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
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