Risk Assessment and Identification Methodology for the Defense Industry in Times of Crisis: Decision-Making

Annually, different corporations within the defense industry must analyze their needs and decide whether to renew existing contracts or sign new contracts with government suppliers and contractors. There are multiple risks in entering these agreements, especially in times of crisis, such as potential contractor delays, shutdowns, or even bankruptcy. This paper aimed to present a novel data-driven supplier risk identification and assessment framework that rigorously examines the stability of such potential firms and their respective plants, with a focus on financial risk factors. Supply chain risk and financial bankruptcy literature are analyzed, and different aspects are combined to create a novel supplier risk assessment methodology. This hybrid procedure combines a linear discriminant bankruptcy model with a multicriteria scoring procedure built using the DELPHI method. The methodology calculates individual plant-level supplier risk indices, which can be used to aid the defense purchasers in choosing more stable suppliers and contractors. This framework is then applied to a case study of an aviation supply chain purchaser within the US government, specifically in the context of plant closures during the COVID-19 pandemic. The model was tested and validated using historical supplier data provided by the purchaser. The purchaser was able to implement the framework and use it for risk management, demonstrating its importance to manufacturers and purchasers within the defense industry. We show that the model performs well both in crisis situations (COVID-19) and in non-crisis situations. This hybrid data-driven risk analysis methodology is practical to implement and can be used proactively by firms to improve the stability of their supplier base through risk assessment and reduction.