It is hard not to conclude that the US will be in the midst of another recession based on the economic indicators. How major the financial impact might be, or how long the recession might last is less clear. Building operational resilience and developing problem/solution scenarios prior to a recession will allow you to be more nimble and weather the impending economic downturn.
It is important to have a plan for addressing these challenges versus just hoping it does not occur. “Hope” is not a strategy. The key is to include the various department heads early in the discussions; identify areas that should be reviewed; and develop a course of action.
Based on previous recessions, we have compiled a list of areas where operations should proactively address.
1. Retailers Missing Forecasts
Historically, the consumer has been impacted and discretionary spending has pulled back, causing retailers to miss order and sales forecasts. What makes this potential recession so different are the existing supply chain constraints making it difficult to get back in stock. Missed forecasts will mean carrying additional inventory positions longer than anticipated. Or it may mean actively building safety stocks taking more investment and space.
Operations that become congested with inventory will become less efficient as inventory tends to be double handled, driving up labor costs and taxing space use. The goal in recession proofing your operations is to be extremely efficient with labor costs and minimize effects on operating costs.
Here are some aspects that should be reviewed within your operations:
- Be sure that the operations management is looped into all purchasing and marketing communications regarding sales and inventory forecasts. Historically, some operations tend to be the last department to know that inventory will be a problem.
- Ensure that you have worked with the management team to identify any preexisting inventory positions that are excessive or obsolete; and remove these to free up critical space.
- Maximize all available space, including any additional storage and racking that should be installed.
Taking care of labor and inventory are the two most critical issues.
Hyper-Focus on Being Customer Centric
During the last recession, retailers became hyper-focused on being customer centric to support the brand and sales. The operations must be able to deliver on these same principles to not lose the customer demand.
This often means supporting the customer on their preferred delivery method – whether its buy online pick up in store or curbside, or ship small parcel delivery. The pandemic has forced many operations to pivot quickly. Though some aspects tied to customer service metrics need attention in many companies.
Consider these aspects when developing your plan:
- What critical customer service metrics might you be missing?
- Order and item fill rates
- Order turnaround time
- Order accuracy
- Return processing turnaround time
- If you have constraints in your current distribution center, are there opportunities to utilize third party logistics (3PLs) to handle some portion of fulfillment or kitting of products?
- Have you identified where and how you are not currently meeting the customer’s needs, and developed an action plan for making corrections?
Being customer centric helps maximize critical sales during a recession.
Maximize Efficiency – Do More with Less
One of the first line items to be slashed tends to be labor within the operations. The difficult part is that many companies do not know their current labor metrics by department well enough to understand the potential outcome that management directs them to make.
As distribution consultants, we are constantly reinforcing with clients that you must know your numbers. You must know what it costs to fulfill an order? How many units per man hour are you picking and packing versus your goal? What are your receiving and put-away rates? While those are major expense and productivity metrics, there are many more.
Companies must implement productivity metrics, even if they are rudimentary initially. Labor must be scaled to meet the workload. However, if your company is looking to be customer centric and you do not know how many FTEs it will take to fulfill the revised demand projection, you will most likely cut your labor to a dangerous level.
- If you do not have a WMS capable of providing productivity metrics, at a minimum, consider how to implement throughput metrics at the shift or team level.
- Implement a plan for reviewing productivity metrics and challenging the managers and supervisors to determine how to continual improve the operations.
- Determine what challenges exist in the operation that keep you from being more efficient.
- Ensure you have the right managers and supervisors that reinforce managements expectations and best practices.
Develop Problem/Solution Scenarios
One thing we have found effective with clients in dealing with the stresses of prior recessions is to think through the “what ifs?” If this happens (e.g., 10% reduction in orders from plan), this will be our plan of action.
Decrease order demand. In talking with management, what are the scenarios that you should take time to think through and plan for? For example, what if the pull back in customer spending is 10%, what will be the affects on your labor budget? How would you deal with a major decrease by department and number of personnel? Are there more responsibility you would ask key people to do to keep operational with less people?
Inventory versus space. Is management open to identifying and liquidating merchandise that is obsolete and slow moving to free up space? Do they foresee carrying more safety stock that will require more cubic space and inventory locations?
Rising freight costs. Given the rising cost of freight, what else can be done to mitigate price increases? Consider a transportation consultant to validate and improve your strategy.
We are facing escalating inflation at over 9.1%. Will this lead to a recession? Take the time now to determine scenarios and plans your management may ask you to put into effect. It is always better to do this is advance and get your management’s best thinking.