How Does the Defense Supply Chain Work?

By Adam Patti, Chief Executive Officer, VistaShares | November 2026

The defense supply chain is the network of companies that design, build and sustain military equipment, from the prime contractors that deliver aircraft, ships and missiles to the thousands of suppliers that make their components, materials and subsystems. Government budgets set demand, but production depends on suppliers deep in the chain, where capacity, skilled labor and critical materials can limit how quickly output can increase.

How is the defense supply chain structured?

Defense production is usually described in tiers.

Prime contractors. Primes hold the main contracts with the government and are responsible for delivering complete systems, such as fighter aircraft, submarines, missile defense systems or satellites. They manage design, integration and testing.

Tier 1 suppliers. These companies provide major subsystems: engines, radars, avionics, propulsion, guidance systems and electronic warfare equipment.

Tier 2 and Tier 3 suppliers. Below them are makers of components and parts, including circuit boards, castings, forgings, bearings, connectors, rocket motors and specialized electronics. Many are small or mid-sized firms, and some are the only qualified source for a given part.

Materials and energetics. At the base of the chain are producers of specialty metals such as titanium, critical minerals and rare earth elements, and energetics, the explosives and propellants used in munitions.

Shipyards, depots and sustainment. Public and private shipyards, maintenance depots and service providers keep existing equipment operating, which accounts for a large share of defense spending over a system’s life.

A single major platform can draw on thousands of suppliers across these tiers. Disruption at one small supplier can delay delivery of the entire system.

How is defense spending set?

In the United States, Congress sets defense funding through two main processes. The annual National Defense Authorization Act authorizes programs and policies, and annual appropriations bills provide the money. Funding is divided into categories such as procurement, research and development, operations and maintenance, and personnel.

For fiscal year 2026, the administration requested $848.3 billion in discretionary funding for the Department of Defense, plus $113.3 billion in mandatory funding expected from budget reconciliation, for a total of $961.6 billion, according to the Congressional Research Service.¹ The reconciliation law enacted in July 2025 directed funding toward priorities including shipbuilding, missile defense and munitions, with about $25 billion going to munitions procurement and supply chain development, according to Breaking Defense’s review of the Pentagon’s spending plan.²

Budgets are not the same as production. Money appropriated for a program is typically spent over several years as contracts are awarded and work is completed, so changes in funding reach suppliers gradually.

Why has the defense supply chain come under strain?

Munitions demand. Conflicts in Europe and the Middle East consumed artillery shells, air defense interceptors and precision munitions faster than they were being produced, exposing limits in production capacity.

Consolidation. Decades of mergers reduced the number of suppliers in many categories. In some areas, the government depends on one or two qualified producers.

Long lead times. Components such as solid rocket motors, castings, forgings and microelectronics can take many months or years to produce, and expanding capacity requires new facilities, tooling and qualification.

Workforce. Shipbuilding, aerospace manufacturing and munitions production require skilled trades, engineers and security-cleared staff, and hiring and training take time.

Critical materials. Supplies of some critical minerals and rare earth processing are concentrated outside the United States, which creates exposure to trade restrictions.

How are governments responding?

The U.S. government has pursued several approaches: multiyear procurement contracts that give suppliers confidence to invest, direct funding for production capacity through programs such as the Industrial Base Analysis and Sustainment program, investment in critical minerals and the National Defense Stockpile, and efforts to bring new and commercial technology companies into defense procurement.³

Allied spending is also rising. At their June 2025 summit, NATO members committed to raise spending on defense and related security investment to 5% of gross domestic product by 2035, including 3.5% for core defense.⁴ European governments have announced programs to expand production of munitions and air defense systems. Higher allied budgets add demand for many of the same suppliers that serve the U.S. military.

How is the industry changing?

New technologies are expanding the range of companies involved in defense. Autonomous systems and drones, space-based sensing, software, AI and advanced manufacturing are drawing companies from outside the traditional defense industry. Some newer firms build products with their own capital and sell finished systems, rather than waiting for government-funded development contracts.

These changes connect defense to other industries. Satellites and launch services link it to the space economy. Semiconductors, computing and AI tie it to the AI supply chain. Robotics and autonomy overlap with the developments described in our article on humanoid robots.

How can investors think about defense supply chain exposure?

Defense companies differ widely in their economics. Primes earn revenue on large, long-term programs, often under cost-plus or fixed-price contracts that carry different risks. Fixed-price contracts can expose a contractor to losses if costs rise. Suppliers deeper in the chain may benefit from higher volumes across many programs, but they can be smaller and less diversified. Shipbuilders and munitions producers face capacity and labor constraints that affect how quickly they can increase output.

Useful questions include how much of a company’s revenue comes from defense, which programs and customers it depends on, how its contracts are structured, how large its backlog is relative to annual revenue, and whether it is investing to expand capacity.

What are the risks of investing in the defense supply chain?

Budget and political risk. Funding depends on legislation, which can be delayed by continuing resolutions or changed by shifts in policy priorities.

Program risk. Programs can be cancelled, restructured or delayed, and cost overruns on fixed-price contracts can reduce profits.

Concentration. Many companies depend on a small number of government customers and programs.

Execution and supply risk. Labor shortages, materials constraints and supplier problems can delay deliveries.

Export and regulatory risk. Export controls and international sales approvals can affect foreign revenue.

Valuation. Expectations for higher spending may already be reflected in share prices. Investments involve risk, including possible loss of principal.

Frequently asked questions

What is a prime contractor?

A prime contractor holds the main contract with the government for a weapons system or program and is responsible for delivering it. The prime manages design, integration and testing and subcontracts much of the work to suppliers in lower tiers. Most major U.S. programs are led by a small number of large primes.

Why does it take so long to increase munitions production?

Munitions depend on specialized inputs, such as energetics, rocket motors and guidance electronics, often from a limited number of qualified suppliers. Expanding output requires new facilities, tooling, testing and trained workers, and each new source must be qualified. Funding commitments help, but physical capacity takes years to build.

What is multiyear procurement?

Multiyear procurement allows the government, with congressional approval, to buy a system over several years under a single contract. The longer commitment gives suppliers more certainty to invest in capacity and buy materials in larger quantities, which can lower unit costs. It also reduces the government’s flexibility to change quantities later.

How does NATO spending affect U.S. defense suppliers?

Allied governments buy many systems, components and munitions from U.S. companies or from joint programs. As NATO members increase their defense budgets, demand for those products can rise. Allies are also expanding their own production, so higher allied spending supports both U.S. and European suppliers.

What are critical minerals in defense?

Critical minerals are materials, such as rare earth elements, gallium, germanium and certain specialty metals, that are essential to defense systems and have supply chains at risk of disruption. They are used in magnets, electronics, sensors and armor. Governments are funding new mining, processing and stockpiles to reduce dependence on concentrated foreign sources.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. Companies in a single industry or theme may be affected by common economic, regulatory or technological developments and may be more volatile than the broad market. References to companies, governments or programs are for illustration only.