Can Supply Chain Prepare for a Recession?

Can Supply Chains Prepare for a Recession?

"Good times are dangerous: Business managers are under constant pressure to bend the rules, be flexible and agree to policies during good times that will cause great pain and suffering when the economy goes south,” according to a study from MIT Center for Logistics

Hoping to cull some lessons learned from experiencing the recession of 2008, Dr. Bruce Arntzen and Dr. Nima Kazemi at the MIT Center for Transportation & Logistics (MIT CTL) analyzed the profiles of 100 manufacturers to see where the companies are in terms of their recession readiness. 

In an article by Ken Cottrill for the MIT CTL, he wrote that the authors concluded that: “Good times are dangerous: Business managers are under constant pressure to bend the rules, be flexible and agree to policies during good times that will cause great pain and suffering when the economy goes south.”

In an effort to help companies understand how their supply chains are affected by an economic downturn they offered these observations:

1. Customer orders fall off a cliff. As customers feel the full force of the economic headwinds, they cancel or delay orders and trade down by buying less expensive items in smaller quantities. Possible countervailing measures include introducing risk-aware contracts that allow for long lead-times and collaborating with customers on ways to share the risk.

2. Customer payments dry up. This is the most hurtful outcome. It’s important that companies keep a tight rein on salespersons who prioritize their earnings above the company’s best interests. Being diligent about collections helps to counter customer tactics such as attempts to change payment terms.

3. Expensive raw materials become a millstone. Using high-end raw materials might be the preferred option when times are good, but when a recession hits companies need to scale back in this area. Switching to standard parts can make it easier to cancel orders because it’s easier for suppliers to sell these parts elsewhere.

4. Payments to suppliers drain your reserves. Honoring supplier contracts becomes more difficult during a downturn. Adopting supplier management practices such as monitoring the financial health of suppliers and qualifying second sources of supply, helps companies to rationalize supplier networks during a downturn.

5. Supporting pre-recession headcount becomes a problem. While employees may be your most valuable resource, they can become a cost burden when the economy goes south. A more flexible labor cost structure, such as using contract manufacturers, might be a better option.

6. Lax indirect spending practices become unsustainable. Indirect spending covers myriad items such as computers, lunches, and even bottled water. These may not be considered mainstream purchases and hence not subject to the usual oversight. Such laxness needs to be addressed when the company is financially stressed.

7. Fixed costs become onerous too. These include outgoings such as rent and monthly payments on equipment. Again, a lack of discipline in this area can’t be tolerated when the company is battling recession.

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