I recently heard a renowned economist on the radio talking about the concept of recession. The initial premise was questionable because the examples provided were just as questionable. However, let’s assume that a recession has been confirmed (which, obviously, no one wants to happen); the question is whether our supply chains are ready to face it or not.
Let’s take a few moments to talk about what a recession is:
An economic recession is a period of significant and widespread decline in a country’s economic activity. It is characterized by a decrease in economic production, an increase in unemployment, a decline in revenues and a contraction in consumer spending and business investment. Recessions are generally defined by two consecutive quarters of negative economic growth, as measured by gross domestic product (GDP).
Recessions can be triggered by different factors, such as financial crises, external shocks (such as oil crises or pandemics), internal economic imbalances (such as housing bubbles), restrictive monetary policies, crises of confidence or other major economic disruptions. Obviously, any resemblance to current facts is entirely coincidental.
This, however, is not the debate…
… well, what exactly are the symptoms of a recession in a supply chain ?
A reduction in demand: During a recession, consumer demand may decline. This can result in fewer orders and fewer sales, which can disrupt the balance between supply and demand in the supply chain.
A reduction in inventory: Companies can reduce their inventories to cope with the drop in demand. This may result in adjustments in inventory levels and reductions in orders placed with suppliers, which may impact inventory planning and management throughout the supply chain.
Pressure on prices: Recessions can cause downward pressure on the prices of products or services. Companies may be forced to reduce prices to stimulate demand, which can impact profit margins and the profitability of supply chain stakeholders.
Financial difficulties for companies: This can result in payment delays, supply disruptions or even the bankruptcy of some companies, which can disrupt the continuity of the supply chain.
Fluctuations in production capacity: Companies may reduce their production capacities due to lower demand. This may result in adjustments in the production capacity of suppliers and manufacturers, which may require a review of production plans and delivery times in the supply chain.
Increased market volatility: Financial markets can be volatile during a recession, which can lead to fluctuations in exchange rates, higher financing costs and uncertainty in investment decisions. This can impact procurement costs and strategic decisions within the supply chain.
So, what are the possible levers?
- We protect supplies through multi-sourcing where deemed necessary. We increase our partnerships-relationships with key suppliers and we work on building loyalty. In fact, a thorough analysis of purchases may be necessary.
- We “clean up” inventories and only keep what can be sold. To compare with a well-known substance, inventory is like cholesterol. There’s both good and bad forms. Cholesterol is necessary but you shouldn’t have too much, or it will build up in the wrong places.
- We revitalise our contracts – and yes, we actually take the dusty contracts out of the cupboards to get them aligned with the economic reality. Our buyer and seller friends must roll up their sleeves alongside us to adapt to the updated contractual conditions.
- We monitor demand and risk in the markets. We identify leading indicators, trends and exceptional phenomena that could accelerate or slow down the recovery.
- We adapt and innovate in value propositions. And yes, being in a period of recession means having time to think about a rebound.
These are, of course, classic solutions, even proven ones; but it is clear that history is an eternal starting over. Yesterday’s solutions are still good today, if we take the time to adapt them.
What about you? Do you see the signs of a recession?