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December 15, 2017
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The high price of supply chain disruptions

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A study sponsored by the consulting firm PricewaterhouseCoopers has quantified the financial impact of a supply chain breakdown, and it isn't cheap.

A study sponsored by the consulting firm PricewaterhouseCoopers has quantified the financial impact of a supply chain breakdown, and it isn't cheap. The study analyzed financial results for 600 U.S. companies over a decade and compared a group of companies that experienced supply chain disruptions against a benchmark group that reported no breakdowns. Supply chain disruptions included such events as product recalls, delays in product launches for safety and quality, and late deliveries due to parts shortages and shipment problems.

The consulting firm worked with Dr. Vinod Singhal of the Georgia Institute of Technology to track the fortunes of publicly held companies that announced disruptions in The Wall Street Journal or via the Dow Jones News Service between 1998 and 2007. Singhal's analysis found that companies that announced supply chain breakdowns saw their average shareholder value plummet compared to peers that had not suffered such incidents. On average, the share prices for companies that announced a disruption dropped 9 percent below those of the benchmark group during the two-day period encompassing the day before and the day of the announcement.

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Supply chain disruptions: a drag on profits
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In addition, the affected companies saw greater volatility in their stock prices—a sign that investor confidence had diminished. The study noted that more than half of the affected companies experienced greater share-price volatility for a period of at least two years following an announced incident. After taking into account normal market movements, researchers concluded that share-price volatility for affected companies in the year following a disruption was on average 8 percentage points higher than that of the benchmarked stocks. Two years after a disruption, the share-price volatility of affected companies was even greater—10 percent higher than that for the benchmark companies.

Companies with battered supply chains also took a hit in terms of profitability. More than 60 percent of those companies reported lower returns on assets and sales than their peers. In addition, one year after the event, companies affected by supply chain woes saw their median return on sales fall 4 percentage points, from 10.5 percent to 6.4 percent. Return on sales represents a company's operating profit or loss as a percentage of total sales for a given period. That ratio, sometimes called the "operating profit margin," is often used to judge operational efficiency.

While it's hard to establish a direct link between supply chain resiliency and competitive advantage, the study provides further evidence that companies with weak supply chains face financial penalties that better-managed companies are able to avoid. "It does not matter who caused the disruption, what was the reason for the disruption, what industry the firm belonged to, or when the disruption happened," said Singhal. "Disruptions devastate corporate performance."

[Source: "From Vulnerable To Valuable: How Integrity Can Transform A Supply Chain," PricewaterhouseCoopers, 2008]

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