Impact of Disasters on different Sectors

I already wrote about different effect supply chain disruptions can have on a focal company and its stakeholders. Now I found another interesting article dealing with the impact of different disasters on different industries within the supply chain.

Method

The authors (Altay and Ramirez) use a exploratory empirical study to analyze the effect of over 3’500 historic natural disasters within over 150’000 firm-years.
From the literature analysis three hypothesis were generated:

• H1: A firm’s financial leverage increases in response to a disaster.
• H2: A firm’s TAT (Total Asset Turnover) will decrease in response to a disaster.
• H3: A firm’s OCF (Operating Cash Flow) will increase in response to a disaster.

Two disaster databases were used to gather the relevant data about the disruptions. Three proxies for the overall effect of the disaster are used: ratio of damage over GDP, affected people by the disaster (per capita) and a composite measure based on the disaster count, affected population, the death toll and the damage.
These were then correlated with the financial leverage, the TAT and the OCF.

Results

Regarding their hypothesis the authors follow for all industries

1. “Results using our monetary proxy suggest a positive and time-persistent correlation between financial leverage and disaster damage for all sectors with the exception of extractive industries.”
2. “In general, firms become less efficient in managing their assets (lower sales as a percentage of assets) after a disaster.”
3. “When we turn to our composite measure, we see support for the negative impact of disasters on firm cash flows.”

The results are nonetheless not consistent over all proxies (damage, people affected and composite), so the authors follow rightly, that the correct proxy has to selected very carefully.

The authors go further in their data analysis and find that…

…damage by windstorms and floods seem to be dramatically different from that of an earthquake, providing evidence against the all-hazards approach.

furthermore:

We also show that the impact of floods on TAT of a firm is dependent on the firm’s position in the supply chain. We found that while upstream partners enjoy a positive impact, downstream partners have to plan for the opposite.

That last finding is quite interesting, since it shows that floods (and windstorms) seem to be disruptions which can be planned for and stock is accrued in advance and sold successfully.

Conclusion

The authors also take some effort to support the robustness of their results. The overall results remain unchanged after removing:

• larger countries (with potentially more disruptions by which not all companies are affected equally),
• G8 countries, and
• countries with higher insurance consumption.

Overall I found this article kind of hard to read. Probably because the reading flow is disrupted by several multiple page tables which could have been moved to the appendix.
But still the article takes a new approach to evaluating the effect of supply chain risks on companies and industries and brings some interesting findings.