What Procurement can Learn from the 2008 Financial Crisis as a Post-COVID Recession Looms
One of the worst global economic declines – also known as The Great Recession – officially began in December 2007 and ran through June of 2009. The complete collapse of the housing market caused this 18-month economic hardship affected not just young adults in their 20s and 30s but also many Americans ages 50 and older as they were all directly or indirectly affected by rising unemployment, falling home values and a decline in the stock market. It is easily seen that all three have already started happening and those who choose to ignore these recession signs will be in for a startling reality check.
Thankfully there are lessons to be learned by CEOs, CFOs, and Supply Chain C-Suite so they can navigate the upcoming business challenges of this post-COVID economic downturn, and come out ahead. “For many supply chain executives, the  Financial Crisis has been one of the toughest challenges in their careers. Firms across multiple industries were required to deal with huge demand-supply mismatches caused by collapsing demand.” We are all observing the beginning of a contracting-period largely due to high rates of inflation, ongoing supply chain disruption, and interest rate hikes because of the massive amount of domestic federal spending during the COVID pandemic.
During this financial squeeze, companies must address shrinking customer orders, increases in the costs of goods and face increasing competition, resulting in decreased margins. Priorities shift during this time as well for supply chain, as they tend to focus on cost-cutting measures, reducing capacity and consolidating suppliers to free up cash. For most business people, pandemic + recession means tightening our belts and finding ways to cut costs without disappointing customers. Controlling indirect spend, or tail spend, might hold the answer. Indirect spending can account for 15-30% of a company’s total revenue. Manufacturers typically can spend 20% or more of their revenue on indirect expenses while across all-business units, indirect spending can be as high as 50% of an organization’s total purchases.
“By not understanding or simply ignoring indirect spend, a company may overspend on these categories which cuts into company profits.” Some of the commonly used indirect spend categories include:
· Office Supplies · Utilities · Technology · Travel · Marketing · Facilities · Human Resources · Outsourced Services
Supply Chain, moreover, Procurement, tends to focus more on direct spending, as it directly relates to the product the company sells. They tend to buy these components in bulk and have long-term contracts in place with trusted suppliers.
Indirect procurement however tends to get overlooked or not appreciated as highly as direct categories as it’s routinely thought of as “low-hanging fruit”....in essence.....”set it and forget it” becomes standard practice and organizations may not even look at their indirect spend categories for years. “Business executives recognize the importance of indirect purchase savings. About 50 percent of Fortune 1000 leaders polled stated that reducing indirect spend costs could improve savings with no interruption of business. Another 70 percent of procurement leaders reported their intentions for reducing indirect spending. Despite this, one study concluded that two-thirds of businesses reviewed do not manage up to 40 percent of their indirect procurements.”
Thankfully there are actions supply chain can take during a recession that include engaging in significant cost-reduction of overhead costs. There are five action areas that are essential to cope with any type of crisis situation – individual as well as economic:
1. Supply chain managers should gain a clear understanding of potential demand scenarios, as demand should be the basis of all supply chain planning.
2. Firms should safeguard their supplies to avoid any critical bottlenecks as suppliers go out of business.
3. Business units must accelerate all efforts to create flexible and breathing supply chains that can cope with all types of variability.
4. Managers should carefully reduce inventories to free up cash that is essential for turnaround actions.
5. Firms should also consider the light at the end of the tunnel and should begin to position themselves for the inevitable upswing.
There are common mistakes supply chain and procurement professionals should avoid, too. One such mistake is ignoring tail and dark spend within indirect categories. Maverick buyers circumnavigate established processes by conducting indirect purchases outside of the system. Maverick buyers pose a financial problem because you don't have visibility into, or control over, how they are spending your organization's money. While this is an issue in all economic climates, it is even more important at a time when organizations can't afford to waste money or lose savings opportunities.
Another area that should not be overlooked or passed down on the list of priorities, are an organizations supplier diversity and sustainability efforts. As we continue down the road of unprecedented uncertainty, businesses the world-over have been adversely affected but a sound supplier diversity and sustainability strategy mixed with indirect spend cost reduction initiatives can help improve business operations, reduce waste and enhance supply chain resiliency. Even with recession risks, “...governments and financial markets are not dropping sustainability as a regulatory or investment focus, but in fact are placing it higher on their agenda. They are ramping up their focus on sustainability in the face of energy price shocks, supply chain disruption, and increasing extreme weather events. Companies that go against this trend will lose opportunities for investment and funding and may not emerge as strong as their competitors in the long run. They may also face future regulatory compliance costs.”
The time to enhance and strengthen sustainability strategies is now. Eco-conscious operational efficiency, such as looking at the office supply category and making a more conscious effort to purchase eco-friendly products like recycled paper products and high-quality remanufactured printer cartridge supplies, can result in better use of scarce resources and a reduction in energy consumption, both of which contribute to the bottom line.
Sustainability, corporate purpose, and long-term value are inextricably linked. An economic downturn is a risk that all businesses face. Research has shown that companies that focus on the “why” of weaving sustainability into their core businesses are likely to be less affected by recession. Studies highlighting lessons in sustainability from previous downturns have demonstrated that companies with robust sustainability strategies proved to be more resilient and fared far better than those that focused only on profit maximization.
The U.S. economy—and perhaps the global economy—is slowing. According to a recent KPMG white paper, every month it seems more likely that a recession is inevitable. Whether or not the emerging downturn will meet all the criteria to be declared a recession, we do know that a downturn is underway. And we also know that in every downturn, some companies come out on top. By preparing in advance and taking action early, these companies not only preserve profits, but also grow revenue, profit, and shareholder value.
What will companies do this time to make the most of the downturn? That depends a lot on what kind of downturn companies prepare for. Will it be a quick V-shape dip and recovery, as in 2020? Or will it be a prolonged, U-shape recession, as in 2008-09? How did the winners win? They not only took the cost actions to preserve margins when sales slowed, but also used the downturn to plot future growth strategies—investing in technology, snapping up new assets and shedding businesses that no longer had sufficient growth potential.