1 supply chain disruptions and shareholder value kevin hendricks richard ivey school of business...
TRANSCRIPT
![Page 1: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/1.jpg)
1
Supply Chain Disruptions and ShareholderValue
Kevin HendricksRichard Ivey School of Business
Ontario, Canada
Vinod R. SinghalDuPree College of ManagementGeorgia Institute of Technology
Atlanta, GA, 30332
![Page 2: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/2.jpg)
2
•Shareholder Value = Create - Destroy
•Poor supply chain performance destroys shareholder value
•Practices that prevent poor supply chain performance create value by avoiding value destruction
Supply chains and shareholder value
![Page 3: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/3.jpg)
3
• Effect of disruptions on shareholder value
• Effect of disruptions on profitability – growth in operating income, sales, cost, assets, and inventory
• Effect of disruptions on risk – share price volatility
- cost of capital (discount rate)
- more expensive and difficult to raise capital
- can affect investment/acquisition plans
- increase the cost of factors of production
- conflict between various stakeholders
Issues examined
![Page 4: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/4.jpg)
4
• Sample
• Measurement time period
• Methods to estimate the impact of disruption on performance
• Statistical tests
• Results
• Implications
Approach
![Page 5: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/5.jpg)
5
• 800+ announcements of supply chain disruptions (production or shipment delays) from Wall Street Journal and Dow Jones News
Sun Microsystems delays shipments of workstations and servers, Dow Jones News Service, December, 14, 2000.
Sony Sees Shortage of Playstation 2s for Holiday Season”, The Wall Street Journal, September 28, 2000.
Boeing pushing for record production, finds parts shortages, delivery delays, Wall Street Journal, June 26, 1997.
Hershey will miss earnings estimate by as much as 10% because of problems in delivering order, Wall Street Journal, September 14, 1999.
Sample
![Page 6: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/6.jpg)
6
Distribution of disruptions by sales volume
26.48
15.01
20.94
11.49
7.29
18.78
0
5
10
15
20
25
30
35
40
Less than$50 million
$50 millionto $100million
$100 millionto $250million
$250 milionto $500million
$500 millionto $1billion
Over$1billion
Sal
es v
olum
e of
firm
s ex
perie
ncin
g gl
tiche
s at
the
time
of th
e gl
tich
anno
unce
men
(%
of f
irms)
![Page 7: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/7.jpg)
7
Responsibility for disruptions
33.61
12.8114.51
3.816.05
29.38
0
5
10
15
20
25
30
35
40
Internal Customer Supplier Nature andgovernment
Othercombinations
Noneprovided
% o
f Fir
ms
![Page 8: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/8.jpg)
8
Reasons for disruptions
21.64
8.94 8.823 8.46
4.11 3.26
29.38
0
5
10
15
20
25
30
35
Partshortages
Ramp/roll-out problems
Orderchanges bycustomers
Productionproblems
Developmentproblems
Qualityproblems
Noneprovided
Num
ber
of f
irms
(%)
![Page 9: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/9.jpg)
9
• Compare performance of disruption experiencing firms with portfolios of similar type of firms
- Size (created 14 portfolio)- Book to market value (subdivided each of the 14 into 5 )- Prior performance (subdivided each of the 70 into 3)
• 210 portfolios of firms
• Simulated 1000 benchmark portfolios
• Used the simulated distribution to test statistical significance
Estimating stock price performance implications
![Page 10: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/10.jpg)
10
• One to one matching
- Closest in size- Closest in performance- Closest in SIC match
• Estimate the difference in stock price performance between the sample firm and its benchmark
• Estimate the difference in change in volatility of the sample firm and its benchmark
Estimating stock price performance and risk implications
![Page 11: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/11.jpg)
11
Methodology for estimating the profitability impacts
•Create benchmark samples to adjust for the effect of economy and industry
