More Energy Hikes? CEOs, CFOs Think So

McGladrey survey of small-to-mid-sized company executives shows nearly half expect another 10-percent jolt, along with sharp pressure on profits.
Stephen TaubJuly 31, 2008

Small and medium-sized manufacturers are bracing for even higher energy, raw materials and transportation costs in the near term, a survey of CFOs and CEOs by accounting and consulting-services firm RSM McGladrey shows.

Nearly half (48 percent) the companies polled over the past 10 days were expecting energy prices to rise by at least another 10 percent over the next several months. This is 50 percent more than reported in a similar survey released by the firm just this past April. The latest survey is a follow-up to see what respondents expected in the new environment of cost hikes.

In addition, 43 percent of companies predict in the latest survey that raw material costs will increase by 10 percent or more, a 60 percent increase from April. When it comes to projected transportation costs, 52 percent of companies expect drastic increases compared to 20 percent in the survey three months ago — a 60 percent increase.

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“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. “The disconnect in the supply chain has the potential to cause a deeper fault line if companies are not prepared moving forward. 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.”

McGladrey recommends that companies consider several long-term strategies to managing the structural cost changes being driven by the new realities in commodities pricing and transportation costs.

They 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; implementing lean manufacturing, pursuing cost savings opportunities to curtail unnecessary expenditures, and taking advantage of government programs and tax incentives to support efficiency efforts and boost cash flow.

The latest RSM McGladrey energy cost survey included responses from 357 CEOs, CFOs, and other senior level executives from small and medium manufacturing and distribution companies, a majority of whom are with private companies. It was conducted as a follow-up to the firm’s April 2008 Manufacturing and Wholesale Distribution survey. The later 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.