Estimated reading time: 4 minutes

Nolan’s Notes: Feeling the Heat of Rising Input Costs

About 10 or 12 years ago, one of the family activities I engaged in with my children was hot air ballooning. At one point, my son and I even had student pilot licenses for them. My daughter would have had a license as well, but she wasn’t quite 14 at the time, which was a requirement to get a hot air balloon pilot license. Most of our time, though, was spent as volunteers on the ground crew. My kids were right at middle school age at a that time, so ballooning was a grand opportunity to teach physics, especially Newton’s laws of dynamics.

The typical recreational hot air balloon that you see at festivals and such, with a basket just large enough to hold two propane tanks and three or four people, has the capacity to hold about 90,000 cubic feet of air, plus or minus. Imagine that nylon envelope holding 90,000 basketballs. At first, that seems like quite a lot of space, all floppy and stretchy. Except those balloons are definitely not stretchy.

Current designs for hot air balloons were, believe it or not, developed by the U.S. military in the mid-20th century as a potential “silent entry” military use vehicle. Ultimately, the propane burners were too noisy and too bright for night use¹. But the general structure they developed became the modern hot air balloon. The structure starts with a metal ring, milled out of billet aluminum, that is about 18 inches in diameter. Attached to that ring are a series of fabric straps (like those in your car’s seat belt), which make up the vertical support for the balloon. In fact, the basket will attach to the opposite end of all these vertical trusses. Horizontal straps of the same material will wrap around the balloon, defining the general shape of the structure. Finally, the coated, air-tight nylon is added to enclose the shape defined by the straps. Everything hangs from the top ring; where the ring goes, so the balloon follows. That’s why you always see ground crews holding a rope that goes to the top of the balloon—they’re controlling the top ring.

To fly, the balloon’s pilot adds heat to the inside of the balloon envelope, creating lift through convection. Once the warm air is inside the balloon envelope, the nylon becomes rigid and remarkably inflexible. With 90,000 cubic feet of space to cover when heat is applied by the burner, there is a distinct lag time between applying heat and getting a response in the flight of the balloon. Thirty seconds isn’t out of the ordinary, in fact. Student pilots have a tendency at first to create a dangerous oscillation in the balloons’ flight by pouring on too much heat while the balloon is still reacting, and then being forced to let heat out of the top vent to slow the ascent.

Inflation and upward pressure are the perfect metaphors for this issue of SMT007 Magazine. The global economy, because of gigantic shifts in supply, demand, and distribution in the wake of the COVID pandemic, is on the rise. Demand for product is huge, as is the demand for upstream materials and components. Of course, we have labor shortages and wage pressures to account for. As a result, this rapid increase in demand, applied to a fixed-capacity supply chain, exerts tremendous upward pressure on pricing. It’s just like hitting the burner on a hot air balloon that heats up the fixed capacity of the balloon envelope and drives the whole contraption upward.

In this issue, we look at how these upward pressures on input costs are passing through pricing to your customers. Is there room in your margins to absorb these cost increases? Are there ways to change what you do or how you do it, so that you can minimize the price increases and possibly gain an extra level of competitiveness? How do you do your part not to overcorrect? While we explore these topics inside this issue, I also want to share some additional perspective.

In a recent conversation with I-Connect007, IPC Chief Economist Shawn DuBravac, noted, “If you look at the research that IPC is publishing every month, companies report that orders are up. But at the same time, costs are up, and profit margins are down. So, they probably haven’t raised prices as much as they should to offset higher costs.”

To use the balloon metaphor, we’re not done pouring heat into that balloon. DuBravac also states later in that conversation, “On top of that, I don’t think we’ve seen the end of price increases. Contracts needed to be rewritten. And companies needed to see if the cost increases they were facing were temporary or more permanent. Prices are up and companies will need to pass those forward. But I do think the rate of increase will slow.” One could conclude that DuBravac is speaking to the possibility of market oscillation due to overcorrections.

Of course, labor plays a part in this whole dynamic. DuBravac shares, "We’ll be more reliant on wage increases and business investment to drive growth. If you look at IPC’s newly released indices, the ability to hire skilled labor remains a major constraint for companies—at least over the next six months—so I don’t anticipate that to improve. In fact, most firms say that will deteriorate over the next six months. My rough estimate is that we have nearly 120,000 open jobs in our industry in the U.S.” 

References

1. Historical development of balloon flight, Britannica.com.

This column originally appears in the February 2022 issue of SMT007 Magazine.