How Does a Recession Impact Your Supply Chain?

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With the discouraging numbers in the manufacturing sector, there’s a buzz about a recession in the United States. The risks of a recession are heightened due to global events such as the lockdown in China, the war in Ukraine, the Federal Reserve raising interest rates, and high inflation. During the snowballing of unexpected events, business leaders may be thinking: How will an economic slump affect the global supply chain? And how can companies deal with its effects?

An economic downturn would multiply the numerous issues that are already affecting global supply chains. These include increasing transportation costs, labor shortages, inflation, fluctuating demand, and a shortage of essential goods. Though it’s impossible to foresee when an economic slump will occur or how severe it’ll be, figuring out how a recession could affect supply chains optimization can help businesses alleviate the effects. Read on to learn more.

Domino Effect from Falling Demand

Companies may witness a drop in demand or customers buying the most affordable items. The change in demand for products will differ based on whether the items are essential or nonessential products. Changes in demand will have domino effects all through your supply chain as your business adjusts its ordering, stock, and manufacturing strategies.

Your business should be geared up to adapt fast, deprioritizing items that aren’t in demand and shifting focus to those items that are driving maximum earnings within the supply chain. When several businesses reprioritize similar types of products, or when there’s material scarcity for manufacturing those items, prices for such goods will increase. Increasing material costs are likely to eat away profit margins as well as impact customers.

Due to demand shortages in retail, retailers are stuck with up to three seasons’ worth of garments. According to the National Retail Federation, ports will witness an 8.8 percent dip every year in the units they handle and this decline will continue until spring 2023.

Reduced Cash Flow

To uphold service levels amidst goods and material scarcities, a few businesses depended on bulk ordering. As customer purchases dipped, some of these companies might have surplus stock and so they need to stop or terminate orders from the suppliers. High levels of inventory affect cash flow, and this will come into focus when revenue declines underscoring the importance of effective supply chain optimization. Organizations with surplus items might like to sell them to peers in a proactive manner or provide discounts to buyers.

However, stopping or terminating orders could damage your business relationship with the suppliers and disrupt the supply chain. When demand normalizes, businesses that stopped or canceled important orders may get deprioritized by suppliers compared to those who continued ordering during the recession. Businesses de-prioritized by the suppliers may be amongst the last to receive their cargo during peak demand or the suppliers may charge higher prices. Hence, it is necessary to leverage supply chain optimization services to maintain agile inventory management and promote reliable supplier relationships.

Failure to Scale up When Demand Recovers

A recession could worsen the labor force crunch and impede your organization’s capability to scale up when demand returns to normal. The combined effect of the shortage of competent workers as well as an aging labor force is already creating problems within logistics and production and services.

Based on the findings of the National Association of Manufacturers, almost one-fourth of the production labor force is 55 years of age or more. Besides, there aren’t enough young professionals to replace the aged workforce. Further, the pandemic made over 2.4 million US citizens retire early. New layoffs due to an economic slump would possibly result in more workers leaving the labor force permanently.

After the economy recovers, the exit of skilled workers will be seriously felt as businesses strive hard to train new workers quickly. It would hamper a business’s ability to capture demand, resulting in high prices, and affecting the supply chain.

Navigating the Downturn

The best way to navigate a recession is to choose the contingency approach with a focus on supply chain optimization. Here is how:

Manage lead times: When you have continuing agreements and big orders to complete, keep your suppliers informed. Handle lead times efficiently so that your customers are confident and can pay.

Look at the raw materials: During an economic downturn, use standard materials instead of high-end ones at a more affordable price. Standard materials are easy to exchange or cancel as the supplier can on-sell these with ease. Niche and expensive materials are difficult to cancel, putting the supplier at an increased risk to sell a very niche product.

Ensure open communication: Be transparent and open in your communication with people involved in the supply chain because you’re experiencing the economic slump together.

Preparing Your Supply Chain

A downturn results in the following challenges:

  • Difficulty in forecasting consumer demand
  • Erratic supplier performance
  • Lower stock movement
  • Problems in handling inventory

All of this leads to a ripple effect in the supply chain. So, you need to optimize your supply chain to become recession-ready to gain a competitive advantage in the marketplace.

Here is how you can prepare for a recession:

Perform a Supply Chain Risk Audit

Predicting as well as overcoming barriers to the supply chain are crucial amid a recession. If your supply chain lacks optimization, it’s burdened with risks and ineffectiveness, from supplier projections to resource holdups.

When you perform a supply chain risk assessment, consider customer service, contingency plans, visibility, and supplier chain partner performance. 

Adopt Automation

Manual procedures are prone to errors and are time-consuming for order picking in your warehouse or when it comes to supplier communication. Many businesses are embracing automation solutions across several phases of the supply chain to increase efficiency, save time, as well as restrict supply chain instability, ultimately optimizing the supply chain.

With modern technological advancements in improved data analytics as well as artificial intelligence, automation is essential to gain a competitive advantage in the long term. Automation tools help in improving demand forecasting and stock allocation by allowing your business to respond to adjustments in real-time. With the latest order and inventory updates, your company can cut back on delays and deficiencies across the entire supply chain. 

Collating data from previous supplier performance and order completion offers the valuable insights required to avoid supply chain interruptions in the future. 

Leverage the Power of Insights

Recessions have various effects on the supply chain. Decisions related to historical data or hasty downturn recovery predictions leave businesses developing their strategies with skepticism. That’s why you need to use effective tools to collate data in real time and act strategically.

ERP integration: Manually feeding data into your business ERP solution lessens accuracy and timeliness. Implement ERP integrations to connect your ERP software with your inventory management, and accounting systems. This ensures complete visibility across numerous channels and creates optimized workflows.

Supply chain optimization: Gain useful insights into your supplier’s efficiency with supply chain optimization. Supply chain optimization services lessen the obligation on your team and help your business to reap the maximum benefits from inventory control, demand planning, order fulfillment, decision making, on-time rates, supplier compliance, and customer service. It will help you prepare your supply chain for the recession.

Why Korcomptenz?

If you’re looking for supply chain optimization services, our consultants will work with you to understand your business process and then recommend which solution you must choose.

Korcomptenz uses Success by Design, a consulting approach built around three major principles: Early Breakthrough, Proactive Assistance, and Predictable Achievement.

Conclusion

If your business hasn’t yet started the digital transformation of the supply chain, it’s high time you do so. Microsoft offers supply chain solutions that can help businesses implement a powerful, agile, and transparent system to address supply chain challenges and adapt to changes in supply as well as demand.

Build a digital interpretation of your physical supply chain and improve the visibility of your total value chain. Make informed supply chain decisions with proactive risk management through useful, predictive insights powered by AI and machine learning. Request a free consultation today and discover the benefits of supply chain optimization.

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