How Will Recession Affect Supply Chains?

Supply Chain Leaders Can’t Afford to Guess About the Future

Executive Summary

In Part One of this blog series  were going to discuss the phenomenon that seems to be at the center of every economic advisor’s latest report: recession. Notably, we’ll be examining the shaky logic for some statements we’ve seen about the potential for an economic slowdown to actually help supply chains recover.  We’re going to discuss why the uncertainty recession creates is actually supply chains worst enemy. We’ll also look at how the current “potential” for recession makes this uncertainty worse in the short term. 

In Part Two of this exploration, Responding To Uncertainty, we’ll pivot from the problem and talk about what supply chain leaders can do to manage through this crisis, and step out and offer some guidance about what they should do to come out ahead. To that end, we’ll be talking about what it takes to build a strong internal consensus, and why it’s not necessarily a good idea, at times like these, to be overly concerned with the actions and statements of your competitors. 

How Ripples of Supply Chain Uncertainty Became Waves

Let’s start off with a quick recap of where we’ve been for the last two years with supply chains and risk management. The headlines have been consistent: and the message has been that supply chains cannot keep up with demand. 

At first, many of the stockouts were clearly related to the exigencies of pandemic-driven needs: toilet paper, disinfectant, PPE materials, and canned goods. But fairly quickly, second-tier effects took hold, and the shortages became more comprehensive and unpredictable: computer chips, furniture, and building supplies joined the “want” list. Ultimately, the multiplicity and endurance of these shortages began to drive sharp pricing increases, resulting in inflation across the globe. As you’re no doubt painfully aware, the US has seen its worst inflationary period in the last 40+ years.

How Supply Chains Are Supposed to Work

In “less extraordinary times,” a high-functioning supply chain team will operate like this:

  • Demand planners make a forecast based on recent buying trends, seasonality, and any new products or promotions that are being introduced.
  • Based on the demand plan, the supply planning or inventory management teams make a plan for volume and types of supplies to order from vendors.
  • The procurement team orders those goods — and as the supplies arrive, the manufacturing team builds the product.
  • Throughout the process, the logistics team ensures the materials are arriving on-time and customer care makes sure the buyer is aware of the delivery date and any delays.

A simple outline, to be sure, but this will do for our immediate purposes.

Demand Is The Driver

As you can see, its a logical, serial flow of goods — and it all starts with the demand planning process. Depending on the industry, this process can take 30 days or it can take 6-12 months. The shorter the demand planning cycle time is — for example, for food supply — the more exposed planners and their organizations are to immediate disruptions. Makes sense right? With less buffer time to react, problems crop up more frequently. However, the silver lining for shorter cycles is that demand planners can usually recalibrate faster after an initial disruption. 

On the other hand, the longer the demand planning cycle times are (for example, with automobiles), the more robust they tend to be. At least at first: because its possible to make up lost time. However…once long-cycle supply chains get behind, its much more difficult to catch back up. 


Demand Planning is Key 

Normally, the first place to look when supply chains break down is to the accuracy of the demand plan. Supply chain (and demand planning) veterans know, predicting demand can be maddeningly difficult. You don’t have to be a demand planner to know that consumers can be fickle, and today virality in consumer behavior is an ever-more powerful demand-variable. One never knows how fast a new fad will be adopted, or how powerful the emotional / hoarding reaction will be for any given shortage. And even without the behavioral peculiarities of the current moment, it has always been difficult to estimate how well a new product will be received — on the up or down side.

We rightly begin any analysis with demand, but of course it’s only one the areas of uncertainty pertinent to the supply chain. The chain is aptly named, because when one link breaks, the rest of the operation can be imperiled.  If a supplier misses a deadline, supply chain workers have to find another supplier and expedite production. When ships begin to leave ports late, suppliers may consider (or absolutely require) a switch from sea to air shipping. When raw material prices increase dramatically, procurement may consider swapping from one material or supplier to another.

