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Supply Chain Disruptions and Corporate

Performance

Vinod R. Singhal

College of Management

Georgia Institute of Technology

Atlanta, GA, 30332

E-mail: Vinod.singhal@mgt.gatech.edu

April 2011

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• Without facts you are just another person with

an opinion

unless

you are at a level of the organization where your

opinion becomes fact.

• When research is limited or absent, anecdotes

prevail.

Some thoughts

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•The financial consequences of supply chain

disruptions

- shareholder value

- stock price volatility

- profitability

•Drivers of supply chain disruptions.

• Implications for investors.

Agenda

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• Disruptions due to natural disasters

- Hurricane Katrina in USA

- Volcanic eruption in Iceland

- Floods in Australia

- Earthquake in Japan

• Disruptions not due to natural disasters

- Boeing Dreamliner

- Toyota quality problems

- Johnson & Johnson product recalls

- BP Deepwater Horizon oil rig collapse

Supply chain disruptions are frequent

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• 70% of executives indicated that supply chain risks

have increased over the past three years, and will

increase over the next five years (McKinsey 2010).

• 75% of firms experienced unexpected production

hiccups in the last 12 months and 25% said the

problems are getting worse (Business Continuity

Institute survey 2010).

• Second most important issue (IBM 2009).

Awareness about supply chain risks

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Obstacles to addressing risks

47

36 36

1814

6

0

10

20

30

40

50

60

Insuff icent time Inadequate

personnel

Insuff icient

budget

Not a priority No reason given Not recognized

% o

f firm

s

Survey done by Harris Interactive in 2005.

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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

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1000+ announcements of supply chain disruptions

(production or shipment delays) from Wall Street Journal and

Dow Jones News from 1990 to 2007.

- Apple Inc. said it will delay shipment of its Apple TV

device until mid-March , Dow Jones News Service,

February 27, 2007.

- Sony to delay launch of Playstation3 because of

manufacturing issues”, The Wall Street Journal, October

6, 2006.

- Boeing has run into delays producing the latest military

navigation satellites, Wall Street Journal, August 23,

2006.

Sample

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Stock market reaction to disruption announcements

-7.18 -7.17-6.81

-7.81

-10

-8

-6

-4

-2

0

Portfolio Matched Size MatchedPerformance

Matched Industry Matched

Avera

ge s

hare

ho

lder re

turn

(%

)

10

Comparison with stock market reaction to other

corporate events

Financial events

Stock splits 3.3%

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 name 0.7%

Brand leveraging 0.3%

Celebrity endorsement 0.2%

New product introduction 0.7%

Affirmative action awards 1.6%

Information technology events

IT Investments 1.0%

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%

Automotive recalls -0.5%

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Average stock returns over different intervals

-13.68

-7.18

-10.45

-1.77

-15

-12

-9

-6

-3

0

Year before

On

announcement 1st year after 2nd year after

Avera

ge s

hare

hold

er

retu

rn (

%)

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Average stock returns over three years

-40.66

-34.77-32.21

-38.40

-50

-40

-30

-20

-10

0

Portfolio Matched Size Matched

Performance

Matched Industry Matched

Avera

ge s

hare

hold

er

retu

rn (

%)

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Volatility changes

On average 21% increase in volatility

50

55

60

65

70

75

-24 -20 -16 -12 -8 -4 1 5 9 13 17 21

Event Month

Annualized E

quity V

ola

tility

(%

)

Disruptions

Control Sample

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S&P 500 has returned about 12% annually over the

last 15 years.

Major disruptions are associated with 35%

underperformance in stock returns.

One major disruption every 10 years – average

return of 9%

Broader perspectives

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Profitability impacts of disruptions

-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

Perc

ent change

Mean

Median

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•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.

•Firms do not quickly recover from disruptions.

Summary

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• Globalization of supply chains

• Increased reliance on outsourcing and partnerships

• Single sourcing

• Over-concentration of operations

• Little slack in the supply chain – focus on efficiency

• Competition

Are supply chains more prone to disruptions

today?

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•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?

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Supply chain disruption experiencing firms are torpedo stocks

Sell or hedge these stocks.

Supply chain risk analyses should be an important part of stock recommendations and selections.

Educate firms about the consequences of supply chain risks.

Serve as a catalyst to motivate firms to be proactive in mitigating supply chain risks.

Implications

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• Can you afford the risk of a major supply chain

disruption?

• What is the easiest way to create shareholder

value or make money? Stop losing it!

Final Thoughts