Article

Implications of The Defense Production Act in reaction to COVID-19

 

What this means now

Medical professionals around the country are voicing concerns over the availability of critical supplies.  Masks, gloves and particularly ventilators are in short supply.  We’ve seen the effects of these shortages in Italy and elsewhere.  Like the strategic oil reserve, the government maintains a certain stockpile of medical materials in the case of a widespread emergency. The present concern is that due to the expected level of this outbreak, demand will exceed the capacities of both the reserve and private industry. Quickly producing more is critical. This also may be a challenge if many of the people capable of producing these items are themselves not well. 

Currently, only GM has been directly asked to produce ventilators under the act, although these activities are already underway.  GM is pushing full steam ahead, working with Ventec Life Systems to build a VOCSN (ventilator, oxygen, cough, suction, and nebulizer).  Outside of GM, no overarching action has been taken to forcibly invoke these powers among private industry outside of contract prioritization.  It remains unlikely that unrelated industries will be forced to produce.  There have been calls to increase capacity among existing manufacturers as well as increased orders and new contracts from the government.  At this time, the government overall is encouraging as opposed to enforcing.

What exactly is the Defense Production Act?

For many of you, the Defense Production Act may be a new term, but this act was passed in September 1950.  Used during the Korean war to ensure mobilization of equipment and supplies, what the act does is give the government the authority to redirect activities of private industry towards that of national defense.  Very specifically, the redirection of Priorities and Allocations (Title I), Expansion of Productive Capacity and Supply (Title III), and Title VII, General Provisions (such as establishing a volunteer pool of expertise or the cessation of impending foreign acquisition of a company). 

In defense of what?  In this case the obvious enemy of COVID 19.  This act covers military conflict, acts of terrorism and natural or manmade disasters.  The DPA has been used numerous times over the years, not just in times of outward war.  It has been used in response to a variety of issues such as ensuring power continued during massive power shortages in California, to increase the production of rare earth magnets used in tech and to guarantee fuel supply, to name a few.

Implications to industry

If you are a producer of surgical masks, ventilators or any of the other critically needed medical supplies this specifically applies to you.  The DPA means the prioritization of government contracts over that of private contracts.  An increase in government orders has already taken place and can be expected to increase.  

What it could also mean is that funds are allocated towards an expansion of capacity at your facility.  Loan guarantees can also be made available for people or supplies needed to expedite production capabilities and modernize equipment.  These will likely be the biggest industry impact.  Some companies have indicated the possibility of expanding production or the start-up of existing idled or low volume facilities with government support.

Realities of large-scale production changes 

It is unlikely that the government forcibly directs a business to convert production capabilities to those outside of the company’s purview.   The act itself specifically highlights that the government and private industry collaborate saying “every effort should be made to foster cooperation between the defense and commercial sectors”.

More practically, converting a production line from one product to another can take months and that’s with a pre-planned, expedited conversion.   Countless manufacturers experience delays and hardships for very minor product changes and that’s with years of experience and expertise.

It will most likely be unnecessary to convert large scale facilities to completely unrelated commodities as existing manufacturers of this type or similar equipment have indicated the possibility to increase production now or soon if they can receive additional funding and support.  We are already seeing partnerships amongst medical supply companies and non-medical companies without enforcing the Defense Production Act.

What companies are already doing

3M had already increased production of the N95 respirator in response to increased demand and had also previously contracted with the government for 35 million of the masks without the involvement of the DPA.   3M is also shifting more of its capacity towards healthcare applications as opposed to industrial.  Honeywell is also in the contract finalization phase with the government for producing more masks, though quantities have not been disclosed.  

Prestige Ameritech, the largest mask manufacturer in the US, has gone from producing 250K masks per day to now producing 1 million masks per day.  Prestige Ameritech has also diverted their sales only to medical facilities, ensuring masks go where they are most needed.

Private industry has also taken up the call to action without government intervention, converting production to needed items like hand sanitizer and masks.  Distilleries like Rabbit Hole, Smooth Ambler, and TX Whisky are producing hand sanitizer and providing alcohol for further production of sanitizer by their parent company Pernod Ricard.  Ford is working with GE Healthcare in expanding production of ventilators.

What you can do and how Seraph can help

Know that this crisis will come to an end.  If your company currently supplies these types of products or would like to transition to doing so, gear up your supervisory, engineering, quality or logistics expertise with companies like Seraph and OpsOnsite. 

Temporary capacity increases that are expected to be ramped down once things return to normal still require the same high level of performance as your permanent operations.   Seraph can provide the needed guidance for fast ramp up and ramp down of operations and has a successful history of doing just that.

To learn more contact us at: Crisishelp@Seraph.com

About Seraph: 

Seraph's team of operational managers and senior consultants intercede on our client's' behalf to fix a crisis that is putting the business at immediate risk, turnaround a situation that is damaging the bottom line or restructuring to improve the balance sheet. Seraph has successfully delivered projects in the following regions: The Americas, Europe, China, and India. Seraph's Industry Expertise Includes Aerospace, Automotive, Energy Infrastructure, Healthcare, and Medical Devices. Through our other operating companies, we are continually looking for distressed situations where we can put our expertise and capital to work to create value.

 

19 March 2020