Manufacturers: Are You Prepared for a Double-Dip Recession?

Aug. 11, 2011
The old adage of 'spend money to make money' affords manufacturers the ability to drive innovation now, when it's cost-effective and very much needed.

Manufacturing numbers are on the rise -- it's a bit of good news, in what seems to be a rather uncertain climate. Will it last? We want it to, of course, but the people who watch economic trends for a living are seeing signs that we are headed for a double-dip recession.

Before I go any further, let me tell you I'm not an economist, so what I am talking about here comes in the spirit of what I learned in scouting: Be prepared. You can take steps now that can shore up defenses if the worst-case scenario does come true; if it doesn't, these actions will still serve your company in even the best of times.

Since 2007, volatility has been the name of the game. The banking crisis, rising commodity prices and natural disasters have all taken a toll on business. Dealing with fluctuations in markets, consumer confidence and the political landscape have become as much a part of strategic planning as sourcing and production strategies are.

That means that we're all working toward creating more flexible, responsive and innovative supply networks in order to navigate whatever 'normal' looks like today. It also means that some of hard-and-fast practices that manufacturers have grown to love over the past 20 years need to be revisited and revised.

There are three shifts that manufacturers can make now to prepare for what comes next no matter what that is:

Boy Scout Lesson #1 -- Forecast the Weather: "Red sky at night, sailors delight", "If smoke goes high, no rain comes by." Proper preparation for 'stormy weather' within the supply chain and the resulting the pain of lead times has been one of the major lessons of the recession and may make you reassess your inventory positions. Two years ago, the average lead time in electronics was 12 days. Today, lead times have escalated to more than 60 days. This means that the prevailing 'wait and see' approach -- waiting for demand to rise to pull necessary inventory -- won't work. If you can't get products to market in a timely (i.e. when consumers are looking) and efficient manner, you'll miss your window of opportunity.

So go ahead, hold inventory -- at a reasonable level, of course. It will build in flexibility and buy you some additional time if the weather changes and demand is more than you forecast or your supplier suddenly disappears.

Boy Scout Lesson #2 -- Tie a Bowline Knot: A bowline knot is an important mount-climbing knot that's also useful for lowering someone from a burning building. Perhaps this lesson might make you rethink supplier consolidation. Conventional wisdom is that reducing the number of suppliers you do business with makes sense -- it's less work for your supply management team; when something goes wrong, you know exactly who is responsible; and, if you are strategic to a supplier, you have greater leverage. Throw all that reasoning out the window, right now. Depending on a fewer number of suppliers exposes you to all of their challenges.

Relying on the same group of suppliers may have another interesting by-product: complacency. No doubt that the past few years have been hard on suppliers, and some have had to focus so hard on bringing in new customers, that those existing customers they "depend on" may not have been getting the proper attention. Mixing up the line-up can bring in fresh perspective and may inspire the bench to put a little more effort into your needs.

Change your perspective within your critical commodities on the importance of a diverse network of supply options. Knowing how to rig a 'rescue knot' on key commodities will ensure that you have escape options due to insufficient quality or timeliness from primary suppliers.

Boy Scout Lesson #3 -- Onward! There is no doubt that it takes a Boy Scout's optimism in these times to consider the option to spread the wealth -- even just a little bit. The days of "cash as king" need to go. Holding onto cash now actually slows down the ability of the macro-economy to recover and will only exacerbate the depth of the next round of recession. The old adage of "spend money to make money" affords manufacturers the ability to drive innovation now, when it's cost-effective and very much needed.

Every Boy Scout knows the value of proper investment to succeed. You sharpen the knife now, for use when you need it. While everyone else is realizing the next change has just happened, you can be capitalizing upon it.

If we don't make changes to how we design, source, build and deliver products to market now and there is another (possibly even deeper) recession on the horizon, we may survive, but the ultimate recovery will be harder, longer and certainly less robust.

Paul Martyn is vice president of supply strategy at BravoSolution

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