Maturing generations have a tendency to view price inflation as a symptom of the modern age. With a tear in their eye, they recall the days when a piece of rock candy was a few cents, and the most expensive car a wealthy individual could possibly afford was a fraction of what a Toyota Corolla costs today.

This is, of course, an oversimplification of the concept of price inflation, but it’s an accurate depiction of how professionals across all manufacturing industries feel watching component prices increase year-over-year. Price increases, alone, however, are not enough to blame inflation as the primary cause of financial strain. The goal of an economic body is to moderate price inflation to where costs rise and fall in perfect proportion to the value of the national currency; in theory, while that Corolla may look more expensive today, buyers should be spending proportionally what they would have at any point in the past. It is only when this ratio is disrupted through other economic factors that buyers begin to feel the pinch.

In today’s aerospace industry, that pinch is feeling more like a MIL-grade vice grip.

According to the Bureau of Labor Statistics, the US Producer Price Index for Aerospace Product and Parts Manufacturing is at 230.40, a net increase of 1.10 percent from last year. While in itself this is not an egregious increase, look a little further and you’ll notice that this is a whopping 11.7 percent increase from 2010. This is a significant issue, and one that the aerospace industry has been aware of for years – even if proactive in-house strategies for coping with it are limited at best, and non-existent at worst.

What’s Responsible for the Rapid Price Inflation

Aerospace manufacturing does not operate on the buyer cycle other tech-based industries are known for. It is expected for Apple to release a new smartphone annually, for example, and it is equally expected that there is a Day 1 consumer pool substantial enough to make such a business model worthwhile.

Compare this model to an aerospace OEM such as Boeing, who this year celebrated the 50th anniversary of their landmark 747 design. While updates and enhancements have been made to navigation and electronic equipment since its introduction, the base design has essentially been left unchanged since 1960. As of today, there are 547 of these aircraft still in regular use, and each has a service life of roughly 30 years or 165,000 hours. A newer model Boeing 777 costs approximately $320 million, but even a price tag that significant cannot sustain a 30-year buyer cycle for any component manufacturer involved. Instead, Tier 1 and Tier 2 suppliers must focus their year-to-year sustainability on providing aftermarket parts and components needed for OEMs to honor long-term service commitments.

This model, however, is dependent on a consistent, predictable marketplace. As the economy has improved and airlines are posting record profits as a result of efficiency improvements on all levels, Boeing and Airbus are seeing an unprecedented demand for their products. By mid-2020, Airbus expects to ship at least 410 new aircraft to customers, with the intention to maintain regular production of approximately 70 per month (a figure so high studies have been commissioned to measure this expectation’s feasibility). This is good news for aircraft manufacturers, but production increases also require suppliers to ramp up their output to match. When demand is not met, prices skyrocket, and supply chain disruption becomes widespread across the industry.

Not only has component production been slow to react to customer needs, but suppliers have also struggled to implement the infrastructure required to do so, such as integrated software and automated machinery. These improvements require upfront investments many have been unprepared to make, and as a result, their rollouts have been spread over multiple years. This leaves their OEM customers to procure inventory in a competitive, inflated marketplace their budgets are not prepared to handle.

To cope with price inflation, which is not projected to improve, OEMs have taken to adopting two separate solutions: one for completing current product lifecycles, and another to proactively ensure future ones.

1. Last Time Buys

Not long ago, the U.S. military specification controlled the electronic components placed into all commercial and military aircraft. While costly, it ensured the availability of critical components over extended lifecycles. This all changed in 1994, when the Secretary of Defense mandated that defense suppliers seek out commercial-off-the-shelf (COTS) solutions for their designs to give a strategic boost to the economy while cutting costs. In that respect, the initiative was a success – but in return, this also meant that military and commercial aircraft manufactures would now have to compete with other industries who require the same base components and semiconductors. Where aerospace OEMs were once insulated from the swings of supply and demand, now they run the very real risk of not being able to source the components they require.

Even more concerning is the fact that, despite its size, aerospace does not have enough influence to be a primary driver of the electronic component market. According to Boeing, over 93 percent of all components are purchased by companies operating in computer, telecommunication, and consumer industries. More recently, automotive and IoT industries have pushed demand to record highs, resulting in a market-wide component shortage that all OEMs are feeling.

The only true solution to this issue, that could be implemented today, is a commitment to securing enough inventory through a last time buy to support their aircraft at beginning of the buyer cycle.

The sooner the electronic inventory can be purchased in the process, the better; electronic component suppliers are going to concentrate on where there is the most profit potential, and that is in other industries that demand smaller, faster, more efficient components with each new product launch. With component lifecycles shortening by the year, the chances of a critical electronic component being available for longer than three or four years (let alone the lifespan of an aircraft) are almost nonexistent. If the inventory is already in hand ready to use when needed, however, then there is no need to worry about what the market does.

Last time buys used to be looked upon as a last resort – an inconvenient reaction to the unexpected. Now, they need to be considered an essential piece of any aerospace OEM’s inventory management strategy.

2. Vertical Integration

While last time buys are the choice to overcome inflation today, many OEMs are also looking toward securing the lifecycles of future products, as well. This is exactly what vertical integration could provide, and future strategies built on this premise will play a key role in the future of the industry.

Boeing, in fact, has made strides to take matters into their own hands with a vertical integration initiative designed to bring more component suppliers under their umbrella, most recently auxiliary power unit supplier Safran. No technology is off the table, and reports indicate that Boeing is carefully analyzing the value of each component in their aircraft from wings and seats down to flight-control computers.

For suppliers such as Spirit AeroSystems and United Technologies, this presents something of a nightmare scenario. OEM customers such as Boeing are learning to live without them – and without additional offerings that can match what in-house authorized suppliers can already provide, they run the risk of becoming obsolete as far as aerospace is concerned. A commitment to transparency equal to or greater than their OEM customers is a must, or by nature, the market will leave them behind.

How is your company prepared to counter price inflation? If you have an initiative, story, or analysis to share, let us know in the comments below!