•Three different benchmark samples created by matching on Sales Assets Standard Industry Classification (SIC) Codes Prior Performance
![Page 12: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/12.jpg)
12
Average stock returns on disruption announcements
-7.18 -7.17-6.81
-7.81
-10
-8
-6
-4
-2
0
Portfolio Matched Size MatchedPerformance
Matched Industry Matched
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 13: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/13.jpg)
13
Average stock returns over different intervals
-13.68
-7.18
-10.45
-1.77
-15
-12
-9
-6
-3
0
Year beforeOn
announcement 1st year after 2nd year after
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 14: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/14.jpg)
14
Average stock returns over three years
-40.66
-34.77-32.21
-38.40
-50
-40
-30
-20
-10
0
Portfolio Matched Size MatchedPerformance
Matched Industry Matched
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 15: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/15.jpg)
15
Year to year changes in equity volatility
-1.74
13.5
2.82
15.16
-5
0
5
10
15
20
Two years beforeto one year
before
One year beforeto one year after
One year after totwo years after
Two years beforeto two years after
% C
hang
e in
equ
ity r
isk
(sta
ndar
d de
viat
ion)
![Page 16: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/16.jpg)
16
Profitability impacts in the year before the disruption
-107.43-114.67
-92.24
-42.27-32.02
-35.82
-140
-120
-100
-80
-60
-40
-20
0
Operating Income Return on Sales Return on Assets
Performance Measures
Per
cent
cha
nge
Mean
Median
![Page 17: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/17.jpg)
17
Profitability impacts in the year before the disruption
13.88
9.59
6.08
10.66
-6.92
3.064.29
-2.84
-20
-15
-10
-5
0
5
10
15
20
Sales Cost Assets Inventory
Per
cent
cha
nge
Mean
Median
![Page 18: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/18.jpg)
18
Profitability impacts in the year after the disruption
-6.36
-18.09
0.94
-4.62
0.1
-6.27
-20
-15
-10
-5
0
5
Operating Income Return on Sales Return on Assets
Per
cent
cha
nge
Mean
Median
![Page 19: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/19.jpg)
19
Profitability impacts in the 2nd year after the disruption
-25.44
-36.19
-23.09
-6.58
-3.49
-8.32
-40
-35
-30
-25
-20
-15
-10
-5
0
5
Operating Income Return on Sales Return on Assets
Per
cent
cha
nge
Mean
Median
![Page 20: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/20.jpg)
20
Average stock returns by responsibility
-35.69
-24.93
-52.88-60
-50
-40
-30
-20
-10
0
Internal Supplier Customer
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 21: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/21.jpg)
21
Average stock returns by reason
-25.48
-52.79
-46.59
-41.67
-60
-50
-40
-30
-20
-10
0
Part shortagesRamp/roll-out
problemsOrder changesby customers
Productionproblems
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 22: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/22.jpg)
22
Average stock returns by size
-47.05
-64.28
-46.68
-32.35
-19.61
-70
-60
-50
-40
-30
-20
-10
0
Ist quintile(smallest) 2nd quintile 3rd quintile 4th quintile
5th quintile(largest)
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 23: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/23.jpg)
23
• Disruptions cause significant destruction in corporate performance
• It does not matter who or what caused the disruption – you still pay
• Small firms suffer more from disruptions
• Market always took a dim view of supply chain disruptions
• Firms do not quickly recover from disruptions
Summary
![Page 24: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/24.jpg)
24
•Consequences are not known
•Low frequency events
•Resource shortages
•Requires cross-functional effort
•Short tenure of managers
•You don’t get credit for fixing problems that never happened
•You have not experienced one
Why enough attention is not paid to the possibility of disruptions?
![Page 25: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/25.jpg)
25
•Globalization of supply chains
• Increased reliance on outsourcing and partnerships
•Single sourcing
•Little slack in the supply chain
•Competition
Are supply chains more prone to disruptions today?
