Select Committee on Defence Appendices to the Minutes of Evidence


APPENDIX 23

Further submission from BAE Systems on Royal Ordnance Defence Strategy (3 May 2002)

  Thank you for your letter of 30 April, asking for an update on the rationalisation of RO Defence sites and the consequences for sourcing the supply of ammunition, explosives and other key components.

  Since our paper of 24 January, there have been developments relating to the sites at Birtley and Bridgwater. These are set out in the attached paper. The Committee may also find it useful to understand the Company position on outsourcing, and the paper includes a section to explain our policy and process as regards selecting strategic suppliers.

  I hope this information meets your request. Please do not hesitate to get in touch if you have any further queries.

BAE Systems RO Defence—Strategy Update[1]

BIRTLEY

  Following the conclusion of the work of the joint TU/Management working group, RO Defence announced on 24 April that it would be pursuing an option to consolidate on the Birtley site. Under the consolidation option agreed with the trade unions, a phased manpower reduction programme will commence towards the end of 2002. This will be substantially complete by the end of 2006 when it is anticipated that the workforce will have been reduced by about 50 per cent. It Is expected that this reduction in manpower will be realised through a combination of natural wastage and voluntary means.

  Due to the downturn in current workload, RO Defence has decided to exit forging and cartridge case manufacture at Birtley. Requirements in these areas will be sourced through international competition. (A note on our policy and processes for selecting strategic suppliers is included at the end of this paper.)

  RO Defence will be investing in and growing its munitions design and manufacturing capability on the Birtley site. While the details of the consolidation plan have yet to be finalised, RO Defence is confident that a way forward has been found that will allow continued operations at the facility. When the plan has been concluded and implemented, RO Defence will have a modern and efficient factory and working practices, enabling the facility to compete effectively to win future business as a core part of RO Defence.

BRIDGWATER

  A formal consultation process with local and national officials has begun. The Bridgwater facility has manufactured at a virtual loss for several years, virtual because it is an integral part of the business and not a separate profit and loss centre. Due to the high fixed cost of re-qualifying products that have been made at Bridgwater for many years, the Company has continued to absorb the operational cost of an inefficient facility. However, with the possible introduction of new products which will utilise insensitive explosives, it is sensible to review whether the economic case for running an inefficient facility is still sound. The new factor in the equation is the avoidance of re-qualification costs as the legacy products and materials are replaced by novel ones. The likely cost of re-qualifying new materials will be the same wherever those materials are sourced and it is possible that they can be obtained from external suppliers at a lower total cost than by intramural production. These are the issues that the Company will be discussing with the TU representatives.

  An associated issue relates to the need to invest in insensitive munitions processing plant for shell filling. It is the Company's intention to locate this plant, should an investment decision be taken, at its fill and pack facility at Glascoed. The industrial logic of this intent is sound but the TUs have indicated that they would like the Company to consider making this investment at Bridgwater instead. RO Defence is prepared to review this in the context of the other issues facing the Bridgwater site.

STRATEGIC OUTSOURCING

  RO Defence applies robust industrial source selection processes to all strategic sourcing decisions. Using industry knowledge and research, potential suppliers are identified and subjected to strategic review. Issues such as financial stability, security considerations, customer and product base, technological capability and security of supply are considered at this stage. Candidate suppliers are then selected and site visits made to validate the research findings. At this time much more detailed reviews are undertaken of business and process capability, process control, capacity, engineering resource availability, quality standards, health and safety standards and willingness to enter into long-term contracts which demand continual improvement.

  The results of this review are combined with the results of commercial and pricing dialogue and a full risk assessment is undertaken. This risk assessment includes aspects such as capacity, cultural fit, potential for continual improvement, future research and technology plans. Security of supply issues are discussed with MoD. The results of this work are finally brought together with the more traditional aspects of supplier selection such as quality rating, delivery performance (historic or forecast), and commercial criteria before a supplier selection is made. Strategic supply contracts are then agreed, which require formal, regular, senior management reviews to consider performance in all areas and agree improvement plans.



1   Ev 69. Back


 
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