To prepare for a recession that may or may not come, make sure to account for what’s different this time around.
Economic uncertainty is clouding the future of supply chain and conflicting signals make it especially difficult to plan. For supply chain leaders to properly control costs and navigate demand volatility ahead of a potential recession, they must consider some of the critical differences between today’s conditions and prior downturns.
In general, today’s environment is economically ambiguous. Record inflation and governments’ fiscal responses are contributing to recession concerns but other typically reliable indicators of a recession — the credit and term spreads — are signaling that the risk is low. Unemployment is likely to rise, according to some models, but for now remains at multidecade lows. And then there are the still-unsettled global geopolitical conditions after Russia’s invasion of Ukraine.
And the state of the supply chain itself is dramatically and meaningfully different heading into a potential recession in 2022 or 2023 than in the past.
Difference No. 2: Supply-constrained vs. demand-driven market dynamics
The low level of availability creates another important difference: market conditions today are supply-constrained while demand-driven markets preceded previous recessions. Chief supply chain officers (CSCOs) entered those recessions with levels of inventory and inputs appropriate to meet demand — and actually faced the threat of holding too much inventory and other costs, given the sudden and sustained drop in demand.
The market facing most supply chains today is supply-constrained, where supply often cannot meet demand. A recession now presents an opportunity for the supply chain to once again balance demand and supply, and be ready for continued disruption.
These two critical differences change the calculus for supply chain leaders as they prepare for a potential recession. Accordingly, CSCOs must avoid changes in strategic direction based on premature assessments of the duration and depth of the recession, and the likelihood and timing of a full recovery. What supply chain leaders can do is take these three actions to prepare:
Identify critical resource bottlenecks and use them to guide your cost reduction strategy. In the current environment, many supply chains are struggling to meet demand anyway. The constraints they are experiencing can clarify other decisions about how much raw material and work in progress (WIP) inventory to carry, backup labor to retain or freight partners to secure.
Redefine the organization’s desired risk appetite to identify strategic decision points. A critical flaw of the supply chain risk management strategy pre-2019 assumed that supply chains would have the ability to recover from any single high-impact disruption before the next one occurred. The past three years have demonstrated how consequential that assumption has been. Supply chain leaders must reevaluate their risk appetite and adjust to a level that is appropriate to the current environment.
Make decisions based on recession recovery projections only after the supply chain has achieved its target volume. Base those strategic decisions on recession duration and the anticipated rate of recovery for the most severe bottlenecks in the supply chain. The pace of recovery for both critical resources and demand are critical uncertainties.
The most likely scenario is that supply chains will have to shift back and forth between a demand-driven posture and a supply-constrained one, and should continue to monitor its actual volume in relation to target volume.
The big take-away is that a coming recession will be different from past recessions, and supply chain leaders must take a cool-headed approach to their response. Leverage the drop in demand as an opportunity to rebalance demand with supply, ready the supply chain for continued volatility, and base significant shifts in strategy on assessments of both the shape of the recovery and likely rate of recovery for critical resources.
The ambiguous outlook for recession has supply chain leaders searching for a strategy to ensure the supply chain is properly prepared.
However, there are critical differences between the present situation and the periods preceding past recessions.
Supply chain leaders should take three actions to set the right course for the supply chain.
Suzie Petrusic is a Gartner Research Director, serving chief supply chain officers in all areas of supply chain related to strategy, leadership and execution.
Experience Supply Chain conferences
Join your peers for the unveiling of the latest insights at Gartner conferences.