Marketplace Update: Military Uniforms: Defense Contractors on Risky Rollercoaster

Companies tough out sudden surges and drops in demand.

military uniform producers are pushed to their limits in the face of erratic upswings and downswings in demand from the U.S. Department of Defense (DOD). Caught up in a dicey juggling act, they must keep their operations lean enough to withstand sudden cutbacks in defense spending, yet be robust enough to ramp up quickly to ship big orders to Iraq or other wartime hot spots on short notice.

Military procurement has been on an upramp since 9-11, but has peaked and appears to be on the downturn. For many types of sewn goods, the military has ordered much more than it needs, and is dramatically downsizing orders to adjust. "All these contracts are out there, and as the war starts winding down, everyone starts putting the brakes on," says Bill Kernodle, site director for Clemson Apparel Research, which is partially funded by the DOD.

To make matters more complicated, as military units return home from global missions, they are turning in some of their unused equipment, including uniforms -- creating a supply source that is difficult to forecast in planning inventory.

The military has a real dilemma at the moment -- to scale things down without destroying the industrial base, says Kernodle. "Once it is gone, it cannot be revived, and offshore sourcing will be far less responsive and more costly overall," he says.

The uncertainty about the future of government funding puts defense contractors in a very difficult position because they must set aside a certain amount of their capacity for contracts they have been awarded, says Rick Cippele, president of Selma, AL-based American Apparel (a defense contractor with no affiliation to the L.A.-based T-shirt producer by the same name).

The Defense Supply Center Philadelphia (DSCP), which procures apparel and other supplies for the DOD, had to field contracts before Congress funded its actions more than 18 months later. "Our government is in a real conundrum -- they have to meet their need, but don't have the funding to do it," says Cippele. "That has created a lot of problems for people in the industry, because your capacity has to remain ready, willing and able to perform. The uniform still needs to be there on Monday. The fact that it isn't funded until a year later doesn't change that fact."

Today's DOD contracts have enormous differences between the guaranteed minimum and maximum quantities, with no assurances. In that regard, it's become more like the commercial apparel business. Many contractors have been hit hard by plummeting demand.

Employment at Fort Dodge, IA-based Hawkeye Glove Manufacturing, which relies on defense contracting for all but 2 percent of its business, tripled during the past two years. But there has been a severe downturn since December. "When the government overestimates demand, they require you to reduce your minimums, which has happened quite often," says Jim Rodenborn, president. "It comes and goes. You put all your eggs in one basket, and it's been a nice ride for a couple years. It comes down to keeping personnel. You do a good job for the government, but you do it at the expense of your employees."

Hawkeye's survival strategy is to aim for highly specialized items that require intricate manufacturing processes, such as the firm's intermediate cold/wet glove worn by soldiers in Afghanistan, and summer flying gloves for pilots. There is less competition to make these products.
Although Baltimore-based Maryland Clothing landed a four-year, $31 million contract to produce 480,000 Air Force dress coats, the first orders have not been released yet, reports president Gus Piccinini. The 80-year-old company won its first defense contract in 1989 and has worked exclusively for the military ever since. "My employees have been laid off for the last six weeks because the government is reducing [its] stock," Piccinini told Apparel in late April. "Most people don't realize that it takes eight to 12 months to train an operator. My greatest concern is: How many employees will I lose during this layoff?"

The best of times, the worst of times
With contraction of commercial demand for U.S.-made apparel, it has become survival of the fittest among those still in the game. "It's a myth that it's easy being a government contractor because [the government] can only source in the U.S.," says Fred Isenberg, vice president of sales for Miami Lakes, FL-based New Generation Computing (NGC), which supplies software to several defense contractors. "If only so much apparel [capacity] is left in this country, then these are the sharpest companies out there to have stayed in business throughout this cycle."
During the past two years, some apparel manufacturers have seen an explosion of growth because of increased demand for uniforms and military gear during wartime, and the introduction last year of the U.S. Army's active combat uniform (ACU), which triggered $3.5 billion in "buys" by the government to be completed by December 2007. In fiscal 2004, the Defense Supply Center Philadelphia (DSCP) procured $2.6 billion in textile/clothing products, and procurement this year should hit $2.5 billion, compared with typical peacetime procurement levels of about $1.5 billion.

But with the confusion over demand and delays in funding, this projection doesn't automatically give contractors much confidence.
"You have a very stressed manufacturing community, which at the same time is compressing in terms of deliveries and how quickly things need to be turned," says Isenberg. "They are going through some good times right now, but it's tough times, and they face probably the most uncertain future of anybody. The only thing certain is the contracts they have in hand that the government has signed off on."

Defense apparel supply chains are much longer than commercial supply chains in part because items and many components are unique to the military. "There is no secondary market for these products, and manufacturers are reluctant to produce at their own risk," says Kernodle. "In military procurement you must have the money and reserve it when you make a commitment. The military is always short sufficient money, so they must apply the available money to the most urgent need. That prevents a smooth flow of orders, causing stops, starts and long production lead times."
Then, a wartime surge in demand may strike. "It is very difficult for the industry to gear up and produce in the time and quantities the military needs when the lines are cold," says Kernodle. "But our industry always manages to work miracles, because it's a lot more than just business in wartime."
As Hawkeye Glove's Rodenborn puts it: "The question is whether the military will commit to sustaining their production and employment base on a consistent basis. The government can put you in business or put you out of business."

