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Shoring Up for a Downturn, in Three Steps

Oct. 31, 2019
Preparing for a recession can still involve expansion and innovation, but with a different tack.

Is a recession on the way? Economic indicators – and news headlines – are mixed. For example, look at these two stories from September in CBS News and Barron’s, respectively.

What’s a manufacturer to make of all this, and how can they differentiate real alarms from false alarms?

We can’t say for sure whether a recession will take hold in the near or distant future. However, given that the United States has enjoyed the longest economic expansion in its history, it’s logical to expect things to slow down, at some point. So, it’s a good idea for manufacturers – no matter if they’re bullish or bearish – to give serious consideration to how they’d handle a downturn. That doesn’t mean you should batten down the hatches and turn off all engines of innovation. On the contrary, preparing for a recession can still involve expansion and innovation. But companies must marry these growth-oriented efforts with defensive actions designed to cushion their operations against the impact of economic turmoil.

It’s good to see that many companies are already getting ready. In Sikich’s 2019 Manufacturing and Distribution Report, 63% of respondents said they are preparing for the possibility of a recession. Here’s a three-point checklist to help manufacturers do recession prep right:

1. Get closer to your customers

High-quality customer service is the hallmark of any successful manufacturer. Customer relationships become even more crucial with a potential recession looming. At a minimum, you must meet customer needs promptly and consistently in order to retain and grow the business relationships. But you can also seek out opportunities to gain valuable intelligence about economic indicators customers see in their industries. By checking in with customers more often, asking smart, probing questions, and more closely scrutinizing customers’ order volume trends, you can get a pulse on customers’ business environments. From there, you can operate with a more complete set of facts and get out ahead of any shift in demand.

2. Extend yourself

Manufacturers whose customer bases span multiple industries will be better positioned to weather economic storms and come out on the other side healthy. So before things get dire economically, review customer concentration and act if it relies too much on any one industry. If you do have too much customer concentration, it’s time to down on business development work and, as you land new customers, ramp up your plant operations. A heavier workload now may be necessary to give yourself the buffer you need to survive a downturn.

You must of course prioritize customer service and responsiveness above all else; no company can afford to take on more work than it can handle. But by diversifying your customer base and seeking opportunities in industries that are less likely to suffer a severe setback in a recession (e.g., food, healthcare), you can strengthen your sales pipeline and more effectively insulate against any downturn.

3. Get your head out of the clouds

Manufacturers often have big ambitions about new products and markets. But in today’s uncertain economic environment, every aggressive action must be a slam-dunk, or awfully close to it. You have little room for error today and can’t afford to build a new product or launch an entirely new service line speculatively. Instead, a company should mostly stick to its core competencies. It should also only develop a new product or service in response to clear customer demand. And when it comes to acquisitive behavior, manufacturers must thoroughly scrutinize any acquisition targets – not only from a financial perspective, but also in terms of technology infrastructure, cybersecurity preparedness, personnel and culture. Post-merger integrations are always challenging, and a bust can be especially costly in a downturn.

Instead of focusing on the most ambitious items on its wish list, work to strengthen your company’s core. Cash flow is oxygen for any company. So, you must work to more quickly collect receivables and exercise the utmost care in spending. Similarly, your top employees will be the ones who help upi dig out of any economic hole. So, efforts to retain these individuals (by enhancing benefits or compensation, for example) should come before any new hiring.

Amid all the talk of recession, few manufacturers should be gloomy today. We see great opportunity for growth and continued innovation in the industry. But to keep that opportunity alive through and beyond any recession, address the possibility of a downturn head-on. By proactively building defenses against recession, you will be prepared to survive an economic decline and thrive when it’s over.

Jerry Murphy is partner-in-charge of Sikich’s manufacturing and distribution services team.

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