Facing the Facts: Manufacturers Seek Relief From High Energy Costs and Many Seek Holistic Approach to Global Supply Chains

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Recognizing that high, volatile energy costs are here to stay, managers at production and manufacturing companies say they must act to offset the impact of high costs or their companies' margins will suffer.

Recognizing that high, volatile energy costs are here to stay, managers at production and manufacturing companies say they must act to offset the impact of high costs or their companies' margins will suffer. Further, four times as many respondents as last year expect high energy prices to hurt their margins. These findings are the result of Industry Directions' second annual study on the impact of energy costs on supply chain strategy, The Energy Cost Factor: Transforming the Supply Chain to Offset Margin Squeeze. The survey garnered responses from 139 respondents from a wide range of industrial companies.

While energy costs have leveled off and even subsided in some regions over the last year, an increasing number of top manufacturing executives (79% vs. 77% in 2005) are focused on supply chain issues to energy costs. In fact, executives indicated that virtually every aspect of the supply chain - topped by logistics and transportation; procurement, production, inventory management, and planning - is being seriously impacted by increased energy costs. Warehouse management, reverse logistics, procurement and planning are being impacted at a larger portion of companies than in the previous year.

"This year's findings are significant because they demonstrate that companies are not simply bearing the brunt of high energy costs in the most obvious areas of the supply chain," said William Brandel, Principal at Industry Directions. "Further, they now recognize that they cannot pass these higher costs on to customers or demand lower costs from suppliers."

Over four times as many respondents as in 2005 (22% vs. 5%) now recognize that energy costs may hurt their margins. Meanwhile, only 15% of respondents believe they can pass higher costs on to customers, compared to 31% in 2005. Moreover, fewer companies expect lower costs from their suppliers to offset energy costs going forward.

Industry Directions research suggests that companies will derive some measure of benefit by focusing on specific areas of the supply chain. However, the overwhelming conclusion is that high energy costs provide little choice for companies but to optimize their supply chain network

to design and improve planning and execution in a more holistic fashion, and ultimately transform the structure and dynamics of their supply chains to support global operations.

This study was sponsored by Logility, http://www.logility.com; and Manhattan Associates, http://www.manh.com. Free copies of this survey report are available at: http://www.industrydirections.com.

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NANCY HODGMAN
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