Minding Your Inventory Drivers As Recession Lurks: A Guide by a Supply Chain Consultant

If you’re leading, running, executing, or accountable for the performance of a supply chain for a client and you’re not intimately aware of what your inventories are doing, it’s not too late to get curious.

There isn’t a clear-cut definition of a recession or when we’re in one, or what the repercussions might be, but we can be sure that the inflation we’ve been experiencing and an upward adjustment of interest rates that make purchasing more expensive will have some sort of an impact on consumer demand patters.

What does recession mean right now?

We all exist in a consumer-driven world. Even if your products are not direct consumer goods, they are very likely still impacted by whether the general population is spending money or not.

If your company does not have a Sales & Operations Planning process or does not do meaningful Demand Planning or Forecasting, your purchasing and materials management teams are essentially blind to how they need to be executing in the supply chain. In today’s world, demand may be changing faster than you can actually replenish your materials.

If that’s the case, you’re at huge risk of getting caught with way too much inventory as consumer buying behaviors potentially slow in the coming months in response to actual or anticipated recession.

Understanding the Impact of Recession on Supply Chain

A recession can have a profound impact on supply chains, leading to reduced demand, decreased production, and increased costs. During such times, companies often face significant challenges in maintaining efficient operations. This is where supply chain consulting firms come into play. These firms specialize in identifying areas of inefficiency and implementing cost-saving measures that can help businesses weather the storm.

By analyzing market trends and forecasting demand, supply chain consultants provide invaluable insights that enable companies to make informed decisions about inventory management, logistics, and production. This proactive approach helps businesses maintain a competitive edge, even in the face of economic downturns. With the right strategies in place, companies can not only survive a recession but also position themselves for stronger growth when the economy recovers.

The 4 Key Drivers Of Inventory Management, Simply Stated

Demand: The quantity you anticipate selling over a period of time. It’s a look into the future, frequently based on historical behaviors.

Replenishment Leadtime: The amount of time it takes to obtain new product once an order is placed.

Variability: The variability and predictability of demand and replenishment leadtime.

Service Level: How frequently you want to be able to have product in-stock to ship customer orders on-time and in-full.

While these concepts are simple, effective employment is anything but easy. One of the most important drivers to understand is the Demand Forecast, as it is literally the reason you keep inventory and place purchase orders. Achieving the right balance among these drivers is crucial for maintaining optimal inventory levels and ensuring customer satisfaction.

Basic Demand Planning In The Absence Of Anything Better

We recommend some basic demand analysis, as per the steps below, at a monthly cadence, if not weekly if your team’s bandwidth allows for it, to better understand and meet the needs of your clients. The sooner you can identify where forecasts are out of alignment, the sooner your purchasing teams can adjust orders and materials planners can adjust inventory needs.

Step 1: Compare Forecasts to Historical

We recommend comparing 3, 6 and 12 months of forecast and historical. The telescoping time horizon will help to understand if there is seasonality and if demand patterns are shifting slowly or quickly.

Step 2: Identify Outliers

Identify the materials that have the largest deviations between forecast and historical. The importance of a material can be judged by how much it can impact the P&L and/or the satisfaction of your customers. More important materials may have a tighter deviation tolerance, such as 10%. Lower-importance materials may not trigger for review unless their deviations exceed 50%.

Step 3: Root-Cause Analyze Key Deviations

Prioritize your effort here – it's not effective to look for the reasons behind every deviation, which is why we recommend to understand which products are the key drivers of profitability or customer satisfaction. There are many possible reasons a forecast doesn't match historical patterns, including legitimate changes in demand. But statistical forecasting tools will not anticipate changes that haven't yet occurred, so be aware of data overrides.

Statistical forecast model is wrong
Someone has overridden the statistical forecast
Promotional lifts have been added to reflect marketing activities
Supply constraints are limiting shipments

Step 4: Talk to Sales and Operations People

Once there's an initial understanding of the deviation, we recommend speaking to sales, marketing, or customer service people to better understand the anticipated reality. Is that BOGO promotion still relevant? Is the customer experiencing supply constraints of their own? Does your customer anticipate slowing demand from their customers? Are your operations limited by constraints such as material shortages/labor shortages/machine downtime?

Step 5: Decide What Is The Best Forecast

Someone needs to be responsible for deciding what is the best forecast. Some organizations delegate that responsibility to their sales teams, some to their supply chain teams. Measuring forecast accuracy and bias can be a great way to see who has the “best” forecasting ability, but the fact is that just having eyes on the numbers and having the discussions will improve your ability to anticipate what the business needs.

Our supply chain and operations advisors are experienced in many manufacturing and distribution companies. We help find the best way to optimize your supply chain management and get the results you want.

The Role of Supply Chain Consulting Firms

Supply chain consulting firms are pivotal in helping companies optimize their supply chains and unlock their full potential. These firms bring a wealth of expertise in supply chain management, logistics, and operations, offering tailored solutions that address specific business needs. By conducting thorough assessments, they identify areas for improvement and implement cost-saving measures that enhance overall efficiency.

Moreover, supply chain consulting firms provide thought leadership and guidance on industry best practices, ensuring that companies stay ahead of the competition. Their deep understanding of supply chain capabilities allows businesses to make informed decisions that drive performance and profitability. Partnering with a supply chain consulting firm can be a game-changer, providing the insights and strategies needed to navigate complex supply chain challenges and achieve long-term success.

Supply Chain Visibility and Risk Management

Achieving supply chain visibility is crucial for managing risk and ensuring that goods are delivered on time and in the right quantity. Supply chain consulting firms play a vital role in this aspect by implementing advanced tracking and monitoring systems that provide real-time data and analytics. This enhanced visibility allows businesses to identify potential risks early and take proactive steps to mitigate them.

With greater visibility into their supply chains, companies can significantly improve their inventory management, reducing excess stock and minimizing costs. Additionally, this level of transparency enhances customer satisfaction by ensuring timely and accurate deliveries. By leveraging the expertise of supply chain consulting firms, businesses can build more resilient and efficient supply chains that are better equipped to handle uncertainties and meet customer demands.