Recession proofing your business with smart supply chain decisions
Recently, South Africa entered a technical recession for the first time since 2009, with Statistics SA revising the growth forecast downwards to 2.6%. There is no doubt our economy is taking strain thanks to burgeoning fuel prices, exchange rate volatility and weakened business confidence, and while the public is still grappling to understand the impact of the news, arguably the first area to be impacted will be consumer spending. The tightening of belts will have a direct knock-on to industry thanks to a decreased demand for goods and services in most sectors. For companies, an economic downturn is by no means easy, however, re-evaluating supply chain strategy to improve efficiency and flexibility, and more so to capitalise on hidden opportunity, can go a long way in helping to weather the recessionary storm.
A depressed economy typically results in less access to credit, pricing pressure, and of course, lowered demand. These factors translate into revenue shrinkage due to less spending by consumers, bottom-line impact thanks to pricing pressures and a higher cost of operations caused by less access to, or a higher cost of, credit. For the most part, the only strategy that really works in the face of such challenges is one of driving costs and efficiencies throughout the organisation.
This is where a robust supply chain strategy comes to the fore since a well-designed supply chain is all about cost and efficiency. Efficiency within supply chain speaks to the ability to continuously improve the ability to complete transactions while containing or decreasing costs successfully. Standardisation, automation, increased transparency and data-driven decision making are all tactics available to supply chains to improve efficiency.
The creation of a variable cost structures within a supply chain allows for the rapid scaling up, or down, of operations in line with demand fluctuations. From a supply chain perspective, outsourcing and the sharing of assets is one way to build variability into an organisations cost base. Owned assets and networks are not only constraints to rapid growth, but in times of decreased demand, these can be a heavy financial burden to bear. Utilising 3PL, and indeed 4PL, service providers allow businesses to maintain (or even lower) the total cost for logistics per SKU regardless of demand volume, and this type of model translates into costs correlating directly with sales, instead of costs remaining constant through good times, and bad.
Recessionary-led consumer-demand has differing effects on different market segments and organisations would be well advised to not merely baton down the hatches, but to also understand these demand changes and actively gear their supply chain to capitalise on the hidden benefits a recession may offer. Arguably, premium products bear the brunt of decreased demand, however, in times of constrained spending, these products often find new consumers who, thanks to a desire to “spoil” themselves, buy and try products they would not usually purchase. Consumer acquisition is the hardest, and most costly, step in the customer journey, so organisations should gear themselves to capture these “spoil- me” customers by offering easily accessible products when and where the customers require them. This may need premium brands to shift distribution patterns and reach consumers beyond their traditional client base.
On the flip side, premium brands also lose clients to cheaper alternatives during a recession, and therefore organisations offering more affordable options should prepare for such brand shifts by increasing inventory holdings during tough times. This may seem counter-intuitive, but the results of switched demand can be dramatic and long-lasting. In a study conducted post the 2008 recession in the USA, it was found that approximately 20% of consumers changed to cheaper alternatives during a recession, and remarkably, as many as 48% of these switched consumers did not go back to premium products once the depression lifted. Thus there is an intrinsic opportunity for such products, and their supply chains should be geared to capture these switching customers through available inventory, aligned delivery networks and rapid routes to market.
Walt Disney is quoted as saying “I’ve heard there’s going to be a recession. I’ve decided not to participate”. While any local organisation cannot wholly avoid the impact of the technical recession, they are able to reassess their supply chain, understand their changing customer profile and strive to benefit, not suffer during the current economic slump.