Primary Arms

Brace for It…

Because here it comes. We’ve all seen prices skyrocketing. It seems that price hikes are impacting every facet of our lives from hamburgers to hot dogs and the Soldier Systems market isn’t any different. Several cause factors are resulting in an increase in manufacturing costs:

– The raw materials are made from petroleum products and their prices are on the rise

– Fuel surcharges on shipping of raw and finished goods

– The weak dollar

– The increase in the Federal Minimum Wage

One company has reported to me a 25% increase in materials costs. A technique to mitigate these rising costs is to stockpile materials but this is only a short-term solution if it is even possible in the first place. Tighter credit terms as well as material availability may not make this an option. Another point for manufacturers to consider is their designs. I recommend that they look at each design and eliminate excess material and processes as well as considering lower cost, alternative materials. Shipping costs will continue to rise so consolidating raw materials as well as finished goods into fewer shipments may help alleviate costs.

There is a little bit of light at the end of this tunnel. The weak dollar has made American products even more attractive to foreign buyers. Unfortunately, this phenomenon is mitigated to a slight degree by spiraling shipping costs. Additionally, as the cost of foreign products increase, the pricing edge they have long held over American made items will begin to diminish. I believe this factor will help US based manufacturers increase their domestic market share.

Make no mistake, tough times are ahead. Some companies may need to eliminate poor performing SKUs or reevaluate profit margins. Consumers will most likely avoid purchasing “nice-to-have” products and concentrate on more critical items. Military consumers will begin to rely more on issue items. Smaller manufacturers may want to consider tapping new ways to sell to the Government. I see room in the market for several small firms similar to the outdoor industry’s factory rep system that can interact with a network of vendors to facilitate micro purchases of Soldier Systems items for deployed units using contingency funds. While there are already companies doing this, including the prime vendors, someone with the right connections both within DoD down to the unit level as well as in industry could become very successful if they can control their overhead.

Those hit hardest by this high energy cost environment are companies providing equipment to the Government on firm fixed price contracts. This includes not only contracts with DSCP but also companies with products on GSA. While production costs climb, profit margins for these vendors will decrease. In some cases this will be disastrous as margins are usually tight to begin with in order to win solicitations.

Dual use companies, or companies that serve both Government as well as commercial clients will face little choice other than to raise the price point on their commercial products in order to recoup any losses they may face supporting Government firm fixed prices.

In addition to rising manufacturing costs there are two more factors that will affect the Soldier Systems industry.

– Tightening of the military budget

– Recent Soldier Systems items have been paid for primarily with supplemental dollars

Airplanes cost a lot more than boots and consequently get more attention from the military’s funding source; Congress. An aircraft manufacturer can afford a lobbyist and employ more people in a congressional district so naturally, when we are in a resource constrained environment, those items will get more emphasis. Except to the Infantryman who’s survival depends on his feet, boots just aren’t very sexy.

Although the military has done an outstanding job of improving the American Warrior’s personal equipment, it has been done with supplemental dollars and outside of the regular military budget. This means that when the supplementals go away, so do extra dollars for boots. Funding will eventually return to pre-war levels.

I do not believe that there is a single solution to these problems. Manufacturers and military outfitters will need to do a top to bottom evaluation of their operation and implement several solutions. If this environment lasts, and I believe it will, we will see a “culling of the herd”. Many companies who have prospered in the current environment may not be able to adapt.

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