The macroeconomic business cycle low point is coming. According to mounting leading indicator evidence, US Industrial Production, our benchmark for the industrial economy, will reach a low in mid-2020, just as we forecasted back in September 2018. If your business moves in synch with the industrial economy, this means that you will likely see rise in your own rates-of-change starting in the second half of the year.
Now is the time to position your company to capitalize on the upcoming rising trend. You need to develop a plan that will ensure the necessary assets are in place when the rising trend arrives. There are three key asset categories – people, equipment (capacity), and inventory – that could help you maximize your growth potential in the second half of this year and into 2021.
Unless your business is facing unique circumstances, we do not advise cutting staff levels during the current slowdown, as you will need that labor to maximize your output during the next business cycle rising trend. If anything, leverage the current lull in activity to cross-train your employees or help them obtain additional skills. This will yield better productivity in the future.
Ask yourself what you wish you had during the last rising trend, which for many businesses was in 2018. Many ITR clients were facing capacity constraints during that time, which led to growing backlogs and, in some cases, missed opportunities to take on additional orders and grow market share. Look to automation if, as with many of our clients, labor is an ongoing challenge for your business. Investing in automation and other technological improvements near a business cycle low will be less disruptive than doing so when your operation is much busier.
Effective management of inventory levels is key to maximizing the upcoming cyclical rising trend. During periods of deceleration, companies typically lower the amount of inventory they hold. This is sensible, as it reflects slowing market demand. However, many firms also wait too long to increase their inventories during periods of improving market conditions, leading to missed opportunities. As the business cycle bottoms out over the next two quarters, it is particularly important to hold sufficient inventories of components and replacement parts, as cyclical lows are typically associated with more replacement and retrofitting activity relative to new product sales.
Time is of the essence when it comes to preparing your business for the rise expected in the second half of this year and into 2021. Some of these measures can take some time to implement, and, depending on where you are in your business cycle, you may need to consider more aggressive Management Objectives™.
We are always available to discuss how to best apply these strategies in the unique market conditions of your business. Please don’t hesitate to reach out to us to discuss how you can maximize your business cycle rise in the second half of this year.