments Semiconductor Group reduced its cycle time in obtaining manufacturing supplies by 25 to 40 percent and the number of material inspectors from 14 to 1 at one site and 15 to 7 inspectors at another site. Honda claimed an 8 to 1 return on its supplier relationships investment with an average 48-percent increase in supplier productivity, a drop in the average parts per million defect rate from 900 to 200, and virtual elimination of cost overruns. Varian Oncology Systems saved about $10 million and eliminated half of its inspection staff. To the extent that opportunities to improve supplier relations on defense programs exist and are capitalized upon, the outcomes of weapon system programs could similarly improve. Suppliers can contribute to resolving long-standing cost and schedule problems in major weapon system programs. As the pace of technological improvement quickens, shorter product cycle times will improve DOD’s ability to incorporate the latest innovations. Better supplier relationships may lower investment costs, enabling the services to modernize at a faster pace with existing funding. DOD believes that modernization should proceed more quickly and wants to increase the annual investment in procurement by $20 billion, but the money has been slow to materialize. In addition, shorter weapon system development cycles could yield improved products and better capabilities to the military forces sooner. The Chairman and the Ranking Minority Member, Subcommittee on Acquisition and Technology, Senate Committee on Armed Services, asked us to assess whether best supplier practices can benefit weapon system programs. The objectives of this report are to (1) identify best commercial practices for establishing, managing, and sustaining excellent supplier relationships and (2) compare these practices with those of DOD, selected prime contractors, and the supplier teams on two weapon system programs. To identify firms considered among the best in the commercial sector regarding supplier relationships, we conducted literature searches, consulted data from past winners of the Malcolm Baldrige Quality Award, and met with experts in the area of supplier management to gather uniform information about supplier management practices and their effects. We gathered information from the following commercial firms, which our research showed to be among the best in the area of supplier relationships: Motorola, Inc. (wireless communication equipment manufacturer), Schaumburg, Illinois. Chrysler Corporation (automobile manufacturer), Auburn Hills, Michigan. Texas Instruments Semiconductor Group (semiconductor manufacturer), Dallas, Texas. Xerox, Inc. (document production equipment manufacturer), Webster, New York. Honda of America (automobile manufacturer), Marysville, Ohio. Corning, Inc. (glass product manufacturer), Corning, New York. Varian Oncology Systems, Inc. (oncology equipment manufacturer), Palo Alto, California. Baxter Healthcare Corporation (medical supplies manufacturer), Round Lake, Illinois. DuPont (petroleum and other products manufacturer), Wilmington, Delaware. Plow & Hearth (mail order catalog company), Madison, Virginia. Toyota Motor Sales, USA, Inc. (automobile manufacturer), Torrance, California. McKesson Corporation (wholesale distributor), San Francisco, California. We selected 6 companies from the top 50 DOD prime contractors to assess the degree to which defense contracting companies were aware of and were implementing best supplier practices. These firms were McDonnell Douglas Military Transport Aircraft Division (acquired by the Boeing Corporation during the course of our review), Long Beach, California; Northrop Grumman Electronics and Systems Integration Division (acquisition by Lockheed Martin pending), Hawthorne, California; AlliedSignal Aerospace, Torrance, California; Honeywell Defense Avionics Systems Group, Albuquerque, New Mexico; Motorola Space and Systems Technology Group, Scottsdale, Arizona; and Boeing Space and Systems Group, Seattle, Washington. Some of these firms also serve as suppliers to other defense prime contractors and perform a significant amount of work for commercial companies. Together, the companies receive billions of dollars in government contracts for goods and services each year. We met with each firm and reviewed literature on their supplier management practices. Interviews with knowledgeable officials at both the commercial and defense firms were a primary source of information. To obtain insights into the dynamics of contracting teams in an actual program situation and to obtain the supplier’s perspective, we conducted case studies of two weapon systems currently in development. Our case studies were performed on two munitions programs: the Brilliant Anti-armor Submunition, referred to as BAT, which is the older and more traditional of the two programs; and the Joint Direct Attack Munitions (JDAM) program, which is piloting several acquisition reforms and has applied innovative supplier management techniques. For each program, we discussed practices with the military service program office and the prime contractor and selected suppliers at the first and second tiers. We concentrated on suppliers who were designing custom components for the end product. In the report, we kept suppliers anonymous—designating them with a letter—to guard against harming the contracting team. The BAT is a 3-foot long, 44-pound self-guided, submunition that, once dispensed, glides as it searches for moving tanks and other armored targets that it is intended to track and destroy. The submunition began in 1984 as a classified program and progressed into the engineering and manufacturing development phase in May 1991. It is an Army program and Northrop Grumman is the prime contractor. The Army has funded efforts to develop a new version of the BAT, which is to improve performance against stationary targets.