Business cycles being what they are, this economic recession will end, sooner or later. But, prosperity may not be just around the corner. No one knows when the upturn will take hold, or what the new environment will look like. Here is what's clear: Businesses that make smart, structural changes to the way they operate will be better off than those that keep chipping away at costs.
From where we sit today, it appears the economic downturn will include three distinct phases - falling, the bottom and the rebound. The fall began around April of last year. Companies abruptly pulled back on supply chain activities and curtailed production. Maximizing cash without fundamentally changing the business was the order of the day.
We now arguably have reached the bottom, or second phase. Early this year we saw a slight thaw in supply chain activities as many business executives realized the cutbacks had cut too close to the bone. Now, we see companies starting to formalize their initial cost reductions with the goal of operating more efficiently going forward. There is a glimmer of hope that things will start picking up in the next few months with a solid rebound (the third phase) next year.
The focus on improving cash position will not go away. At the same time, everyone is looking for ways to grow and improve profitability. With a slow upturn, this will be a challenge. When the recovery picture comes into focus, we will see a new economic landscape and a new set of competitors. Although there is no way of knowing the contours of the new world, you have to start preparing anyway.
Where Do We Go From Here?
What actions your business should take depends in large part on what your company has already done to weather the downturn. I have identified eight sets of Supply Chain Levers that companies should consider pulling, individually or in tandem, in their efforts to survive the storm. Rather than turning their attention to other activities or levers, companies need to keep making improvements in all eight areas in advance of the upturn - and beyond.
Supply Chain Levers For Downturn and Upturn
• working capital
• direct materials
• indirect materials
• cost to produce
• cost to deliver
• cost to serve
Companies that worked aggressively from the first signs of economic collapse are likely much better positioned to start taking advantage of emerging opportunities. Others still have a lot of work to do. At a minimum, you need to make your initial cost reductions permanent. Most organizations do not have hidden reserves of cash to carry them into the upturn.
On the other hand, cutting costs will probably not be sufficient. Senior executives have to start making changes that will help their business become more sustainable over the long term, such as gaining tighter control and visibility over supply chain processes.
Growing inorganically via mergers and acquisitions is a particularly attractive option just now. There may be product lines, factories or suppliers that you could purchase now - the price will probably never be lower than it is today.
Whether or not you are positioned to take advantage of a merger or acquisition, most companies have contracts ripe to be renegotiated. Vendors, partners and suppliers are likely to be more open to favorable terms than they will ever be again. Get a new deal done - today.
If you have not already done so, you should rationalize your product/customer mix, making the hard decisions to cut off those that are least profitable. In times of growth, most companies justify keeping unprofitable customers and product lines in the fold under the notion that they are an investment for the future. In these economic times, holding on to unprofitable customers and product line is much harder to justify. When the market is down, you have to take a much harder stance and stop doing that.
We are coming through the bottom of the downturn - change is ahead. Do not expect a return to the past - we will emerge in a different business and economic landscape. At this point, the cost of inaction is likely greater than the cost of action, and there are several things you should consider doing now to prepare for the upturn, whatever form it may take.
Actions to Take Now
• Industrialize your short-term cost-cutting strategy
• Make structural changes to lower your long-term cost structure
• Balance cost cutting with growth investments
• Establish an innovation agenda to better position for new competition
• Look for M&A opportunities to strengthen your business model
We can't know when the recovery will take root, but we must prepare for it even so.
Source: Deloitte Consulting
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