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When a recession hits, customers can reduce your revenues and stop your outbound product flow faster than you can trim expenses and halt your inbound flow of raw materials. Working capital becomes stressed as your materials pipeline backs up and profits take a hit. Here are six simple ways to prepare for a downturn before it happens-and to respond effectively when it does.
There is something about the good times that makes people forget about the bad times. Yet the bad times are by no means rare. Senior managers who are in their fifties will already have lived through six stock market crashes and be experiencing their eighth major economic downturn.
If we were talking about floods or earthquakes, most business leaders would be very prepared. Not so with economic slumps. During better times, companies still take on staggering debt, carry huge fixed costs and create inflexible supply chains. Then, when the downturn arrives, it finds all the cracks in the supply chain. Recessions like this one pry those cracks wide open. And Murphy's Law dictates that recessions always strike at the worst time.
Can businesses do more to recession-proof themselves and their supply chains? We believe they can. Indeed, we maintain that businesses in many manufacturing industries can more actively anticipate and prepare for severe downturns-and then respond in more disciplined ways once the downturn is upon them. (For a look at how one company has met the challenge, see the accompanying sidebar on Philips Healthcare.)
Impact of Recessions on Supply Chains
Recessions and stock market crashes should not be a surprise to anyone. True, we don't know when they will happen. But we do know that they will happen at some point. Recessions, as defined by the National Bureau of Economic Research, are a fairly common occurrence.¹ There have been eight official recessions (including the one that began in December 2007) in the last 50 years. The time between recessions averages about six years, with each lasting just less than one year.
A history of stock-market crashes shows that they are a fact of economic life too. (See Exhibit 1.)
There have been at least six sharp sell-offs in the last half-century. They occur between five and 10 years apart, show drops in...