2022 was an interesting year, right? Actually, I’m sure that most of us would agree that we’ve had an interesting few years now. The manufacturing industry has certainly seen its share of ups and downs over that period. Supply chain issues, inflationary pressures, and workforce shortages are just a few of the issues that have challenged every industry, not solely manufacturing. By definition, most of us understand that we were already technically in an economic recession earlier this year. But most industries didn’t necessarily feel the extent of its pain due to the atypical path that it took our economy to get to that point. However, as we look ahead, we’re suddenly facing the real possibility of a painful recession in 2023. What can manufacturers do to prepare for this, as well as continue to plant the seeds for growth?
Despite the uncertainties around supply chains, inflation, and the overall economy, manufacturers shouldn’t necessarily rush to make cuts just yet. As we all know and have likely experienced, recessions lead many companies to lay-off employees, cut down on research and development costs, slash training budgets, and reduce marketing and sales expenditures. However, given the fact that most manufacturers are already facing workforce shortages and are still working on fulfilling backlogged orders, making cuts at this point would likely just prolong their operating pains. In actuality, manufacturers stand to gain a lot from a downturn. Recessions oftentimes reduce the competitive landscape and weed out the proverbial playing field. Survival of the fittest, anyone? The key is having a recessionary strategy, acting early, and properly positioning your company to seize the available opportunities. Effective measures and strategies include some key components.
First, manufacturers obviously need to control costs and look at their overall financial well-being. A common misconception is that companies should make extreme cuts during an economic downturn. However, the risk in doing this is that companies can sometimes cut too deeply, and those cuts may end up being made in painful areas. Companies who come out on top after recessionary periods act early to control costs, but they do it in a way that protects valuable assets by not scaling back too deeply in those key areas. Successful companies also managed cash flows and balance sheets beyond traditional profit and loss efficiencies. Now is the perfect time for manufacturers to be looking for productivity gains and process optimization. Implementing improvement opportunities and cost savings early on will reduce the need for drastic future measures when the pressure to deliver might be even greater. Automation is also an area that manufacturers should be exploring early. There are still many lucrative grants and funding options out there for manufacturers. Successful organizations think about how to drive efficiency and reinvest in their businesses for the short- and long-terms. Companies should be looking to invest in critical technology and capabilities. Manufacturers need to start planning and executing those investments now.
It may not seem intuitive or even appropriate, but economic downturns can be a great time to explore mergers and acquisitions. Recessions generally result in reduced company valuations across all industries, so some acquisitions become very attractive. Savvy investors can acquire new product lines, customers, and process capabilities at reduced prices, and they should be looking into markets that perform well when other markets are depressed. Due to the workforce shortages in manufacturing and elsewhere, companies should be retaining talent. With numerous open jobs around the industry, displaced employees should have no issues finding employment opportunities elsewhere. This will obviously lead to greater pain once the economic downturn has ended. Layoffs could ultimately hurt manufacturers more than the downturn itself. As we all know, the tight labor market is likely here to stay for the foreseeable future. It’s vitally important that we keep all of our employees right now. As things begin to pick up again, manufacturers will need those people once again.
Regardless of the potential warning signs, predicting the timing and severity of recessions is difficult at best. I’m sure that this won’t give many of you a great peace of mind, but there are steps that manufacturers can take right now to at least initiate the discussion regarding how they can withstand and possibly grow in a recession. TDO’s team is fully certified to help manufacturers make the necessary organizational changes and achieve operational excellence at all levels. Reach out today to learn more and schedule a free consultation!