Last October, I had the pleasure of presenting at the 2019 IMPACT Manufacturing/Research & Development Summit in Schaumburg, IL. My presentation was titled Surviving the Next Recession with Help from Procurement. After I completed my presentation, there was the normal question and answer portion. During that portion, there was one comment in particular that stood out to me. A gentleman stated: “I have been with my company 4 years now, and we have never discussed a recession”. This startled me a bit, largely because it wasn’t in fact a question, but also because several other audience members were nodding their heads in agreement.
While I cannot speak for that gentleman today, I would imagine his company is having that conversation now. We are still in the midst of a trade war, and now our world has been shaken by the Coronavirus global pandemic. With this next recession looming, I aim to outline 6 things procurements can do, to best position their organizations to withstand it.
Before diving into that, let’s take a look back at the most recent recession. This took place roughly between late 2007 and mid-2009. This recession, as I know most remember, hurt a lot of people and a lot of companies. However, that was not this country’s worst recession. Judging by change in GDP and Peak level of Unemployment, the Great Depression was far worse. In fact, it is in line with the recessions America has seen almost every decade since the Great Depression.
I am not suggesting that we are about to witness another Great Depression. However, I do believe that companies should prepare for a recession that is as bad, or worse, then the one we lived through in the late 2000s. With that being said, there are some lessons that can be learned from past recessions, for procurement professionals to better prepare themselves and their companies for the next one.
1. Understand True Demand 1
90% of organizations saw a decrease in demand last time around. Because forecasting demand is the first step in developing any strategy, it’s essential to see past speculation and recognize true demand. Even a slight over or under-reaction could prove harmful. Establish a process for monitoring the probability of order cancellations. Increase direct communication with customers, identify new channels, and insist upon an ongoing exchange of information. Prepare multiple demand scenarios, and plan your actions accordingly for a series of potential scenarios.
2. Monitor the Supply Chain
Obviously you’re not the only company that’ll feel the effects of the incoming recession. You run the risk of losing suppliers, even entire supply chains, to bankruptcy. Identify your critical suppliers. Monitor their health and lead times, and understand what alternatives are available.
3. Focus on Flexibility
Proactively address demand uncertainty and create supply chains that are flexible to a wide range of demand. Understand the effects of demand fluctuations and identify what actions should be taken for each demand scenario. Push for smart contracts that account for potential fluctuations in demand.
4. Manage Inventories to Free Up Cash
Reducing inventories while meeting service-level requirements is a challenge in the best of times. During a recession it’s even harder. However, you should aim to avoid surplus inventory wherever possible. Review all orders against demand scenarios, and understand cancellation opportunities within contracts. Align your inventory policies, changes in demand necessitate that you review and rethink your inventory policies. For example, you might consider reducing your typical order size to align with the new demand reality.
5. Drive Down Costs Strategically
Review your most recent spend analysis, or run a new one if none exists. If there are any quick wins, take advantage of them. Understand where your major cost buckets are, and strategize how to cut down on them without impacting the business. Prematurely cutting off a supplier to meet a corporate mandate on cost reductions, could mean paying more in the long run. Consider where moving spend through a Group Purchasing Organization (GPO) makes sense. GPOs leverage the combined purchasing power of their members to obtain the most advantageous pricing. You can click here to learn more about Corcentric’s GPO offerings.
6. Prepare for the Better Days
Don’t wallow. Planning for a sunny day could mean seizing on opportunities that other organizations don’t recognize. Develop and retain talent. Lay-offs were an unfortunate fact of the last recession, but organizations that could afford to, should focus on optimizing the talent they’ve got. You should also keep an eye out for potential hires that your competitors have let go. Prepare long-term initiatives. In boom years, it’s often challenging to think big picture. During a recession, you could enjoy opportunity to focus on planning long-term initiatives. A little planning could go a long way when things get better.
In summary, modern procurement teams empower a company to see the sourcing process from end-to-end, and gain new insights into the supply chain. They’ve got flexible category and business unit expertise, and can provide the insights companies need to make their entire organization more adaptable. So while things could go from bad to worse any day now, today’s best in class procurement teams can help their companies make it through to the other side.
1 Lessons For Supply Chains from the Financial Crisis - Supply Chain 24/7; Kai Hoberg and Knut Alicke