The economy changes continuously, and recessions and downturns are a normal part of the cycle. Even though economic slowdowns are inevitable, it is hard to predict precisely when they will occur. Recessions can be especially challenging for a manufacturing company, or any firm that has to manage inventory. It can be challenging to prepare your supply chain and processes for a recession, but doing so can help you deal with potential problems.
What do warehouses, businesses, and supply chain managers have to deal with during a recession? Customer demand may fall as the recession starts. When this happens, lead times can expand, and inventory can begin to pile up in your warehouse. Even during a recession, supplier payments will come due, you will still be responsible for import tariffs and other taxes, and you will still need to pay employees. The drop in demand can make these regular payments a burden.
Business processes, supply chain management practices, and warehousing strategies can help you weather a recession. Inventory and supply chain management software can be a vital part of organizing for a recession and being prepared when one comes. Here are a few tips to help prepare your business for a recession.
Find Cheaper Alternatives
Cutting costs might seem like a simple step, but it is one of the most effective ways to recession-proof a business. You can inspect cash flow reports and find ways you can reduce costs to a minimum while still maintaining business operations and keeping customers satisfied. Here are some of the most common areas where you can find cost-cutting opportunities:
REDUCE FIXED COSTS
Fixed costs can get out of control during a recession and cause your company to hemorrhage money during the downturn.
How can you get fixed costs under control? You can start with your property. If you’re renting or leasing warehouse space, look into ways you can reduce that cost. One option is to relocate to a less expensive location. You can also look into the possibility of renegotiating with your landlord to lower your lease payments in exchange for lengthening the lease term.
CLEAR EXCESS INVENTORY
Inventory is another area where you may do some cost-cutting, particularly when it comes to storage space. You can find ways to remove excess stock (deadstock) to reduce storage space requirements.
This step can be a significant cost-saver if you lease your warehouse space, because it can help you move to a smaller, cheaper space or renegotiate with your existing landlord. If you own your warehouse, getting rid of excess inventory can also help during a recession. For example, you could potentially establish an additional income stream by renting warehouse space freed up by removing deadstock to other businesses.
MITIGATE EMPLOYEE COSTS
When operating costs get tighter during a downturn, issues such as employee redundancy become more apparent.
While a mass layoff might be one solution, there are certainly other options. You can look into negotiating employment terms or contracts with existing employees, or you could find employees who are willing to become contractors instead of full-time employees. These steps can provide workforce flexibility and allow you to expand or contract your workforce as needed.
REVIEW SUPPLIER COSTS
The final, and perhaps most significant, step to prepare for a recession is to find ways you can reduce your supplier costs.
If you are importing, you can look into sourcing materials from less costly suppliers. You may also reduce transportation or tariff costs by switching to a local supplier, or one in a different location from your current supplier.
Getting a closer supplier can also help you implement a Just-In-Time (JIT) inventory management system with economic order quantities (EOQ). Such a system can help you adjust production so that you do not have excess inventory. You can also renegotiate payment periods with your supplier to give you more time to pay them.
Avoid Excess Inventory
During a recession, you may see customer demand decrease, which affects inventory. Many business managers use forecasting to determine future demand. They then make production, supply, and inventory plans according to these predictions.
A more-recession-proof strategy could be demand-driven manufacturing.
WHAT IS DEMAND-DRIVEN MANUFACTURING?
Demand-driven manufacturing is a system of production planning, scheduling, and execution based on actual, real-time customer demand. This operational approach allows you to streamline inventory.
A related concept that companies need to understand if they want to implement demand-driven operations is the Theory of Constraints (TOC). TOC requires that companies find the one resource or process that most limits the ability of a company to meet demand. At the heart of demand-driven manufacturing is the idea that in any production line, there is one resource that limits the ability of the manufacturer to meet demand. This slowest part becomes the pacemaker for your production process, and you scale your operation around it.
HOW DOES DEMAND-DRIVEN MANUFACTURING HELP IN A RECESSION?
With demand-driven manufacturing, the pacemaker for business operations is customer demand. With this strategy, you can limit costs because you do not pay for materials or labor or warehouse space until you have a reason to do so. The most significant advantage of demand-driven manufacturing in a recession is that it can help reduce the problem of excess inventory.
By only manufacturing to order, and streamlining the entire supply chain and production line accordingly, your business shouldn’t have to worry about having excess inventory. The costs associated with storage, obsolescence, and reduced sales should decline.
During a recession, your inventory represents all your business capital tied up in an illiquid (non-cash) form. To get cash, which may be necessary during a downturn, you may need to sell your inventory. Without demand, it can be almost impossible to sell your product. Demand-driven manufacturing presents a possible solution to this problem.
DEALING WITH VARYING CONDITIONS
Overstocking and understocking are both problems, depending on the economic situation. Overstocking is a problem during a recession when demand falls. However, understocking is a problem during an expansion, when demand skyrockets. In a downturn, you lose investments that get tied up in unsold inventory; but in an expansion, you could lose customers to your competitors if you can’t meet demand.
In both cases, demand-driven manufacturing offers a solution. By optimizing your entire system to respond to customer demand as it varies, you allow your manufacturing business to be flexible enough to meet any economic conditions.
UNDERSTAND TRUE CAPACITY
The concept of capacity is essential to inventory management. There are two types of capacity to consider:
- Working capacity is the capacity you can achieve under practical circumstances. In other words, it is what you can produce with your current employees, equipment, supplies, and TOC pacemakers.
- Theoretical capacity is the capacity in ideal conditions. It would measure your capacity if you didn’t have any downtime due to setups, repairs, replacements, or other limiting factors.
Your working capacity is your actual capacity (or true capacity) because it is an estimation of what you can realistically produce based on your current capabilities. If demand exceeds your true capacity, then you will likely be understocked. If demand is less than true capacity, then normal operations will lead to overstocking.
During a recession, your working capacity is usually going to be higher than the demand. The excess capacity represents a loss of profits because you are paying salaries for idle workers or warehousing costs for unused storage space.
During a recession, your goal is to reduce working capacity to limit costs. The trick is to be flexible enough to expand the working capacity when the economy improves.
CREATING FLEXIBLE WORKING CAPACITY
How can you create flexible working capacity?
- A business could ask employees to become contractors. With contractors, you can expand or contract your workforce as necessary.
- You could also renegotiate contracts with existing employees to create a more flexible working arrangement.
- You can also maximize existing warehouse space or find a smaller, cheaper warehouse space that you can maximize.
HOW TO MAXIMIZE WAREHOUSE SPACE
There are several ways to increase capacity without adding square footage to your warehouse needs:
- Add vertical storage space by extending shelving upward
- Reduce aisle width
- Add partial pallet space instead of leaving empty space in corners or along walls
- Use containers or trailers for inventory that only requires short-term storage
- Use a warehouse management system to organize storage and to find and eliminate unused space
Plan for the Future
Your most powerful tool, before or during a recession, is planning. With adequate planning, you can prepare for the worst but remain flexible enough to handle better conditions as well. You can look at past recessions to see how companies successfully survived the downturn.
Creating agile operations that can expand or contract when necessary requires planning. Manufacturing and inventory management software can bring you the right level of organization. Such software can help with demand-driven manufacturing, capacity planning, storage utilization, scaling operations up or down, and supply chain management.
Another advantage of this software is that it can provide you with data that you can use to improve performance. For example, you can track key performance indicators (KPIs) and use this information to streamline your demand-driven operations even further, allowing you to change focus to areas that will bring more profitability. Such management software can help in any condition, but starting before a recession sets in will give you time to perfect operations and give your employees a chance to learn the new system.