According to the results of a recent survey conducted by Prime Advantage, a purchasing consortium, increasing costs are a significant concern for midsize manufacturers. Specifically, the cost of commodities is a vexing concern.
As identified by participants in the Prime Advantage Group Outlook (GO) survey, the main cost pressure for midsize manufacturing companies is the cost of raw materials, which was cited by 96 participants as one of the top three concerns, and by 76 percent of them as the key. Inflation was named as the second most-pressing concern, followed by the cost of healthcare.
But it isn’t just midsize manufacturers that now feel the pressure of rising commodity costs. Earlier this year, as the cost of many commodities began to rise, most companies chose not to raise prices, citing fears of driving customers away. That widely held approach seems about to change. For instance, Procter & Gamble announced today, as reported in an IndustryWeek item, that its net profits rose 11 percent this quarter. That growth was driven by a five percent net sales growth in developing countries. It’s worth noting, however, that as P&G’s Chief Financial Officer Jon Moeller says in an item picked up by BusinessWeek, the company expects its costs to increase roughly $1.8 billion this fiscal year, or about triple what P&G planned. Although the company is concentrating on trimming operational costs, it’s probably safe to assume P&G will raise it’s prices soon.
Some companies in other industries have already raised prices. For example, General Motors, Toyota and Ford have all announced price hikes to counter their rising costs. Higher steel and aluminum prices are an issue, but so are increasing, or at least holding steady, prices for rubber and copper. The effects of the earthquake and tsunami in Japan are already complicating matters as well.
Nevertheless, this doesn’t all imply that the horizon is necessarily gloomy. The results of the Prime Advantage survey show that the percentage of executives at midsize companies who anticipate revenue increases in 2011 has doubled compared to just six months ago. Last August, 36 percent of those executives expected revenue increases, but by February of this year, the number had doubled to 72 percent. That would seem to indicate a prevailing sense of optimism about the economy among survey participants.
Perhaps even more telling, not only did 41 percent of the survey participants report that they expect their companies to increase capital spending over 2010 levels, 65 percent of the respondents said they planned to invest in manufacturing equipment this year. Furthermore, 40 percent of the respondents whose companies source products from off-shore vendors cited plans to bring sourcing back to North America in the near future. That itself indicates a rebalancing in sourcing strategy.
One other concern caught my eye. That is, when asked about potential obstacles that would prevent their companies from achieving purchasing goals, survey respondents overwhelmingly cited an in ability to maintain forecast accuracy and demand variability. In fact, it was cited by 76 percent of the respondents. The next two concerns are predictable as well. First, an inability for suppliers to keep pace for predictable demand was cited by 41 percent of the respondents. The third potential obstacle, cited by 39 percent of the survey respondents, is the ability to manage understaffed purchasing departments.
So while the future does look promising, there certainly are challenges ahead. Dealing with rising commodity costs can be tricky because while customers may tolerate some price increases, there is a limit to just how much they’ll accept. An ability to improve forecast accuracy and manage fluctuating demand can be tricky too, but use of S&OP has proven to bring about significant improvement.
What do you see? Is your company struggling with rising materials cost as well?