The Market Selloff
You would have to be hiding under a rock to not hear that the market sold off. The S&P 500 sold off 3%; the Dow tumbled 1,000 points, and tech company leaders lost a combined $1 trillion intraday (recovering almost half later in the day). Manufacturing activity based on the ISM’s manufacturing PMI (purchasing managers index) contracted to 46.8%, declining from June’s figures. In addition, the world is bracing for more violence as Iran is expected to attack Israel imminently.
This selloff is not unexpected. Many economists have been calling for a recession for the last year as the market soared to all-time highs, yet they have largely changed that stance lately. That reversed course when the weaker-than-expected July jobs report triggered a reliable recession indicator that Wall Street closely monitors. On the other hand, inflation readings are still substantially above targeted levels and companies like NVIDIA continue to trade at huge multiples. Additionally, a CEO group speaker talked about the key risks in the investment landscape (AI effect, S&P in bubble range, persistent inflation, record levels of debt, threats to the US dollar, geopolitical tensions, cyber security). Watching these signals, it signals for caution and volatility.
Smart Businesses are Prepared for Volatility
Volatility has been the name of the game. In our recent article, we discussed volatility, uncertainty, complexity, and ambiguity (VUCA) and the related impacts. As we have been communicating, volatility and supply chain disruptions will be the new normal. Since the pandemic, many companies have emphasized agility, resilience, and flexibility and have built their supply chains to support growth during these turbulent times.
For example, our most successful clients have been automating and digitizing their supply chains to ensure consistent quality, customer value, improved service levels, better cash flow, and reduced costs. They are better utilizing ERP systems, upgrading when appropriate to gain access to advanced functionality, rolling out artificial intelligence (AI) with advanced forecasting, predictive analytics, maintenance, and scenario planning for changing circumstances. Of course, these technologies support profitable growth, but they also create agility and flexibility as employees can stop focusing on mundane tasks and instead focus on exception management. Additionally, clients have been utilizing robotics, automation equipment, digital twins, and other systems to minimize the need for manual labor with high workers compensation requirements. Thus, they can flex up or down rapidly to changing circumstances without substantial increases in cost.
Another process to prepare for volatility is to establish a SIOP (Sales Inventory Operations Planning) process. SIOP monitors, adjusts, and predicts changes to demand and supply and related impacts on a weekly, monthly, and quarterly basis. Thus, it enables executives to stay in front of changing conditions and make proactive adjustments to strategies and plans to ensure customer value and profitable growth. For example, an industrial equipment manufacturer decided to emphasize product lines that best supported growth goals with amble capacity while adjusting prices and sources of supply on low margin products. To learn more about how to roll out SIOP, refer to our complimentary book, SIOP: Creating Predictable Revenue and EBITDA Growth.
What’s Next?
Volatility will remain intact for the next few years. On the other hand, volatility will be a significant opportunity for proactive businesses. If you are prepared for growth yet agile and resilient for changing circumstances, you will surge past your competition and secure a market position for decades to come as the rest struggle mightily.
With that said, if you are prepared for economic volatility, don’t become too confident if you haven’t diversified your risk. There is substantial geopolitical risk that could erupt at any time. Does your product have to flow through the South China Seas? Are you dependent on China? Do you know if your suppliers’ suppliers are prepared for volatility? Do you have the talent to support rapidly changing conditions? How much of your customers and/or suppliers’ business is dependent on risk-laden countries? Take stock of your end-to-end supply chain, determine strategic changes and pivot accordingly.
If you are interested in reading more on this topic:
Although Manufacturing Has Declined, the Smart are Planning for a Renaissance