Can we truly call what we’re experiencing under Covid-19 a recession? This coronavirus-induced downturn is unlike the 2008 recession, where the economy was active but the credit markets were frozen, as Vox’s editor-at-large Ezra Klein points out. It’s more like parts of the economy have simply stopped.
That means many of us are facing a scary and uncertain reality. Yet there are silver linings: firstly, with the cause of the downturn so obvious we may yet see a rapid rebound if and when a vaccine or other solution can be found. And secondly, businesses now have a window of opportunity to reflect on how to adapt and survive in these times and beyond.
Let’s talk about these six ways your business can thrive in a recession:
- Keep your business active during a recession
- Invest in technology
- Review existing inventory management systems
- Evaluate alternative materials and resources
- Protect cashflow during a recession
- Keep communication flowing
1. Don’t put your business on hold
You don’t need to hunker down to wait out the coronavirus-induced lull. Keep a lookout for new opportunities that arise. The key to successfully pursuing these opportunities is knowing your core business and strategy inside out; that will guide you in making the right strategic decisions. If that sounds like a case of easier said than done, consider this finding by Bain & Company, cited by the Harvard Business Review:
“Twice as many companies made the leap from laggards to leaders during the last recession as during surrounding periods of economic calm”.
But why is that?
Recessions are a wild card
Post-recession leaders aren’t always your usual suspects. 85% of companies that were growth leaders before a recession toppled during bad times, according to a 2010 study by Harvard Business Review.
Despite this, few of the leaders have a master plan when they enter a recession. Remaining agile while prioritising long-term growth will not only help businesses overcome a downturn, but also lay the foundation for continued success.
You can make gains early on
Recessions are a good time to capture market share when other businesses are distracted. For
example, the last recession made it a tough time for toy companies — except for Lego. When their competitors were hibernating, they explored the global markets by expanding to Asia and increasing sales in Europe. At the end of the recession, Lego’s profits leapt by 63%.
Gains and losses are sustained
It’s a mistake to think that your business can accept poor results now in hopes that you’ll bounce back after the economy picks up. Fewer than 30% of businesses that lost market share in the downturn of 2001 were able to regain their positions, according to the Bain study.
In short, the time to act for future success is now.
2. Invest in technology
In the face of a recession the instinct may be to withdraw and tighten purse strings to stay protected. Yet one of the best ways to prepare for a recession is to continue to invest in technology and service offerings that are right for your business. This will give you a far better chance of coming out ahead of your competitors once the market bounces back.
The reality of the current Covid-19 climate means that businesses need to turn to digital solutions to continue serving their customers.
So what does investing in technology look like for your business? It may involve supporting your warehouse team with a better system. It can also involve using business analytics to help you truly understand what’s driving your business. When a downturn happens, you’ll be in the best position to provide the best service for your customers.
We’ve written many articles on the benefits of cloud-based apps for your business and customers. For a more detailed guide on how to pick the best inventory management software for your business, check out our comprehensive guide.
The short version, though, is that investing in technology makes your business more robust and therefore better able to handle uncertainty and rapid changes.
3. Review existing inventory management systems
Use the downtime to reflect on your inventory management systems and practices. Your business might be getting by on spreadsheets and infrequent stocktakes, but once the economy picks up, will you be ready to grow with it?
Here are some common warning signs you’ll need to upgrade your inventory management software.
4. Look at alternative materials and nurture relationships
Take this time to assess your raw materials and component parts. If you’re using high-end materials, it might be the right time to look for alternatives — they’re more likely to be budget-friendly and readily available. Customised or niche components are also harder for your suppliers to on-sell so consider using standard components that can be returned to the supplier easily.
Don’t overlook your suppliers either. Good suppliers play an essential role in your business — they should provide good quality products at a competitive price, maintain product quality, deliver products in full and on time, and correct problems.
If you’re able to weed out underperforming or unreliable suppliers before an economic downturn, you’ll be able to develop stronger relationships with great suppliers — ensuring both parties get through the worst of the downturn together.
Here are three ways to reduce business costs while still maintaining good supplier relationships, courtesy of CIO:
- Acknowledge that both parties should not try to take advantage of the situation. This builds a relationship of trust where both parties work together to find a way for everyone to succeed when the conditions turn for the better
- Adopt video conferencing. Save time commuting to and from supplier meetings when you can use video conferences instead. This makes more productive use of your and your supplier’s time
- Communicate regularly. Hold regular review meetings so you can evaluate operations and assess whether your suppliers are meeting your specifications. This will save time and money trying to fix a problem further down the line
You can read the full CIO article for more great tips on reducing business costs while maintaining supplier relationships.
5. Protect cashflow during a recession
Businesses with low cash reserves or unstable cash flows are particularly vulnerable in an unanticipated event such as Covid-19. We’ve talked about some cashflow best practices before, so here are some ways your business can manage its cashflow in a crisis:
Consider alternative revenue streams
Consider how you can temporarily — or maybe even permanently — adopt different revenue streams. Diversifying your revenue streams can alleviate cost pressures, and introduce a more diversified revenue stream in the long term.
