SMEs and the supply chain
68. There have been press reports that SMEs are becoming frustrated
with dealing with UK-based prime contractors. One article reported
that a Managing Director of an SME had said that "Bit by
bit we are giving up and gravitating towards other sectors, like
the oil industry" and concluded that "if the DIS is
to create a UK industrial base…. it needs to draw the UK
SME base into the process in a fundamental way as well".[132]
69. The Chairman of DIC did not have concerns about
SMEs gravitating to other sectors and argued that the DIS should
help SMEs by providing greater transparency about the opportunities
that are available.[133]
In his view, the most important thing for SMEs was to have a successful
domestic industry, as for many SMEs their route to market was
through the primes, or the sub-primes, or the major integrators.[134]
70. The Minister believed it was vitally important
to improve the way in which the MoD and larger defence companies
worked with SMEs. He told us that:
I think there is a dual responsibility, which
is clearly set out in the DIS. There is a responsibility on Government,
on the Ministry of Defence, to actively work to find ways to provide
the clarity and transparency in an efficient way that small companies,
who do not have the resources of larger companies, can digest
and manage effectively, but there is an equal responsibility on
the part of the larger companies, who are often their route to
market, to provide that clarity too".[135]
71. Larger companies were to be assessed by the MoD
on the knowledge they had about their own supply chains.[136]
The MoD was also seeking to make itself more "user-friendly"
to SMEs: its website now allowed small companies to make contact
if they considered that they had a service or product which might
be of interest to the MOD.[137]
Lord Drayson acknowledged that in many areas of defence capability
there were some vitally important SMEs, but that the MoD needed
to increase its visibility of these.[138]
72. The Minister told us that the MoD was placing
a considerable amount of its defence contracts with SMEs, and
that the proportion of its contracts place with such companies,
exceeded "the proportion of contracts which the Government
would like to see placed with small, medium-sized companies".[139]
73. A common concern relayed to us was that the MoD
did not have sufficient knowledge of the defence supply chain.
Professor Hartley told us that the DIS recognised the role of
supply chains, but he considered that the MoD and the DTI knew
very little about the complexity and extent of supply chains.
He thought the knowledge was reasonably good at the first tier
level, but that there was very little knowledge about the second
and third level and "how important some of these suppliers
might be towards providing so-called key defence industrial capabilities".[140]
74. There are indications that improvements are being
made. The Secretary of the DIC considered that both industry and
MoD had taken a greater interest in supply chain relationships
and supply chain management in recent years, and that the DIS
had given "tremendous clarity for supply chain improvement
programmes".[141]
But the MoD was only at "the start of a journey" in
terms of understanding supply chains and how to manage them.[142]
75. The DTI was working with Regional Development
Agencies (RDAs) and with the devolved administrations to understand
better the supply chains and to look at performance across the
supply chain. It was acknowledged that some of the supply chains
were very large and very complicated.[143]
The English Regional Development Agencies told us that:
Whilst the identities of the largest defence
contractors are well known, there is more limited visibility of
the long supply chain which is an under utilised source of innovative
solutions to issues facing the MoD. The RDAs feel there is a need
for a cross-sector supply chain analysis of the industry and would
be receptive to exploring ways of participating in such work.[144]
76. We note that the MoD has sought to become
more "user friendly" to Small and Medium-size Enterprises
which are a vital part of the UK defence industry. We look to
the MoD to improve its visibility of such companies.
77. We are concerned that the MoD is only at "the
start of a journey" in terms of understanding supply chains
and how to manage them. We note that the MoD is working with the
DTI, the Regional Development Agencies and the agencies of the
devolved administrations to understand defence supply chains better.
We expect this work to be progressed quickly and good practice
to be identified and promulgated.
78. We consider issues relating to the opportunities
for SMEs to compete for the work underlying long-term partnering
arrangements at paragraph 94.
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