Military Contracts: Steady Revenue in Tough Times

May, 2009

The U.S. military is one customer every small business needs, especially in a recession — just ask Sharon Zambo-Fan, the president of Favorite Foods of Hawaii. She started her company just two years ago and is already selling her Asian-style meats and gourmet coffees in about 250 commissaries worldwide. This year, while most companies are shrinking or standing still, she’s expanding her product lines and is projecting 50 percent more revenue.

Local small businesses are getting a big share of the billions of dollars that the military will spend in Hawaii this year. Many are supplying the commissaries, but other local companies are selling technologies and services that were originally created for the civilian market — so-called dual use companies — while still others are winning construction contracts to build or renovate military housing.

However, as Zambo-Fan explains, success does not come without challenges. “When you work with the military, there is a process, and you need to be patient and flexible, in some cases,” she says. “There may be stricter guidelines and certifications and you need to go through the proper channels to get in. But I tell you, once you’re in, the sky is the limit.”

Charles Ota, vice president for military affairs for the Chamber of Commerce of Hawaii, says for some local companies, the military can offer a lifeline in challenging times.

Ota estimates about 50,000 active-duty military personnel are based here. Add 75,000 family members and about 120,000 veterans, and you’re looking at a very lucrative market. He says defense spending is probably the most stable source of revenue for Hawaii and its businesses.

“When tourism is down and the planes aren’t as full, our military personnel and their families still have to eat and shop,” Ota says. “And when the hotels are half empty, our soldiers still need homes and communities. That’s where small businesses in Hawaii can really benefit from the steady income.” However, he says, businesses shouldn’t focus on the military market only in tough times. “We should be giving them our attention all the time because they provide steady revenue year-round,” Ota adds.

The Defense Commissary Agency, where many military families buy food, operates 255 stores in 12 countries. Last year, DeCA sales totaled $5.8 billion. Oahu’s five commissaries alone brought in $235 million. That’s big business that Zambo-Fan wanted to tap. The first thing she did when she opened up shop was scour the local commissaries and identify holes in their selection. Then, she developed product lines to fill those voids. Her items are now sold in commissaries throughout Hawaii, Alaska, the Mainland, Europe and the Far East.

Zambo-Fan says the beauty of selling to the commissary is that when soldiers live in Hawaii, they become acclimated to the local culture and, in particular, the food. Once they deploy or get transferred to another base, they want to continue to enjoy local cuisine. That’s where Zambo-Fan found her niche.

“You couldn’t get things like shabu-shabu, sukiyaki and teriyaki meat everywhere in the world — until now,” she says, smiling.

Although her business has grown tremendously over the past two years, Zambo-Fan admits her entire staff right now is just her. With the help of brokers and contractors, Zambo-Fan somehow manages all of her worldwide transactions from her home office. “That just goes to show that anybody can do this,” she says.

Every year, the American Logistics Association, a nonprofit formed by manufacturers, distributors, wholesalers and brokers, holds an event at the Hawaii Prince Hotel for local companies to pitch their products to buyers for the military commissaries and exchanges: the Defense Commissary Agency, the Navy Exchange, the Army and Air Force Exchange, the Coast Guard Exchange and the Marine Corps Exchange. The show draws an average of 90 local companies each year. Zambo-Fan, who serves as the chairwoman of the association’s Hawaii conference, says that last year, DeCA approved about a dozen new local companies and nearly 200 new items.

“I think every company should definitely look into selling to the military,” she says. “For small businesses out there, I would pick up the phone, find out who the buyers are and make an appointment. Introduce yourself as a local company and bring your product in. Meet with the buyer and see if they’re interested. If they are, that’s the first step, and then from that point on, they’ll help you establish a contract. You’ve got nothing to lose.” Rapid Technology, a prototyping and 3D-imaging business, is one of Hawaii’s budding dual-use companies, applying their commercial technologies and services to the military market. What started off as a friendly conversation at a technology expo in 2006 resulted in a project that you’d expect to see on TV’s “CSI.”

The military’s Joint POW/MIA Accounting Command’s Central Identification Laboratory, which is responsible for the search, recovery and identification of U.S. personnel missing from past wars, is located at Hickam Air Force Base. According to Emil Reyes, Rapid’s CEO, once JPAC receives human remains, it tries to identify them within a strict timeframe before they must be interred. That’s where Rapid Technology’s 3-D printers come into play. For example, if JPAC’s lab receives an unidentified human skull, it could take a CAT or 3-D scan of it. Then, using one of Rapid’s 3-D printers, layers upon layers of an epoxy-based substance are printed until a life-size replica of the skull is complete.

