Four steps to building a recession-proof supply chain

According to the Bloomberg monthly survey of economists in July 2022, the probability of a recession stands now at 70 %, compared to only 20% in March. According to the quarterly numbers by bevh, the German federal association for e-commerce, with a minus of 10,8 %, e-commerce revenues dropped to 19,8 billion € in the third quarter of 2022.

Whether it’s a black swan event, labor shortages, an energy crisis, or an increase in inflation, the bottom line is that the more prepared your business is, the quicker you can adjust your supply chain planning to respond to these events.  

And change happens quickly. NBC news recently highlighted, “This summer, Target issued a warning similar to Walmart’s, saying consumers were shifting spending away from items that proved popular during the early days of the pandemic, like appliances and furniture, to merchandise like luggage and cosmetics.” As customer demand slows down for certain products and suppliers remain unreliable, making the wrong decisions on what products to replenish or manufacture today can hurt your profit margins. Potentially, you could find yourself with surplus stock of the wrong products, and with rising operating costs, holding additional stock that isn’t selling will add financial strain on your business.

How can a recession impact your supply chain? 

A challenge to balance inventory planning

As cash flow tightens and the flow of materials slows down due to unreliable supply, this adds immense pressure on knowing what and how many products to order or manufacture to meet changing demand. Businesses often over-order and take on the additional costs of holding excess inventories to ensure they meet demand. Conversely, some businesses will slow down orders to conserve working capital as material prices can overshoot revenue, often leading to an out-of-stock situation, resulting in lost sales. 

A decline in available cash flow

As material costs and holding costs increase, this can reduce your available cash flow, which can be used in other areas of the business to combat the effects of a recession. Your customers may also make late payments, affecting your cash flow, bloating your accounts receivable, and potentially impacting your ability to pay your accounts on time. 

Reduced workforce

Deciding to downsize your workforce is the most challenging aspect of steering your business through a recession. If there is reduced demand for manufactured products, plants are often forced to close, and layoffs will occur. Reducing wages or benefits as a solution to preserve jobs can impact the overall morale and level of productivity within your business. It’s often a no-win situation. 

Steps to help recession-proof your supply chain

#1: Focus on your high-velocity, profit-generating products

When working capital is tight, unreliable suppliers add complexity to your inventory planning. You need supplier performance visibility to know which stock items need your attention. The ability to automatically classify your inventory according to sales and velocity gives demand planners the visibility they need to understand what stock items need attention immediately. Not all products hold the same value, and classifying stock into ABC, such as A: highly profitable items, B: medium range items, and C: less profitable items, is essential. 

Classifying your inventory enables demand planners to have agility and speed – why? You quickly focus 20% of your attention on items that generate 80% of your sales. 

What if you have excess products? 

Classifying products according to their sales velocity [how quickly the product sells] will help guide how you address this challenge. If you have a product in excess, it may not be the end of the world. If you know that product sells well [like an A item], based on its classification, you can keep that product in excess and just stop ordering until you are at your model stock level. 

If you have an excess of slow-moving products and, after reviewing your projections discover you may only return to your model stock level for that item in two years – you’ll have to decide if: 

  • You’ll sell those items at a reduced price through promotional campaigns, or if
  • You’re prepared to incur additional holding costs of carrying those products for two years. 

With the increase in inflation, it may be smarter to eliminate these excess products.Classifying your inventory allows you to rationalize your product line, making more informed decisions on where to focus your time and resources – Jörg Salomo, Founder and CEO, Netstock Europe GmbH

#2: Use supplier data to reduce supplier risk

The more you know about your suppliers and how well they perform, the better you can outsmart your competitors and serve your customers. Given the unreliable nature of customers, missing out on a sale can leave a lasting effect on your profits and the potential for repeat business. More than ever, businesses need to re-evaluate their supplier network to ensure they work with reliable suppliers who can support and improve target fill rates. 

Visibility of supplier data will: 

  • Immediately highlight which suppliers are consistently delivering on time and in full
  • Identify critical suppliers where you can potentially re-negotiate better terms & conditions
  • Classify your suppliers by identifying which suppliers to replace due to poor performance or consolidate if you have too many suppliers for one product 
  • Identify trends where you may need to consider alternative suppliers for your profit-generating products 

Regardless of disruption, always follow supplier best practices and build strong relationships with your suppliers, encouraging two-way communication. The more you know what’s impacting your suppliers, the better you will be able to adjust your planning where necessary to keep serving your customers.

Be prepared and create a backup plan within your supplier network. Identify and create a secondary list of reliable suppliers who enable you to be flexible and reduce risk. In developing an ongoing relationship with these suppliers, you’ll also learn more about their terms & conditions, processes, and security measures they have in place. Given the recent increase in cyber attacks, such as the recent HanesBrands ransomware attack, working with suppliers who have a solid security policy and processes in place that will protect their customer data is vital.

#3: Align supply and demand with Sales & Operation Planning (S&OP)

Regardless of whether your business is being impacted by disruption or if you are introducing a new product line, each department in the business must work together with the same data to enhance forecasting, lower inventory costs, and grow revenue by increasing the success of sales and marketing campaigns. 

Improving your internal process leverages data across departments, breaks down siloed working practices, and enables smart decision-making.

DaySpring reduced inventory levels by 65% with S&OP technology to achieve success. 

Managing forecasts for over 300,000 product-customer combinations, including about 7,000 active products, DaySpring managed massive Excel spreadsheets for various product groups and functions, including separate, but coordinated sales, operations, and finance plans. Trying to scale their operations was becoming increasingly complex and time-consuming while working off spreadsheets and aligning spreadsheets used by various departments. Read their success story here

#4: Ensure your planning solution enables the team to thrive 

For businesses to succeed in any environment, the management principle of aligning people, processes, and technology is still extremely relevant. What’s the point of having a great team and effective processes without the right technology in place to support your business goals? Managing your supply chain and planning your inventory on static Excel spreadsheets will drastically limit your business’s ability to be agile and respond to change to ensure you meet demand and increase sales. 

While spreadsheets will always perform a necessary function, they cannot support a business in managing the complexities of multi-departmental collaboration or adjusting data as change happens, all attributes of what supply chains need to thrive in turbulent times. 

The right supply chain planning software (e.g., cloud MRP software) will enhance data from your ERP, with built-in best practices that automatically monitor demand and supply risk for you, adjusting inventory levels to balance your inventory investment with the desired target stock fill rate.

Best Vinyl reduced its inventory value by 50%

Once Best Vinyl stopped working off complex spreadsheets and invested in the right supply chain planning solution, they reduced their inventory value by 50%. Read their success story here. 

Effective technology will also empower your team, increasing productivity in the right areas of inventory planning. With less time spent working off complex spreadsheets, demand planners can focus on improving forecasting and ensuring the right products are being ordered in the right quantities. 

The most important aspect to consider is how a recession will impact your team. 

Preparing your supply chain for a recession requires setting aside time to review your inventory planning processes. Investing in the right technology will also offer relief from traditional manual inventory processes, increasing your team’s productivity and ultimately lifting work satisfaction.

About Netstock

Netstock is a leading supply chain planning software trusted by 2,200 customers globally to optimize their planning. Netstock’s cloud-based solutions enable businesses to be agile, responsive, and profitable. Each solution integrates with leading ERPs and leverages enhanced analytics so you can quickly respond to market change and make the best supply chain planning decisions for your business. 
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You can meet the authors during the E-commerce Berlin Expo 2023!