Recession-Proof Your Business (Part 2)

There have been reports of a US-Japan-Netherland alliance to restrict exports of certain advanced chip making equipment, threatening the semiconductor industry in China. Further amplifying the importance of what we discussed last week. Setting up processes and strategies to prepare for a downturn. If you haven’t read it yet, we’ve covered 3 easy strategies you can use for recession-proofing your company here.

But what if the recession is already here, and there isn't time left to set up measures or safeguards? Well it isn't over yet there are still strategies you can employ to improve your chances of survival. Today we will delve into how companies can set up their supply chains to withstand potential disruptions includes when to re-forecast plans, diversifying suppliers, and how important it is to keep communications open and effective to navigate a recession.

If you want to mitigate the effects of it on your business and ride out the storm? We’ll show you some simple strategies to handle these situations and come out ahead.

Strategy 1: Reforecast and Planning

Economic downturns can have a substantial impact on the financial stability of your business. When customers feel the effects, they often respond by cutting back on expenditures, canceling orders, or delaying purchases. These actions can further worsen your situation, making it crucial for your business to proactively adopt strategies to stay ahead and mitigate the effects of a downturn.

Here are some steps you can adopt and implement when faced with market volatility:

Steer-sales to using excess inventory

To maximize the benefits of S&OP during a recession, it's vital to have a clear understanding of your company's production capabilities, and to regularly communicate and collaborate with your sales, production and demand planning teams.

By staying on top of demand and production trends, and by keeping a close eye on inventory levels, companies can make informed decisions that will help to keep their business running smoothly, even in the face of economic challenges. During a recession focus your S&OP processes to use on-hand raw materials by aligning sales goals with production capabilities and utilize all available resources efficiently and effectively.

In the 2008 recession, automotive manufacturers like GM, Toyota and Ford offered incentives like employee pricing, rebates and even no-interest loans to customers who purchased inventory vehicles rather than new orders. This helped them reduce their inventory levels and conserve cash even during a downturn.

Selling at a discount allows your company to clear off stock and recover some of your costs. While not ideal, recovering cost is better than having unsold inventory in a recession.

Reforecast

Excessive inventory can have a significant impact on a company's finances. Not only does it cost more to maintain and handle, but it also ties up cash that could be used to fund strategic initiatives within the company. It is especially important for companies to be efficient with their inventory and in times of economic downturns. The goal should be to maintain just enough to meet customer demand without having an excess that leads to financial losses.

How often should your company re-forecast when facing disruptions?

It’s impossible to pinpoint an exact timing for reviews, but when the market is volatile, schedule a review as often as weekly. And when things are less volatile, it can be done once every quarter. What’s important is to open ad hoc communications so whenever you are presented with new significant data your company can react accordingly.

In the stock market crash of 1987 and what is now known as Black Monday, the Dow dropped 22.6% in one day, the largest single-day drop ever recorded in history. If that much damage can happen in one day, what could happen to your company if it waited for the next quarter to re-forecast and plan.

Overall, forecasting and planning is a key tool for companies to make better decisions, to be more efficient and to improve their bottom line. It helps companies to anticipate and respond to changes in the market and to make better use of their resources.

Adjust Production to Demand

When most companies are trying to reduce expenditure during a downturn, it’s important for you to slow-down production to meet demands as well. Most products have limited shelf lives and maintaining production despite slowing demand can result in unnecessary wastage if your inventory turnover is low.

Adjusting production according to demand will keep a positive free cash flow. Conduct a comprehensive forecast of demand, and direct focus on products that are seeing an increase in orders.

Apparel companies like H&M and Nike outsource their production to third party manufacturers. So, when the pandemic hit, they quickly reduced production by reducing procurement to preserve their own cash flow.

Outsourcing a percentage of your production gives you the flexibility to quickly cut production by reducing procurement from your third party manufacturers.

While it is impossible for any organization to accurately predict and prepare for an economic recession, it is important to have measures in place to mitigate its impact.

Despite the challenges, employing the correct strategies can keep you afloat and if you're lucky enough, you'll be ready to take advantage when the market recovers.

Communicate Regularly

Effective communication is a vital component of any business relationship, and more so when it comes to suppliers. Strong communication can help build trust, prevent misunderstandings, and ensure that both parties are always on the same page.

