Shifting Phases, Shifting Strategies

Management objectives are tailored strategies that are implemented during specific phases of the business cycle to yield better results. The industrial economy and most players in it are at the tail-end of Phase B, Accelerating Growth, and still feeling overwhelming demand pressure relative to their productive capabilities – maximizing this particular phase may require a shift in strategy.

A recent conversation with one of our EVP Flex™ clients covered one such strategic pivot. This client, like most of our clients, was struggling to keep their production up to pace with their inbound order rate. This client's specific circumstance was attributable to raw material availability issues; for others in 2021, labor shortages, shipping capacity, and other issues were the catalysts for similar situations.

Given that external supply chain tightness, a systemic issue, was largely out of the client's control, they looked inward and pivoted to what they could control. Internal review revealed that roughly 60% of their SKUs by volume were accounting for less than 5% of their overall revenue. Under normal supply and capacity circumstances, this was not a problem, as carrying that extreme breadth of inventory had little cost and allowed them to offer niche products with more limited application. However, during the current cycle, it was proving costly and unsustainable to occupy production capacity and consume scarce raw material to produce these fringe products. Ultimately, the client temporarily, and in some cases permanently, suspended production of a large percentage of these non-performing SKUs to focus on higher-performing, more profitable product categories.

This particular management objective fit perfectly with the timing and realities of the current business cycle phase and may be worth considering for your organization.

Looking ahead – in a few short months, we will be broadly pivoting to the next phase of the business cycle: Phase C, Slowing Growth. Many businesses have not experienced Phase C on a sustained basis since 2019. Stay tuned with ITR for when the shift will occur and what you can do to best position your business to capitalize on it.

Connor Lokar

Senior Forecaster