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Supply Chain Disruptions and Corporate Peformenace

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Presented by: Vinod R. Singhal
College of Management
Georgia Institute of Technology
Atlanta, GA

Cass-Capco Institute Conference
April 14, 2011

Published in: Business, Economy & Finance
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Supply Chain Disruptions and Corporate Peformenace

  1. 1. 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 1
  2. 2. Some thoughts• Without facts you are just another person withan opinion unlessyou are at a level of the organization where youropinion becomes fact.• When research is limited or absent, anecdotesprevail. 2
  3. 3. Agenda• The financial consequences of supply chain disruptions - shareholder value - stock price volatility - profitability• Drivers of supply chain disruptions.• Implications for investors. 3
  4. 4. Supply chain disruptions are frequent• 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 4
  5. 5. Awareness about supply chain risks• 70% of executives indicated that supply chain riskshave increased over the past three years, and willincrease over the next five years (McKinsey 2010).• 75% of firms experienced unexpected productionhiccups in the last 12 months and 25% said theproblems are getting worse (Business ContinuityInstitute survey 2010).• Second most important issue (IBM 2009). 5
  6. 6. Obstacles to addressing risks 60 50 47 40 36 36 % of firms 30 18 20 14 10 6 0 Insufficent time Inadequate Insufficient Not a priority No reason given Not recognized personnel budgetSurvey done by Harris Interactive in 2005. 6
  7. 7. Consequences of disruptions 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 7
  8. 8. Sample 1000+ announcements of supply chain disruptions(production or shipment delays) from Wall Street Journal andDow 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. 8
  9. 9. Stock market reaction to disruption announcements Perf ormance Portf olio Matched Size Matched Matched Industry Matched 0 Average shareholder return (%) -2 -4 -6 -6.81 -8 -7.18 -7.17 -7.81 -10 9
  10. 10. Comparison with stock market reaction to other corporate eventsOperational events Marketing eventsIncrease in capital expenditure 1.0% Change in firm name 0.7%Increase in R&D expenditure 1.4% Brand leveraging 0.3%Effective TQM implementation 0.7% Celebrity endorsement 0.2%Internal corporate restructuring 1.0% New product introduction 0.7%Decrease in capital expenditure -1.8% Affirmative action awards 1.6%Plant closing -0.7%Automotive recalls -0.5%Information technology events Financial events IT Investments 1.0% Stock splits 3.3% IT problems -1.7% 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% 10
  11. 11. Average stock returns over different intervals On Year before announcement 1st year after 2nd year after 0 Average shareholder return (%) -3 -1.77 -6 -7.18 -9 -10.45 -12 -13.68 -15 11
  12. 12. Average stock returns over three years Performance Portfolio Matched Size Matched Matched Industry Matched 0Average shareholder return (%) -10 -20 -30 -32.21 -34.77 -40 -38.40 -40.66 -50 12
  13. 13. Volatility changes 75Annualized Equity Volatility (%) 70 65 Disruptions Control Sample 60 55 50 -24 -20 -16 -12 -8 -4 1 5 9 13 17 21 Event Month On average 21% increase in volatility 13
  14. 14. Broader perspectives 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% 14
  15. 15. Profitability impacts of disruptions Performance Measures Operating Income Return on Sales Return on Assets 0 -20Percent change -40 -32.02 -42.27 -35.82 -60 Mean Median -80 -100 -92.24 -107.43 -120 -114.67 -140 15
  16. 16. Summary• 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. 16
  17. 17. Are supply chains more prone to disruptions today?• 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 17
  18. 18. Why enough attention is not paid to the possibility of disruptions?• 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 18
  19. 19. Implications 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. 19
  20. 20. Final Thoughts• Can you afford the risk of a major supply chaindisruption?• What is the easiest way to create shareholdervalue or make money? Stop losing it! 20

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