Uncertainty Crescendoes

With the onset of the pandemic — and moreover, with its unanticipated endurance — uncertainty became comprehensive at unprecedented scale. First, demand spiked because consumers had more money to spend on “shippable” products. After all, consumers werent going on vacations or eating out — and many also benefited from stimulus checks while also being able to pivot successfully to a work-from-home world. Naturally, people also wanted to spend to improve their surroundings: to equip home offices, stay-at-home-gyms, and similar.

Not only did the onset of the pandemic represent a demand spike, it also significantly shifted the  mix of products in demand. For example: restaurants were all but closed, and people were buying more food from grocery stores. A relatively easy adjustment for consumers, but a significant source of disruption for supply chain managers.

The second wave effects began to assert their presence as suppliers and manufacturers began to shut down, in multiple waves, because of covid outbreaks. These rolling outages have continued to this day in parts of China.

Knock-on effects followed: machines and supply lines that were idled at the beginning of covid (because it seemed like demand would stop) proved difficult to restart. Ports couldnt handle inbound shipments because of labor shortages and safety concerns.  Staffing as a whole became problematic (and remains so) as the supply chain industry was one of the hardest hit by the great resignation.

Supply chain leaders have responded heroically to address consumer needs, but even the fastest responders have been bedeviled by a continuing flow of new problems. The supply chain hasn’t been slow to recover solely because demand has been too high or supply too low: rather, uncertainty has created a steady flow of changes impossible to predict and plan-for. As we all know, this uncertainty has outstayed its welcome, particularly on the supply side, as it has endured for several quarters running.  How will the recession that’s predicted to ensue affect small business and big businesses alike? Let’s consider some possibilities…

Can Recession Help? (Maybe…Not)

First, we want to address what we see as a popular misnomer. We’re seeing boosted signal-strength for the idea that a recession might actually be a good thing for supply chain disruption. The basic idea is that recession could help because the letup in demand would give supply chains “time to catch up.” This would, in turn, have positive effects for business in general.

There is an appealing first-order logic to this line of thinking: If too much demand and not enough supply caused all the supply chain problems and drove inflation — then it stands to reason that less demand, due to recession, should allow supply chain shortages the opportunity to be remediated. Unfortunately, as with many things supply chain related, the reality is more convoluted.


Demand Remains…Uncertain

The major flaw of this reasoning sits right on the surface. The thing is: the proposed logic, while appealing, is completely hypothetical. The stark fact is, we dont really know if demand will slow down!  To be sure, steady or rising demand may be a good thing for business, but it can quickly become a bad thing if supply chains aren’t prepared.  

And supply chain leaders have to be prepared…either way.

Now, in addition to all the on-going challenges, supply chain leaders must be wary of a drop in demand that could” happen. We say could,” because by all accounts, consumer demand is still strong. There are signs of a recession, which is defined as two consecutive quarters of negative GDP, and in this case one would expect higher prices to crimp purchasing power enough to cause a pull-back in consumer spending. However, actual demand decreases are only spotty right now.

This puts supply chain leaders in an extremely precarious position: Do you start lowering inventories based on the assumption of lower demand in the future? If demand does decrease, you’ll get stuck holding / storing / reducing price on surplus. If demand doesnt decrease, you may well stockout again, and miss revenue, upset customers, and lose market share. Ouch, ouch, and double-ouch.

Given the pain of missing on either side of this equation, for most companies, the natural thing to do is to maintain the status quo until theres a clear reason to do otherwise. Unfortunately, as the pandemic has shown, the “status quo & hope” approach tends to fall short — especially when uncertainty rattles supply chains across their multiple interdependent links.

How Should Supply Chain Personnel Respond?

In Part Two of this blog entry, we’ll take a look at some coordinated steps supply chain leaders can take to meet this moment and emerge from it with even greater strength and resilience. 

It all begins with assuring alignment for their strategic plans and priorities, and this idea works its way down to the day-to-day operation through inward-focus, more immediate and integrated communication — and the right tools to facilitate inclusive, consistent, and authoritative interactions among all parties to the supply chain.  Nothing magic, but a reliable and proven mechanism for making your supply chain team’s hard work pay off over the long run.

David Blonski

David Blonski

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