Cary, NC-based glove maker Polygenex isn't as reliant on military business as Hawkeye. Defense work accounts for about 5 percent of the firm's production. But it could become a bigger piece of the pie if its new warm-weather combat utility glove is tapped as a standard issue item. "We've had very large military orders for our heat- and flame-resistant gloves, and that has made a big, big impact to our bottom line," says Joseph D. McGarry, president and CEO.

IT & Automation: To implement or not to implement?
Companies surviving from contract to contract are reluctant to invest in technology, in some cases because they must keep overhead low to compete in the fierce bidding for military contracts, says Kernodle. "We still have a large number of commercial sewing companies on their way to going out of business," he says. "They see this military work, which has been a huge amount of work in the last year or two, as a way to survive. So the military has been receiving a lot more bids for every item, sometimes by a factor of 10 or more."

Many contractors are bidding extremely low just to survive. "That in itself is holding the investment in technology and people to an absolute minimum in this industry, which is going to hurt it drastically in the long run," he says. "If you are competing with companies that are just trying to stay alive, this gives you little room to win contracts and invest."

Dan Pittman, director of engineering and support for Eton Systems, says he is seeing tolerance for investment in operations among some of the contractors who have won the prized five-year production contracts for the Army's new combat uniform. These firms are investing in automated materials handling and shop floor control systems to support lean manufacturing practices, says Pittman, whose firm recently created a business unit to provide factory automation solutions for military apparel and textile makers.

Pittman says the longer-term ACU contracts have given manufacturers confidence to invest not only in unit production systems such as Eton's but also in automated pocket setters, hook-and-loop fastener tacking machines and other technologies to reduce their direct labor costs.
Such investment makes contractors more appealing to the government, which is looking to shorten supply chains, and allow smaller contractors to get a foot in the door. "In the past, the government has always gone for the lowest bid, but they are now looking for 'best value,' which means they also want to be sure you can deliver quality product on time," Pittman says. "It was an old boys' network, but those doors have been broken down with technology. [New players] are going in and offering a better price and faster delivery."

Investing in an Eton unit production system saved Tennessee-based Tullahoma Industries enough in direct labor to allow the firm to be the lowest bidder for a five-year, $27.6 million contract to make both coats and trousers for the Army's ACU. Tullahoma is making 570,000 pairs of pants and 342,000 coats annually. "This caused our business to grow significantly -- we will be adding 100 to 125 operators and increasing sales by at least 50 percent," says Richard Davenport, president.

When Tullahoma's long-time contract for the white Navy jumper ended because of the Navy's rollout of new styles, the Eton system enabled Tullahoma to switch gears. "We are taking that system and converting it for the ACU coat, which will help us with the start-up cost," says Davenport. "This will have a significant payback over the next year or two."

Kernodle says he is aware of only a handful of contractors that are investing aggressively in lean manufacturing, betting on dramatic cost savings to enable them to offer rock-bottom bids -- a smart move, but a true gamble. "The unknown at this point is: Are they going to be able to make these new manufacturing practices and technology work the way they expected? It's a pretty risky step, to bet your business on it," he says. "But that's the only way they see of getting through this and still being around on the other end."

Several major defense apparel producers have made seven-figure investments in NGC's real-time shop floor control systems, says Isenberg. "Most factories around the world do not have these systems. Basically these American government contractors are the ones buying them," he says. "The boom in demand enabled them to make this investment, so it was a no-brainer for them. If there is a scale-back in business, their investments will already have been paid for."

Meanwhile, the DOD's RFID initiative remains in its infancy, with pilot testing at the pallet and case level. As in the commercial market, the greatest supply chain advantages are expected to materialize when RFID reaches the item level. "That type of RFID is not into the military yet -- it is way too early, even though the military is the leader in testing it for logistics," says Kernodle. "It's still too costly and too early for it to have an impact."
While RFID may still be in its early phases of implementation, the DOD's Rapid Fielding Initiative (RFI) is well underway. The goal of the RFI is to speed supplies to soldiers in the field. Contractors taking part in the initiatives are faced with a major challenge. They must be able to gear up a dwindling base of experienced cut-and-sew employees to provide deliveries on short notice.

To this end, Hawkeye Glove has reopened some glove factories recently closed by commercial glove producers that moved their production offshore. "This has significantly reduced training and conversion processes in addressing RFI requirements," Rodenborn says.

The main problem in the military supply chain is with textile manufacturers, which are much smaller in number than their counterparts in apparel manufacturing, says Kernodle. "Most military items perform better than commercial items primarily because of the fiber and finish," he says. "There are a very limited number of fabric producers and finishers, so that's where the real constraints are in the supply chain, especially if it's a military-unique product all the way up to the fiber."

The bottom line: It's in the government's best interest to make sure that its U.S. supply base stays in business, says Rodenborn. "We are the only country in the world that outfits our soldiers from head to foot with our own domestic production, and that is a tremendous strategic advantage," he says.

STACI KUSTERBECK is a free-lance writer based in Long Island, NY, who frequently covers business topics for trade and consumer magazines.