Supply Chain Resilience in a Market Downturn

The robust growth since the last global recession in 2008/2009 has reached its climax. We are now forced to face a stark new reality as a recession ominously looms in the not-so-distant future. It is hard to deny that the last two years have been challenging from a supply chain perspective, many were caught off-guard and supply chain inefficiencies were mercilessly punished.

Some large organizations opted for the ostrich approach, sticking their heads in the sand of strong balance sheets. A sound method since we all knew (hoped) that the pandemic and political tensions would eventually ease. However, as demand dwindles, we must raise our heads from the sand, as we cannot trust strong balance sheets to protect us forever, as even a strong balance sheet eventually weakens. Here follows four strategies to ensure your supply chain can cope with an upcoming recession and downturn in demand:  

Postponement & delayed differentiation  
Adopting a pull manufacturing methodology does not only allow better regulation of upstream demand (i.e. reduce the buildup of raw material). It further enables consolidation of ingoing material. 

“Consolidation brings stability” 

Stock levels are driven by uncertainty. By attributing the same demand to a lower number of stock keeping units (SKU's), uncertainty is reduced as consolidation brings stability. Driving down both cycle & safety stock as a result. It also positively affects planning & forecasting complexity as the horizon shifts forward, reducing the parameters optimized upon. 

Simplify ingoing components  
During uncertain times simplicity is key, by 1) moving towards industry standard parts and 2) making these standard parts shared among your products, complexity in the supply chain can drastically be reduced. Sourcing new suppliers become significantly easier (a necessity as financial risk becomes more imminent), and as demand decreases excessive stock buildup becomes less likely (once again, consolidation brings stability). 

Lean procurement principles 
The latest in line of our trifecta of lean methodologies, (starting with delayed differentiation & industry standard parts) is a lean procurement approach. Both previously mentioned concepts resonate well with a pull-driven purchasing approach, with smaller and more frequent orders, effectively protecting against raw material buildup. A preferred alternative is naturally to adopt a Vendor Managed Inventory (VMI) approach, transferring the risk to suppliers. 

Hedging and risk management 
Inflation is rampant, energy & raw material prices are fluctuating greatly.

“Proper risk management & hedging can enable consistent cashflow” 

The fortune tellers of the world bought long standing raw material & energy futures in early 2021. The less fortunate did not, financial risk & cashflow issues are truly on the agenda. Proper risk management & hedging can enable consistent cash flow (by maintaining consistency in expenses). As most of us are not fortune tellers we must closely track the market dynamics & development to know when to hedge and to be able to predict when cost pressure from suppliers will ease. To get insight and support in the raw material market dynamics join Triathlon’s & ISEA’s Raw Material Watch. For more information contact Rmw@Triathlon.se