Key Supply Chain Provisions of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2024

https://www.insidegovernmentcontracts.com/2024/01/key-supply-chain-provisions-of-the-national-defense-authorization-act-ndaa-for-fiscal-year-fy-2024/

This post continues our ongoing coverage of the FY 2024 NDAA.

The FY 2024 NDAA includes numerous supply chain and stockpile management provisions aimed at addressing a host of perceived vulnerabilities and weaknesses in Department of Defense (“DoD”) supply chain networks used to secure goods and services for our national defense. Of particular note, this year’s NDAA seeks to address China’s and Russia’s continued dominance in the global supply chain for many critical materials and rare earth elements. Supply chain- and stockpile-related measures in the NDAA could present significant opportunities for contractors poised to support the U.S. Government’s efforts to on-shore and friend-shore U.S. and DoD sourcing and manufacturing, but Congress’s focus on increasing supply chain visibility could also herald new rounds of compliance and reporting requirements attached to federal procurements.

This post is organized in three sections: (1) provisions to build supply chain resilience for critical industries, including semiconductors and pharmaceuticals; (2) provisions to overhaul DoD systems for tracking and managing supply chains and the National Defense Stockpile; and (3) provisions to assess and secure supply chains and the National Defense Stockpile for critical minerals and rare earth elements (“REE”). This post addresses not only the legislation, but also the accompanying Conference Report and committee reports. Although these reports do not carry the force of law, they direct DoD action (e.g., by requiring DoD’s assessment and reporting on certain topics) and inform the direction that Congress and DoD will take on the issues we discuss.

Provisions to Build Supply Chain Resilience for Critical Industries

The FY24 NDAA focuses on identifying and mitigating vulnerabilities throughout the DoD supply chain. This legislation includes provisions impacting a host of critical industries, including semiconductors and pharmaceuticals/therapeutics.

Provisions to Secure Semiconductor Supply Chains

Congress understands that the semiconductor industry underpins the development of DoD technology priorities, including artificial intelligence, 5G communications, quantum computing, and autonomous vehicles. To this end, Congress has directed DoD to report on efforts to on-shore and secure semiconductor production. For instance, the House Armed Services Committee (“HASC”) Report directs DoD to brief Congress on plans to incentivize domestic production of printed circuit boards and substrates, either through direct investment or other authorities. The HASC and Senate Armed Services Committee (“SASC”) Reports also require DoD to examine efforts to leverage new semiconductor technologies, including chiplet-based System-in-Package architecture and Magnetoresistive random-access memory. Additionally, Section 1513 of the NDAA requires DoD to establish a pilot program to enable collaboration between the National Security Agency’s Cybersecurity Collaboration Center and U.S. semiconductor manufacturers to improve the cybersecurity of semiconductor design and manufacturing processes. This collaboration, combined with DoD’s reporting obligations, presents an opportunity for contractors to further engage with DoD on efforts to secure and expand semiconductor manufacturing.

The NDAA also focuses on strengthening the controls that ensure the security of microelectronics purchased by DoD. For example, the HASC Report requires DoD to report on its implementation of Section 889 (prohibiting DoD and its contractors from using or acquiring certain telecommunications or video surveillance services and equipment linked to five Chinese companies) and requires DoD to report on the rationale behind what has been perceived as the frequent waiver of the requirement to source microelectronics from “Trusted” suppliers. The HASC Report also directs DoD to report on software design, including by providing proposals to ensure that: (1) by FY 2026, every new silicon device acquired by DoD undergoes rigorous pre-production testing to detect the existence of and prevent exploitation of design vulnerabilities; and (2) contractors certify that they have performed a “comprehensive functional, structural, and behavioral analyses” of their chip designs to identify and remediate points of access that could be subject to unauthorized manipulation. These requirements signal Congress’s desire that DoD tighten its controls around semiconductor supply chain security and may indicate that contractors could face greater scrutiny in the future.

Provisions to Secure Supply Chains for Pharmaceuticals and Therapeutics

The Biden Administration identified pharmaceuticals and active pharmaceutical ingredients (“APIs”) as a critical product area in a February 2021 Executive Order on America’s Supply Chains (see our prior coverage here). As of 2019, almost 75 percent of APIs were manufactured outside the United States, with China holding a dominant global market share of API production. Congress remains focused on shoring up supply chain vulnerabilities and stockpile deficits, which could result in opportunities for industry to provide domestic sources of key pharmaceuticals and APIs. The key topics addressed in the NDAA and accompanying reports include:

• Establishing a military pharmaceutical and medical device vulnerability working group. Section 716 builds on efforts to shore up DoD’s pharmaceutical supply chain by establishing a military pharmaceutical and medical device vulnerability working group to, among other things: (1) assess supply chain vulnerabilities for pharmaceuticals and APIs and develop a plan to mitigate them, including by reducing dependence on APIs from foreign sources; (2) develop a list of pharmaceuticals critical to DoD; and (3) develop a plan for stockpiling essential pharmaceuticals to ensure availability in the event of armed conflict.

• Domestic production of APIs and precursors. Section 216 authorizes the use of DoD funding to support R&D for manufacturing and scaling the domestic production of APIs and key starting ingredients. Additionally, the HASC Report directs DoD to leverage synthetic biology to reduce reliance on foreign-manufactured APIs and report to Congress on efforts to strengthen domestic production supply chains for APIs and essential medicines.

• Domestic purchases of key pharmaceuticals. The HASC and SASC Reports reflect congressional concern for establishing domestic sources for key pharmaceuticals, requiring DoD to examine the feasibility of purchasing amoxicillin from U.S. sources and encouraging the transition to domestically manufactured influenza vaccines.

