Our national media likes to play Chicken Little – predicting calamity with the merest justification. We’ve heard the predictions we’ll be facing a recession in 2023, but the pundits vary in terms of when and how deep the recession will be.
A lot of people are getting caught up in the news, but you won’t find the answers to what you need to do for your business in the pages of a newspaper. The media is focused on the most views, while you need to focus on how to prepare for an economic downturn.
Distributors are better positioned than B2C companies to weather a recession, so they should try not to pay too much attention to the current events and prophecies of despair.
In fact, distributors will come out ahead if they take the time now to strengthen their company. Think about a pendulum. Before the pandemic, everyone had their prices and quantity optimized. Things were moving—then chaos. The supply chain broke, the pendulum swung wildly, and pundits are predicting it will swing sharply again.
That’s not the case. The pendulum swings until it’s stable—we just haven’t reached that stable part yet. The good news is that distribution always has a way of coming out of a recession stronger, leaner and meaner than before.
3 Ways Distributors Can Prepare for a Potential Economic Downturn
Regardless of whether a recession is upon us, distributors need to be fast and nimble. Success will be contingent upon how quickly you can think on your feet, and that response time can be helped by doing a few things. Do any one (or all three) of these three strategies to be better positioned at the end of any economic-uncertainty tunnel.
- Watch inventory exposure.
Remember the Great Recession? If a recession is upon us, the proven thing is backlog will vaporize. It’ll evaporate. Distributors will get choked up because they haven’t evaluated their exposure. Then the backlog of inventory shows up—and they have to front the bill. In recessions past, distributors were loaded with inventory with a high purchase price.
How do you prevent a repeat of that situation? Evaluate your inventory exposure. Consider both scenarios: What if your backlog dries up, and what if you get an influx of inventory? How will you react?
- You must know—to the dollar—what your exposure is if all of your backlog shows up at your door in a short time frame.
- Talk to your customers to get insight into pipeline inventory. What are you waiting on? What are they waiting on?
- Talk to your suppliers, and do pre-expediting to make sure you have accurate lead times. If there’s any issue, are there other suppliers you can turn to? Is order splitting an option to ensure you get what you need ASAP? Distributors more closely aligned with their suppliers are the most successful during unpredictable times.
- Create deeper customer relationships.
In industrial distribution, most products are bought—not sold. This industry is all about the relationships. And for the past few years, distributors have inadvertently (or not) punished their customers by promising delivery then not meeting those deadlines due to any number of reasons. Weathering a potential recession will hinge on your customer relationships and how you invest in the overall customer experience.
Figure out a way to get closer to your customer so you can easily and accurately create a game plan around their needs. If you don’t already have a Customer Relationship Management (CRM) software, now is the time to get one.
Rather than the old song-and-dance of trying to estimate demand, guessing what your customers might buy, you must engage in an open and honest dialogue with the leaders and decision-makers in your customer base. (And a CRM can support this, too.) This job isn’t for salespeople, though they can help solidify the relationship and continue the conversation. It’s a job for the leaders on both sides.
It’s more important to have accurate lead times than short lead times. You have to establish trust to optimize inventory levels for you and your customers
- Conduct scenario planning.
Typically, people manage what’s going on right in front of them and don’t look at what’s ahead. Focus on managing through the cycle, looking toward the future, rather than simply getting through today.
A good rule of thumb is plan 30 to 60 days out. If commodity prices impact your business, start tracking those metrics. Watch out for price increases and look for cost reduction opportunities. In a recession and after the supplier backlog magically ships, the first thing to happen is lead times will start extending; then people can’t get products.
To create the best scenario plan, assume that your biggest, most important supplier goes upside down over night or they get acquired by your main competitor. What do you do? What’s the management process? What do sales reps need to do? The last thing you want is something catastrophic like that to happen and have your people stare at you like deer in headlights, unsure what to do.
At the end of the day, distributors must be light on their feet to survive a potential recession. You need to be able to react quickly, and it’s easier to do so when you have a strategy in place for even the worse-case scenario. Added strategies to ensure success are systems and processes in place to allow for quick reactions as well as an open line of communication (and the strong relationship to support it) with customers and suppliers. Do these things and a recession will only be a speedbump—not a collision.
Want to learn more? Listen to the MDM podcast where Tom Gale and I discuss the unique and deeper factors the current market outlook is triggering for distributors and the underlying longer-term positive trends. Listen to it free here: Quicktake: Mindsets for Managing a Slowdown – Modern Distribution Management