Economic recession is the latest in a long list of challenges that businesses face at the start of 2023, but are they prepared?
And will the usual fall-back strategies work for them this time? Dealing with complexity and making the right decisions, at the right time, could be critical.
The unprecedented economic, market and geopolitical volatility experienced by many businesses over the past year means that boards have probably never been better prepared to navigate a prolonged economic recession.
Having survived a global pandemic, supply disruption and runaway energy and fuel costs brought on by the energy supply crisis and the war in Ukraine, most businesses have already been forced to reduce costs and right-size capacity in order to optimise performance and improve operational resilience. With double-digit inflation set to continue through quarter one 2023, boards know that a dip in demand brought on by recession will force them to dig deep once more, but this time they are ready.
The CBI’s latest economic forecast indicates that businesses are concerned about ongoing uncertainty, but many are also seeing opportunities for growth in the year ahead. The data suggests that the economy has probably been in recession since quarter three 2022, when GDP contracted by 0.2%. The outlook for 2023 is that GDP growth will contract further, falling to -0.4%, before expanding again, albeit slowly, in 2024.
Right-sizing capacity has already proved a sensible supply chain strategy for many UK-based manufacturing businesses; ensuring they have the right materials, in the right locations, to meet the expected levels of demand. However, in a recession, demand signals can become more complex to interpret, so businesses should ensure that they have access to robust data-based models for scenario planning purposes.
In fact, increased complexity is likely to be a key challenge for decision makers in 2023. Businesses know that there are levers that they can pull to remove cost and optimise performance, but when should they use them, and how much? Fall-back strategies such as raising debt to fund investments or increasing inventory may not be viable due to raised interest rates and the increased cost of borrowing. Therefore, to tackle complexity, businesses should let data drive their decisions and their performance.
Despite the recession, some industries are still growing strongly, which makes decision-making even more challenging. For example, the aerospace and defence sector is undergoing a major ramp up, due to a sharp increase in demand for narrow-body aircraft following the removal of pandemic-related travel restrictions.
Some parts manufacturers saw order books increase by as much as 60-70% in 2022, with further expansion expected in 2023. While securing supplies and increasing inventory to mitigate the risk of disruption have been vital strategies for businesses in the sector, many are also facing chronic skills shortages, having reduced headcount significantly during the pandemic. There is now an urgent need to onboard skills and experience quickly to meet the ramp-up opportunity.
Finding the confidence to invest in people or automation during a recession is never easy, but those businesses that do so could increase their market share and be better placed to meet growing demand when the economic cycle turns positive.
Quality data and strong customer relationships can facilitate better investment decisions by helping boards to feel more confident about their demand forecasts and production capacity. However, with interest rates rising, many businesses will be understandably wary about adding to their capital expenditure just now, and while inflation is expected to dip in a few months’ time, any uptick in consumer demand will take time to filter through.
To boost their performance and enhance operational resilience, businesses across industry sectors should carry out an end-to-end review of their supply chains and ensure they have an accurate understanding of any weak links. Sharing information gleaned as part of the review process can unearth significant value-driving opportunities.
For example, many manufacturers experienced major supply side challenges in 2022, such as the global shortage of semiconductors. By sharing information with stakeholders across the value chain, some have been able to free up unused inventory and identify new sources of supply. Increased supply chain collaboration and its role in mitigating supply-side risk factors could become a key differentiator in years to come.
Another strategy that businesses with global footprints should consider, if they haven’t already, is nearshoring. This can bring multiple benefits such as reducing complexity, increasing control and supporting the achievement of sustainability goals.
Dual or multiple sourcing strategies should also be considered, particularly for critical parts that are in short supply or those that could become hard-to-source in the future based on projected increases in demand. While dual sourcing strategies carry a cost, this can often be offset by introducing process or value chain efficiencies elsewhere.
During a recession, board-level decision makers need greater visibility and control. To achieve this, they must keep their supply chains, costs and people strategies under review, and ensure they are making decisions based on up-to-date, accurate information. However, they must also hold their nerve. Those businesses that are most likely to rise to the top are those that keep a positive mindset; looking beyond short-term economic and market constraints to the inevitable return of a steady growth cycle.
☛ Nick Harrison is head of consulting at consultancy Vendigital.