Recession brings bad news for all, but for the supply chain it can be particularly challenging. Here’s why…
During a recession, overall consumption drops precipitously as consumers are unable, or unwilling, to spend. As a result, manufacturers tend to lower operational costs to maintain break-even and/or mitigate losses. With transport and logistics being a larger portion of these costs, they are also the first to experience the effects of cost reduction efforts. In turn, transporters are compelled to reduce freight charges which may negatively impact revenues and future business sustainability.
Why would we worry about a recession now? After all the last recession was more than 10 years ago. However, with a global economy closely knit with the help of technology, the reality is events such as the COVID-19 pandemic have the potential to trigger a recession and affect the supply chain, along with other operational services.
Can this situation be prevented? Is it possible to recession-proof the supply chain?
Although the consequences of recession cannot be entirely eliminated, there are proactive measures that can help to safeguard against a supply chain breakdown:
During high economic expansion periods, a supply chain is expected to treat every product — those with high-margin and low-margin - with equal importance. However, during recessionary periods, low-margin products can become deadweights that pull down financial stability.
As a pre-emptive measure, businesses should make a list of low-margin products which could have lower demand during a recessionary period. An SOP for removing them from the supply chain’s activities should be created. This will help buffer high-margin products without driving the costs up. As a result, the supply chain can better insulate itself from the downturn of the recession to a certain extent.
Carriers and supply chains are like chains and cogs of machinery. The system breaks down if one of them is not in alignment with the other. During the recession, both the parties would be at a loss since revenues will plummet while costs keep spiraling upwards.
In such a situation, an ideal way to stay recession-proof would be through future contracts. Future contracts are contracts dated for a future period. The costs are tricky to calculate and might require the help of a financial planner. However, a future contract ensures both the business and the carrier can operate at an optimal rate that is beneficial for both or, at least, at a cost that does not incur losses for both the parties.
There is another benefit of integrating future contracts for transportation. It provides more clarity on supplier costs. As a result, it becomes easier to share the risk that both sides have to go through during recessionary times.
Artificial Intelligence, machine learning, Robotic Process Automation — the list of technologies that are reducing human intervention while boosting automation is growing every day. Can they help the supply chain become recession-proof? Absolutely.
Automation can help connect every link of a supply chain for better operational efficiency, and most importantly, cost reduction. During times of economic recession, cost reduction is an ideal business strategy to tide over tough times.
Automation makes it possible to integrate several siloed systems that work independently within the supply chain. For example, if demand management is tied to inventory management and purchases, unnecessary purchases that incur supply chain resources can be avoided. Since automation is the future of the supply chain, businesses should start planning for it when the economic climate is good rather than wait for a downturn to stall all business transformation activities.
According to IBM, over the next three years, 79 percent of consumer product manufacturers and 85 percent of retailers are expected to switch to this automation. This rate is said to be high in the Nordic regions where the need for a smart supply chain is high.
If you look at the economic history in the U.S., it has undergone 14 recessions since the Great Depression in 1929. Since 1945, the average recession lasts close to 10 months. Whether we will face a recession soon is a question for the economists, but it is always the right time to plan for staying strong during recessionary times.
The tightening process begins with identifying low-margin products that could become deadweights during recessionary periods. Further, future contracts with carriers to tide over the recession periods can also be negotiated. In the end, there is also automation. All of these pre-emptive measures can help a business recession-proof its supply chain.
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