A counterargument to cutting staff and inventory.
One of those rituals that takes place around this time is developing the business plan and related budgets for the new year. Deciphering the crystal ball, discerning optimism from reality in the sales forecast, determining budget capital investments and human resource needs, and so on, is always a complex task. The very unusual pandemic/post-pandemic world we are now in makes it even more so.
As we look to 2022, we see some unusual and especially onerous hurdles: a more strained supply chain, deteriorating consumer sentiment, increasing inflation, and segments of the economy still reeling from the worst days of the pandemic. While no single hurdle can be compensated for, the combination of threats can tempt the planner to take a conservative approach and decide it’s time to hunker down.
But what does a conservative approach to planning and budgeting really mean? Typically, plans might include reducing inventory, cutting back capital spending and trimming staff (or hours worked by staff) to “right size” expenditures with the projected (feared?) lower levels of business. All are prudent steps that in normal times should be considered when an industry or the economy shows symptoms of fatigue. The problem is these are not normal times!
Reducing purchases to trim inventory levels works great when future business is questionable and if needed supply is readily available. It might be a very risky strategy to pursue, however, when the supply chain is stretched, and spot shortages of critical materials and components are reported almost everywhere. One could argue that, if anything, now is a prudent time to procure extra inventory as a hedge, especially if the global supply chain further deteriorates, causing more material shortages and price inflation. Having enough materials available to satisfy customers, but not too much inventory burning up critical working capital, is always a balancing act. The challenge is greater than ever to reconcile a measure of thriftiness in a slowing economic environment, while maintaining what is needed to service (read: retain) critical customers.
Investing in capital equipment is another area where traditional thinking might say to cut back to only what is essential or replacement items. Again, however, these unusual times possibly call for a different strategy. When uncertain about the future, the smart play has historically been to cut spending and not take on additional debt. Yet, when economic pundits agree the historically low interest rates most likely will not continue, and lead times for equipment are stretched about as far as the supply chain is, now may be the time to invest in capital equipment. Maybe the small ticket items could be pushed off, but for the big-ticket equipment that requires leases or bank financing, the savings over three to five years from today’s low finance rates may well be the most prudent investment decision a company can make. Planning and budgeting for such investments more than ever require a sober look at backlogs, customer forecasts and resulting cash flow.
Budgeting staff may be the most difficult aspect of planning. In even the best of times, one can plan to hire, but it’s another thing to find the talent. Finding good people can take a long time. Ditto for training and assimilating them into the organization. Long before Covid changed the business landscape, there were cries about a looming crisis that would impact all companies in every industry. That impending crisis is the replacement of a historically unprecedented number of retiring baby boomers with far fewer people in the pipeline of younger generations to fill those positions.
For those in manufacturing, the needs and lack of availability of qualified talent is well documented. Many companies have utilized creative means to attract and train the next generation. Regrettably, it is equally well documented that many young people do not like set hours or working every day and prefer far more personal flexibility at work than most manufacturing businesses can offer. During the pandemic, work from home and flexible work rules were employed to keep companies running and product being manufactured. A result of this is that many younger people prefer to work from home than go into an office. Rather than reducing workplace flexibility, it increased during the pandemic far more than anyone thought possible.
The pandemic accelerated one other trend: Many of the about-to-retire “baby boomers” chose to leave the workforce earlier than planned to avoid exposure to Covid-19 or assist in the care of family members.
In uncertain times, one of the most tempting plans of action is to reduce head count to the “right size” for anticipated level of business. Implementing such a strategy today might be devastating, however. Many industry companies have reported sizable staff reductions, citing business uncertainty and supply chain issues. Those companies that spent valuable resources to identify, hire and train talent, just to cut them, may be giving the competition the greatest gift possible: available talented employees! The difficulty in today’s economic environment is understanding the collateral damage making otherwise traditional human resource planning decisions may have on your business.
Be it inventory levels, capital investment spending or human resource needs, planning and budgeting in uncertain times is challenging. In today’s unique vortex of supply chain disruptions and lack of available skilled labor, determining the best course of action may be more demanding than ever. This year think long and hard as you do your business planning and budgeting.