Five effective strategies for managing escalating input costs.
Andy Patterson is a director in Mercer Management Consulting’s energy and utilities practice. Contact him at andy.patterson@mercermc.com.
The energy utility supply base historically has been a built-in shock absorber on rate increases, a place where continuous improvement could occur and price concessions extracted. Today, however, as we move into the top of the cycle for the utility infrastructure buildout, the supply market has turned on utilities with a vengeance. The twin shocks of rising commodity prices and emerging labor scarcities have all but eliminated the “low-cost bid” era. Utility project managers everywhere are asking, “How do we explain these budget increases?”
Economic forecasts are mixed as to what 2007-2008 will bring, although there is an increasing consensus that recessionary forces are at work. Earnings softness coupled with rising interest rates and overvalued global-equity markets likely will lead to downward pressures on U.S. GDP growth. Thus, 2007 likely will see base materials and finished good prices increasing overall, but at much slower rates and with greater volatility than in 2006.