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Transportation, energy, and raw material costs will be a major issue for consumer packaged goods and general manufacturing companies this year as these firms look to manage inflation, according to a new study by Archstone Consulting, a management consulting firm based in Stamford, Conn.
The dual challenge of managing cost inflation and soft customer demand have become the critical business issue for U.S. corporations during 2008, said Todd D. Lavieri, president and c.e.o. of Archstone Consulting, in a statement. Success in managing levels of cost inflation [that] have not been seen since the 1970s and addressing an economic slow down will be essential to lift sagging stock prices.
The most common source of cost inflation has stemmed from the recent rise in commodity prices, particularly in the following categories, according to the study:
-- 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, noted 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.
As companies deal with increased cost inflation, they are most likely to apply one of the following strategies, Archstone said:
-- 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 offsets: 57 percent of companies studied are planning cost reductions elsewhere in operations to offset cost inflation. The most common sources of cost offsets are reductions in material use and waste.
In 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.