Developments

Last week, the U.S. stock market suffered an 800 point one-day decline precipitated by a singular news event, a yield rate inversion. Such a condition occurs when the interest rate on ten-year U.S. Treasury securities drops below the market interest rate on two-year Treasuries. The significance of such an event is that such an inversion preceded each of nine prior economic recessions, hence alarms bells ring across equity markets.

Today, The Wall Street Journal somewhat amplified such a warning sign with a report that shipments of recreational vehicles emanating from Elkhart Indiana, the epicenter of the multi-branded U.S. recreational vehicle supply and manufacturing networks have fallen 20 percent this year, after an over 4 percent drop in 2018. Multiyear drops in Elkhart RV industry shipments have preceded the last three U.S. recessions.  Q2-2019 Global PMI Trending

Both our Quarterly Newsletter and Supply Chain Matters readers may have also taken note of our highlighting of both Q1 and Q2 global supply chain manufacturing and supply chain activity levels as the J.P. Morgan Global Manufacturing PMI index drop through the official contraction level for two consecutive months. production levels fell for the first time since October 2012  while new business shrank at the fastest pace since September 2012. The back-to-back sub 50 readings last occurred in the second half of 2012, providing an indication that the six-year growth run has reached a stumbling point. The report authors indicated that of the 30 nations that make-up the index, 18 had signaled contraction, to include China, Germany, and Taiwan, all powerhouse manufacturers.

 

Recessionary Signals are Yellow

Thus, regardless of what the Trump Administration is currently stating for public consumption, many relevant data and information points are indeed signaling economic contraction is anticipated, and the question is when.

In our Ferrari Consulting and Research Group 2019 Predictions for Industry and Global Supply Chains published at the beginning of this year, we highlighted economist outlooks indicating that there was a 20-25 percent probability of economic recession by Q4 of this year, and a more likely possibility in 2020.  We cited the Duke University CFO Global Business Outlook survey released in mid-December 2018, that indicted that half of U.S. CFO’s believed that recession would occur by the end of 2019, and upwards of 80 percent leaning toward occurrence by the end of 2020. These past two weeks now place far more credence on what CFO’s felt was in the cards.

For businesses and multi-industry supply chain management and procurement teams, there is no escaping an economic recession scenario sometime in the next 6 quarters, which for many is a tactical window for sales and operations planning (S&OP) or integrated business planning (IBP) processes. As the summer vacation period winds down and businesses now return to full staffing, it is now time to consider needs for recession focused scenarios.

Teams need to focus on key business metrics such as working capital turnover, inventory turns and the cash-to-cash turnover processes. In a pre-recession period, the CFO looking glass is especially focused on reduction of supply and customer demand fulfillment cost reductions, including logistics and transportation costs. That implies an extraordinary challenge for many in the current global trade conflict environment where inventory buys have been accelerated to avoid added tariff deadlines. Overall planning of inventory levels and assortment for the upcoming 2019 holiday fulfillment surge that arrives in just over two months will be crucial, and that there will be a lot of attention paid to any excess inventory lying around at the start of 2020.

This blog existed during the 2008-2009 global recession, along with subsequent shorter downturn cycles and thus we have archived content on means to plan and execute in either a pre or post recessionary period. If there is one clear lesson that has been derived from prior severe economic downturns is that changes in markets, and business responses to those changes come at unprecedented speeds. In this period of just-in-time supply chain activity levels, when product demand dramatically decelerates at a rapid rate, all tiers within that supply chain quickly feel the effects at just about the same time, During the 2008-2009 recession, we wrote of the global inventory backflush that ensued at remarkable speed.

Notice that we are emphasizing “global” recession, principally because PMI data already suggests that the U.S. is one of a few nations that has not as yet reached contraction. It is now a matter of time, and when that comes, it will be global in-nature, and include elements of other trade conflicts.

 

Now is the Time

A looming recession is a good time to asses overall planning processes when an emphasis on demand-driven, pull-through planning and manufacturing processes. Historic sales forecasts or classic MRP-driven planning are not effective in times of high uncertainty. The sensing of actual item-level demand levels are the best barometers as to when customers or consumers exercise a pull back. S&OP and IBP teams will need to focus on an upcoming period of best case, worst-case and most prudent demand and supply matching are the watchword. Planning cycle that require weeks of analysis and plan generation will not suffice, instead planning has to be a net-change, on the go process of continual ongoing analysis and insights.

This is not only a time for contingency planning, but also active supply and demand network risk mitigation.

For procurement teams that are already dealing with the selection of alternative or new suppliers given the ongoing tariff war involving China, now is especially the time to have active supplier back-up plans. This is not the time to pass along the major burden of added tariff or material costs to key suppliers. You will need suppliers to be as financially viable as possible during an economic downturn. That applies even more today, as many industries have transferred more of a product’s component and COGS value-added to suppliers. This is an important period for added collaboration with line-of-business, product design and management teams to investigate means to reduce product manufacturing costs or to offer more cost attractive versions of products to consumers.

We would be remiss to not call attention to logistics, customer fulfillment and transportation management teams in their efforts to step-up cost and headcount controls. Last year, many business CFO’s communicated concerns regarding explosive growth levels in transportation and logistics costs. The coming period will no doubt add to such C-Suite concerns. Outsourcing and supplementary services contract arrangements will be scrutinized as to length, cost burdens and contingency pullback factors. Keep that in-mind for 2020 negotiations and contracting.

 

Final Thoughts

As industry analysts and global supply chain observers, we often preach that timely data and information are the key to more agile supply chain decision-making.

The data and information signals related to a looming economic slowdown are flashing yellow and maybe soon, red. Yellow is the signal to begin recessionary focused planning and resource decision-making, when the planning window allows for such considerations. Do not wait for the red signal, since that will likely be the sign for a lot of pain arriving.

 

Bob Ferrari

© Copyright 2019, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.