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ASCM Insights

Episode 3: What We Learned from the Last Recession


Intro: Welcome to The Rebound where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, editorial director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now, to today's episode.

Bob Trebilcock: Welcome to today's episode of The Rebound, what we learned from the last recession. I'm Bob Trebilcock.

Abe Eshkenazi: I'm Abe Eshkenazi.

Bob: Joining us today is Morgan Swink. Morgan is West Chair and Professor of Supply Chain Management at the Neeley Business School of Management, Texas Christian University. He's also a frequent contributor to Supply Chain Management review and ASCM.

If you watched the movie, The Perfect Storm, you might remember that George Clooney's crew faced a convergence of three storms. Any one of which might have sunk their ship. As supply chain professionals, we're in the same boat as those fishermen. We're contending with a health crisis, a financial crisis, and now social upheaval. Any one of the three would be challenging enough. You put them together, and we're all wondering if we'll get safely back to shore, but at least when it comes to the financial crisis, there are lessons we can learn from how companies handled the 2008 recession and recovery. Those are what Morgan will share with us today. With that, I'm going to let Abe get us started.

Abe: Thanks, Bob, and welcome Morgan.

Morgan: Thanks.

Abe: Let's dig into a little bit Morgan. We've got obviously, as Bob pointed out to some significant challenges, both on the humanitarian as well as on the economic side. There are things that we've learned obviously from past disruptions, actions that can be taken both before, as well as during, and then after recessions. From your perspective, the impact varies by industry as well as by the various functions and each of the phases both before, during, and after, give us some of your insights into why this was important for you as a research topic, and then more importantly, what did you learn out of that? What are the high level learnings that you got?

Morgan: Well, thanks Abe and Bob, and it's great to be with you today. Appreciate the opportunity to share some of the research I've done. Actually, I started working on this early 2019 when some pundits out there started to think when our next recession was going to happen. There was a lot of buzz around that if you recall. It seems like a lifetime ago now, but people were thinking, well we're really due for the next recession.

I had done some work back in 2010 timeframe kind of looking at what happened to some specific firms after the last recession and started to talk with ASCM some folks there. We started to take a much more detailed and larger look at what happened to firms in different industries in that last recession. Again, we were thinking about helping folks prepare for the next recession. We didn't realize how timely this was going to be given what's happened in this last year. We decided to take a large look. I've collected financial data for almost 2000 firms in five different industry sectors and basically trying to uncover drivers of what we're calling resilience.

What is it that makes some firms more resilient to recession? We're looking at that in two different ways. First of all, what was it about the firms going into the recession, their structure, their asset structure, some of their supply chain practices, their working capital situation that maybe made them less impacted by the recession during that two year period, 2008, 2009. Then what was it that they did during 2008 and 2009 as reflected in their financial statements that help them to recover faster?

Some firms made a lot more progress in 2010 in recovering from the dip. I mean, everybody's struggled obviously financially through that period. Everyone's profitability was hurt, everybody's sales growth went down, but some firms were able to climb back up the curve a little faster. We started to look at what did they do during the recession to make that climb a little faster and I can go into the details but the big picture is supply chain matters. That was the big message that came out of it. There's some specific factors that have to do with asset structure, with working capital obviously with how you manage inventories and things like that that make a big difference.

One of the key things that I'll point out, just kind of a side study, we looked at companies that were highly ranked in the Gartner ranking, supply chain firms in that time period and also ASCM member firms. These are both kind of ways of gauging how serious are these companies about their supply chain, how intentional are they in managing their supply chain, if they're willing to contribute or participate in an organization like ASCM or they're ranked by Gartner, you would think they would be leaders in that regard.

In both cases, we found that those firms did better for example, the ASCM member firms saw about a 4% above industry, average sales grow. They retain their sales about 4% better than their industry averages, and they were better at maintaining their market capitalization as well. They maintained about 25% more of their market cap during that recession period than their average industry competitors. That's the big picture supply chain matters, and we can get into some of the details a little more down the line here.

