Only the Quick, Nimble Succeed as Small Firms Scramble for Business

By RICHARD C. BARNARD
Editor in Chief

A relative few insiders in the defense world have heard of tiny Banneker Industries Inc. of Lincoln, R.I. But those who do point to Banneker as a powerful example of how a minute company with scant financing can succeed in a market dominated by multibillion-dollar giants such as Raytheon Co. and Northrop Grumman Corp.

A decade ago, Banneker was a machine shop with 35 employees and revenues of $750,000 that struggled to stay in business as its customers switched to plastics and placed their orders elsewhere. Banneker has since dumped its machines, focused on supply chain management services and driven its revenues into the $3-million to $5-million range, according to Cheryl Snead, president and founder.

Along the way, Banneker avoided the pitfalls that doomed other small defense companies and latched onto a key ally: Raytheon, the $17-billion behemoth that controls a huge swath of the defense market.

Banneker “is a big success story,” said Raytheon’s Timothy J. Wholey, vice president of supply chain management. Banneker “has grown so that it is used almost throughout the whole company now.”

Wholey praised Banneker’s ability “to market its capabilities” and attract new business. “They’ve done some regional warehousing for us — which is a big deal because of space constraints” — and assembled kits from parts Banneker purchased from other companies.

Impressed with the firm, Raytheon became a mentor to Banneker, encouraging all Raytheon business units to take a look at the company and helping Banneker broaden its customer base. “One of the greatest things Raytheon did was give us access to other markets and opportunities through the Aerospace Industries Association (AIA),” said Snead.

Raytheon paid half of Banneker’s first-year AIA fee. Snead attended AIA’s national and regional meetings “and got the opportunity to network directly with the big four.” She especially remembers one AIA dinner during which Daniel Burnham, then-Raytheon chief executive, literally took her by the arm and introduced her to other industrial titans in the room.

Banneker has grown because it is responsive to the needs of its customer and Snead feverishly markets the company’s services at every opportunity. Also, Raytheon needs Banneker. The industry giant looks for suppliers with a niche product “or maybe some core applications that we can’t do ourselves,” Wholey said.

In addition, prime contractors are required by their government customers to subcontract a portion of their work to small businesses. “Generally, 5 percent is the mark, but that is negotiable,” said Michael A. Bush, director of Lockheed Martin Supplier Diversity.

Northrop Grumman Ship Systems recently won a maintenance contract with a 40 percent set-aside for small companies. Budget authority for the Pentagon in 2004 is $442 billion, though the entire amount may not be subject to small business set-asides.

Despite its size, the defense marketplace is strewn with the bones of small- and medium-size companies that never made the cut in a tough, complex business. The difference, several experts said, often lies in the reliability and responsiveness of suppliers.

“I’m looking for the best value,” said Veasey Wilson, vice president of supply chain management for Northrop Grumman Newport News. “I can get a product that may cost less … but I may have reliability issues with that product which will drive up my costs.” A supplier that requires a lot of oversight may not get a second chance with Newport News, Wilson said.

Bush said his company “identifies suppliers that can help us where we have had challenges.” If Lockheed has a high failure rate on a module, it will find a vendor that can build it better, he said.

Several experts said there are some key steps to success for small companies in the defense market. The first is to be responsive as problems arise. L. Teno Henderson, director of full-service operations for Northrop Grumman Ship Systems, said his company has a new contract for maintenance and repair of 24 destroyers and is eager to establish “good partnerships” with small companies that “are able to communicate” and help turn ships around rapidly.

Yet some small companies cannot respond to Ship Systems’ complex requirements. The “smaller guys” sometimes cannot sustain their work forces due to the volatility of the shipbuilding business. They lose key people and inexperienced labor becomes a factor in performance, Henderson said.

Even tiny companies “have to be about change,” said Snead. “They have to look at their industry and their customers and not be left behind.” Small company executives should “meet with key decision-makers” of the prime contractors on a regular basis to understand how their customers are changing and “determine where they may be able to play a part.”

Being responsive may mean that suppliers have to change their internal processes, said Wilson. Newport News once “laid out the factory floor” of a supplier that had a unique technology but was able to produce only one or two units per week. “Our requirement was 60 a week,” said Wilson. The solution included “us aligning him with the manufacturing extension partnership in that state and basically providing some consulting services for him.”

A healthy balance sheet also is important to prime contactors. “We don’t want to become partners” with companies that may not have the financial viability to sustain themselves, said Raytheon’s Wholey.

A reasonably diversified customer base is one of the elements that Lockheed Martin looks for, Bush said. “We don’t want to be the bulk of a supplier’s business. That concerns us.”

All the experts contacted by Sea Power agreed that successful small companies are always networking with potential customers. A good place to do that is with the National Minority Supplier Development Council Inc., which has 39 regional offices and was created in 1972 to foster links between corporate America and minority-owned companies.

“You need the opportunity to meet those in strategic positions” to hire your company, Snead said. “It’s all about relationships.”

Several experts said small companies can get a big boost from the Defense Department’s Mentor-Protégé Program run by the Department of Defense Office of Small and Disadvantaged Business Utilization, which can be reached at www.acq.osd.mil/sadbu. Its purpose is to develop small businesses with the potential to become valued suppliers to the Pentagon. Banneker and Raytheon are in the program. Lockheed Martin in May became mentor to tiny R&D Electronics Inc., of Brownsboro, Ala., the maker of electro-optics and specialized coatings for major defense companies.

AIA, headquartered in Arlington, Va., runs its Supplier Management Council as a forum for networking by small companies and prime contractors. Membership fees range from $3,000 to $5,000, based on member companies’ annual revenues.

Banneker’s Snead said she exhibits at a select number of trade shows each year. “But they cost a lot of money,” and she routinely assesses the costs and benefits of each.

Despite skillful networking, some small- and medium-size companies stumble after they land a contract and therefore never developing successful strategic relationships with the primes. “Typically, they overload themselves,” said Wholey. “They get an opportunity and … they go for the big bang and take on more than they can handle. They become somewhat of a troubled supplier. Typically, we go in and help.” But price and quality decline, driving down the rating that Raytheon gives each of its suppliers.

“If I have one lesson learned [for suppliers] it’s to start with something manageable,” said Wholey, especially when dealing with a company the size of Raytheon. “Build credibility through performance, and then move up the food chain over a period of time.”

Snead said she has seen medium and small companies damage themselves because they assume that once they have a deal with a prime, “they are entitled to certain opportunities. But unless you perform and achieve expectations, you are not entitled to anything.”

Those who stumble are risking their reputations in a huge business, said Northrop’s Wilson. “We are constantly looking at rationalizing our supply base, and 48 to 50 percent of our supplier portfolio” comprises small businesses.