Even before COVID-19 brought unprecedented disruption to supply chains, business leaders were expecting a recession. In 2019, Bloomberg estimated a 26% chance of a recession for 2020. Now that this is likely for the remaining balance of the year and well into 2021, companies are scrambling to manage in a new normal and supply chain planning and management during a recession has taken on new urgency.
As companies find their path through the new landscape, they are also looking at ways to better manage supply chain planning in a recession. In addition to scaling back production and looking closely at costs at all levels of the enterprise, they are making crucial decisions on supply chain management that will help them respond quickly and in a more agile fashion to continuing disruption.
Impact of Recessions on Supply Chains
There are several ways supply chains can be impacted during a recession. These include:
- Supplier Viability – As recessions hit almost all sectors of every industry, suppliers are struggling with the same dire economic conditions as producers. This can impact delivery schedules and create shortages.
- Raw Materials Cost – Many companies rely on expensive components and materials to set themselves apart from competitors who may use more common parts and materials for production. Likewise, many industries have inherently expensive raw materials costs as part of their structure. These may take up much of the purchasing budget to acquire the working capital required to continue production. It may also result in excessive inventory if the finished goods requiring these materials suffer a severe drop in demand.
- Cost Structure – Both fixed and indirect costs quickly become a drain as recession hits the need for fast reductions when possible without threatening service levels. In the case of both producers and suppliers, some fixed costs may not be able to be reduced, causing the further shrinkage of operating margins.
- Cash Flow – Perhaps the biggest impact on supply chains during a recession relates to cash flow. With long supply lines, companies may have contracted agreements that require them to take delivery and pay on short terms. This drives up inventory and holding costs and reduces cash flow needed by the company to offset recession effects in other areas of the enterprise.
Best Practices for Supply Chain Planning in a Recession
While a recession is never a good thing, there are steps that companies can take to manage their supply chain to the other side. These best practices can make them more competitive during the downtown, as well as remain after the economy has started to recover as well. Here are four best practices to consider for managing supply chains during a recession:
- Move Quickly – Recessions can be slow or fast to develop and few have moved as rapidly as the one triggered by COVID-19. Regardless of the speed, companies should act quickly to reassess demand and re-forecast the business.
- Segment Suppliers – Just as demand software has ABC categorization capabilities, so too should companies use analysis to segment suppliers to manage the supply chain. Classifying suppliers based on revenue generated by specific goods can help determine which ones to shield. This segmentation may also extend to suppliers who have had patchy delivery records pre-recession or may have quality or financial issues. By segmenting suppliers, companies can develop a plan to deal with issues and renegotiate, delay or cancel when required.
- Develop a Command Center Approach – To detect even the most subtle upstream demand signals, companies can develop a “command center” approach where they collect and analyze all the data possible to detect not only overt signals from suppliers but also subtle signals such as longer lead times, delays in communication or changes in staffing.
- Collaborate with Partners – During tough times, quick response and communication can establish a higher level of partnership about handling supply issues during a downturn. Effective collaboration can lead to better solutions for all parties and may include renegotiation of contracts, terms, or volume minimums to help weather the storm.
Enabling Best Practices with Software
The best approach a company can take to ensure these best practices is to deploy best-in-class planning software. Each of these practices requires fast access to real-time data and a robust analytical capability to enact effectively. Because companies must often re-forecast swiftly in a downturn, having this data already at the fingertips of planners and decision-makers is crucial.
This software allows the projection of revenues, cost of goods sold, and margins down to the item level. Combined with onboard ABC analysis, planning software can help segment suppliers to make timely and crucial decisions. And because software removes silos and automates tasks, the system is transparent, allowing quick and effective collaboration. This improves response time and helps companies get ahead of issues. COVID-19 and the resulting economic downturn have brought about unprecedented challenges. And as companies ramp up their S&OP systems in response, planning software from DemandCaster can provide supply chain planners with tools to develop agile systems and mitigate risks to adapt to new realities quickly and accurately. And as a final bonus, they can actually optimize their supply chains during a recession.