Aerospace OEMs and Overcoming the Challenge of Annualized Budgets
As the new year approached, one of the last stories of 2018 reported that the Pentagon awarded Boeing a $400 million contract to cover engineering services for their B-1 and B-52 bombers. This is but another feather in the cap for what amounted to a landmark year for Boeing, who won more than 20 contracts in 2018 amounting to approximately $13.7 billion.
But while it’s easy to assume that these mass sums are provided in the form of an upfront check, government contracts of this nature come with caveats that present unique challenges for their benefactors, which, given the current state of the market, have been increasingly difficult to adhere to.
First, the budgets for these contracts are not distributed from the government all at once, but on an annual basis that must be approved annually for as long as the contract remains in effect. As a result, aerospace contractors such as Boeing, despite the 25 to 30-year lifecycles of their products, can only purchase the necessary critical components they require on an annual basis. For some inventory such as fasteners and connectors, this is not a significant issue, but the assumption that these parts will be available for several years does not apply to electronic equipment.
During the 1980s and the military buildup that reflected the era, suppliers produced highly specialized, “mil-spec” components that were only available to a single customer beholden to the federal government. While expensive to maintain, it ensured that the inventory in question, insulated from market competition, would be readily available when needed, for as long as needed.
Fast forward to the 1990s and beyond, however, the transition to commercial-off-the-shelf (COTS) components forced aerospace OEMs to enter the same markets as automotive and consumer industry OEMs. With a wider consumer base to rely on, electronic component suppliers no longer have to depend solely on a single market, and can ebb and flow production offerings based on where the profit potential lies.
Today, that potential is squarely in the automotive, IoT, and consumer markets, and aerospace OEMs have been forced to adapt to a new reality their business model is not equipped to accommodate – a reality that can see the critical electronic inventory they require transition toward obsolescence unexpectedly, and far sooner than any of their products require.
This reality flies directly against the nature of how aerospace OEM budgets must be approved annually, without any regard for inflation or potential obsolescence issues. In any other market, an OEM would have greater control of their cash flow to dictate more capital to inventory procurement however they see fit – but in aerospace, if the inventory is not already on hand, there’s little choice but to roll the dice and hope fate is on their side that year. The average lifecycle of an electronic component can be as little as a year depending on what OCMs choose to produce, and for an OEM who requires components to service aircraft for 30 years, it’s not a matter of if obsolescence issues occur, but when. The danger is so great that only a few EOL notices are enough to compromise an aerospace OEM’s annual budget for an entire year.
The Department of Defense needs to understand that the growing danger of obsolescence cannot be resolved on a short-term, year-to-year basis. The only real solution that can get to the root of the issue is to authorize multi-year funding for the purchase of end-of-life inventory.
Without such authorization, contractors are forced to enter the open market, which results in significant financial strain for all parties involved. Many of these end-of-life components at this point in their lifecycle are only available through non-authorized resellers, who not only drastically inflate the component price, but often conform to less-than-desirable transparency standards. This has led in a steady rise in the use of counterfeit components in much of the government equipment in operation today, most of which can only be detected after the component breaks. By the military’s own estimation, as much as 15 percent of the spare and replacement parts used to service weapons, vehicles, and other equipment is counterfeit. A strategy that causes more problems than it solves is hardly a strategy worth implementing.
But even if such authorization was granted, a strategy that requires manufacturer’s committing to large orders of inventory upfront in the name of long-term business continuity is still no small matter. If OEMs are already struggling to source obsoleted components in a competitive marketplace, the idea of freeing up the capital required to purchase all the electronic capital necessary for a 20-plus year run in a single transaction sounds daunting.
A Partstat solution, however, is not a traditional method. Instead of compromising their restricted annual budget on either sourcing through authorized resellers or stockpiling inventory sufficient for 30 years upfront, we offer our customers a solution that allows them to obtain all the electronics they require without using a dime of their own working capital. Instead, Partstat will purchase the components on the customers’ behalf using our own capital. Adopting such a strategy has almost too many benefits to count – a locked-in price immune from inflated pricing caused by market competition, guaranteed authentic components sourced direct from the manufacturer, and a level of business continuity that all but eliminates any risk associated with obsolescence.
And as an added bonus, any transaction done through Partstat qualifies as a set-aside for a small business, fulfilling the requirement aerospace OEMs have to dedicate a portion of their annual budget to business with specific designations (minority-owned, veteran-owned, designated small business, etc.).
An annualized budget dictated by a government contract no longer has to be limiting. Instead of aerospace OEMs being forced to survive year-to-year on a razor-thin margin, a Partstat solution puts spending power back in the customer’s hands, insulated from the volatile whims of a competitive electronic component market. That’s where it belongs, and exactly where it should stay.