If you’ve traditionally sold to other business buyers, consider pivoting to sell online to B2C customers. You could also take this time to take your sales digital by moving your B2B sales online with a dedicated online B2B eCommerce platform.
In response to the pandemic many businesses have been taking stock of their resources and production facilities and adapting production to meet the high demand for products such as face masks and hand sanitisers.
New Zealand-based Good George Brewing are putting their distilleries to work making hand sanitisers, in response to a shortage in the country.
Global sneaker company New Balance is also doing their part. They are working to produce prototypes for face masks at their manufacturing facility in America, with other facilities to follow when ready.
If you can’t create a new product line at short notice but still want to sell your products, try setting up an eCommerce store, which can work for both B2C and B2B businesses.
It can be hard to keep making sales in light of recent social distancing measures many countries have implemented. We’ve written up a guide to help you maintain sales revenue while social distancing.
Focus on inventory management
Global crises cause supply chain disruptions due to shortages in raw materials and component parts. Most businesses should have inventory safety stock parameters already set up. Once a crisis hits, you’ll need to re-evaluate and update them to reflect market volatility. It is also best practice to reduce finished goods and perishable goods so you don’t tie up capital.
In a time of uncertainty, balancing inventory management and cashflow is not easy. Companies that used a pared-down approach to inventory management, such as a just-in-time system, are more likely to be capable of quickly assessing their situation, identifying opportunities to drive down inventory, and pivoting.
Reconsider variable costs during a recession
A quick way of reducing cash outflows is focusing on your variable costs. Many companies have already implemented variable cost-reduction measures such as banning travel and non-essential meetings, freezing hiring, and restricting spend on entertainment and training. Cutting back on variable costs, instead of fixed costs like salaries and insurance, is less financially and operationally harmful to your business.
Think outside your box
All businesses exist in an ecosystem. You can’t focus solely on your own operations and inventory levels. Protect your supply chains and keep goods and services flowing, but don’t forget to consider the upstream and downstream impacts of your decisions.
Walmart is a great example of a well-developed and aligned supply chain. They worked with their suppliers to have vendor-managed inventory, built strategic partnerships with vendors to reduce prices, used technology to gain supply chain efficiencies and more. These efforts allowed them to be the leader in low-cost grocery retail and pass the savings on to their customers.
6. Keep communication open
More than ever, the pandemic has highlighted the importance of building strong supplier relationships. It’s essential to identify your best suppliers and communicate regularly with them so that there’s transparency across the supply chain.
Toyota and Honda are great examples of good supplier management. A survey measuring manufacturer-supplier relations in the U.S. automobile industry. In 17 categories, including trust and perceived opportunity, Toyota and Honda were leaders; followed by Nissan, while Chrysler, Ford, and GM were fourth, fifth, and sixth. In particular, suppliers said that Toyota and Honda were better communicators and that they were more trustworthy and more concerned about suppliers’ profitability than other manufacturers were. One way they did this was through sharing information intensively but selectively.
Yes, it’s time-consuming to catch up with suppliers frequently but transparency on both sides of the channel prevents mistakes like incorrect inventory count or missing purchase orders.
Map upstream suppliers
Companies that can map their suppliers’ suppliers are able to react quickly when a crisis hits. For example, after an earthquake hit Japan in 2011, many companies struggled to understand how it would impact them for weeks because they were unfamiliar with upstream suppliers. This left them scrambling for alternatives when it was too late.
The upstream value chain includes all of the materials, people and environmental factors that contribute to your product and service. If you’re a manufacturer, you’d look at how your suppliers process their materials and how those materials are sourced and extracted. Retailers Nike and H&M have thoroughly mapped their supply chain and published it for transparency.
Create a value stream map
It’s good to map your upstream supply chain, but it’s even better to map the entire supply chain using a value stream map. It displays all the important steps of the process that deliver value from start to finish. With a value stream map, you’ll be able to improve your processes by prioritising value-adding steps and minimising wasteful steps.
As a manufacturer, wholesaler or distributor, the idea of mapping out your entire supply chain may seem intimidating, but it boils down to six steps:
- Assemble a cross-functional team. This should consist of high-level managers and supervisors from different departments
- Determine the process families. That is, groups of products or services that go through the same or similar processing steps
- Identify similarities. Prioritise each process family because products that share many of the same steps and methods can be manufactured more efficiently
- Create the current state map. Collect data and information by walking through the process and interviewing the people who perform the task
- Create the future state map. Find out where you can improve, identify bottlenecks and what other improvements are required
- Draft a future plan. Use your future state map and draft a plan of how you will get there
You can use software such as sourcemap or templates on Lucidchart to help you visualise your supply chain.
Mitigate supply chain risks
Supply chains have dependencies that put your business at risk. The coronavirus has exposed global supply chain weaknesses, so here are our recommendations for managing supply chain risks and challenges.
In a nutshell
Don’t let a recession stop you from improving your business. Companies that use the six outlined tips to be prepared and proactive will be able to recover faster — and find themselves in a better position — once the economy picks up.