An Empirical Analysis of the Effect of Supply Chain Disruptions on Operating Performance

Supply Chain professionals all knew there was a linkage between supply chain performance and shareholder value. But no one ever did the work involved in understanding it and validating this with hard numbers. After all, the two constituencies for this output would be the hard-edged number lovers—CEO’s who care about shareholder value, and supply chain executives, who would clearly put the results to work. Kevin B. Hendricks of Richard Ivey School of Business at The University of Western Ontario and Vinod R. Singhal of DuPree College of Management at Georgia Institute of Technology wrote their seminal report two years ago on this topic.

They looked at over one thousand companies’ supply chain glitches and related these to their subsequent impacts on shareholder value. Staggering impacts based on issues such as delays in new product introductions, short or delayed shipments, etc., resulted in an average of over 10% reductions in shareholder value! (figure 1)

figure 1

But, with shareholder value an ongoing story of gloom, today the story is more fundamental—back to operating performance—the real story.

So, Hendrick and Singhal are back at it again with new research. This new paper documents the impact of supply chain disruptions on operating performance. Based on a sample of 885 disruptions announced by publicly traded firms, they estimate that in the year leading to the announcement, firms on average experience a 107% drop in their operating income, 114% drop in return on sales and 93% drop in return on assets. During this time period, the level of return on sales drops by 13.78% and return on assets by 2.32%. Firms that experience disruptions face on average 6.92% lower sales growth, 10.66% growth in cost, and 13.88% growth in inventories. More importantly, firms do not quickly recover from the negative economic consequences of disruptions. During the two-year time period after the disruption announcement, the changes in operating income, sales, total costs, and inventories are insignificantly different from zero.

If you want these papers, you can contact Vinod Singhal at: vinod.singhal@mgt.gatech.edu.

This new paper is a great motivator for continued process and systems investments. It provides a compelling view into the financial consequences of demand-supply mismatches.

Another extremely important point in the overall research is that supply chain 3Pe improvements must be made by small firms, as well as large. Though large firms get all the press (both positive and negative), the small firms are more adversely affected by glitches, like running the risk of losing customers.

Figure 2

"Disruptions are likely to adversely affect the short and long-term profitability of the firm. It can lead to both short and long-term loss in sales and market share, lower sales price due to markdowns of excess inventories, and could prevent the firm from capitalizing on strong market demand due to unavailability of products. Disruptions can negatively impact customer service if customers are unable to get the products they want at the time they asked for. Poor customer service leads to higher customer dissatisfaction and lower loyalty among customers. Disruptions can adversely impact the firm’s reputation and credibility among customers, causing customers not to consider the firm as a possible source for meeting their future needs,” says Henrick and Singhal. ChainLink’s research on the CPG Retail tug of war indicated likewise, that firms would be ‘fired’ by their customers for poor supply chain performance.
Who should read these papers?

  • CEOs, who are worried about shareholder value and operation performance improvements in their firms.
  • CFO, CIO and VP of Supply Chains who are responsible for strategy and implementation of process and technology improvement that will improve over-all business improvements in the firm.
  • VP of Sales who don’t release ‘till it is too late, then lose share with their customers due to poor supply chain operations.

Get the report from Prof. Singhal! vinod.singhal@mgt.gatech.edu.

 

 

 

©2003 ChainLink Research, Inc.