If you’ve been following the economy recently, you’ve likely heard experts say we’re close to entering a global recession.
Recessions create several economic issues, including higher unemployment and interest rates and less consumer spending. For the everyday worker, this means tightening their belts and finding ways to spend less by putting off purchases like a new home or vehicle.
Another unintended problem is that manufacturing and production decline because of less appetite for products. According to Deloitte, U.S. manufacturing lost about 10% of its GDP during the Great Recession, a far worse number than the overall economy.
With a possible recession, what can manufacturers and distributors do to get on the same page?
The answer lies in supply chain management (SCM).
Recessions make it tough to do business normally, but for manufacturers, issues compound quickly.
It costs more to manufacture products due to rising material prices but decreased consumer spending makes it harder to offload products once they’ve been made. The problem doesn’t end there.
Higher material costs and lower consumer spending often lead to manufacturers looking for ways to do more with less. Companies may go through layoffs to survive in the short term but struggle when the economy takes off again.
Although supply chain issues can influence each of the problems outlined, solving them can help companies weather the storm and improve. The trick is finding ways for distributors to work with manufacturers to address weak points in the supply chain and find workarounds to keep products, and dollars, flowing.
The traditional supply chain is normally fragile but becomes unstable during a recession.
Everyone in the supply chain must deal with higher costs for raw materials, equipment, and final products – they’re also gripping their wallets tightly than usual. The result is unintended industry contraction stemming from manufacturers and distributors trying to do the same amount of work with fewer resources.
As prices rise, customer demands may increase. Everyone wants the best deal possible, so customers might threaten to spend less or ask for leeway from manufacturers in the form of rebates or discounts. At the same time, orders may be smaller or less frequent.
Manufacturers, also feeling the pinch of a tighter economy and higher raw material costs, may produce less product and focus on just-in-time (JIT) work to reduce inventory. Every company knows the deal: on-hand inventory that isn’t moving is a sunk cost. It doesn’t get recouped until it’s sold – even if it means selling at a loss. To avoid that fate, manufacturers may make fewer products, limiting the number of finished goods available and forcing prices to rise for distributors and end users.
Higher prices across the board also means manufacturers have less capital for expansion projects, upgrades, and maintenance. Distributors might not have money available due to contracts they’ve signed that need to be honored. Those fulfillments keep product flowing but tie up capital that could be used elsewhere.
The United States has seen nearly 50 economic declines since its inception. They range from short-term recessions to two long-term depressions, including the Great Depression and Great Recession.
In many cases, the downturns were short-lived, leading to eventual economic upswings. But to get there, companies like our electrical distributor partners needed to take steps to reduce damage and weather the storm. That means making some shrewd moves, leaning in at certain moments, and constantly keeping an ear to the ground.
Customers are fickle creatures, so understanding what they need and when goes a long way toward avoiding costly inventory mistakes.
Buying cycles depend on many factors, including seasonality, location, and economic factors. You wouldn’t buy a beach ball during a snowstorm, so why assume your customers want magnesium ground rods in the middle of February when the soil is frozen solid?
Forecasting is difficult if you’re only looking forward, but historical data offers a framework to build a basic overview of when products will likely sell well. Although historical data doesn’t account for urgent requests, it can help you prepare for runs on a product that might be several months out. Proper forecasting buys you time to find vendors, secure products, and be ready for the impending rush when it comes.
Inventory that’s stuck on the shelves isn’t making you money.
Electrical distributors can reduce on-hand inventory by making more frequent, smaller purchases and taking advantage of just-in-time buying. It’s more intentional and limits the chance of ordering everything under the sun in one order.
Smaller orders tie up less money in stock, leaving more available for other initiatives. For manufacturers, just-in-time production makes sense because they only produce enough supply to meet demand at that moment. It’s more cost-effective than creating more than is needed and hoping customers come knocking.
Ordering smaller shipments more frequently do have a couple limitations, however, according to Marcus Tagliaferri, Director of Supply Chain for Kris-Tech.
“Any time you make smaller orders, you may have to factor in slightly higher costs in both the purchase price and/or logistics cost,” Tagliaferri explained. “As long as you manage your freight and purchase prices accordingly, this method can help reduce overall costs.”
If your forecasting is accurate, it’s easier to plan with your manufacturing partners.
Keeping a close relationship with your manufacturers can help you secure enough inventory for busy periods throughout the year. You can also avoid costly supply chain issues that prevent products from arriving or creating short orders when you don’t need them the least.
Build strong and trusted relationships with your best manufacturing partners, but don’t forget to have a backup plan.
Maintaining great supplier partnerships makes it easier to spot potential pitfalls, avoid hiccups, and take advantage of production lulls. It’s also a competitive advantage that gets products on your shelves and into customers’ hands.
But if your manufacturer falters or has trouble filling orders, don’t hesitate to find another manufacturer to pick up the slack. Haven’t a second partner at the ready ensures products are available when you need them most.
Having a steady stream of inventory coming in is great. Not having enough money to afford payroll each week is not.
Liquid capital, or money on hand, ensures you can stay afloat in the short term to retain staff, buy materials, perform critical maintenance, and keep the lights on.
Not sure how to increase cash on hand? Start by looking for ways to optimize operations and reduce overall costs. Examples include implementing automated workflows and inventory tracking software to boost productivity or leasing equipment rather than buying it outright.
Another good way for distributors to free up additional capital in the short term is to discount excess inventory. When a recession hits, consumers often spend less money. That means risking items building up on shelves and locking up money for weeks, months, or even longer.
“By discounting excess inventory, distributors can reduce the amount of capital tied up in products sitting on their shelves while freeing up warehouse space,” Tagliaferri said. “The key is to lower prices to remove excess product, but not sell off so much that you don’t have enough available when customers need it.”
Recessions offer a worthwhile opportunity to review your product lines and offerings to find slow-moving or low-selling products. The less time and money spent ordering low-performing goods, the better for your bottom line.
From ERP systems and inventory tracking to digital workflows and scheduling software, there’s no shortage of technology available to streamline operations and find savings.
Automation tools and digital management systems can reduce overhead costs while optimizing labor. They also have the potential to reduce lead times, improve customer service, and make it easier to forecast future needs and better predict runs on products and services.
As a result, teams are more productive, and companies run more efficiently.
You know what they say, “People who ignore history are doomed to repeat it.”
It’s worth exploring how your company and industry have historically handled global economic downturns. If there were lessons to be learned, find ways to use them to avoid potential pitfalls.
Taking previous lessons to heart empowers you to create plans that minimize losses and generate strategic growth.
It’s worth noting that everything comes full circle eventually.
Economic booms are tempered by downturns and vice versa. Understanding how the two work together and preparing for leaner times will ensure your company thrives when conditions improve.
Supply chain management is only one piece of the puzzle, but crucial to ensuring products are available when customers need them most.
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