5 Ways EDI Can Help Prepare Your Supply Chain for a Recession
With inflation remaining at some of the highest rates in over 10 years, and the Federal Open Market Committee expecting to keep interest rates elevated throughout 2023, many businesses are preparing for a recession. A recession can cause trouble for companies and supply chain managers-- especially if they are unprepared to face it. From cash flow problems and credit impairment to difficulty recovering once the economic downturn passes, a looming recession can potentially spell disaster.
Three essential steps for preparing your supply chain for a recession are investing in automation, leveraging the power of data, and utilizing cloud-based supply chain solutions. An effective tool that accomplishes these goals is Electronic Data Interchange (EDI). EDI can help make your supply chain recession-proof and support you in further growth.
How a Recession Can Impact Supply Chains
A recession impacts businesses in several ways, including increasing pressure on supply chains. Although recessions impact companies differently and are generally unpredictable, there are several ways a recession could affect your supply chain.
1. Unpredictable Demand
Shifts in customer demand are one of the first signs of a recession that companies experience. Spending slows as customers anticipate a recession or experience a reduction in buying power from rising inflation. As demand winds down, businesses make fewer sales and experience cash flow reduction.
Unpredictable demand also impacts the way companies forecast demand and order inventory. When businesses use manual demand forecasting or out-of-date data, they end up with inaccurate forecasting that can lead to overstocks or stockouts. Demand for items like groceries and consumer goods may also shift from discretionary items to necessities, further impacting demand planning. To stay ahead, companies must be able to adjust their processes quickly as demand changes.
2. Cash Flow Problems
A steady stream of incoming cash is critical for any business, and cash flow can be an issue during a recession when spending slows. Buyers may stretch out their payment terms as far as possible if they are experiencing their own cash flow problems, making it even more challenging for upstream partners to pay their suppliers.
During a recession, businesses often do everything they can to maximize their cash flow, including cutting employee benefits and restricting their marketing budgets. Inventory management is a critical area where businesses can help improve their cash flow. When companies store excess stock, they tie up cash that could be better spent in other areas. Effective forecasting and inventory allocation methods can help resolve this issue.
3. Difficulty Growing in a Recovery
A recession can have long-term effects that impact supply chains even into economic recovery. Factors like labor shortages and tightened credit conditions make it difficult for businesses to gain access to the talent and capital they need. If companies experienced stockouts and lost sales during the recession, they could lose much-needed customer loyalty, making a recovery challenging.
5 Ways EDI Can Support Your Supply Chain
With so many uncertainties facing your business in a recession, you need effective tools to support your supply chain and resolve potential challenges. One solution to these challenges is electronic data interchange (EDI).
EDI is a system that uses automation to transmit business documents electronically between companies, streamlining the ordering process. Businesses typically use EDI to securely and accurately transmit information between trading partners, which may include suppliers, retailers, distributors, 3PLs, and shippers.
Preparing your supply chain for a recession with EDI can provide valuable support to your supply chain and equip it to maintain efficiency into recovery.
1. Respond to Orders with Greater Agility
The cash flow restrictions and short supply of goods accompanying a recession demand fast response times to incoming orders. Quickly, efficiently, and accurately processing orders helps you keep lead times short and reduce the order-to-cash cycle. To maintain a flexible and adaptive supply chain, you need the ability to automate order processing.
EDI connects trading partners and automatically translates incoming data into a standardized format their ERP system can read. Furthermore, EDI integration makes it easy to automatically create responding outgoing documents so your company can streamline both order processing and invoicing. By improving the timeliness of order fulfillment, payment collection, and other critical business processes, EDI helps you maintain a competitive advantage.
2. Improve Trading Partner Communications
Effective communication between upstream suppliers and downstream retailers and distributors is critical for a functioning supply chain, especially during a recession. Trading partners must be up to date on demand fluctuations to stay ahead of supply chain challenges. If demand in one sales channel or through one supplier falls, you need other trade relationships you can rely on.
EDI allows you to expand your channels and trade relationships with other supply chain partners when customer demand in one area declines. Becoming EDI capable allows you to work with a broader range of trading partners and improve relationships with them, strengthening your supply chain during a recession and into the future.
3. Reduce Manual Processes
Manual data input is time-consuming and can lead to increased errors. Faxing or emailing orders and manually inputting them into a system draws out order processing, straining your team and making it difficult to expand your business. During a recession, you can't afford to operate inefficiently because of error-filled order documents or slow manual processes.
EDI replaces manual data entry with automation to save companies time and effort. Take, for example, SoftTouch Labs. By replacing manual data entry with an EDI integration from TrueCommerce, the brand was able to create a centralized hub for all its orders and create flexibility in order processing, without sacrificing accuracy. The technology has also enabled SoftTouch Labs to expand its sales channels and increase its order output, all while giving time back to their teams for other high-priority items.
4. Liberate Your Team and Ensure Compliance
Maintaining EDI compliance is critical for working with certain retailers that want to standardize document exchange between their trading partners. Yet maintaining compliance across dozens or even hundreds of customers is challenging for many suppliers and their teams.
Compliance can become an issue during a recession, when suppliers may have smaller teams that are strained under heavier workloads. Avoiding chargebacks for non-compliance is even more critical for suppliers when they're dealing with reduced cash flow. A fully managed EDI service can take the administrative burden of compliance off your team and ensure ongoing EDI compliance, so you can redirect your resources to operate more strategically.
5. Control the Bullwhip Effect to Keep Inventory Lean
Keeping inventory lean is critical to maintaining sufficient cash flow during a recession. However, companies along the supply chain may react to demand fluctuations differently.
When they're concerned about a potential recession or trying to recover from one, retailers and suppliers may build their stock to ensure they can meet demand. These actions lead to the bullwhip effect, a phenomenon that sometimes occurs when multiple parties in the supply chain inflate their orders or demand forecasts to act as a buffer, resulting in excess stock and higher supply chain costs.
EDI systems can speed up communication between trading partners and promote inventory visibility so partners can mitigate the effects of the bullwhip effect before they get out of control. This level of visibility allows you to lower your inventory costs and keep from tying up funds in excess inventory, increasing your cash flow.
Improve Your Recession Readiness with EDI
When you want to improve your company's ability to fulfill demand while staying flexible, EDI software is a key solution. EDI automates document exchange to improve your process efficiency, reduce lead times, and make it easier and more cost-effective to do business.
TrueCommerce's globally recognized EDI solution is a fully managed service trusted by thousands of retailers, suppliers, distributors, and other trading partners. To see how TrueCommerce EDI can help you protect your supply chain during a recession and accelerate key business processes, request a free demo today.