Is Your Supply Chain Ready for the Next Downturn?

Is Your Supply Chain Ready for the Next Downturn?

Ten years ago, in the great recession, I spent time as a supply chain consultant going from one manufacturing plant to another. I trekked a large swath of the North American countryside from Mishawaka, Canada to Bluffton, IN rolling up my sleeves alongside leaders to fix broken systems.

At the time, it seemed… probably rightfully so, that the economic world as we knew it was collapsing. I attribute a large part of my manufacturing operational know-how today to those very long days and weekends in the trenches. Few things forge your skills like making high-stakes decisions that mean life or death to a plant and the livelihoods of hard-working folks.

As humans we have selective memories, we tend to forget about our past struggles like the above. In a way it’s how we evolve so we can focus on the future. “If the brain registers an overwhelming trauma, then it can essentially block that memory in a process called dissociation – or detachment from reality,” says Darlene McLaughlin MD, psychiatrist and clinical assistant professor with the Texas A&M College of Medicine, in the ScientificDaily.

Today, we’re witnessing the longest running economic expansion in US history. This is fantastic and I, like you, don’t want to see another recession, depression or whatever we end up calling the next downturn. It’ll happen though, just as the sun rises and sets each day.

This post isn’t about predicting the timing of what’s to come, it’s about those critical lessons learned during past challenging times. Those invaluable plays gleaned from leaders by witnessing firsthand how they prepared and what they did; what the companies looked like from a structural, operational and supply base standpoint. In summary, this post is about what actions leaders took to not only manage through, but also to position their companies to thrive post downturn.

Action 1: Deeply Understand Your Tiered Supply Base

It’s often not your direct suppliers but your sub-tier suppliers that cause supply disruption. If the economy tightens and these companies falter, you need to know where they are, what they do and how to contact them. The most successful companies know who their sub-tier suppliers, Tier IIs and Tier IIIs are.

Develop a detailed Plan for Every Part now for all your Tier I components, including your tooling and gauges. Add backup suppliers to this list and ensure you have them set up in your system. At some companies this process takes 3-4 weeks so starting now will save you critical time. Further, partner with your Tier Is to map your Tier II supply base; if positioned properly, you can “add value” not “micromanage” your Tier Is by helping them de-risk their business.

“Decisions should be weighed by merits in terms of both opportunities to grow if successful or pivot from change. Options are key, which is why things like entangling contracts should be weighted for risk,” says Steve Johanson President of Traverse City, MI based supply chain design software firm Starboard Corp

As we saw with the last downturn, today’s hyperconnected global economy can unravel quickly. Diligently documenting your extended supply base and backup options allows you to make informed decisions faster if your business needs to pivot.

Action 2: Proactively Monitor Your Supplier Health

Much like a footrace, leading manufacturers beat their competition to resource a troubled supplier. The result of winning this race isn’t bragging rights though. The loser often gets stuck footing the bill for expensive ongoing operational costs to keep the supplier’s business afloat to build their parts. In this instance, it literally pays to be first.

Leaders need to set up scalable systems and processes for cost-effectively monitoring a supplier’s ongoing financial and delivery risk so they can respond fast to avoid this situation. Yes, your team may be able to handle five onsite supplier audits each month, but what if you had to complete 30? You need a scalable partner that can monitor suppliers on premises. Do you have a quick way to request and receive updated supplier financials? You need a method for obtaining the latest information as financials can deteriorate quickly during a downturn.

“Leaders should beware of getting bogged down in short-term tactical negotiations over lease and labor costs, common when the economy is going well, when they could be missing a larger opportunity to cut their landed costs and supply risk,” says Johanson.

New technologies are giving us more options today. Technology-enabled service providers (combination software and services firms) can now monitor the risk of each of your suppliers for a low ongoing monthly fee, while delivering detailed data to you on demand via cloud software.

Action 3: Engage a Scalable Supply Chain Risk Management Partner

Preparing for, or when going through, a downturn isn’t the time to staff up. Good luck getting your hiring requests approved. The conundrum with distressed supplier headwinds during an economic downturn is that the amount of people you need to manage could spike periodically depending on the day, but your leadership will likely institute a hiring freeze.

The most successful companies have a managed services supply partner on contract to support their supply chain risk management efforts. These firms should have experienced professionals on staff with the ability to add people to support you as needed. A managed services firm can act as the “light switch” you can flip for added bandwidth to respond to changing market conditions faster than your competitors.

“Flexibility options are becoming more prevalent, including seasonal and short-term warehouse space sharing and increased fulfillment services from 3PLs. Options allow manufacturers to quickly scale and adjust to changing environments,” adds Johanson.

Leading firms are incorporating managed services firms into their operations now to address day-to-day needs – e.g., supplier plant audits and continuous improvement initiatives. The thought process of this approach is to maintain an active working relationship with your partner so you can act quickly in unison as major challenges arise.

Action 4: Test Drive Your Systems Before You Need Them

The time to stress test your systems isn’t when you need them most. Find ways to “get in your practice now.” There’s a reason college football teams don’t simply show up and play games on Saturdays. Teams put in lots of work during two-a-day practices over the summer to put themselves in best possible position to win when it matters in the fall. You need to follow their lead.

“Supply chain design software tools can help put facts on the table and lay out potential future roadmaps of cost and service levels options,” says Johanson.

But software shouldn’t be used as a black box that spits out a magical result. It’s merely a sandbox to form a plan for next month, quarter and/or year.

“Software should be leveraged to generate a hard number like adding a warehouse is worth $1M in cost savings; leaders should then use their judgement to balance that opportunity against the risk of a downturn,” adds Johanson.

Action 5: Focus on Simplicity to Make Fast Decisions, Not Perfect Ones

Supply chain planning can be a monster on its own. Leaders often fall under the spell of building a “digital twin” – a perfect computer model of their supply chain. Make no mistake, building this twin requires enormous time and effort.

“Unfortunately, a digital twin can turn into a trickster; the very precision that goes into building the model makes it hypersensitive and misleading”, says Johanson.

There’s certainly a time and place to make the investment to build a digital twin, but like all software forecasting tools we need to remember that the outputs are based on the inputs. As inputs change in unpredictable ways, we need to be flexible to not make decisions solely on “what the system says.” Instead, make decisions based on the best available information and your experience.

“Simple models based on market averages are the best way to model future supply chains,” adds Johnason.

Adding too many variables and insisting on the model reconciling precisely is a hubris exercise. Leaders should strive to make swift decisions based on actual data; striving for perfection only fosters costly analysis paralysis.

Navigating with Precision to Thrive Post Downturn

Our past struggles are better recast as invaluable experience. If you managed through the last downturn, you have the battle scares that inform your decisions today. The next downturn will be different, they all are. Yes, it’ll have flavors of the past where our prior strategies can be used, but we need to be flexible for a wider range of scenarios.

As an example, the global economy is now composed of many more online orders, which require companies to actively expand their delivery network locations and inventory distribution points to meet accelerated service delivery times.

“A downturn would expose risk in the form of potentially expiring working capital and commitment to warehouse leases or 3PL contracts. Distributors would be trapped between lower economic volumes and customer service expectations,” adds Johnason.

Rapid changes in the economy offer rare leadership opportunities to turn short-term efforts into longer-term market share gains. Take the above diligent actions today so your company can weather tomorrow’s storm and be in a better position on the other side.

-William