As the global economy continues to face the threat of a prolonged downturn amid weakening consumer demand and slowing economic growth, it is essential for businesses to prepare their operations for a recession. Fulfillment is a critical part of customer experience and adapting it to an unpredictable economic climate is paramount for businesses to remain competitive.
By taking a proactive approach, your fulfillment operations will be better positioned to weather what could be an unprecedented market contraction that will leave many unprepared. Based on previous recessions, the following four strategies can help your operations prepare for a recession.
Review Volume Forecasts and Align on Expectations
Historically, when the economy contracts, customer demand fluctuates drastically. As a result, sales forecasts tend to become more unpredictable and businesses must be prepared to adjust their operations as needed.
Without alignment on both short-term and long-term forecasts, businesses risk running into unexpected capacity issues – a mistake that could cost them customers and brand equity. Missed forecasts can also lead to financial strain as businesses are left with excess inventory or the need to source additional supplies. Warehouses that become overburdened with inventory can cause labor issues and shipping delays that can further damage the customer experience.
As a first step, volume forecasts should be reviewed by all stakeholders, including the Operations management team to verify that expectations are in line with reality. This will help to ensure that inventory and labor requirements are managed appropriately and operations can respond quickly to changing market conditions. Leaving the Operations team out of the forecasting conversation could result in miscalculations and avoidable costly mistakes.
Take stock of preexisting inventory locations that have become dormant or obsolete. Inventory that is not actively managed can be the source of significant financial losses, particularly during a downturn. To minimize the risks associated with excess or obsolete inventory, Operations should regularly review all locations to identify inventory that can be liquidated. This helps preserve working capital and reduce the risk of carrying stagnant inventory.
With less consumer demand comes lower inventory turnover rates. To maintain profitability, fulfillment operations should maximize all horizontal and vertical space by properly consolidating inventory. Adding additional trays or shelves to existing racking can help increase efficiency and keep inventory organized while taking advantage of vertical space with mezzanines can improve storage capacity.
Consider Flexible Labor Models
Recessions can bring significant labor challenges that require businesses to quickly adjust their staffing levels. To ensure that the labor force remains lean and agile, operations should look towards flexible labor models such as on-demand or seasonal workers.
Flexible staffing allows operations to adjust labor levels quickly in order to meet customer demand while reducing costs associated with a traditional workforce. Instead of hiring a full-time employee, on-demand labor can be used to fill in gaps during peak periods while also allowing operations to quickly retool when customer needs change.
A flexible staffing plan also helps operations prepare for possible layoffs should the situation worsen. Businesses should start planning for potential labor reductions early and create a system that allows them to respond quickly while minimizing the impact on operations.
Having a plan in place can help operations remain profitable in the long-term and minimize the risks associated with having too many full-time employees on payroll. With labor costs being one of the largest expense categories for operations, a flexible staffing model can be a key factor in staying afloat during a recession.
Plan for the Unexpected
When faced with a sudden downturn, businesses in the fulfillment industry should have contingency plans in place that address potential supply chain issues, including material shortages, supplier restraints, and labor availability. Having a backup plan in place allows operations to quickly adjust their processes and react to unexpected market conditions.
Scenario analysis and sensitivity analysis are two tools that can be used to evaluate the risk and impact of sudden changes in the market. Using a scenario analysis, operations can create a set of potential scenarios to prepare for different market conditions. A base-case scenario should be prepared first that reflects no major changes from the present. Best-case and worst-case scenarios can then be developed that reflect the potential impact of a recession.
Sensitivity analysis, on the other hand, helps operations identify which business variables are most sensitive to market changes. Also referred to as a “what-if” analysis, a sensitivity analysis helps operations identify the variables that should be monitored closely in order to anticipate and respond quickly to market changes. Historical data can be used to map the potential impact of external market forces on different business variables, thereby helping operations identify vulnerabilities. With vulnerable areas of the business identified, operations can develop strategies for mitigating risks and preparing for potential crises.
By combining both methods of analysis, fulfillment teams can prepare for different market conditions and create a plan of action should the situation worsen.
What will the management team do if there is more inventory than space?
What will those responsible for coordinating freight carriers do if shipping and transport costs become prohibitive?
What will senior management do if inflation causes an increase in wages and other labor costs?
When faced with a sudden downturn, operations should be prepared to answer these questions and more. By anticipating future market conditions and preparing for the unexpected, operations can remain agile and profitable even during an economic recession.
Reduce Overhead Expenses and Focus on Efficiency
A recession can put a strain on businesses’ finances, which means that scrutinizing operating costs is essential. With declining demand, labor allocated for non-essential tasks tends to be the first to go, which can result in unanticipated downturns in service and customer satisfaction. Prior to any layoffs, operations should review their existing processes and identify any areas that can be streamlined or automated.
Can dependencies be eliminated without compromising service levels?
Can manual processes be replaced with automated systems?
Is there potential to reduce hiring costs by outsourcing certain tasks?
What new technologies can be implemented to improve efficiency?
To answer these questions, it is necessary to understand current labor metrics and identify areas that could benefit from improved efficiency. This can include redesigning existing processes, eliminating redundancies, and leveraging technology to automate certain manual tasks.
This is a particularly important task for the operations team, as small changes in workflow can have significant impacts on profitability. Without at least a rudimentary understanding of process takt times, labor utilization rates, and areas of potential improvement, operations teams can easily overlook potentially useful cost-cutting measures.
By focusing on efficiency, operations teams can balance cost reduction and service levels to ensure that their logistics business remains both cost-effective and competitive, even during a recession.
To learn more about how Optichain Advisors can help improve your operations, contact us today.
