Manufacturers Seen Bolstering Efforts to Manage Inflation

Transportation, energy and raw material costs become critical concern in 2008, Archstone study finds

Stamford, CT — May 2, 2008 — Surging costs for transportation, energy and raw materials are prompting manufacturers to bolster their efforts to manage inflation, but only the strongest brands are finding that they can pass significant price increases on to their customers, according to a new survey from supply chain consultancy Archstone Consulting.

The survey revealed current approaches used by consumer packaged goods and general manufacturing companies to address the recent spike in critical commodity and raw material costs.

"The dual challenge of managing cost inflation and soft customer demand have become the critical business issue for US corporations during 2008," said Todd D. Lavieri, president and CEO of Archstone Consulting. "Success in managing levels of cost inflation which have not been seen since the 1970s, and addressing an economic slowdown will be essential to lift sagging stock prices."

Source of Cost Inflation

The most common source of cost inflation has stemmed from the recent rise in commodity prices, particularly in the following categories:

  • Transportation: 89 percent of companies have experienced high or moderate transportation-related cost inflation.
  • Energy: 84 percent of companies have experienced high or moderate energy cost inflation.
  • Raw materials: 75 percent of companies have experienced high or moderate energy cost inflation.

"Despite surging commodity prices, only 14 percent of responding companies experienced high levels of inflation for labor, and only 3 percent of respondents saw a jump in sales, general and administrative costs," said David P. Sievers, consumer products and retail practice leader at Archstone. "This is good news and suggests inflation has not yet spread into broader labor and overhead costs and we see this continuing in the near-term."

Sievers warned, however, that concentrated supply of certain raw materials such as fertilizer will continue to add to rising prices.

Strategies for Addressing Cost Inflation

As companies deal with increased cost inflation, they are most likely to apply one of the following strategies:

  • Effective Price Increases: 44 percent of companies plan effective price increases, which entails direct price increase, reducing the size of product sold at same price, or reduction in promotions.
  • Cost Off-sets: 57 percent of companies studied are planning cost reductions elsewhere in operations to off-set cost inflation. The most common sources of cost off-sets are reductions in material use and waste.

"Some sectors like food and beverage have had to deal with very high levels of cost inflation approaching 7 percent to 9 percent," said Bob Allen, principal and supply chain practice leader at Archstone. "Only the strongest brands with innovative products will be able to pass those increases through to consumers. The rest will have to offset those costs elsewhere in the business or lower earnings."

For the study, entitled "2008 Supply Chain Priorities and Practices Survey," Archstone Consulting surveyed 35 companies in the food, beverage, consumer products, transportation and general manufacturing industries, over half of which produced revenues over $1 billion. The survey was completed during February and March 2008.