3 Ways to Prepare for Manufacturing Contraction & Recession
Another round of tariffs. Lower customer demand. Inventories dwindling. The major signs of manufacturing contraction are plain and obvious to see ― especially laid out in the most recent Manufacturing ISM® Report On Business®. There’s no doubt about it: Manufacturing is headed into a recession.
Recession is a dirty word, but it’s far from the end of the world. After a decade of booming growth, the good times were bound to slow down eventually. It’s not a welcome revelation, but it’s far from a surprise to the industry’s top executives. Many have already taken evasive maneuvers and begun gearing up for tougher times. Recession isn’t pretty, but it can be weathered with the right approach.
1. Top target: The supply chain
With looming recession, there are a few things every manufacturer can and should do to hunker down. Taking control of the budget is at the top of the list. The top target for spending cuts and conservation? The supply chain.
The supply chain is broad and expensive, with costs across the chain of custody. Unless you’re big enough to control the entire supply chain ― the top 5% to 7% of manufacturers ― you’re at the mercy of the costs that come with it. The simplest way to tighten up supply chain costs is to understand the process. Identify chokepoints, costly mistakes, and extraneous steps and eliminate them. Renegotiate vendor and 3PL contracts for better terms, pricing, or extended lines of credit. Don’t forget to audit your supply chain to ensure you’re actually saving costs.
2. How to Be Flexible During Contraction
Tightening your belt doesn’t always mean cutting costs. For many manufacturers, the best way to prep for recession is to become flexible. Explore flexibility across your operations, balance sheet, and fulfillment channels.
- Operational flexibility. Tap into higher productivity, better processes, and superfluous cost cutting. Embrace the idea of doing more with less and making efficiency a top priority.
- Balance sheet flexibility. Reduce leverage if possible, while maintaining cash reserves to stave off emergencies or fuel investments in innovation. Reduce inventory costs and explore vendor warehousing.
- Fulfillment flexibility. Understand and target customer segments better. Add value without discounting price or, if possible, increase price to justify real value. Above all, maintain the integrity of the product.
Being flexible in a time when rigid demands are the norm helps manufacturers stay grounded. Trying to stay afloat solely through cost-cutting isn’t enough. Adaptation is essential, and flexibility is the key.
3. Embrace Transparency
Economic recession isn’t a secret. It affects everyone, and it’s a real part of every transaction taking place. Don’t expect to maintain the status quo and don’t be afraid to let your customers and suppliers know what struggles you face. If you need to charge more, secure better financing terms, or retrain your workforce, be transparent. The more upfront you are, the easier it is to communicate and find an amicable solution.
The Future of Manufacturing and its Impending Recession
The manufacturing economy has already moved into contraction territory and executives have acted in kind to prepare for downturn. It’s not a matter of if, but rather when recession becomes reality. Smart manufacturers need to start preparing now and be consciously aware of what the future holds.