Bob: If you think about the companies you looked at going into the recession, or while managing through the recession, what did those companies do to position themselves to get through it?

Morgan: Well, a little bit of caveat here first. The last recession of course, was financially driven and it basically created a demand shock for almost everyone although different than the staple firms that were selling staple goods, grocery stores, et cetera tended to suffer a little less than those that sold the discretionary goods. I just want to point that out. It was overall demand shock for everyone. This recession is a little different because we see demand shocks in some industries, but really it's more supply shocks and other industries. Having said that, the companies that were going into the last recession, the thing that separated them was first of all, an intense ability to manage a working capital. There's a lot of different metrics. We looked at about 30 different metrics and generally, the ones who had better control over internal processes going into the recession tended to do better. They actually didn't necessarily have lower cash conversion cycles. They had lower inventories and lower receivables. Interestingly, they tended to pay their suppliers faster, not slower, which is what you'd expect to drive down cash conversion cycle.

An interesting one was that the companies going into recession who did better tended to hold more of their inventory in a pre-configured state so that their percentage of inventory that was in raw material or component or work in process form was higher. I take that to mean they were better at postponement, better at responding. They didn't necessarily have lower gross margins going in, but they had better net margins. From that, I take it to mean that they were better at managing their SGNA, their overheads, their transaction costs and things like that, as opposed to the direct costs.

The other big thing that came out of it, if you look at the structures of the companies and how they differed those that had more of a variable cost structure going into the recession that is there are more labor-intensive actually than asset-intensive and had more productive employees in terms of the sales per employee metric, they tended to do better as well.

Bob: Just since you talked about metrics, a couple of times, what were the key metrics that you were looking at?

Morgan: We looked at, as I mentioned, about 30 different kinds of metrics and I can group them in some key categories. We looked at expenses. Things like operating expenses, cogs as a percentage of sales SGNA, as a percentage of sale, advertising expense, R&D expense, goodwill expense. Then we looked at working capital, days of inventory, receivables, payables. Then we looked at the asset and debt profile. Things like asset employee ratios, cash as a percentage of assets, inventories of course, plant property and equipment as a percentage of total assets, depreciation, debt equity. Then some productivity measures, sales to assets, sales to plant property and equipment and sales employees.

Those were all the things that we looked at to see if there were key differences that drove outcome performance differences. Then on the performance side, we looked at sales growth, we looked at profit, some different profit measures, but mainly return on assets and then some market value aspects such as market caps or market cap is the number of stock shares outstanding times the average price of the share. That's a measure of both the intangible assets or value of the company, as well as the book value.

Abe: It's really interesting, Morgan, on some of the activities that the organizations took prior to the recession in terms of their nimbleness and agility, I think you're identifying a number of those critical success factors. Give me a sense of what you're seeing on during and after, what are they doing to recover, if they've some of the activities that they've taken prior to the recession, but they find themselves and maybe they haven't taken all of the necessary steps to respond to it, what are you seeing in terms of some of the responses that companies are having, while they're in this particular recession or this pandemic?

Morgan: Right. Again, what we looked at was, how did investments, working capital, asset structure, how did those things change during the recession, and then which of those changes seem to be significantly correlated with a faster recovery after the recession. The things that popped out, first of all, the firms that were most resilient, in terms of recovering faster, showed pretty dramatic differences in their ability to recover, they recovered their profitability at about 12% rate, greater than the laggards. They grew sales faster, they recovered their market cap faster.

One really interesting thing is these companies actually grew market share through the recession and post-recession, whereas the vast majority of other companies lost market share. Some of these more resilient firms were able to capitalize on that. Now, what is it that made them resilient? Well, they were among the fastest in terms of cutting expenses first or lowering operating expenses, specifically, cost of goods sold in SG&A. That's both direct costs and indirect costs.

