An Object Lesson In The Fragility Of The Modern Economy

I’ve started shooting a fair amount again this year (as karmic balance for my pro-Obama vote, I bought a Kimber 1911 and a Springfield M1A for Kwaanza, as well as a Kahr P9 for TG); and I’m recently stunned by the price of ammo (and shooting enough that it matters).

Bulk (200 – 1,000 rounds) .308 rifle ammunition is over $1.25/round for Federal Match and well over $0.50/round for bulk military surplus (about 2x what I’m used to paying). 45ACP is $0.50 in bulk (over 2x what I’m used to paying).

Now before you get concerned that by buying 500 – 1,000 rounds at a time I’m stocking up for the Zombie wars, note that a morning’s serious practice with the handgun can use 200 rounds, and that a morning with the rifle is 50 rounds easily.

(And as a result of burning all this powder, my shooting is getting back to decent, except for my one bad pistol habit – lifting my head to see where the shot went, which pulls the rounds low.)

But I just was sent a great blog post on why ammo is so spendy and one that ought to get us all thinking about the modern economy.

Supply Chain Management 101: on the ammunition shortage:

…Ammo makers, too, know with fair certainty how much they’re going to sell to the wholesalers during that period, and sign contracts for the purchase of sufficient components to produce those products. They don’t typically keep large stores of components on hand, as standing inventory is expensive, so components are delivered on a “just in time” basis.

The suppliers of those components do the same thing with raw materials; again, ammunition is a stable business, which allows them to forecast with pretty good accuracy the stuff they need to make the components they sell. This pattern repeats itself on up the chain, all the way to the people who mine the stuff necessary to make a single cartridge.

Along comes a huge, sudden spike in demand. Retailers all over the country are suddenly swamped with ammunition purchases, and quickly call their suppliers to get more. The first few calls are rewarded with replacement stock, but soon the wholesaler’s shelves are bare too – their entire year allotment of ammunition is gone in just a few days.

Read the whole thing, as they say…his final paragraph is worth noting as well:

The supply chain is simply empty, all the way up to the people who mine the raw materials. It’s going to take time to replace all the links in that chain, and it’s not because of the war in Iraq/Afghanistan, The Joos, FEMA, the CIA, a secret agreement to implement gun control through ammo availability, or any other silly theory you may have heard. This is a textbook example of what happens when an inelastic supply chain, composed with scarce “just in time” inventories, meets insatiable demand. It’s not sexy or intriguing, but that’s the way it is.

You know what’s scarier? Your food comes to you the same way. Imagine what would happen if…

Or if two of the big container ports were closed for two months…


9 thoughts on “An Object Lesson In The Fragility Of The Modern Economy”

  1. The supply chain explanation makes a lot of sense, and would explain some things I’ve observed, e.g., that finished ammo became scarce before reloading components spiked in price and then become scarce as well. There’s still product getting through: I was in the big Cabela’s store near Reno a couple of weeks ago, and they had stock in most popular rifle and pistol calibers, and in fact quite a lot of choice in shotgun rounds. This likely means the big manufacturers are favoring the volume buyers in their allocations.

    Anyone doubting this kind of things can easily happen should check out the “MIT Beer Game”: an old supply chain simulation updated for the Web. I ran into this first in grad school in systems and simulation classes, and again in some sort of management training or other. It was even more fun the second time since I knew what was going to happen.

  2. I believe Asimov talked about this in ‘Caves of Steel”. I read this along time ago, so I’m paraphrasing here.

    Basically, this is the predictable outcome of large centralized populations. Eventually, the demand for any particular necessity (food, water, fuel etc) is so high that any break in the supply chain creates almost immediate shortages.

    As population gets larger, the time that society can allow a supply shortage gets exponentially shorter.

  3. Interesting point, Alchemist.

    I’m wondering if the real variable is complexity of the system, rather than population size, due to dependencies. Though the 2 do tend to co-vary.

  4. One other thing is the market hates what would normally be called waste. And a vast pile of unused inventory is waste.

    Modern supply-chain management shrinks this sort of waste down to a bare minimum. Not having to carry large inventories also means prices are usually lower than they would be if everyone in the chain had to store and finance big inventories.

    The tricky part is if you do have sudden demand shocks to any input to production, low inventories mean immediate shortages and price spikes.

    Not sure if this generally indicates “fragility” – going to an inventory-heavy approach would raise producer prices, which causes its own problems – but it could mean that for nationally sensitive items such as war material, we may want to have “strategic reserves” for the raw materials needed to make ammo, etc.

  5. Well, the last major supply infrastructure disruption we had was the Katrina hurricane impact on the oil industry, which resulted in some lessons learned.

