What do driving to work, sitting in a cubicle, and making dinner have in common? In addition to being on an office worker’s to-do list, all of the above involve energy. And whether oil or natural gas, energy costs have been making consumers cringe as of late.
With the price of oil at record highs, it has become painfully clear to individuals and businesses alike just how closely linked energy has become with many aspects of daily life. Businesses are doing what they can to offset rising energy costs, but many are feeling the pinch.
In a recent RSM McGladrey study focusing on energy, respondents identified that there has been a clear change in the cost impact levels of energy, raw materials, and transportation.
From April to July, the number of companies expecting cost increases greater than 10 percent rose from 30.2 percent to 48.3 percent. For raw materials, the number jumped from 28 percent to 42.8 percent. And for transportation, it surged from 20.1 percent to 52.5 percent.
“In this particular case, markets are driving behavior,” said Tom Murphy, Executive Vice President of Manufacturing and Wholesale Distribution at RSM McGladrey. “As gas prices rise and businesses are slowing, consumption is decreasing. Gasoline consumption had been going up for awhile, but now it’s headed downward.”
Despite that drop in consumption, companies are still struggling with the increased costs.
“Businesses had been able to pass some of these costs through before, but that is becoming increasingly difficult,” Murphy noted.
To cope with the extra costs, Murphy suggests companies curtail any unnecessary expenditures and tighten their belts as much as possible.
“Companies also need to focus on continuously improving their operations through lean initiatives, sourcing products from economic countries, and they need to look at their overall costs,” Murphy said. “They also need to grow their revenues, which most are doing through exports.”
If you’re thinking about reducing your workforce to reduce costs, think again. Murphy notes that while it may improve your bottom line in the short term, when economic conditions improve and you’re looking to hire, you may not be able to find the skilled workers you need.
Companies should also investigate an energy audit. Utilities may offer this service for free, or a third party could do it for a fee.
“Energy has changed global economics,” he said. “Companies are reevaluating their sourcing and looking at domestic sources versus global sources.”
Clearly this isn’t a short term problem. Even if the cost of oil were to drop significantly, it would still be awhile before companies notice a difference, according to Murphy.
“It took several months to reach these companies, and it would take several months to go away,” he said. “There will be continued pressure on the cost of oil.”
And it’s not just oil.
“Natural gas isn’t grabbing headlines,” Murphy added. “But that doesn’t mean it is causing any less of a problem for industries like plastics and process manufacturing that use it as a feedstock.”
Murphy suggests that despite the turmoil from energy costs, this could still be a time for you to grab market share from your competitors.
“Businesses should be creating an environment of continuous improvement anyway,” he said. “It’s going to be extremely competitive for awhile and the most aggressive companies are going to be better positioned to weather the energy crisis.”
Some companies may be experiencing a feeling of déjà vu -- Murphy points out that the situation facing businesses today is the same one that they may have faced 30 years ago.
“The issue has been around for awhile, but we still haven’t done anything about it,” Murphy said. “Manufacturing companies and distributors have been working towards increasing efficiency for years, but it’s still a big problem.”
So what’s a cash-strapped manufacturer to do?
“Companies have known that energy costs are an issue, so the survey results aren’t exactly news to them,” Murphy added. “But they need to take a hard look at their operations and be sure that they’re doing things the best possible way in the best possible place. Energy is in everything; it impacts everything.”
Lean and efficiency have been buzz words in manufacturing for awhile now, and perhaps the current economic situation today underscores their importance more than ever before.
“There’s no better time than today to reevaluate your strategy,” Murphy added. “You don’t need to wait for good or bad times to take a look at what you’re doing. You should be focusing on improvement all the time.
RSM McGladrey is a professional services firm providing accounting, tax and business consulting. For more information, visit http://www.rsmmcgladrey.com.