With the U.S. having entered an inflationary period, concerns have emerged about its impact on defense spending. In an already tight component market, this inflationary pressure could bring about new sourcing challenges for the U.S. DOD.
In May of 2022, the annual inflation rate in the U.S. unexpectedly hit 8.6%. According to the Bureau of Labor Statics, this was the highest level since 1981. Impacts of inflation are broad and unpredictable, and the defense supply chain is not immune. Strategizing and preparing for electronic component sourcing during times like this takes on another layer of complication during a period of economic uncertainty.
The current Congressional budget adjustments seem poised to account for inflation
The current high rates of inflation put the U.S. military budget in a financial situation not seen in recent decades. Whether or not the current military budget for FY 2023 is sufficient to compensate for the uncertainty of inflation remains unknown.
That’s not to say there aren’t on-going discussions addressing the impact of inflation – in fact, it’s quite the opposite. The crux of the debate over defense spending is that the budget does not consider the continued high rate of inflation. Some experts argue that the current budget is based on an estimate of inflation that is now outdated, and it’s unlikely that inflation will drop significantly enough for the rates in the proposed budget to even out. The concern is that budget shortfalls can put both growth and modernization at risk.
On the other hand, some argue that defense spending proceeds in its own lane and is largely unaffected by the markers of inflation hitting commercial markets. Recently, the House addressed the shortfall concerns with a newly passed $37 billion spending authorization, on top of the $773 billion requested, to cover inflationary increases. The Senate and House will finalize the overall amount in the final bill, but the Senate Armed Services Committee has already backed an even bigger increase of $45 billion. The risk of a continuing resolution capping spending looms if the final bill is not passed before October 1.
Until inflation cools, keep cost reduction at the forefront when sourcing electronic components for military use
Prioritizing cost reduction throughout a program’s life cycle helps to accommodate changes in inflationary dynamics. Reducing costs requires a strategy that is comprehensive and sustainable. Focus not just on the elimination of costs, but the streamlining of processes and the identification of possible alternative parts. Further, bringing teams together on cross-functional projects could help unlock previously unseen productivity and remove bottlenecks and redundancies. With ambitious plans like the rollout of AI in focus, digital tools will also be significant contributors to future cost reduction efforts in areas such as reporting, development and risk assessment.
While on-shoring is expanding, the fact remains that increased domestic productivity won’t meet all of the vast needs of supporting U.S. military technology. In response to the uncertainty of inflation, embracing a cost reduction approach, enhancing inventory management practices, planning for obsolescence, and expanding sourcing options offers enhanced stability—regardless of uncertain outside market forces.
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