Preparing the Company for Extreme Economic Volatility
The coronavirus pandemic is wreaking havoc in global supply chains, economies and the stock market. While its ultimate economic ramifications are unknowable at present, immediate observations include potential economic demand shock and expectations of a recession.
Over half of procurement respondents to our 2020 Key Issues Study have already adjusted budgets, developed recession contingency plans or both. One thing is certain: We are in for a protracted period of volatility. It is therefore imperative that CPOs take steps to help insulate their companies from the effects of instability.
By the first six weeks of 2020, worries about an imminent recession had somewhat abated. Market consensus put the chances at around 30%. But suddenly, after an unprecedented run, the financial markets quickly gave up their gains – and more – due to concerns about the potential economic impact of a coronavirus pandemic. Uncertainty in trading relationships and the outcome of the upcoming U.S. presidential election have also been a source of worry for businesses.
The already severe impact of Covid-19 on businesses has supply management organisations heavily focused on managing the supply chain and reacting to new shocks appearing almost daily at this point.
While it is comforting to know that procurement executives are alert to the threat of disruptive economic events and were already taking steps to prepare, it is also important to remember that cost reduction and contingency plans can backfire if they end up hurting long-term sustainability. So, executives must tread lightly.
Procurement is uniquely positioned to influence and control external spend across the organisation, which commonly accounts for the largest expenditure outside of payroll. The traditional approach of arbitrary cost elimination through mass layoffs can hollow out a company’s capacity to react to sudden changes in supply market conditions as well as capitalise on growth opportunities. Procurement should be encouraged to utilise its core bargaining and negotiation skills to provide additional cost savings, demand management, value generation and cash conservation.
Download the full report from The Hackett Group here.
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