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October 12, 2022
Contributor: Suzie Petrusic
To prepare for a recession that may or may not come, make sure to account for what’s different this time around.
Economic uncertainty is clouding the future of supply chain and conflicting signals make it especially difficult to plan. For supply chain leaders to properly control costs and navigate demand volatility ahead of a potential recession, they must consider some of the critical differences between today’s conditions and prior downturns.
In general, today’s environment is economically ambiguous. Record inflation and governments’ fiscal responses are contributing to recession concerns but other typically reliable indicators of a recession — the credit and term spreads — are signaling that the risk is low. Unemployment is likely to rise, according to some models, but for now remains at multidecade lows. And then there are the still-unsettled global geopolitical conditions after Russia’s invasion of Ukraine.
And the state of the supply chain itself is dramatically and meaningfully different heading into a potential recession in 2022 or 2023 than in the past.
Download now: A Modern Recession Playbook for Supply Chain Leaders
Supply chain leaders planning strategy should note two big differences between today and prior recessionary periods.
The 2019-22 period has been extremely volatile for supply chains, and risk events are proliferating. The rate and volume of these disruptions is a big risk for supply chain continuity.
The available volume of supply, talent and freight is diminished in many supply chains today for a range of reasons, including:
Some supply chains, with retail being a notable exception, have depleted their own critical resources and safety stocks, and face similar constraints upstream.
The labor market is extremely tight, with more jobs open than people looking for employment.
Travel restrictions related to the pandemic have created labor shortages, while bad freight actors have created untenable bottlenecks throughout freight and transport functions globally.
The low level of availability creates another important difference: market conditions today are supply-constrained while demand-driven markets preceded previous recessions. Chief supply chain officers (CSCOs) entered those recessions with levels of inventory and inputs appropriate to meet demand — and actually faced the threat of holding too much inventory and other costs, given the sudden and sustained drop in demand.
The market facing most supply chains today is supply-constrained, where supply often cannot meet demand. A recession now presents an opportunity for the supply chain to once again balance demand and supply, and be ready for continued disruption.
These two critical differences change the calculus for supply chain leaders as they prepare for a potential recession. Accordingly, CSCOs must avoid changes in strategic direction based on premature assessments of the duration and depth of the recession, and the likelihood and timing of a full recovery. What supply chain leaders can do is take these three actions to prepare:
The most likely scenario is that supply chains will have to shift back and forth between a demand-driven posture and a supply-constrained one, and should continue to monitor its actual volume in relation to target volume.
The big take-away is that a coming recession will be different from past recessions, and supply chain leaders must take a cool-headed approach to their response. Leverage the drop in demand as an opportunity to rebalance demand with supply, ready the supply chain for continued volatility, and base significant shifts in strategy on assessments of both the shape of the recovery and likely rate of recovery for critical resources.
In short:
The ambiguous outlook for recession has supply chain leaders searching for a strategy to ensure the supply chain is properly prepared.
However, there are critical differences between the present situation and the periods preceding past recessions.
Supply chain leaders should take three actions to set the right course for the supply chain.
Suzie Petrusic is a Gartner Research Director, serving chief supply chain officers in all areas of supply chain related to strategy, leadership and execution.
This story was originally published on the Gartner Blog Network.
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Preparing the Supply Chain for a Recession in a Supply-Constrained Market
4 CSCO Leadership Priorities in Response to High Inflation and Recession Risk
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