Cindy Jutras: Energy costs have consumers and manufacturers looking twice at location

Unless you happen to be a city dweller that long ago traded in your car in favor of public transportation, you are faced with the rising cost of energy every time you pull up to a gas pump. It's a painful reminder that hits you where it hurts: in the wallet. For those of us who use a personal vehicle for work and leisure activities, it's simply a fact of life.

09/01/2008



Unless you happen to be a city dweller that long ago traded in your car in favor of public transportation, you are faced with the rising cost of energy every time you pull up to a gas pump. It's a painful reminder that hits you where it hurts: in the wallet. For those of us who use a personal vehicle for work and leisure activities, it's simply a fact of life.



As the price per gallon started creeping up, few of us made any significant lifestyle adjustments. But now that the price of oil has driven the average price per gallon of regular gas beyond $4 in most areas, we're seeing changes everywhere. In particular, many of us plan errands more carefully and think twice about hopping in the car for something that could wait until the next time we're out. I even try to work from home one or two days a week.

But are we seeing some not-so-subtle changes in manufacturing? Absolutely. We begin each Aberdeen survey by investigating the top pressures surrounding whatever topic we are benchmarking. A dominant theme throughout manufacturing this year has been a focus on minimizing costs and maximizing returns. In January we studied Manufacturing Operations Management: The Next Generation of Manufacturing Systems . We found the top pressure to be the need to reduce manufacturing costs (63 percent).

More recently our study of Enterprise Asset Management: Asset Utilization and Real Time Interoperability (June 2008) found the need to maximize Return-on-Assets (RoA) as the No. 1 driver (65 percent). And as far as ERP in Manufacturing (June 2008) is concerned, pressures to reduce costs edged out the perennial favorites: growth and customer service.

At the same time, manufacturers are finding it harder to reduce costs. In 2007, our Best-in-Class were able to reduce inventory, manufacturing operational costs, and administrative costs by 24 percent, 18 percent, and 18 percent respectively. This year Best-in-Class were still able to reduce costs, but at more modest rates–about 17 percent less than last year. Reductions in manufacturing operational costs took the hardest hit at 22 percent less than last year.

For the past decade or more we've seen an uptake in offshoring of manufacturing operations and sourcing of materials from low-cost countries. Today much of these savings are eaten up by rising transportation costs. This is causing manufacturers to rethink sourcing strategies for both materials and manufacturing. I don't anticipate any decline in globalization because there's simply too much opportunity for companies in emerging economies.

But we may see a shift toward making products and providing services from locations closer to the customer. This might mean products to be sold in China are sourced and manufactured locally in China, but it could also mean products to be sold in North America are sourced and manufactured in North America.

Could manufacturing jobs be returning to the United States? Will offshoring be replaced with near-shoring?

It took many months of rising fuel costs to get the average citizen to modify habits. How long will it take for U.S. manufacturing companies to adjust to rising energy costs? We might try to limit fuel consumption by driving less because we can't ignore how these rising costs influence our lifestyles. Manufacturers won't be able to ignore it for long either. Are they ready for change?








Author Information
Cindy Jutras, who oversees research and client development related to manufacturing at Boston-based AberdeenGroup, has more than 30 years worth of ERP and supply chain-related experience. Cindy, a former director for a prominent enterprise vendor, has authored numerous white papers as well as a book titled ERP Optimization.




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