There are increasing signs that a downturn in the U.S. economy is coming, as well as signs of slowing economies in China and Europe. Various agencies and banks have lowered forecasts of gross domestic product growth; housing construction and auto sales have slowed; and companies have reduced or delayed capital spending. You can blame this on the Federal Reserve increasing interest rates, trade wars with China or the natural end of an expansion cycle that began with monetary stimulus after the last recession-or all three. What types of actions should you be taking now to help navigate the potential downturn?
Lets start with actions you might take regarding your customer base. In the face of a downturn, it is good practice to shore up your customer base and take prudent actions to lock in your customers for the next few years. Check on their degree of satisfaction with your company as a supplier, and take action accordingly to address any gaps. If you have some shorter-term customer contracts in place, it might be timely to discuss whether the contract could be extended, perhaps with concessions of some type.
Look for options that will create stickiness between your company and your customer, such as products that have been uniquely customized to their needs, funding of some customer capital requirements, joint technical projects, customized supply chain services and the like.
Ensure open lines of communication between your company and your customers at multiple levels in the organization and across various functions such as sales, technology and technical service, customer service and supply chain. Make sure that the respective inputs from the customer are being integrated and consolidated into an accurate and up-to-date picture for functional and top management.
On the procurement side, consider a Pareto chart of the value of the supply contracts you have in place, along with the associated timing of the supply arrangement and the number of potential suppliers for each. Perhaps it is timely to accelerate technical approval of a new supplier in one or more categories.
Consider either negotiation or bidding for selected raw materials or services, as suppliers may be receptive to price reductions or other concessions in exchange for a higher percentage of your business or a longer contract period. In the current environment of volatile oil prices and uncertain tariffs, try to be more nimble and take advantage of short- to medium-term dislocations in the raw materials and transportation markets in which you participate. Be sure to update as necessary your own raw materials and transportation outlooks so that your suppliers have as accurate a picture as possible of your needs.
Take a hard look at your capital spending plans for 2019 and 2020. Take a critical look at any projects that are aimed at increased capacity and discuss with key customers whether their volume outlooks have changed. It may be a good time to prioritize projects with lower risk exposure to the macroeconomic environment, such as efficiency projects (see my October 2018 column) or projects that are required to enable sales of next-generation, higher-margin or leadership products. Consider raising your hurdle rate for capital projects, as well as ensuring robust testing of project economics for downturn scenarios.
Now is a good time to take a fresh look at staffing needs, as well. Reexamine any increases in staffing that were sought or approved in the last year and subject these needs to a higher level of scrutiny. Take a hard look at contractor and consultant usage across your department or the entire organization and challenge it where sensible. Ensure that where efficiency projects have been completed, any associated staffing reductions have been implemented.
Think carefully about your communication strategy with your staff and throughout the company. If you are too early in your communications to your organization, your staff may be confused by the apparent disconnect between your message and that of higher leadership. Discuss with your own leader what they are hearing from higher levels and whether there is any plan for an organization-wide communication of some type. If so, plan a staff meeting shortly thereafter to discuss the implications for your department.
Watch for significant disconnects between the message and the actions that take place in the organization. Once people are aware of any message about a business slowdown, they are especially sensitive to such disconnects, such as fancy venues for meetings, seemingly unfair budget decisions, disparate hiring practices between departments or ill-timed policy changes such as those regarding travel or bonuses. Be prepared to discuss such apparent (or real) disconnects with your staff and address the rationale behind them to the extent possible. Elevate any valid concerns to your leadership.
As we begin a new year, it is timely to assess whether your 2019 financial plan, perhaps assembled in a more optimistic environment, is already looking difficult to achieve. Consider what levers you have to pull that will allow you to achieve the plan, albeit in a different way than was anticipated. For example, if volumes are projected to be a bit lower than expected, perhaps you have levers to pull that will improve margins, especially given the recent sharp drop in crude oil prices.
Take a look at your product mix and ascertain if there are opportunities to shift to higher-margin products. Consider whether there are any opportunities to turn services you provide into a new profit center or even into a subscription model. Be cognizant, though, of the fact that any margin improvement actions you take must be prompt, as delays in implementation will make the plan that much harder to achieve.
I hope these strategies for a possible downturn are useful, and I wish everyone a successful 2019!
Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Email her at saralefcourt@gmail.com or phone (908) 400-5210.