While economists and analysts make Herculean efforts to forecast economic changes, history has shown that these exercises are prone to significant errors. Economic models, though advanced, often fail to anticipate the magnitude, duration, or even the onset of a recession. For example, in October 2022, Bloomberg Economics predicted with 100% probability that the U.S. would enter a recession within 12 months. However, the latest figure for the third quarter of 2023 indicates the U.S. grew 4.3%. 

During recessions, uncertainty increases: How much will demand decrease? How delayed will customer payments be? Will financing conditions remain stable? These are some of the questions companies faces. In the face of this uncertainty, many companies freeze, postpone investment decisions, and cut costs, risking their market share and, even worse, leaving the organization in a weakened position for when the economy recovers. Conversely, others take advantage of the recessionary context to make decisions that would be difficult to execute under other circumstances. They divest from non-core business units, merge areas, or change teams, abandon less attractive investments, and redirect resources towards opportunities revealed by the economic context. 

In these more turbulent scenarios, planning and coordination are practices that help reduce uncertainty within the organization. One of the most transversal and critical processes in the organization is Sales and Operations Planning (S&OP). This process integrates sales and operations functions to create a coherent operational plan that supports the business strategy. An effective S&OP helps companies balance supply and demand, optimize inventory levels, and improve operational efficiency (see Montblanc’s publication here). 

During a recession, a well-structured S&OP process enables companies to respond quickly to changes in market demand, adjust production, and minimize operating costs. The key to this process is understanding deviations and responding promptly. Since initial plans generated in the S&OP will likely be only partially fulfilled, executives will need to understand the causes of these deviations, propose corrective actions quickly, and develop new plans to align the organization with its environment. 

In recessionary contexts, organizations might benefit from understanding their variable cost structure and analyzing whether it makes sense from a risk/return perspective to move towards a more variable structure—understanding that this might incur lower margins but with less risk in uncertain scenarios. 

A multinational trade services company is a gold standard in maintaining a large portion of its cost base varieable.. After a major economic crisis in which its high base of equipment and machines nearly led the company to bankruptcy, senior management mandated outsourcing fleets and equipment, accepting a loss of margin but gaining organizational flexibility. Their commitment to being a variable cost company was such that they defined a target for the cost variability ratio (variable costs/total costs) to evaluate their projects. Thus, if a project was profitable but had a variability ratio lower than 0.7, the project was not executed. 

Not all organizations can make their costs variable; the feasibility will depend on the sector’s uncertainty and the available market alternatives for achieving a “more variable” cost. However, the first step will be to explore alternatives. 

In summary, to tackle the uncertainty that comes with recession periods, coordination and planning processes are essential. A mature S&OP process will alert deviations and require rapid responses to deviations from initial plans. This process, combined with a sufficiently variable cost base, could enable organizations to quickly adjust to market fluctuations and not only survive a recession but also emerge stronger and better prepared for the future.