Pentagon’s Efforts to Boost Industrial Base Not Moving the Needle Yet: Report

While the Pentagon has signaled its intent to scale technology, field new systems faster, and work more with nontraditional vendors, a new report identifies persistent manufacturing capacity, resourcing, workforce, and modernization challenges that could hinder its ability to deliver on those goals. 

The Reagan Institute’s annual National Security Innovation Base report card measures the Pentagon’s performance and progress in a number of areas the institute views as key indicators of a healthy, diverse defense industrial base. 

“We see building blocks, but we’re not there yet,” Roger Zakheim, the Reagan Institute’s Washington Director, told reporters March 11. “There are great aspirations for what has to happen within our innovation base and the impact it should have on our national defense. And we haven’t seen sufficient, in our judgment, movement there. The production, the modernization is not revealing itself across the force like we think it should.”

The aspirations Zakheim referenced are largely captured in Defense Secretary Pete Hegseth’s strategy to transform the way the Pentagon buys and fields systems—and which companies it partners with to do so. The new approach, revealed in November, calls for the military services to adopt a commercial-first acquisition mindset and craft tailored manufacturing strategies focused on ramping up production quantities. It also backs a number of reforms experts have called for in recent years, like eliminating the cumbersome Joint Capabilities Integration and Development System and making speed a performance metric for programs. 

Those reforms, combined with signaling from the Trump administration that the fiscal 2027 budget request could increase DOD’s topline funding to $1.5 trillion, send a strong message about funding priorities to companies looking to work with the department, the report notes. However, despite growth in defense tech spending—and a stated interest in adopting more commercial technology—awards to nontraditional defense companies still make up less than 1 percent of total contracts. 

And a record-long government shutdown coupled with a lack of deeper program management reforms and unstable funding further complicates that message. 

“[The] “Acquisition Transformation Strategy” reinforces a deliberate push for faster, output-driven acquisition,” the report states. “Still, execution is constrained by appropriations delays, stop-gap funding, and limited visibility from appropriation to obligation.”

The department also continues to struggle with key modernization programs, the report notes. While DOD has touted progress on some major development efforts like the Air Force’s B-21, the services are still struggling to get hypersonic weapons programs out of the gate, and the F-35’s Block 4 modernization effort remains behind schedule. 

Scaling is also a challenge, due in part to a fragile supply chain and a lack of investment in new manufacturing technologies that could make production lines more efficient. The department is moving in the right direction, the report contends, pointing to DOD’s investment in critical minerals and a 5 percent increase in production output. But it’s not clear the supply chain and manufacturing base is prepared for a potential conflict with China. 

“The U.S. is moving to increase defense manufacturing throughput, from critical mineral sourcing and refinement to advanced manufacturing and footprint expansion,” the report states. “Public and private capital are scaling production across the stack, but structural fragilities remain—particularly in sub-tier supply chains.”

Eric Snelgrove, a subject matter expert who helped draft the report, said additional funding in fiscal 2027 could help address some of these challenges, especially if it’s prioritized toward increasing production of more affordable autonomous systems and missile interceptors. Zakheim cautioned that while more funding will help, a major increase in a single year could be counterproductive, especially if it’s not sustained in future budgets.

“I think if they tried to do one year, you would see less efficient use of those funds and would probably not get the sorts of things we’re talking about here in an optimal fashion,” he said.

Still more reforms targeting the industrial base are likely on the way—top lawmakers in Congress, including House Armed Services Committee Chairman Mike Rogers (R-Ala.), have said the 2027 National Defense Authorization bill will have a special focus on invigorating the defense industrial base, similar to how the 2025 policy bill focused on service members’ quality of life and the 2026 bill homed in on acquisition policy.