    First, the feds did something really smart, the EPA temporarily relaxed the rules on fuels back to, essentially, if it burns in their engine you can sell it, and recommended to the states that they do the same (and if I recall correctly basically every state except California followed suit). People outside the industry may not realize, but the refined oil/gas market is really regionally segmented due to the crazy quilt of various federal/state/local regulations. This move basically saved the day all by itself. Not only did it open up inventories and refineries that wouldn’t normally be usable, but the psychological impact of giving everyone control over the situation again can’t be underestimated.

    The only thing that could have been better here, and the generalizable lesson of this, is if it had been part of a preplanned response strategy. As it was, a lot of our logistics command and control software went into cybernetic apoplexy over some of the stuff we tried to ram into it, and some of the record keeping probably wasn’t too synced with reality as a result. Being able to factor that into the contingency emergency planning would have been nice.

    Second, the media has got to be more responsible (yeah, I know, good luck with that). Ironically, most of the areas that actually did have supply shortages weren’t actually areas experiencing supply shortages. I’m thinking particularly of southern Tennessee and Kentucky, where the local media ran (false) stories of local supply shortages which proceeded to generate local supply shortages as people started hoarding. There was plenty of supply, the problem was that only enough transportation resources for normal use had been left in place and the rest were off hauling fuel across regions (thanks to the EPA rule waiver).

    The shortage persisted until basically the oil companies got tired of the negative publicity and pulled transport resources out of the affected areas and into the media affected areas. We ended redirecting tankers from Florida, which was REALLY touch and go for a while (we had stations selling dyed [off road] fuel products, mixing avgas and low octane, you name it), to have to go and put out the media induced disaster in Kentucky/Tennessee.

    Which brings me to my last point, you can actually get away with a lot of disruption to the supply chain IF you have enough transport capacity. Factories and mines can suddenly ramp up to full capacity, delay maintenance, have workers work overtime if the need is bad enough (and temporary enough), and your willing to throw enough money/run enough inefficiencies. What you can’t do is just whistle and have extra trucks, rail cars, ships, airplanes and their respective crews appear from nowhere. If you do have extra transport, the other problems can go away fast.

    If the military doesn’t maintain a rather large excess fleet of transport capacity in country, we probably should consider it.

  6. One related anecdote to inventories and “just-in-time” strategies…

    In the mid 1990s, a partner and I ran a little computer store and sold parts and whole systems on the internet. We were doing about $100K/month in sales (and we didn’t even have a “real” website).

    Anyway, one of the best markets at the time was selling RAM. Since RAM prices were continuously dropping, people figured out that if they took RAM orders – and billed people’s credit cards – they could take orders over the course of a week and fill them on a Friday, basically shorting the price of RAM for up to a week. It may not sound like much, but if you did $100K/week, you could make $1 or $2K/week doing this.

    Everything was fine until Taiwan – which is where most RAM came from in those days – was about to have an election and China shot missiles into the ocean to intimidate voters from voting for the Taiwan Independence candidates. This happened on a Thursday, and RAM prices doubled overnight. Since these price arbitrage outfits filled their orders on Fridays, they were essentially “short-squeezed” into oblivion. Some of them were lucky and hadn’t billed people’s credit cards, but others had and tried to cancel after the fact, which got them in trouble with VISA, which pulled their merchant accounts.

    We got lucky in that we didn’t play this game very aggressively, although others did.

    An aside: we _did_ make good money shorting computer prices by selling to local government. It took them so long to actually buy the computers they ordered that you could massively lowball the bid and still make a fat profit when you actually filled the order.

  7. One thing that makes the ammo shortage, than say a banana shortage, is there is very little practical limit on the amount you can store. A thousand rounds might fit in a shoebox depending on caliber, and it doesn’t go bad. So the only real thing that effect the demand, is cash on hand, and perceived demand. The latter can be driven up by the scarcity itself, if I can’t rely on getting ammo on the way to the range, buy in bulk to have feed the “habit” suddenly seems like a good idea, when before the closet might only contain what was left over from the last range trip.

  8. Very interesting and insightful comments, Treefrog & Foobarista, Loved this…

    bq. “An aside: we did make good money shorting computer prices by selling to local government. It took them so long to actually buy the computers they ordered that you could massively lowball the bid and still make a fat profit when you actually filled the order.”

  9. Hi Marc. I dropped by a gun shop for the first time in years and was surprised that all the shelves were bare of ammo. I have a P9 and a CZ75, and the last time I went to a range was about three years ago. (I lived in NJ for a couple of years, and never went to the range there.) I’m not really willing to blow this sort of money on 9mm ammo, but I do have a Kadet kit for the CZ so I can fire 22LR. Mostly I save money by shooting an Airsoft pellet gun. No recoil to cope with, so the practice has limited application, but it keeps me from getting completely rusty. Eventually the supply chain will catch up.

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