Strategy 2: Communications

During a recession, it is important for companies to act quickly to address supplier-facing issues in order to maintain financial stability. This requires effective communication by setting clear expectations, regularly updating each other on changes and addressing any issues or concerns promptly. Without proper communication companies run the risk of being unaware of suppliers unable to fulfill their commitments, leading to delays, canceled orders, and ultimately, a need to find a new supplier.

Discuss switching purchases, and redirecting orders to parts that are more crucial for your company's operations. You can also tap into your network and assist suppliers in finding new markets for parts that are no longer needed. A large company can leverage its network to connect suppliers with potential buyers, such as other divisions, customers, or suppliers that use similar parts.

Finding a new supplier can be time-consuming and resource-intensive so if there are signs they need help, consider helping your strategic suppliers survive by providing support, rather than replacing them.

Renegotiate Terms

One strategy for handling a recession is to renegotiate terms with suppliers. The goal of these negotiations is to reduce costs and maintain profitability, even during challenging economic times.

While it is unlikely to receive a discount alone, you can negotiate strategic discounts with key suppliers in exchange for longer-term contracts or increased volume. In exchange for a lower price today, suppliers get to keep you on contract for a longer period of time. This allows for stable, predictable pricing and helps to build strong relationships with suppliers.

Or bargain for temporary price reductions in response to market changes, such as a recession. This allows companies to respond quickly to changes in market conditions and still maintain profitability.

It is important to approach these negotiations transparently and collaboratively, ensuring that both the company and the supplier are able to benefit from the new pricing arrangement.

Enforce Contract Terms

Enforcing contract terms is a crucial step in maintaining the integrity of a business relationship and ensuring predetermined metrics are met. We’ve covered what those metrics are in a post you can read here. By clearly outlining expectations in contracts, the company ensures that suppliers are aware of their responsibilities and the consequences for failing them.

Regularly enforce contract clauses on suppliers who fall short in meeting their obligations to ensure they fulfill your orders and keep your supply chain intact. This approach creates a clear link between non-compliance and negative consequences, which prompts suppliers to prioritize their obligations to the company.

An example of this is Lindemann Chimney Supply, a chimney tool and supplies distributor in the US. They add-on finance charges to invoices when bills are paid 15-30 days past due. The longer a client waits delays the bill, the more they will need to pay.

Strategy 3: Sourcing

Switch to Back-up Suppliers

Sourcing plays a critical role in ensuring the success and stability of a business, especially during instability. By having a solid sourcing strategy in place, companies can proactively address supply chain disruptions and minimize the impact on their operations and finances. Back-up sources and substitution parts are key components of a comprehensive sourcing strategy, providing options for alternative suppliers and materials in the event of supply chain disruptions.

Here’s how you can incorporate back-up sources and substitutions in your business strategy so your company maintains a steady flow of materials and continuity even during tough economic times.

Companies should have backup suppliers as a risk management strategy to ensure continuity of supply in case their primary suppliers encounter disruptions in their ability to deliver the goods or services. Having a backup supplier in place can help your company mitigate the impact of these disruptions and minimize the risk of supply chain interruption.

Additionally, having multiple suppliers for a product or service can also help a company negotiate better prices and improve their overall bargaining position with suppliers. It also provides a way to ensure quality and delivery time with the suppliers.

Intel, a major producer of microprocessors and semiconductor products, source supplies for its chips from TSMC, Samsung, UMC, and GlobalFoundries. Not relying only on one supplier. They understand that backup suppliers are important because they reduce the risks associated with relying on a single supplier, and help improve cost, quality and delivery time.

One strategy that you can use during a recession to mitigate supply chain disruptions is to look for substitute components for critical parts that are unavailable or scarce. This approach may involve making some engineering changes, retooling, or conducting new testing. The goal is to find a replacement component that can perform the same function as the original part, while meeting the same quality and performance standards.

In the automotive industry, manufacturers use a wide range of suppliers for different parts, and sometimes these suppliers may be affected by a recession or other external factors. In such cases, the manufacturers can look for alternative suppliers that can provide the same parts, or even negotiate with their current suppliers to provide alternatives. This way the manufacturer can secure the supply of the critical parts for their production lines and minimize the impact of the disruption.

Being proactive and looking for substitute components, companies can minimize the impact of supply chain disruptions and keep their production lines running.

Substitute Parts

Conclusion