Recession-Proof Your Business, Before the Next Recession Hits

BY: ROGER TOMLINSON

No one can ever predict exactly where the economy is headed. And with several uncertain factors at play in 2020, including the spreading coronavirus and the upcoming election, it’s impossible to know what state the economy might be in a year or even months from now. With the impacts of the last recession still weighing heavily on the industry, it’s never too early to start preparing your business for the next economic downturn. Rather than waiting for the downturn to hit, why not fortify your business ahead of time to ensure your company emerges successful?

STRENGTHEN YOUR BUSINESS IN FIVE STEPS
Recession-proofing your manufacturing facility starts with five key steps:

1. Lower inventory costs. Having too much inventory reduces cash without adding to sales. On the other hand, having too little inventory can result in lost sales and, possibly, lost customers. Optimize the amount of inventory so that you have enough to meet demand, plus a safety stock allowance. Going forward, inventory levels should be adjusted as the market changes.
2. Implement Vendor Managed Inventory (VMI). In a VMI program, the vendor is responsible for supplying the customer when the items are needed. This system leads to lower inventory levels and a reduction in purchasing-related administration costs. Additionally, VMI removes the need for significant safety stock because the supplier manages the resupply lead times. All of these factors can lead to significant cost savings, which will be invaluable in the event of a downturn.
3. Revamp your marketing. In times of a recession, customers want to know they are getting as much value out of their purchases as possible. Marketing messages should reflect this in order to draw customers to your products. However, ‘value’ is not the same as ‘lower price’; cutting prices to drive more demand is not sustainable and should be the last tactic considered.
4. Drop unprofitable products or services. The only exceptions to this rule are any strategic items that generate additional sales from other products to compensate for the loss.
5. Innovate. Launch a new product to gain additional market share, or consider other forms of diversification. Once the downturn is over, this will put the company in a better position to move more quickly toward recovery as well.

IN A DOWNTURN, CASH FLOW IS KING
It is essential to understand that in a slowing economy, cash flow is one of the most critical components of success for a small or mid-sized business. The numbers will always tell you the truth about the health of your business, and this truth cannot be ignored. By effectively monitoring and managing cash flow, you can plan for periods of decline. To improve cash flow, start by:

• Reducing monthly expenses. This could involve negotiating a lower monthly rent with your landlord, finding deals on utilities and leasing equipment instead of buying to maximize the amount of cash on hand. Waiting to pay payables will help as well, which can be accomplished by extending terms with suppliers. On the other hand, some suppliers might offer a discount for paying early, which could lead to savings.
• Increasing the inflow of cash. An effective collection program is key here. Keep well-written sales contracts for official records and follow-up with customers regularly. Collect receivables sooner by offering customers a discount for paying early, only for your best customers. Retaining loyal customers also is important – remind them why they chose your company in the first place, again emphasizing value. By maintaining better relationships, you will be more likely to receive payments sooner.
• Handling “problem customers.” Every company has them. They ask for extras, complain regularly, pay late and even underpay. They will likely become more problematic at the first sign of a recession. Unprofitable customers should be thanked for their business and let go. Customers who pay late or underpay should be transitioned to “pay in advance.”

STREAMLINE OPERATIONS TO STAY AFLOAT
Aside from increasing cash flow, improving operations can mean the difference between your company surviving a recession, or falling significantly behind. Streamline operations when times are good so you are better prepared once things slow down. This includes:

• Utilizing a Kaizen strategy. This Lean tool will help streamline business activities at all levels of a company, bringing workers together to achieve regular, incremental improvements in processes.
• Strategizing layoffs. Layoffs must be considered very carefully before being implemented. Layoffs are a massive morale killer – and a nervous team is not an effective team. If the company decides a layoff is inevitable, be sure to only cut once and cut deep enough so it will not have to happen again.
• Reducing hours before salaries. If someone’s salary is cut 10% but you ask them to work the same number of hours, their productivity and engagement will almost always decrease. A better idea is to cut hours. This will save the same amount of cash without any loss in productivity.
• Communicating. Be open with employees and make sure everyone is on the same page. Workers should feel as if the entire organization is working together to weather the downturn. This will result in increased motivation and loyalty to the business overall.

The best time to prepare for a downturn is well before it occurs. Companies that implement these changes ahead of time are the ones that consistently survive recessions and emerge even stronger than before. To ensure your company stays successful through any economic state, the time to plan is now.

To learn more about how to recession-proof your business by evaluating risks and costs, The Center offers a Risk Management and Total Cost of Ownership for Supply Chain course. See the upcoming schedule and course details here.


MEET OUR EXPERT

Roger Tomlinson, Lean Program Manager
Roger has been a Program Manager at The Center for 18 years. He has trained and mentored hundreds of Michigan manufacturers in the entire portfolio of Lean strategies and methods (e.g., Kaizen events, Standardized Work, 5S/Workplace Organization, Value Stream Mapping, Total Productive Maintenance, Culture Change, Team Building, Operations Management and Process Re-Engineering). In addition to his training and consulting work, Roger has more than 20 years of experience in manufacturing management.

Since 1991, the Michigan Manufacturing Technology Center has assisted Michigan’s small and medium-sized businesses to successfully compete and grow. Through personalized services designed to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.the-center.org.