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Recession proofing the supply chain

Many organisations have enjoyed unquestionable success during the recent economic expansion, including higher margins, product portfolio expansion and a renaissance in talent acquisition, with millions of new jobs created over the past several years.  However, signals from multiple sources point to a coming recession within the next 18 to 24 months. A recent Grant Thornton survey of more than 250 C-level executives and business owners found more than three-quarters of respondents expect a recession to occur within the next two years, with the potential to impact a number of critical supply chain attributes, including physical infrastructure planning, new-equipment procurement and critical research and development investments. Faced with these potential challenges, many organizations are embracing the pathway to recession preparedness by adopting a number of strategies designed to preserve recent performance gains and minimize supply chain disruptions. 

Organisations can prepare for the uncertain times ahead by adopting a recession mitigation framework that targets the most high-risk supply base, process and delivery capabilities. With such a framework in place, they can quickly develop what can be termed a ready-for-deployment supply chain immune system to minimize any disruptions and preserve the competitive advantage of their supply chain.  While some leaders are resigned to acceptance of inevitable recessionary effects, savvy, proactive executives can translate the noise of a recession into actionable, deployment-ready mitigation strategies to capture the highest level of supply chain resilience and agility possible.

Identifying the signs of recession 

While knowledge of an impending recession is important, paying close attention and preparing for the potential impact on your operation is mission critical. Grant Thornton’s survey found that nearly three in 10 (29%) respondents have a supply chain resiliency strategy in place. The balance of respondents, 71%, are in various stages of considering, planning or implementing such a strategy. 

Based on our research, Grant Thornton has identified seven key recession indicators which, when combined, can provide a useful framework to assess your risk preparedness for a possible economic slowdown. These indicators, when viewed across the enterprise, can also inform your supply chain mitigation strategies:  

  1. Global dashboard deterioration outside of normal control limits (e.g. growing inventories, demand drop)

  2. Supply partner financial issues including market contraction and growing backlogs

  3. Internal and trading partner budget contractions and budget freezes

  4. Diminishing margin capture against long-term forecasts

  5. Talent pool shrinkage across core functions due to functional budget issues

  6. Cross-functional continuous improvement investment shrinkage and funding shortfalls

  7. Shrinking cross-functional cooperation and synchronization (“local survival focus”)

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Taken together, these seven indicators should prompt a number of introspective questions regarding an organization’s supply chain health, including:  

  • Could diminishing supply partner financial performance potentially transition from periodic issue management to a quantifiable supply risk? 

  • Will our promised “market-known” business process improvements lapse because of internal funding choke-holds?  

  • Can talent attrition become a highly visible concern to key customers?  

  • When will my growing inventory pipeline reach the critical stage of unbudgeted obsolescence, disposal and excess storage costs?  

While each question individually poses a tactical risk with (hopefully) only a localized performance impact, the effects of multiple scenarios in parallel pose significant risks to supply chain flexibility, adaptability and ultimately profitability.  For those executives who see the signs of a recession as an opportunity to further refine and strengthen their existing supply chains, there are several practical strategies leaders can rapidly deploy as part of an offensive recessionary response.

Building up organisational supply chain immunity 

Organisations have a clear opportunity to benefit from a supply chain recession preparedness framework designed to address the seven indicators outlined across the end-to-end supply chain value stream.  Holistically evaluating the complete supply chain value stream, an effective supply chain immunity assessment should catalog the most significant supply chain risks, including the magnitude of the possible fallout of each identified risk along with the individual risk trigger point.  Armed with priority risks and their associated trigger points, the assessment must then translate into ready-for-deployment mitigation strategies to lessen quantified recessionary impacts, preserve competitive advantages, and lessen market fears. Once in place, the immune system can provide the tailwinds to preserve market confidence and sound financial footing.  Key aspects of a successful immune system include:

  • Contingency SKU rationalization planning to drive out unnecessary cost and complexity when laser focus on higher-margin products become a true recessionary lifeboat

  • Highly targeted supply contract temporary modifications, including advanced buys for high-risk components, tighter backlog management and improved risk-sharing across the relationship

  • Customer segmentation refinement to pre-select and plan for service level adjustments should supply constraints become a reality

  • Cross-functional preparedness to harness available enterprise-wide cerebral horsepower and prevent isolated, siloed recession response plans (e.g. expand the power of S&OP as a functional integrator)

  • Advanced automation efforts prior to major recessionary impacts to better prepare for, and ethically manage, labor reallocations

  • Close coordination with strategic suppliers to improve transparency to core supplier cost drivers and appropriately share recessionary concerns and deploy a partnership approach to proactively manage down costs where possible

Ultimately, the assessment, along with the adoption of targeted risk mitigation strategies, can proactively reduce an organization’s overall recession risk profile and the magnitude of any possible disruption. Known and documented risks, proactive mitigation strategies and deployment-ready action plans are the necessary resilience tools for the next recession. Long before competitors are scrambling to adapt, proactive business leaders can take the steps necessary today to set their organisations on the right path. They’ll face down a coming recession with confidence, greater precision and highly ethical responses to challenging supply chain design and resourcing questions.

 

By Bob Hawkey, Director, Operations Transformation, Advisory Services, Grant Thornton LLP

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