Generation Recession

 "summer's gone" - Wake up Boo, The Boo Radleys

Well we are into September, and the future is not looking so bright we have to wear shades (Timbuk 3).  A long winter and probably a long few years are to come.  Figures in the news today suggest a 10% drop in real incomes over this year and next for UK households, some £3000 on average.  We shall be no better off than we were in 2003, despite high employment/low unemployment.

That money has to come from somewhere - and that means first of all from discretionary spend.  That new sofa, car, holiday, wallpaper - if it can be put off it will be.  Which means a hit to the retail and service sectors, followed by the manufacturing sector (or possibly lead by it).

My kids recently turned 20 and hopefully by the time they fully enter the workplace things will be better.  But it got me thinking.

My kids are really just becoming aware of the economy and business, so lets say that most of us really understand that when we have been working for a while, say when we are 25.  (I didn't even start work until I was nearly 26 - perpetual student!).

Assuming this current crisis can be resolved in about 5 years (it will be more than one) then we are talking 2027.  That is 20 years after the global financial crisis of 2007/8.

So, in 2007 people who were 25 might be aware of good times coming to an end, and then start to experience austerity, Brexit, covid, the 2022 cost of living crisis... By 2027 they will be 45 and be able to remember one or two good years for the economy a long time ago.  Anyone under 45 will never have known anything but tough times.  

Of course us oldsters will be telling our war stories about the times of plenty.  And be rightly ignored.  

We talk of recovery as a part of the business cycle, but realistically we have to be in boom before people feel recovery has happened, and those breathing spaces have been short recently.

We all know our early experiences in business have an influence on how we behave in our careers.  What will it mean for them?

45 year old should be the engines of business - a combination of energy and experience.  They will have known nothing but recession and depression.  Will they be able to imagine a better future?  Will their formative years set them on a path of limited risk?

The impact of these years will be not just economic, but psychological (which will also impact on the economy).

What will it do to business thinking and strategy?

I've no idea, but we ought to start thinking about getting young people to have the right mindset.

It would probably help if we stopped telling them they could buy a house if they gave up eating avocado toast (is that really a thing?) and recognised they are our future.  And they will pay our pensions.  I hope they have a booming economy to help them do so.

Anyway, have a good weekend.  Sorry if I am being gloomy.

Training fees

  Sorry folks, but they are going to have to go up.

I am currently increasing rates where I work as a third party, and those training providers are going to be increasing rates too.

Generally there has been little fee inflation since the mid 2010s, but actual inflation was relatively low and so a slow deterioration in fee rates could be made up with an extra day or two.

We are not in that place now.

But training is also one of those areas where budgets are under pressure when times are hard (I always argue that Procurement and Sales training should be protected, but I am biased).

So, rates for this year and already agreed dates for next year are staying the same.

New enquiries are at higher rates starting tomorrow 1 September 2022.

If you are not doing the same now, you will have to think about it.  Yes, that does contribute to inflation.  But inflation can no longer be ignored.

Grim thoughts and prospects

 The weather is still quite nice, Europe (and teachers) are still on holiday for another week (I'm going away myself for a long weekend).

It all ok isnt it?

Well, the economic storm clouds are darkening day by day.  So, no.  Not really.

Sorry to be such a Buzzkill (as the Americans say).

It is quite possible that now is as good as it is going to be for a while. Yes, even allowing for strikes, inflation and supply chain disruption.  All could get worse before they get better.

I would love to say it could all be over in 6 months, but there is no realistic mechanism for that.

So, now is the time to prepare.

What does that mean?  Well if there are any goods or services that are really important to you, check when the contract ends.  If you don't have a contract, make one.  It is not going to be perfect protection but better than not having one.  But don't expect it to guarantee supply or prices - if it is a choice between fulfilling the contract or going out of business, most suppliers will break the contract and worry about it later. If there is a later.

Look at your supply chain.  Are there any alternative suppliers?  Now would be a  good time to cozy up to them and spread your bets.  Or to get even cozier with your existing single supplier if that is the better option.  But work out what you are going to do if it all goes to pieces.  Or when your supplier goes bust.

Reset your Procurement objectives.  Savings are basically not going to happen (for most businesses) so think about what is important.

Look at your stock position.  There is a balance to be made on working capital.  Interest rates are forecast to go up to 4% base in 2023, so maybe 8% retail.  Can you tie in your interest rates?  Can you refinance to get onto fixed rates?  Industrial inflation is running at 15% to 20%, so compared to 4% interest, stock is cheap.  Can you buy it now and stock?  Yes, I know that adds to the bullwhip effect but you can think about it.  Your FD may hate the impact on working capital but will hate the lost profit even more (well, they will if their bonuses are measured properly).

Space heaters are cheaper now than they will be in November.  So is energy efficient equipment.

Prepare a war chest for the fire sales (if you can).  Bargains could be had as businesses close.  Know what you want and see if you can get a bargain (but don't buy "bargains" for the sake of it).

The best time to do this was yesterday.  The next best is today.  The next, next best is tomorrow.

