Recessions occur when there is a consecutive decrease in economic growth. The global economy is volatile, and its impacts can travel through many parts of business and society. Recessions happen when there’s a drop in real gross domestic product, income, employment, manufacturing production and consumer retail sales. When the economy goes south, it can have a big impact on your supply chain.
How will a recession affect your inventory business?
During a recession, inventory managers feel changes to the market as consumer spending slows down. You’ll notice a decrease in customer orders, as your inventory stock starts collecting dust. Though it might prove challenging, you might need to get rid of dead stock.
Consumers stop buying expensive or luxury items. In a recession, the “nice-to-haves” are no longer factored into their disposable income budgets. Rather, people save money if job insecurity or housing markets put pressure on their wallets. Inventory managers might be stuck with extra inventory stock and uncertainty around their pricing modules. Warehouse shipments might slow down and space can go underutilised.
How will a recession impact your supply chain?
Supply chain managers will feel the shift in demand from their customers, sending out less inventory stock than normal. Supply chain managers are also impacted by import and export rules and fees. When there is a change in a political environment, there is often a change to tariffs. The tariffs are either incurred by supply chain managers or their customers. Either way, this cost can be a large burden and even harder to afford during a recession. The result of higher tariffs in a recession will be a decrease in orders or a change to a local supplier without tariffs.
Supply chains may also have to lay off people which means they aren’t operating at their most efficient capacity. Goods may take longer to be delivered because they don’t have the same amount of staff on the ground. A recession will have trickle-down effects throughout the supply chain.
How can your businesses navigate a recession?
Control lead times
If you have ongoing contracts with regular, large orders to fulfil, you can still mitigate this with your suppliers. Make sure you are able to manage lead times well so that customers are assured and have the ability to pay.
Evaluate your raw materials
When it comes to production, you may need to have a look at your raw materials. If you’re using high-end materials, it might be time to cut back on this. Instead, during a recession, look for generic, standard materials at a more reasonable cost. Standard parts can be exchanged or cancelled because the supplier can on-sell these easier. With expensive, niche materials, it’s harder to cancel an order because it puts the supplier at a higher risk to sell a very specific product.
Keep communications open
It’s important to keep an open and honest line with members of the supply chain because you are all going through the recession together. Although your business motives will vary throughout the supply chain, you are all dependent on each other. Support each other and be honest about what your business is experiencing. Chances are people will be willing to help and you can come to a compromise or arrangement that can help involved parties get through the recession together.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.