The Looming Recession

As many of you will know, I have been a guest on a significant number of podcasts in recent times discussing the steps executives can take to deal with upcoming challenges. 

There has been a lot of talk about the impact inflation and interest rate rises will have on demand. Big questions are being asked about whether the predicted recession will eventuate and, if it does, what can be done about it.

For those who have listened to those podcasts, you will know I have a consistent response to these questions: to make sure you have what I call ‘Business 101’ activities in place.

The first impact a recession will have on your business is a reduction in demand for your product or services, and consequently a reduction in revenue. A typical knee-jerk reaction is to start cost-cutting, and the cost that’s easiest to cut is staff. There is no doubt fiscal responsibility is required but blindly cutting costs is often a strategic mistake.

When demand for your product diminishes it becomes even more important that the service you provide the clients you do have is first class. Don’t give them a reason to go elsewhere, to shop around for price. Make sure your Business 101 activities are well-honed and operating flawlessly.

There is no doubt COVID-19 brought many challenges to business in the last three years. This has resulted in a significant increase in the demand for my supply chain audit services, with companies looking for ways to improve their supply chain resilience and ways to make better use of technology. There is no doubt that the best way to fight against both a recession and the inflationary environment we find ourselves in, is to focus on improving productivity.

Supply chain audit projects I have undertaken between 2020 and 2022 have shown that some companies found themselves with the following challenges during and post COVID:

• GMROI (Gross Margin Return on Investment – an inventory profitability evaluation ratio that analyses a firm’s ability to turn inventory into cash above the cost of the inventory) was reduced by 52.02%
• Inventory levels increased by 324.75%
• Seven SKUs generated 28.28% of sales
• Six of those seven SKUs represented 9.06% of excess inventory
• 218 SKUs generated 79.82% of the gross margin
• Excess stock represented 78.33% of their inventory holding
• 224 SKUs have insufficient inventory holding and are regularly out of stock
• 330 SKUs had inventory for three years or more
• Inventory turns reduced by 48.06% with an average of 4.22
• 30% of customers only ordered from the business once
• 7% of customers ordered at least once a month

Research we have undertaken on a number of International and Australian public companies reveals the following:

• Inventory turns for Australian companies range from 0.18 to 3.19, while comparative companies in the US ranged from 7.59 to 11.84
• All companies had a significant lift in their inventory as a percentage of sales numbers in the year 2021 to 2022. The increase ranges from 8.62% to 55.46%

It was clear that COVID handed executives big challenges and some dealt with them better than others.

The big questions for you are:

• What are your numbers?
• What is this telling you about your business?
• What is your next step considering the probability of the predicted recession?

If this topic is of interest to you, reach out and book a virtual coffee. We can have a confidential discussion about your situation and what steps might be useful for you.

© David Ogilvie