They were really good at lowering working capital, that is inventories and sales. Again, they did not necessarily slow down on payments to suppliers. In fact, many of them paid their suppliers even faster so you can see they made the effort to protect perhaps some of their suppliers during the recession. They were able to spin off certain assets we saw in terms of the PPE to asset- that's plant property and equipment to asset ratio, they were able to shed some nonproductive assets faster, they were able to lower their depreciation expenses. Not quite sure how to interpret that but perhaps some of the assets that they divested or shed were things that they had a lot of depreciation expense on. They were able to increase productivity dramatically. This is probably the biggest if you look at the absolute differences in the numbers, the sales to assets, number, the sales to PPE number, the sales employee number, they were able to really drive those metrics up substantially more, whereas almost all the others saw decreases in those productivity metrics.

Bob: I was interested, you talked a little bit about the laggards, versus the leaders, meaning that people who lead the way on this were able to take market share from the laggards. I wonder two things around that. One is since you looked at different industries, was there an industry that stood out in terms of being more resilient in recovering? If so, do you have a sense of why but within industries was that leader laggard phenomenon consistent? Meaning, regardless of the industry, the leaders tended to take market share over the laggards?

Morgan: The short answer is it was pretty consistent. These key differences were fairly consistent across leaders and laggards. The two things I would point out is I talked about working capital and then fixed assets. The fixed asset issue was more of a concern in the manufacturing industries, whereas working capital was a stronger driver in retail. The five sectors that we looked at were oil and mining, the extraction industries; manufacturing; communications; retail trade; and then services.

Really the differences popped out between manufacturing and retail trade and it makes a lot of sense. Manufacturing's where you're going to have more of the asset-intensive PPE drivers. That's where that variable cost structure really seems to matter a lot more there. Whereas in the retail trade, it's really just all about managing all that inventory and working capital positioning correctly.

Abe: Morgan, let me move on to something that you brought up before and that is the organizations that had the variable cost structure, specifically, more labor seem to outperform those that were more capital intensive. Okay, I'm a supply chain manager, and taking a look at the data that you're providing me, and I'm looking at a recession just looming, and not only if it's not already here, I'm anticipating it. What do I do on the labor side? What do I do on my talent development side, given that we're clearly headed into a very difficult time period here? Give me some of the things that I can do not only for my team but for the organization that can help us respond much quicker to this disruption.

Morgan: Well, you can actually look at this two ways. It's a complex situation, it's a crisis of sorts, is also a great opportunity to realign the organization, to realign talent, to move talent around, to try to use the transition time to put people in the best place where they can make the greatest contributions. Then, while we're worried about expenses at this point, it's actually a great time to think about training and development and in terms of repositioning or positioning the firm to be resilient in the next situation, whatever that might be, once we get through this one, I think there's a lot of merit to trying to develop a learning organization.

One of the things we see again, through the data, although it's indirect, but what we see is companies are able to manage change quickly, to learn quickly, are the ones who are going to fare better in these very dynamic situations. Where does that change management come from? Well, it comes from employees who have more generalized skills, who are able to shift from one thing to another. Actually, I have another study that looks at how companies learn from small disruptions and how they're able to take that learning and apply it to these large disruptions.

Now, that's not in this financial data that we're looking at but there is evidence there that shows that companies that intentionally take small disruptions as learning opportunities, and use that to train employees in different response modes, protocols, whatever you want to call it tend to do better when these large disruptions, these large economically-driven disruptions occur.

It's really a great time to think about talent strategically and to try to make changes both at the organizational level and how work is done. Obviously, remote work is something that people are thinking a lot about now but more largely think about how you can use talent as a way to move the ship if necessary, during major times of change like this.

Abe: Really helpful. Thanks, Morgan.

Bob: Thank you, Morgan. That's all the time we have today. Thanks for joining us, and we hope you'll be back for our next episode when we'll be joined by Milena Janjevic, a research scientist at the Megacity Logistics Lab at MIT Center for Transportation and Logistics. Now Milena is going to discuss new approaches and models for supply chain design, as well as the new digital tools that will enable them. I look forward to seeing you then I'm Bob Trebilcock.

Abe: I'm Abe Eshkenazi. All the best everybody. Stay safe and healthy.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit and We hope you'll join us again.

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