“From there, the actual remains can be interred and can go through the processing and be laid to rest,” says Russ Ogi,Rapid’s CFO. JPAC can then use the 3-D replica to complete its forensic investigation. “For example, a person’s image could be superimposed over the skull to determine whether the facial features and skull are a match,” Ogi explains. “Although superimposition is not a new process, the computer software and technology that we provide has made it a much more quantitative process, whereas before, it was much more subjective,” he says. To his knowledge, this is the first time 3-D printing has ever been used in the field of forensics. “And it’s all being done right here in Hawaii. Pretty cool stuff, huh?”

Small businesses in the local construction industry are also benefiting from military spending, especially now, when private clients are cutting projects. Last year, Army Hawaii Family Housing executed more than $550 million in contracts, of which more than 65 percent were awarded to small businesses and more than 95 percent went to local companies. AHFH oversees the construction and renovation of military housing by private companies, plus its maintenance and property management. It has a 50-year contract with Actus Lend Lease, the Army’s preferred developer, and subcontracts with many small businesses. David Gray, the design and construction operations manager for Actus Lend Lease in Hawaii, says subcontracts can range from $20,000 to $10 million. Currently, the AHFH Project is about halfway through its initial 10-year development period, in which 5,388 new homes will be built and 2,506 homes renovated. The entire project is valued at more than $5.35 billion over the 50 years that end in 2054.

“There is a full scope of work that still needs to be done and a lot of opportunity for all different subcontractors to get a piece of the pie,” Gray says. The challenge, he adds, is that the bidding process can be long. “We want to make sure that the due process is followed properly and everyone receives a fair shot,” Gray says.

To bid for jobs, companies must be registered with Actus to get on its database of more than 1,000 subcontractors. At least once a year, Actus holds forums to add new businesses to its database. Gray says the qualifications are simple. “They have to hold a Hawaii contractor’s license in the specific trade that they’re bidding in, whether it’s a general contractor’s license or a subcontractor’s license, and just give some information on your (employee) turnover and perhaps other pertinent information, such as how your business is doing and then you’re on our database,” Gray explains. He says the bidding process can take up to two or three months before a contract is awarded.

Rapid Technology’s Reyes says he waited a year to win the JPAC contract — the company’s first military contract and its biggest job to date, worth about $100,000. “We were able to pay off a lot of bills with that money,” Reyes says, laughing.

Although he had to reduce his bid price slightly to win the contract, he says it was worth it to get Rapid’s foot in the door. “We had to look at this military job as part of our long-term business plan,” Reyes says. “We knew that if we didn’t budge on our price, the bidding process could take another year, so we decided it was smarter to be flexible and build up a relationship with the military, and hopefully that would open up more doors for us in the future.” Reyes likens the bidding process to filing your taxes. “It’s a lot of reading and paperwork, but it’s definitely doable.”

For newcomers looking to get into the military system, whether it’s on the food, technology or construction side, Zambo-Fan says find out what your company needs to do before it can do business with the federal government. Find out where you need to be registered and get those preliminary things done first, she says. “Call the different agencies, or find someone who’s completed the process before and have them walk you through it.”

The next step, Zambo-Fan says, is to familiarize yourself with how the different military agencies function. “You have to understand that you’re playing by a new set of rules,” she says.

For food, that means vendors are responsible for fully servicing their products — monitoring deliveries, following proper food-safety protocol, merchandising and doing product demonstrations.

On the construction side, Actus’ Gray says the workflow on a large neighborhood project is significantly different for workers who are accustomed to building one house at a time. “The work is more like a big assembly line,” he says. “We could have up to 800 workers a day, so deadlines are extremely important.” But, he says, once you get familiar with the environment, it’s like any other construction site.

The Chamber of Commerce’s Ota says military partnerships have helped many local companies profit and build their brands. “Take Hawaiian Host, for example,” Ota says. “They’re big time, and they started off as a small little company, too. The bottom line is: We need the military and the military needs us. If you’re a small business out there that can provide quality and service, this is definitely the place you want to be. It doesn’t matter if you’re selling cookies or if you’re a skilled laborer. The military adds balance to any company.”

Useful Web sites and resources:

Defense Commissary Agency:
www.commissaries.com

American Logistics Association:
www.ala-national.org

Central Contractor Registry (to register to sell to the federal government): 
www.ccr.gov

Actus Lend Lease:
www.actuslendlease.com

Favorite Foods of Hawaii:
www.favoritesofhawaii.com

Chamber of Commerce of Hawaii:
www.cochawaii.com

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