Parmesh Bhaskaran
Chicago
Corporate America is tightening its collective belt in anticipation of a potential recession. Declining forecasts are prompting businesses to dust off their downsizing playbooks. While decisive action is required, all steps taken to shore up working capital need to be taken with long-term viability in mind.
Executives are clearly prioritizing working capital initiatives amid uncertainty, according to findings published in our fourth annual Disruption Index. When times are tough, after all, cash is king. This uncertainty is impacting almost all industries, and will have a particularly large impact on manufacturing operations.
As companies tighten up inventories, they need to be strategic in how they set new targets and execute. The key is drawing down the operation in an orderly manner so as not to hurt the large percentage of business that is going to materialize, and potentially be unaffected by macroeconomic concerns.
Any downsizing plan needs to take into account several factors that didn’t necessarily exist in prior recessions. Interest rates are high as the Fed continues to work to cool certain economic conditions, including a frenzied hiring pace in certain sectors. Inflation, while easing, remains historically high. Supply chains are stressed and significantly retooled.
As a result, “business as usual” has changed considerably in the three years following the pandemic’s initial outbreak. After tanking in the spring of 2020, consumer and industrial demand roared back. Supply chains were severely challenged, leading to many companies scrambling to acquire or build inventories.
As conditions cool and consumers appear stretched, the natural tendency is to unload inventory. Or draw back on purchases. Or both.
To be sure, inventory must be prudently managed and future expenses scrutinized, but companies must avoid kneejerk reactions or haphazard responses. Slashing inventory or canceling purchase orders without doing a due diligence is not a winning strategy. Another pitfall to avoid is trying to hit year-end targets regardless of the long-term consequences.
Another potential strategic pitfall is losing touch with the customer. Any effective plan will take account of the customer’s needs and put those needs at the center of the business.
Inventory is a strategic advantage that, managed properly, can increase a company’s competitive position going through and coming out of a potential recession.
In the effort to create immediate breathing room, be careful not to damage the long-term health of the business. Attack the problem at the structural level, utilizing analytical tools and information sourced from suppliers and customers.
Any moves made need to be done in a way that that ensures continuity of the business through the current up-and-down volatility in the economy. Here are the steps to take:
Anyone in business knows there is no tradeoff between winning today and winning tomorrow. Both need to be accomplished at the same time. To accomplish this, the bigger picture must be considered even when decisions seem temporary, or action steps seem small.