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Common Concerns as We Prepare for the Recovery

June 8, 2020

Struggling with concerns regarding your order books, production, and inventory? Tune in to our bonus TrendsTalk episode with ITR Director of Speaking Services Alex Chausovsky for steps to take as we prepare for the recovery.

 

 

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Transcript by Rev

Hello everyone. My name is Alex Chausovsky. I'm the director of Speaking Services at ITR Economics. Welcome to another edition of TrendsTalk with ITR. Today, I wanted to discuss three key topics with you. Which are really the messages that we've been hearing from our customers that we provide forecasts for, that we work with on an individual one-on-one basis, to help them see around the corner and really plan better for the future and for the recovery from the events that we're going through right now. The three topics that I wanted to talk about involve the impact on order books, the impact on production, and the impact on inventory levels. Let's talk about order books first.

We clearly see signs that companies are seeing new orders slowing. They're seeing increases in undelivered and unpaid receivables that are resulting from their customers struggling financially. We're seeing, in some cases, that backlogs are evaporating. One of the strategies that we're seeing increasingly leveraged to deal with these problems is companies are agreeing to push out payment terms with their most valuable and stable clients in order to mitigate some of the downside pressure on orders. So if you as a business have not really looked to that strategy in order to offset some of the negativity you're feeling, we certainly recommend that you consider doing so. Perhaps from 90 days to 120 days, or even we've seen pushing out receivables to 180 or 240 days, even upwards of 360 days. Whatever it takes to keep that business flowing, to make sure that you are focused on continuity of operations.

The second thing I wanted to mention is the impact on production. We definitely have seen evidence of supply chain constraints emerging as manufacturers are reopening their facilities in this post COVID-19 pandemic world. We're seeing major changes to the production lines. They're retooling those production lines to focus on creating more space for their employees. In some cases, this is creating a real cost problem, and in other cases, it's having a real substantial impact on the output the companies are are able to achieve. Really, we had one particular customer that is looking at about 75% capacity at two of their factories. And another factory that actually was shut down for the entire month of April, that was only able to open back up in May with about a 20 to 30% capacity because of all the extra space and retooling action that they needed to do to get their operation going again once we got past the shutdown related to COVID-19.

There's also challenges related to getting labor to return, and that's having an impact on production volumes as well. Whether that's related to high unemployment insurance that their employees are able to collect right now. In some cases meaning that's more money than what they were making on the job. In other cases, it has to do with the fear or other COVID related factors preventing people from returning. And in some cases we've seen evidence that people have actually gone on to take other jobs. But of course, all of these challenges result in one thing, which is a negative impact on your ability to produce at the levels that you were doing as a business prior to the black swan events of the first quarter.

The last comments I want to make center around inventory, and really some strategies for managing inventory levels in the face of uncertainty that we have right now. I think that our main recommendation is to be conservative in the amount of inventory that companies hold on hand, really focused on the cost savings of lower inventory levels as part of your belt tightening strategy. And keep in mind, this also will create some opportunities for firms to become better partners with their customers. What I mean by this is that the seller can manage, monitor, or carry inventory for the buyer. Buyer will generally understand that they'll pay a higher cost for this, but it does take some cost out of their operation in both material and labor perspective. The benefit of this is that the seller now has a moat around their client-customer relationship and a more strategic relationship that will allow the continuity of that business to continue into the future, which is of course paramount to making sure we get through the challenges of today and are better prepared to really capitalize on that rising trend of tomorrow.

I hope some of these observations, some of these examples have been helpful to you. Thank you so much for your time today. We hope you'll join us again on the next edition of TrendsTalk with ITR Economics. Have a great day.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.