Devastating Effect of Supply Chain Disruptions on Long-term Profitability and Shareholder Value

STUDY EXECUTIVE SUMMARY

Supply chain professionals intuitively know there is a strong linkage between supply chain performance and corporate financial performance. But they have not been able to quantify their intuition into hard facts that would get the attention of hard-edged number lovers such as CEO’s and CFO’s. A new report by Kevin Hendricks of Richard Ivey School of Business at The University of Western Ontario and Vinod Singhal of College of Management at Georgia Institute of Technology now provides the evidence that supply chain executives have been looking for. Kevin and Vinod looked at nearly 800 instances of supply chain disruptions that caused production and shipment delays and estimated the long-term financial implications of supply chain disruptions. The effects of disruptions are staggering. Some of the key findings are:

• Disruptions have a significant negative effect on profitability. In the year leading to the disruption, the average effect is 107 % drop in operating income, 93% drop in return on assets, 7 % lower sales growth, and 11 % growth in cost. 
•  Over a three year time period around the disruption, disruption experiencing firms report 33 to 40% lower stock returns relative to their competition.
• In the year after the disruption the share price volatility is 13.50% higher when compared to the volatility in the year before the disruption.
• Disruptions have a debilitating affect on performance as firms do not quickly recover from disruptions. Firms continue to operate for at least two year at a lower performance level after experiencing disruptions.

The report also provides findings on the effect of disruptions on corporate performance by the sources and reason for disruptions; different industry groups, and firm size. It also discusses the drivers of disruptions and what firms can do to build capabilities to mitigate and manage disruptions.

The findings discussed in this report have major implications for senior executives:

It underscores the need as to why senior executives must be aware of the primary sources of disruptions in their supply chains, what can be done to mitigate the risks of disruption, and take proactive actions to mitigate risks.

• Recent corporate governance legislation makes senior executives more responsible for forecasts of performance and protection of shareholder value. Since supply chain disruptions are often unforeseen and unexpected and can have a material impact on performance, senior executives can open themselves to litigation from disgruntled shareholder as well as questions from regulators.
• Although the focus on making supply chains more efficient and lean makes economic sense, senior executives must recognize that lean and efficient supply chains face higher risk of disruptions. There is an inverse relationship between efficiency and risk. Firms can no longer afford to focus solely on cost reduction.

eKNOWtion COMMENTARY:

Mr. Singhal and Mr. Hendricks have validated in their study the devastating impacts that supply chain disruptions have on the profitability of a company as well as on shareholder value. It is certain that a robust and agile supply chain will be able to stand the test of disruption better and suffer less impact. The key to agility in the supply begins in Supply Chain design. Too many companies have forgotten or ignored the need to take a fresh look at their originally constructed supply chain design and measure its relative maturity against the competition.

Supply Chain Maturity can be measured based on the 5 Key Processes defined by the Supply Chain Operations Reference (SCOR) Model: Plan, Source, Make, Deliver and Return and overall Best Practices for building agility into the supply chain. Two key elements of moving up the "Supply Chain Maturity Matrix" is ensuring strong collaborative relationships as well as installing sound Knowledge Management practices across the network. At the highest level of maturity, customers and suppliers will work together to link strategies and processes and commit their people to meeting real-time performance targets and measure their achievements in an enterprise-wide balanced scorecard (see below). At this leading-edge maturity level, the multi-firm network is so well integrated that any disruption in the supply chain should be minimized and as we can see from the details of this study – the importance of minimizing any negative impact to profitability and shareholder value can not be underestimated!

Getting The Report

The details of the above study are described in a 65 page report titled "The Effect of Supply Chain Disruptions on Long-term Profitability, Shareholder Value, and Share Price Volatility". To get details on how to purchase the study directly from the authors and talk with them personally regarding their findings contact us at supply-chain@eKNOWtion.com and we will provide you the information to "Unlock Performance".