From: Steve Grammont (islander@midmaine.com)
Date: Tue Aug 26 2003 - 13:33:28 PDT
Hi Mark,
>I don't understand where the 8x multiplier comes from.
By comparing how much the Army would pay us vs. how much we could make in
the civi market without the military. The number was not plucked out of
thin air.
>It seems to me that if
>you sell one widget to the government, that's at most one widget that you
>wouldn't sell to another consumer, many years later, after the
government has
>beaten the tar out of that widget and released its well-used remains in a
>surplus auction. Even with quantity discounts for a big government purhcase
>vs. a bunch of small civilian purchases, I don't see how an 8x price
>multiplier is reasonably justified. I always thought that the "time value of
>money" worked the other way around, i.e. "give me $1 now for the $8 that I
>might not make 10 years from now", vs. "give me $8 now for the $1 that I
>might
>not make 10 years from now". But then, I'm just an engineer; I don't
>understand economics.
:-)
It is indeed quite complicated and depends greatly on if the item is an
"off the shelf" item or something purpose built for gov't specifically.
It also depends if the item is of a physical nature of of an
intellectual nature. Factored in is also the costs of ramping up
production for the item in question and how that investment can be
compensated for over time (i.e. a one shot order might not be worth it at
a given price). Risk, hassle of doing business, previous
failed/underperforming arrangements, etc. also factor in. Doing business
with the government is not all that easy.
Fundamental economics means that the more specialization demanded by the
customer, the higher the costs and therefore the higher the price. The
price can be influenced by "in kind" arrangements which one or the other
party finds value in. In the case of AM General, it is to not have the
stuff resold on the civi market. In theory the gov't received a better
price in exchange for this restriction.
In my case it was the opposite... we gave the gov't a much lower price
because we didn't want them to restrict *us* (under some flawed concept
of national security). Give and take. If the government took, we would
have to take in return. In theory this is the same thing in reverse with
AM General.
If all works out as it should, the gov't receives the best price for the
goods being purchased. There might be restrictions on one party or the
other, but that is horse trading in order to get that best price. This
is basic Captialism and it works fine for the most part.
Also note there is a HUGE difference between purpose made items (like
Humvees and my product) vs. "off the shelf" stuff. What you described is
how things should work for such gov't purchases. And for the most part
it does. This is why there is, yet again, another move by the US
military to purchase slightly modified vehicles instead of ground up
purpose built ones. Industry has lower costs/risks, government gets a
better price, and the taxpayer pays much less. Doesn't always work that
way (Humans have a tendency to frig things up <g>), but by and large it
does work.
Steve
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