This article appears in Supply Chain Management Review, and is truly an article since it contains 5,000+ words and will require most folks a bit of time to read and absorb. Nonetheless, it has some good and obviously timely information since we are already in a recession, although it has not yet been officially declared due to reporting lags. The author is a PhD and well versed in the supply chain management space. The interesting thing is that the article was written in 2009, during (or perhaps just after) the great recession.
‘When a recession hits, customers can reduce your revenues and stop your outbound flow of products faster than you can trim expenses and stop your inbound flow of raw materials. Working capital will be stressed as your materials pipeline backs up and profits will take a hit as costs overshoot revenues. This framework gives supply chain managers six simple ways to prepare for downturn before it happens—and to respond constructively when the economic slump arrives.’
So running through the lengthier than we usually review piece, one finds lots of good advice. There author provides some historical perspective on recessionary impacts to supply chains, then discusses a framework to deal with six challenges for companies in tough times, which many readers will realize is happening in real time now, due to the unprecedented and simultaneous stoppage of major world economies. The list is as follows:
· Customers Cancel Orders and Finished Goods Inventory Builds Up
· Customers Slow Down Bill Payment, Stretch out Payables
· Raw Inventory Builds Up as Material Keeps Arriving
· Parts Shortages Become Critical When a Supplier Collapses
· Direct Labor Spending Stays High
· Overhead Spending Stays High
Each of the ‘challenges’ is followed by a number of practical recommendations to overcome the challenge. An example is in the second category (Payments related), the author suggests seven different steps, two of which involve the use of supply chain financing and flexible payment options. We cover these options extensively and will soon be posting additional member research on the state of the alternative financing space. Since the original article appeared 11 years ago, there has been tremendous growth in open account trade, digital marketplaces and available information to more closely manage working capital. We highly recommend spending time to look this piece over.
‘The stock market crash that started on October 28, 1929 finally hit bottom three years later, after falling by nearly 90 percent. It took a quarter of a century for the market to recover. In the 80 years since, the world has changed in almost every way, yet we are still taken by surprise by steep and sudden economic downturns. Far too many senior managers still make decisions that assume the good times will last forever—which leads to many companies getting caught with working capital trapped in unmoving inventory or accounts receivable.
There are many simple actions that companies can take to better position themselves to withstand a downturn. By far the most effective of those actions are those taken when the economy is buoyant and demand is strong. Once a recession is underway, remedial options are limited—and much less effective.’
Overview provided by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.