Conflicting agenda?

Trump pick for deputy defense secretary brings extensive supply chain management experience at Boeing, but also potential conflicts   Recognition that the supply chain division is good preparation for becoming a corporate chief executive officer or president reached new heights this month when President Donald Trump nominated Patrick Shanahan, the senior vice president for supply chain and operations at Boeing, to be deputy secretary of defense.
   Shanahan, who helped get the floundering 787 Dreamliner production back on track, was likely selected for his overall management skill rather than his ability to directly influence procurement and logistics at the Defense Department. But his ties to Boeing also raise potential conflicts of interest, according to defense industry experts.
   “It’s not that he’s from industry, it’s that he’s from the defense industry and the second largest contractor to the Defense Department,” Mandy Smithberger, director of military reform at the Project on Government Oversight, said in an interview.
   Shanahan became the head of supply chain at Boeing in April 2016. He was responsible for overseeing the company’s manufacturing operations and global supply chain strategy, including implementation of advanced manufacturing technologies. He also was in charge of Boeing policies on sustainability, health and safety, and intellectual property management.
   A mechanical engineer by training who joined the company in 1986, Shanahan spent almost eight years as senior vice president of airplane programs in the Commercial Airplanes division. In that role he had responsibility for engineering, delivery, regulatory compliance, profit and loss, and plant operations in Washington and Charleston, S.C.
   Prior to that assignment, he was general manager of the 787 Dreamliner and led the program during a critical period in the aircraft’s development from 2007 to 2008.
   He also has experience on Boeing’s military side, where he was general manager of Boeing Missile Defense Systems in Washington and Rotorcraft Systems, which builds the Marine Corps’ V-22 Osprey tiltrotor, the CH-47 Chinook and the AH-64D Apache attack helicopter.
   Supply chain executives in recent years have taken center stage in the C-suite as corporations recognized the functions they oversee touch many critical aspects of operations, from sourcing and logistics to design, ordering, compliance, finance, and online fulfillment.

   A global supply chain. Boeing has one of the most sophisticated inbound supply chains for large-scale manufacturing in the world, best exemplified by the 787 Dreamliner. Boeing restructured its entire manufacturing process with the Dreamliner last decade in an effort to lower costs and speed development, while also pioneering the use of lightweight carbon fiber composite materials rather than aluminum for the frame.
   Rather than build the plane at its plants in Washington it became an integrator. Global suppliers manufacture fully-equipped large components and ship them to two assembly plants in Washington (located in Everton and Renton), as well as a new U.S. facility in Charleston, S.C. The aft fuselage and wing tips, for example, are made in Busan, South Korea; the main landing gear wheel well is made in Nagoya, Japan; the center fuselage is built in Grottaglie, Italy; and the forward fuselage is made in Wichita, Kan.
   But airplane deliveries were delayed for three years by quality-control problems within the far-flung supply network, with the delays costing the company billions of dollars. Boeing officials have since acknowledged they shouldn’t have outsourced so much of the engineering and procurement, that manufacturing outsourcing should have been more targeted, and that they should have had more on-site support and oversight for subcontractors.
   According to a 2009 paper in Supply Chain Forum by Christopher S. Tang and Joshua D. Zimmerman of the UCLA Anderson School of Management, and James I. Nelson of MBCP Corp., Boeing’s original Dreamliner management team did not include members with expertise on supply chain management.
   To restore customer confidence in Boeing’s development capability and reduce further delays, Shanahan was brought in to replace marketing expert Mike Bair. Shanahan had proven experience in supply chain management and was subsequently given responsibility for coordinating all manufacturing activities for commercial airplane families.
   Defense analysts said Shanahan’s logistics experience may be useful at the margins, but the real management of the DoD’s procurement, logistics and maintenance will continue to be handled at the level of deputy assistant secretary.
   “I don’t think they [Pentagon leaders] have to come from the defense industry to be effective in that position,” POGO’s Smithberger said. “It’s more about what kind of manager you are.”
   “What you want is someone who is a good manger and is able to make sure things are balanced between the Office of the Secretary and the services, someone who can push policies and make sure contracts are what they should be,” Lawrence Korb, a senior fellow at the Center for American Progress and senior advisor to the Center for Defense Information (part of POGO).

Boeing officials have since acknowledged they shouldn’t have outsourced so much of the engineering and procurement, that manufacturing outsourcing should have been more targeted, and that they should have had more on-site support and oversight for subcontractors.

   Conflicts of Interest? Having a business background can be an asset for the number two official at the Defense Department, but there is a danger Shanahan is too close to the defense industry, both analysts said.
   Shanahan’s understand of defense procurement make him a good candidate to usher in contracting reforms, such as updating the definition of commercial items so Pentagon contracting officers have access to cost and price data to determine if prices are fair and reasonable, Smithberger said.
   Defense suppliers often define products as commercial under the premise that prices are available in the marketplace and the company isn’t obligated to share internal pricing information. When items are only sold to the military, and there is no outside market, the Pentagon often ends up paying inflated prices without more pricing transparency, she said.
   Shanahan should recuse himself from Pentagon decisions involving Boeing, Smithberger and Korb said. The challenge will be how the administration draws that line, given that Boeing is omnipresent in defense acquisition with involvement in military space programs, satellites, helicopters, information technology, airborne early warning and control systems, air cargo planes, fighters, bombers, airborne tankers, and Air Force One.
   Having defense industry experience doesn’t always lead to ethical problems, Smithberger said. The Obama administration tapped Raytheon Co. executive Shay Assad as the Pentagon’s pricing czar, but he used his knowledge of the system to push changes designed to save taxpayers’ money, Smithberger noted.
   The potential conflicts of interest, she said, should be a focus of Shanahan’s confirmation hearing in the Senate.
   President Trump’s January executive order on ethics requirements for political appointees directs officials not to participate in any regulatory or contract decisions that directly or substantially involve their former employer or former clients.
   The order includes a waiver provision that can be signed by the President or his designee, but unlike a similar order from President Obama it does not include criteria for when such a waiver can be granted or a requirement to publicly disclose the waiver, Smithberger said.
   Korb said the Defense Department works best when the deputy is someone from industry – just not the defense industry. Some of the best second deputy secretaries, he said, were David Packard, the co-founder of Hewlett-Packard who served during the Nixon administration; Charlie Duncan, a Coca-Cola veteran who served in the Carter administration; and Don Atwood, who came from General Motors and served under George H.W. Bush.
   “The only problem I have with it [Shanahan’s appointment] is the whole problem of the military industrial complex,” Korb said. “The secretary of defense [James Mattis] is a military guy and then you’re bringing in someone from the defense industry. Will he be able to stand up to the other big corporations?”
   Mattis, a former Army general, personally recommended Shanahan to President Trump, the Pentagon said in a statement.