It is half a generation since the 2008 global financial crisis, and many established managers were too young or too junior to really remember it.  It is a full generation and a half since the 1987 Black Friday crisis (Black Friday was not about shopping).  You need to be at retirement age to remember the last bout of stagflation in the 1970s (3 day week, rolling blackouts and all).  What we are facing is likely unprecedented for today's managers.

I hope I am wrong

But prepare for the worst and hope for the best.  And do it quick.

CIPS Strategic Transformation - online - 4/5th October 2022

 I shall be running the CIPS online open training course on Strategic Transformation on 4th and 5th October 2022.  Full details are here.

We are in, to say the least, "interesting times".  And appropriately as well as a lot of tactical activity businesses are trying to re-evaluate their strategic choices.  The disruption of the past few years has lead most people to realise that business as usual refers to a past state of affairs that we are unlikely to revert to.

As an example, Working From Home (WFH) was a rarity and has now become the "new normal".  Of course, historically most people worked from home - factories and offices were new inventions a couple of hundred years ago.  But things changed, and change again, and while sticking with the previous strategy might be the right approach we should review it and check.

Personally, the move to online training has made me re-think how I work.

Hope to see you there, and hear your thoughts as well as discuss how to set and revise appropriate strategies for the future.

Supply Chain disruption

 Brilliant article in the FT about the supply chain disruptions in the ICT chip manufacturing process.

Sadly, with no easy answers - apart from national (or even regional) self-reliance is not going to work.

Which many politicians will not want to hear (in many countries).

Quite a few business leaders seem very reluctant to hear that things are (necessarily) complicated and will remain so.  In particular in my old stomping ground (the chemicals industry) people find it difficult to process that the usual economic rules do not always apply.  Just because something is profitable and in demand does not mean that competitors will come into the market.  If a profitable product ceases production (e.g. as a result of an industrial incident) it does not follow that other businesses will make it (or that the original manufacturer will build a replacement plant).  There are complexities about risk, availability, production processes, regulations etc. that all need to be understood.  But if you are a customer you are likely to think "well why aren't they doing it?".

Good procurement personnel need to know and understand these complexities (obviously not at granular detail) in order to fully understand the supply chain risks.

In the pre-covid and pre-Brexit times when things were working smoothly, Lean supply chains seemed to be the answer.  At the moment we are all considering Resilient supply chains.  But nothing is ever quite simple, and neither approach is simply good or bad.

Interesting times ahead

IChemE: What Engineers need to know about Contracts

The perennially popular course on what Engineers need to know about contracts (- but don't get taught on their Chem Eng courses, is my suggestion for a subtitle) is being run online on 28th and 30th November 2022.  

Full details are here.

This is two half days on separate days, and assumes no previous knowledge or understanding of contracts or the law.  In fact that is rather the point.  Starts 10am UK time, finishes at 1pm UK time each day.

The course is based on the contract law of England and Wales, but discusses other legal systems and so is (hopefully) more generally applicable around the world.

Hope to see you there.  Or at your place.  We have run this both online and the  traditional in person two full day course for clients recently, and the team at IChemE are always happy to arrange to do so for your organisation.  

Inflation and hard times

 Well, if you don't value your Procurement team now, when will you?

And of course your sales team, operational team and in fact everyone in your business.  But just at the moment your Procurement team are really key.

I'm not terribly good at noticing prices in shops (which tells you that I earn enough money to not be worried about every single penny, unlike too many other people).  But even I have noticed prices going up.  And not just by the nominal 10% or so that is the current inflation rate.

MacDonald's have increased the price of their cheeseburger.  But not by 10% but by 20% (from 99p to 119p).  And if you look around the supermarkets you will see they are far from alone.  Lots of products have broken past the psychological £1 barrier, and gone up to £1.20 or more.

Now this may well reflect real changes in supply conditions and the cost of materials.  I don't know.

But what I do know is that we complain more or less the same about a 20p rise as we do a 15p rise, or a 10p rise.

So sensible sales teams will take the approach that, having had prices held back for years by relatively low inflation, and with customers all expecting there will be inflationary increases, the thing to do is go large!

Why have lots of incremental, annoying price rises?  Go for one big one, and hope to get ahead of the game a bit and increase profits in the process.  If inflation is 10%, why not go for 20%.  Or 30%?  If you can't put up prices now, when can you?

And this is where your procurement team comes in.

We know that for manufactured goods the cost of materials is usually about half the overall cost.  So, if inflation is 10%, we should expect to see a 5% rise not 10%.  After all wages have not yet increased by much, so not all costs have gone up.

Of course, industrial prices are rising even faster than domestic prices (15%+) and I am not suggesting that suppliers can hold down prices for ever.

But as a buyer we should be testing and checking.  Understanding our supplier's position, but also expecting that prices will fall equally quickly rather than being a new baseline.  That prices have increased an appropriate amount, rather than more than is necessary.  Making sure suppliers know we are happy to have monthly price negotiations rather than one big rise.  Maybe some kind of quarterly or annual rebalancing as prices vary.  This is the time when we show our value to organisations.

And of course your sales team should be putting up prices.  Yes, that is how inflation rises. But eroding profit margins are not a good idea either.

Yes this does mean that PAWA Consulting fees will be going up to.  Book now to avoid the rush (as they say).