Energy costs hitting middle market on the bottom line

RSM McGladrey has released data gathered in the last ten days that shows global competition for raw materials and rising energy costs are driving up costs and substantially reducing the bottom line of middle market manufacturers and distributors more than they were just three months ago.

As a follow-up to the 2008 RSM McGladrey Manufacturing and Wholesale Distribution survey conducted in April 2008, the new survey polled the same respondents concerning expected price increases in energy, transportation, and raw materials. A majority of respondents were from private companies, offering rare insight into the strategies and challenges of private manufacturers and distributors.

"The impact of the rising cost of energy is rippling throughout the manufacturing and distribution sectors," said Tom Murphy, executive vice president of manufacturing and wholesale distribution for RSM McGladrey. "With at least 50 percent more companies expecting energy, raw material and transportation cost increases of ten percent or more, we can expect profitability to take a hit over the next several months as companies absorb these costs."

According to the findings, 48 percent of companies are expecting energy prices to rise by ten percent or more – 50 percent more than in April 2008. In addition, 43 percent of companies predict raw material costs to increase by ten percent or more, a 60 percent increase from April. For projected transportation costs, 52 percent of companies expect drastic increases compared to 20 percent previously – an astounding 160 percent increase from just three months ago.

"Various global demand pressures are contributing to increased commodity prices which are reflected in the raw material costs for many manufacturers and distributors," said Murphy. "Product costs are additionally impacted by the significantly higher freight costs driven by the cost of fuel."

While companies are taking immediate action to offset the impact of rising costs, RSM McGladrey also recommends that companies consider a long-term strategy to managing the structural cost changes being driven by the new realities in commodities pricing and transportation costs.

"The disconnect in the supply chain has the potential to cause a deeper fault line if companies are not prepared moving forward," commented Murphy. "This inflationary surge is not an anomaly – it's a sign of a new, long-term global cost environment. It's paramount that companies change the way they do business to survive now and thrive in the future."

Initiatives RSM McGladrey recommends to shield companies against rising energy costs include:

 

  • Turning to export markets as an alternative for growth.
     
  • Sourcing product through the global value chain to reduce import and material costs while maintaining product quality – including reconsidering domestic suppliers, which may be attractive options due to escalating transportation costs.
     
  • Implementing lean manufacturing – a key component of cost reduction under any circumstances.
     
  • Pursuing cost savings opportunities to curtail unnecessary expenditures.
     
  • Taking advantage of government programs and tax incentives to support efficiency efforts and boost cash flow.

Research Methodology

The RSM McGladrey 2008 energy cost survey was conducted the week of July 21, 2008 and includes responses from 357 senior level executives – including CEOs and CFOs – from small and medium manufacturing and distribution companies. This survey was conducted as a follow-up to the 2008 RSM McGladrey Manufacturing and Wholesale Distribution survey which polled executives in April 2008 and was recently released earlier in July 2008. The follow-up survey polled the same respondents on questions related to projected price increases in energy, transportation and raw material costs experienced between April 2008 and July 2008.
You can listen to an
audiocast of Tom Murphy detailing the new data.

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