1. Supply Chain Disruptions and Shareholder
Value
Kevin Hendricks
Richard Ivey School of Business
Ontario, Canada
Vinod R. Singhal
DuPree College of Management
Georgia Institute of Technology
Atlanta, GA, 30332

2. Supply chains and shareholder value
Shareholder Value = Create - Destroy
Poor supply chain performance destroys shareholder value
Practices that prevent poor supply chain performance create value by avoiding value destruction

3. Issues examined 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

4. Measurement time period
Approach
Sample
Measurement time period
Methods to estimate the impact of disruption on performance
Statistical tests
Results
Implications

5. Sample
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.

6. Distribution of disruptions by sales volume

7. Responsibility for disruptions

8. Reasons for disruptions

9. Estimating stock price performance implications
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

10. Estimating stock price performance and risk implications
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

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

12. Average stock returns on disruption announcements

13. Average stock returns over different intervals

14. Average stock returns over three years

15. Year to year changes in equity volatility

16. Profitability impacts in the year before the disruption

17. Profitability impacts in the year before the disruption

18. Profitability impacts in the year after the disruption

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

20. Average stock returns by responsibility

21. Average stock returns by reason

22. Average stock returns by size

23. 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
Market always took a dim view of supply chain disruptions
Firms do not quickly recover from disruptions

24. 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

25. Are supply chains more prone to disruptions today?
Globalization of supply chains
Increased reliance on outsourcing and partnerships
Single sourcing
Little slack in the supply chain
Competition

26. Dealing with disruptions
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

27. Dealing with disruptions
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

28. Implications for making business case
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

29. Additional Results

30. Distribution of sample announcements

31. 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 %
Marketing events
Change in firm name %
Brand leveraging %
Celebrity endorsement %
New product introduction %
Affirmative action awards %
Delay introduction of new % products
Information technology events
IT Investments %
B2C e-commerce %
B2B e-commerce %
IT problems %
Financial events
Stock splits %
Open market share repurchase 3.5%
Proxy contest %
Increasing financial leverage %
Decreasing financial leverage %
Seasoned equity offerings %

32. Average stock returns by industry groups

33. Profitability impacts by industry groups

34. 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

35. Median profitability impacts by responsibility

36. Median Profitability impacts by reason

37. Median Profitability impacts by size