![Page 26: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/26.jpg)
26
• Reduce the frequency (probability) of disruptions
- better forecasting
- better planning
- communicate, collaborate, and share
• Develop ability to predict disruptions (business intelligence)
- select, define, and track key performance indicators
- analyze disruptions to develop key leading indicators
- track leading indicators
- need visibility
Dealing with disruptions
![Page 27: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/27.jpg)
27
• Elapsed time between the occurrence and detection of glitch
- aim for zero elapsed time
- real time visibility of the extended supply chain
- event management systems
• Time it takes to resolve the glitch
- quick resolution, prevent escalation and worsening
- a process for dealing/responding to disruptions
- developing capabilities to react and respond
Dealing with disruptions
![Page 28: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/28.jpg)
28
• Traditional approach – create shareholder value
- efficiency driven (impacts on cost and capital cost)
- cost-benefits analysis (ROI) of potential solutions
- ignores revenue, indirect benefits, and intangibles
• Augment the traditional approach
- need to preserve value and avoid value destruction
- value of reliable, responsive, and robust supply chains
- prevention role of effective SCM
- effective SCM buys insurance against value destruction
Implications for making business case
![Page 29: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/29.jpg)
29
Additional Results
![Page 30: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/30.jpg)
30
Distribution of sample announcements
12.45
18.62
32.41
36.52
0
5
10
15
20
25
30
35
40
1989-1991 1992-1994 1995-1997 1998-2000
Num
ber
of f
irms
(%)
![Page 31: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/31.jpg)
31
Comparison with stock market reaction to other corporate events
Financial events
Stock splits3.3%
Open market share repurchase 3.5%Proxy contest
4.2%Increasing financial leverage
7.6%Decreasing financial leverage -5.4%
Seasoned equity offerings -3.0%
Marketing events
Change in firm name0.7%
Brand leveraging 0.3%Celebrity endorsement
0.2%New product introduction0.7%
Affirmative action awards 1.6%Delay introduction of new -5.3% products
Information technology events
IT Investments1.0%
B2C e-commerce10.5%
B2B e-commerce 3.3%
IT problems -1.7%
Operational events
Increase in capital expenditure 1.0%Increase in R&D expenditure
1.4%Effective TQM implementation 0.7%
Internal corporate restructuring 1.0% Decrease in capital expenditure -1.8% Plant closing
-0.7%
![Page 32: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/32.jpg)
32
Average stock returns by industry groups
-51.12-47.65
-27.31
-35.84
-60
-50
-40
-30
-20
-10
0
Process Batch manufacturing High technology Services and others
Ave
rage
sha
reho
lder
ret
urn
(%)
![Page 33: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/33.jpg)
33
Profitability impacts by industry groups
-70.3
-4.4
5.561.91 1.7
11.93
-56.7
-32.6
-55.6
-3.5-6.5-3.6
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
Process Batch manufacturing High Technology Services and others
Per
cent
cha
nge
Operating Income
Sales
Costs
![Page 34: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/34.jpg)
34
• Lower Revenues
• Higher costs
• Poor asset utilization
• Excess inventory, inventory write-offs, stockouts
• Higher cost of capital/borrowing
• Shareholder lawsuits
• Management and personnel turnover
• Loss of reputation and credibility, negative publicity
Consequences of disruptions
![Page 35: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/35.jpg)
35
Median profitability impacts by responsibility
4.521.25
5.82
-43.7
-29.9
-55.0
-4.3 -1.1-5.6
-70
-60
-50
-40
-30
-20
-10
0
10
20
Internal Supplier Customer
Performance Measures
Per
cent
cha
nge
Operating Income
Sales
Costs
![Page 36: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/36.jpg)
36
Median Profitability impacts by reason
-50.2
-3.0
1.685.65 5.69
2.81
-58.8-59.0
-31.2
-10.3
-2.6-1.2
-70
-60
-50
-40
-30
-20
-10
0
10
20
Parts ShortageRamping/Rollout
problemsOrder changesby customers
Productionproblems
Per
cent
cha
nge
Operating Income
Sales
Costs
![Page 37: 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management](https://reader034.vdocuments.us/reader034/viewer/2022051614/5516feba550346f5558b4f1d/html5/thumbnails/37.jpg)
37
Median Profitability impacts by size
0.3
-7.8
7.62.6
-22.9-25.2-29.5
-66.2-72.4
-86.4-100
-80
-60
-40
-20
0
20
OperatingIncome
Return onSales
Return onAssets Sales Cost
Performance Measures
Per
cent
cha
nge
Larger firms
Smaller firms