Corporate America is tightening its collective belt in anticipation of a potential recession. Declining forecasts are prompting businesses to dust off their downsizing playbooks. While decisive action is required, all steps taken to shore up working capital need to be taken with long-term viability in mind.
Executives are clearly prioritizing working capital initiatives amid uncertainty, according to findings published in our fourth annual Disruption Index. When times are tough, after all, cash is king. This uncertainty is impacting almost all industries, and will have a particularly large impact on manufacturing operations.
As companies tighten up inventories, they need to be strategic in how they set new targets and execute. The key is drawing down the operation in an orderly manner so as not to hurt the large percentage of business that is going to materialize, and potentially be unaffected by macroeconomic concerns.
Adjusting to a new normal
Any downsizing plan needs to take into account several factors that didn’t necessarily exist in prior recessions. Interest rates are high as the Fed continues to work to cool certain economic conditions, including a frenzied hiring pace in certain sectors. Inflation, while easing, remains historically high. Supply chains are stressed and significantly retooled.
As a result, “business as usual” has changed considerably in the three years following the pandemic’s initial outbreak. After tanking in the spring of 2020, consumer and industrial demand roared back. Supply chains were severely challenged, leading to many companies scrambling to acquire or build inventories.
As conditions cool and consumers appear stretched, the natural tendency is to unload inventory. Or draw back on purchases. Or both.
To be sure, inventory must be prudently managed and future expenses scrutinized, but companies must avoid kneejerk reactions or haphazard responses. Slashing inventory or canceling purchase orders without doing a due diligence is not a winning strategy. Another pitfall to avoid is trying to hit year-end targets regardless of the long-term consequences.
Another potential strategic pitfall is losing touch with the customer. Any effective plan will take account of the customer’s needs and put those needs at the center of the business.
Inventory is a strategic advantage that, managed properly, can increase a company’s competitive position going through and coming out of a potential recession.
Employ a smart downsizing plan
In the effort to create immediate breathing room, be careful not to damage the long-term health of the business. Attack the problem at the structural level, utilizing analytical tools and information sourced from suppliers and customers.
Any moves made need to be done in a way that that ensures continuity of the business through the current up-and-down volatility in the economy. Here are the steps to take:
- Ensure the forecast is as accurate as possible, so we have reasonable confidence in products/SKU’s volume projection. Although forecasting algorithms and programs are more advanced than ever, it is important to engage multiple business groups in reaching a consensus forecast. This includes gathering business insights from sales, product management, customers, and other teams. Using KPI’s, such as MAPE and BIAS, will help track meaningful improvements in these consensus forecasts over time. Review macroeconomic trends and the end-consumer demand consumption patterns to further achieve accuracy.
- Develop a time-phased and forecast-driven supply chain model that gives:
- Production plans with capacity and material availability consideration
- Material requirements (purchasing plan) that syncs with the production plan
- Shipment plan that is logistically aligned to the production plan
- Inventory plan yielded from current inventory, production, and shipments
- Draw down capacity strategically. Meet short and medium-term production forecasts without jeopardizing the ability to increase capacity in the future if demand were to rebound. Labor force reductions (furloughs, reduced operating hours, running fewer equipment, etc.); plant closures (permanent or temporary); and sale of facilities or equipment are all options to consider, depending on future projections and difficulty to ramp up operations if required. Review ability to repurpose capacity to manufacture products rather than shutting down lines.
- Reduce material spend, based on material requirement plan. This could include pushing out or cancelling POs, and/or it could require performing a sourcing exercise to consolidate demand into strategic suppliers and optimize pricing negotiation. Be sure to revise schedules of POs without impacting service levels and aligning with production schedules.
Today’s actions will have long-term consequences
Anyone in business knows there is no tradeoff between winning today and winning tomorrow. Both need to be accomplished at the same time. To accomplish this, the bigger picture must be considered even when decisions seem temporary, or action steps seem small.