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Raw Materials Costs Top List of Concerns for Manufacturers

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Cost-saving pressure on engineering managers is likely to increase as manufacturing executive management seeks to offset rising costs for raw materials over the next six months. Two separate surveys see inflation concerns increasing among C-level decision makers.

Chicago-based Grant Thornton LLP (www.GrantThornton.com.), an audit, tax and advisory organization, said its most recent national survey of U.S. manufacturing chief financial officers (CFOs) and senior controllers revealed serious concerns about inflation. The number planning price increases has nearly doubled from six months ago, as raw material and energy prices cause worry, according to Wally Gruenes, Grant Thornton’s national managing partner for consumer and industrial products.

Gruenes reports that 66% of respondents say their company intends to raise the sales price for their goods over the next six months, up from 35% six months earlier. When asked about specific pricing concerns, 96% identified raw materials (such as cotton, metals, petroleum-based product), up from 62% six months earlier. Fifty-eight percent identified concern about rising energy costs, up from 33% six months earlier.

“This was to be expected given the increase in commodity raw material costs experienced by most manufacturers over the last 12 months,” says Gruenes. “With the precipitous increase in these commodity prices in recent months, manufacturers have no choice but to pass along such increases to their customers. While they have done a good job of improving operational efficiencies and driving down costs over the past three years, manufacturers simply could not drive down their conversion costs enough to absorb these raw material price increases.”

Grant Thornton LLP conducted the biannual national survey from March 22 through April 6, 2011, with 318 U.S. CFOs and senior controllers participating, of which 50 were from manufacturing companies.

In February, Prime Advantage, (www.primeadvantage.com), a buying consortium for industrial manufacturers, conducted its seventh Prime Advantage Group Outlook (GO) Survey of executives and purchasing professionals that represent durable goods manufacturing firms, of which the majority has annual revenues between $20 million and $500 million.

The top financial concerns of these small and mid-sized U.S. manufacturers were similar: The top three cost pressures for the next six months are the cost of raw materials (with 96 percent including it among their top three concerns), followed by inflation (52 percent) and healthcare (37 percent)

“In every Group Outlook survey conducted since June 2008, the cost of raw materials (such as metals and plastics) has appeared as the top cost pressure, but the number of respondents citing this as the top concern has grown steadily as the economy has improved (from 36 percent just a year ago, to 51 percent six months ago),” says Louise O’Sullivan, founder and CEO of Prime Advantage.

“Our members, who represent a diverse cross section of manufacturing industries, are experiencing stronger growth and plan to invest back in their businesses, whether through capital expenditures or hiring more employees,” stated O’Sullivan. “What’s unique and challenging about this rebound is the rate at which firms must address pricing inflation in both raw materials and components.”

O’Sullivan says 72 percent of the small and midsized manufacturing professionals who took her survey reported that their companies expect revenue increases in 2011, with 24 percent expecting increases of more than 10 percent. In addition, 65 percent plan capital expenditures for manufacturing equipment and tools in 2011, greatly triggered by the availability of federal business investment tax credits,” she says.

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For more on Grant Thorton’s survey, visit www.GrantThornton.com.

To request a copy of the Prime Advantage 2011 Group Outlook Survey, visit
www.primeadvantage.com/groupoutlook/

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According to Grant Thornton, more manufacturing executives expect to increase headcount in the next six months. “While still not robust, 47% intend to increase headcount, up from 18% six months earlier,” said Wally Gruenes, “and 58% are optimistic about their own company over the next six months, up from 35%.

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