1

Supply Chain Disruptions and Corporate Performance

Vinod R. SinghalScheller College of Business

Georgia Institute of TechnologyAtlanta, GA, 30332

vinod.singhal@scheller.gatech.edu

May 2, 2013Presented in the MOT Program at Sogang University

Seoul, South Korea

2

Primary risk factors

25

12

8 86 6

0

10

20

30

40

Supply Chain Mech/Elecbreakdown

Natural disater Labor issues Fire\Explosion Price Fluctuations

Risk Factors

% o

f firm

s

Survey done by Harris Interactive in 2005.

3

• 70% of executives indicate that supply chain risks has increased in the past three years (McKinsey 2010)

• 68% of executives indicate that supply chain risk will increase in the next 5 years (McKinsey 2010)

• 48% of executives indicate that the frequency of supply chain risk events with negative outcomes have increased in the last three years (Deloitte 2013)

• 64% of executives claim to have supply chain risk management programs but only 55% think that these are effective (Deloitte 2013)

Other surveys about supply chain risks

4

Obstacles to addressing risks

47

36 36

1814

6

0

10

20

30

40

50

60

Insufficent time Inadequatepersonnel

Insufficientbudget

Not a priority No reason given Not recognized

% o

f firm

s

Survey done by Harris Interactive in 2005.

5

•Supply chain risks causes demand-supply mismatches

- Supply is less than demand (undersupply or disruptions)

- Supply is greater than demand (oversupply or excess inventory)

- Product introduction delays

Supply chain risks

6

•Effect of disruptions on shareholder value

•Effect of disruptions on profitability – growth in

operating income, sales, and cost

Issues examined

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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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• 1100+ 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.

- Hershey will miss earnings estimate by as much as 10% because of problems in delivering order, Wall Street Journal, September 14, 1999.

• Recent product recalls by Toyota

• Boeing Dreamliner problems

• Recent labor strikes in Shenzen, China

Sample

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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

10

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

(%)

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•Short-term stock price effects of disruption announcements

- the day before and day of the announcement

•Long-term effects on (typically 3 years)-Stock prices-Profitability

• Performance impacts estimated after adjusting for the performance of benchmarks

Estimating the performance implications

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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

(%)

13

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 name0.7%

Brand leveraging 0.3%Celebrity endorsement

0.2%New product introduction0.7%

Affirmative action awards 1.6%

Information technology eventsIT 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 (US)

-0.4% Automotive recalls (Japanese) -0.62

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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 beforeOn

announcement 1st year after 2nd year after

Ave

rage

sha

reho

lder

ret

urn

(%)

15

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

(%)

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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 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

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Profitability impacts in the year before the disruption

19

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

20

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

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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

• Tightly coupled

• 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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• Can you afford the occurrence of a major supply chain risk event?

• Supply chain risk management is like buying insurance - Insurance is often most worth having when it seems least necessary.

• Insurance is often hard to cost justify.

• What is the easiest way to create shareholder value or make money? Stop losing it!

Summary