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.

Which savings? How do we prioritise?

Last week I was in Germany, working for a multi-national engineering manufacturing company.  Great place and great people.  The Procurement Manager took us out to dinner, and I took the opportunity to ask him what his major problems were.  He took a few seconds to think (a sensible man), and then described his situation.

All the business units have to make savings - everyone is clear about that (although margins and profits are up across the board).  However he is locked into his approach.  Effectively there is a triple lock;
1. Price reductions
2. Working capital reductions
3. Zero inflation.

All laudable goals, but of course the interaction of them leaves him very little room to manoeuvre with suppliers.  A contractor cannot be award for good performance on a 3 year contract with a say 0.5% increase, regardless of the changes in their input costs.  Higher stock levels and fewer deliveries or longer lead times cannot be used to incentivise the agreement.

To make things even worse, the product mix is highly variable and unpredictable and sales are not located on site.  So if they sell in the EU working capital can go down when the manufactured item is invoiced to the customer.  If the customer is in China and terms are DDP, then it will only leave stock (accounts) 5 weeks after it has been dispatched from the factory when it arrives at the customer.  The procurement department has no input to that, but of course has to deal with the WIP issues.

Tricky.

So the Manager has to achieve all of his targets both individually and collectively, and there can be no trade off.  He was very unhappy when I raised the sort of tricks that business managers often use to make those targets - he is going to do it properly.  I am sure he will, but it is a situation where a little more flexibility might actually help achieve the overall targets.  In particular I worry that Quality is at risk if they have to switch to new suppliers rather than stay with established ones simply in order to gain lower prices.