1. Supply Chain Disruptions and Corporate Performance
Vinod R. Singhal
Scheller College of Business
Georgia Institute of Technology
Atlanta, GA, 30332
May 2, 2013
Presented in the MOT Program at Sogang University
Seoul, South Korea

2. Primary risk factors
Survey done by Harris Interactive in 2005.

3. Other surveys about supply chain risks
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)

4. Obstacles to addressing risks
Survey done by Harris Interactive in 2005.

5. Supply chain risks
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

6. Issues examined
Effect of disruptions on shareholder value
Effect of disruptions on profitability – growth in operating income, sales, and cost

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

8. Recent product recalls by Toyota
Sample
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

9. Responsibility for disruptions

10. Reasons for disruptions

11. Estimating the performance implications
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

12. Average stock returns on disruption announcements

13. Comparison with stock market reaction to other corporate events
Operational events
Increase in capital expenditure %
Increase in R&D expenditure %
Effective TQM implementation %
Internal corporate restructuring %
Decrease in capital expenditure -1.8%
Plant closing %
Automotive recalls (US) %
Automotive recalls (Japanese)
Marketing events
Change in firm name %
Brand leveraging %
Celebrity endorsement %
New product introduction %
Affirmative action awards %
Information technology events
IT Investments %
IT problems %
Financial events
Stock splits %
Open market share repurchase 3.5%
Proxy contest %
Increasing financial leverage %
Decreasing financial leverage %
Seasoned equity offerings %

14. Average stock returns over different intervals

15. Average stock returns over three years

16. 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%

17. Profitability impacts in the year before the disruption

18. Profitability impacts in the year before the disruption

19. Profitability impacts in the year after the disruption

20. Profitability impacts in the 2nd year after the disruption

21. 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

22. 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
Tightly coupled
Competition

23. 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

24. Summary
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!