Provisions to Overhaul DoD Systems for Managing and Tracking Supply Chains and the National Defense Stockpile

The NDAA seeks to overhaul portions of DoD’s supply chain and stockpile management and tracking systems, signaling that Congress is committed to proactive mitigation of supply chain risks. This year’s legislation is particularly focused on the National Defense Stockpile, a DoD-managed reserve of raw materials needed to manufacture essential defense items, which serves as a hedge against supply chain disruptions during periods of national emergency. The activities resulting from this year’s NDAA could lead to opportunities for members of industry to partner with DoD to provide innovative supply chain solutions. The key topics addressed include:

• Procedures for replenishing defense stockpiles. In response to the materiel shortages that were made apparent by U.S. aid to Ukraine, Section 831 establishes emergency acquisition authority for purposes of replenishing U.S. stockpiles of defense articles.

• Continuously monitored supply chains. Section 856 requires DoD to establish a pilot program that would employ a combination of government and commercial tools to analyze the supply chains of as many as five weapons platforms identified as part of the Pacific Deterrence Initiative, while the HASC Report requires DoD to assess the commercial availability and feasibility of a DoD-wide, continuously monitored, multi-tiered system that would leverage artificial intelligence to rapidly identify and mitigate supply chain risks.

• Prize competitions. Section 1525 authorizes DoD to launch prize competitions to improve the capabilities of its business systems, including systems supporting industrial base and supply chain visibility, analytics, and management.

• Foreign ownership, control, or influence. The NDAA Conference Report requires DoD to brief Congress on tools it employs to mitigate the risks of foreign ownership, control, or influence within the defense industrial base.

• Tracking supply chain vulnerabilities related to critical minerals and REE. The HASC Report directs DoD to report to Congress on requirements imposed on the prime contractors of major defense acquisition programs to identify vulnerabilities in their supply chains related to critical minerals and REE sourced from or processed by China, and whether such data collection could be improved before 2027. In addition, Congress seeks DoD’s assessment of the elements that would inform a successful partnership between the Department and industry to increase supply chain visibility and security for critical minerals and REE identified as most vulnerable to supply chain shocks.

• Digital solutions. The SASC Report recommends that DoD develop digital solutions to modernize supply chain management.

• End use tracking. The NDAA Conference Report requires the Government Accountability Office to brief Congress on the degree to which DoD is dependent on entities in foreign countries for the procurement of end items and components, including whether DoD procurement processes allow determination of an end item or component’s country of origin.

Provisions to Assess and Secure Supply Chains and the National Defense Stockpile for Critical Minerals and REE

The Biden Administration has identified critical minerals, including REE, as “key inputs” in many modern technologies essential to both U.S. defense and commercial sector production. At present, the United States relies on foreign nations — many of which are not allied and few of which adhere to fair labor and environmental protection standards — to meet its demand for these resources.

This year’s NDAA requires deliberate action by DoD to reduce reliance on non-allied nations for critical minerals and REE and establish a robust network of domestic, allied, and partner nation suppliers. The key provisions in the law include:

• Multi-year procurement authority. Section 152 provides multi-year procurement authority for REE or magnets “processed in the United States by domestic sources” as an alternative to DoD’s standard approach of procuring materials annually. Until the last few years, multi-year procurements had been authorized only infrequently, but the war in Ukraine spurred congressional, DoD, and industry interest in the use of multi-year contracting for munitions. Congress seems to perceive that a similar grant of multi-year procurement authority for domestic REE could galvanize the nascent domestic processing industry and better sustain the U.S. REE stockpile.

• Strategies to achieve critical mineral supply chain independence. Section 1414 requires DoD to develop a strategy to ensure that by 2035, DoD supply chains do not rely on critical minerals mined or processed in “covered countries,” including China, North Korea, Russia, or Iran. As part of the strategy, DoD must identify potential partnerships with U.S. allies and partners to reduce dependence on critical minerals from covered countries.

• Improving critical materials stockpiling. Section 1411 directs the Secretary of Defense, in his role as the National Defense Stockpile Manager, to develop “reliable sources” of strategic and critical materials (including critical minerals) and to contract with these “reliable sources” for purchase of these materials. “Reliable sources” are defined as citizens or business entities of the United States, National Technology and Industrial Base member nations (the United Kingdom, Canada, Australia, and New Zealand), or other qualifying countries.

Additionally, the reports accompanying the NDAA emphasize the need for DoD to work with other federal agencies, industry, and allied and partner nations to develop new sources of critical minerals, new methods of REE extraction, and alternative technologies that can be substituted for critical minerals or REE to meet defense requirements. For instance, the HASC Report directs DoD to report to Congress on opportunities for public-private partnerships to extract critical mineral and metal reserves from recycled and reused materials and requires DoD to brief Congress on domestic partnerships and research investments focused on biological methods to extract and process critical minerals and REE from ores and waste materials — methods that have been explored by the Advanced Research Projects Agency of the Department of Energy (“ARPA-E”). This activity may present opportunities for industry to partner with DoD to receive funding for efforts to mitigate supply chain challenges.

Closing Thoughts

The FY 2024 NDAA reflects continued bipartisan focus on mitigating supply chain vulnerabilities and stockpile shortfalls and suggests that DoD will be keenly focused on reporting on and implementing an array of supply chain-related initiatives in the coming year. This activity presents opportunities for contractors who may hold solutions that meet DoD’s need to assess and secure its supply chains, but it also indicates that contractors and their supply chains may be under greater scrutiny going forward. For contractors and industry generally, understanding where and how enhanced monitoring, reporting, and certification requirements may be required is likely to become essential to effective supply chain planning.