How to prepare for an exit out of the "Great Recession"
One of the most difficult items to predict is the actual timing and speed of economic recovery. This week, Federal Reserve Chief's from the San Francisco and Atlanta Districts stated that the U.S. recovery will likely take on an "L" shape, indicating that recovery will be slow and drawn out. Whenever recovery happens, competitive market landscapes will look very different and economic conditions will dictate how supply chain and business managers handle resumption of risk to accommodate growth.
As markets emerge from the recession, risk aversion will likely be in the backs of everyone's mind. Businesses have been beat up for two years. But the emergence from recession is typically a period of acquisition and merger. Corporate valuations are low and companies will make strategic moves prior to full-on economic expansion. During this recovery phase, expect to see a lot of foreign investment and acquisitions in the U.S.--especially as the U.S. dollar remains weak.
Two key elements in being successful in the recovery are to have maneuverability and flexibility in your business.
Maneuverability refers to having financial resources (either cash on hand or access to credit), willingness to take on risk for growth, speed to market, and few barriers to altering a business model or approach.
Flexibility in this context pertains to the operational "leeway" (ability to source products, manufacture, or acquire raw materials in various markets), have ample suppliers and partners that can bring sourcing flexibility, and the ability to extend or contract the supply chain and inventory levels to meet changing business demands.
Many suppliers have had a difficult time during the recession and reductions in supplier production capacity will give buyers a challenge as the economy improves and capacity tightens further. The greatest determining factor of how well companies will handle the recovery phase is likely to come from their ability to maneuver out of these situations. Flexibility in sourcing, finances, and operational decisions will be a key in increasing maneuverability and reducing risk in the supply chain.
One tip for monitoring the recovery is to watch the U.S. dollar. Ballooning U.S. deficits have weakened the dollar against a basket of prominent currencies. The situation with the dollar is volatile and daily swings are common; it obviously changes the sourcing landscape. Purchasing and sourcing managers have always taken currency exchange into account when procuring products worldwide--but the volatility of the rise and fall of the dollar is adding to the complexity for managers. As the U.S. economy strengthens, the dollar has shown a tendency to go with it. Thinking forward, it would make sense that under a recovery scenario the dollar will strengthen and U.S. imports will once again rise.
Oil prices will also play a factor in sourcing decisions--especially as the U.S. economy recovers. Under the weakest of demand, oil prices have quietly risen to $80 a barrel (some of that rise is coming on the back of the weak dollar). As recovery happens, fuel costs are likely to spike again--perhaps not to the $147 a barrel level of early 2008, but analysts believe that $100 a barrel is possible by the end of 2010.
For businesses to truly handle recovery best, they must have operational and financial flexibility to roll with market changes. They must adapt. And, they have to be willing to reconsider a little bit of risk to be one of the winners in the "land grab" that is to come.
