Supply Chain Disruptions and Operating Performance

I just realized, that up to now I have not written much about why Supply Chain Risk Management should be an important factor many more companies.

Hendricks and Singhal wanted to understand this as well and researched on what effect a missing supply chain risk management can have on a company’s performance. They therefore started a research series, the first article was on the “Effect of Supply Chain Glitches on Shareholder Wealth” (mentioned here). And today I have a look at their second article in this series: “Association between Supply Chain Glitches and Operating Performance”.

Introduction

The authors conducted an empirical study to learn more about the relationship between supply chain glitches (which are defined as supply exceeding or not meeting demand) and operating performance of the company.

Negative Impact of Glitches

First it is important to think about how supply chain glitches work and why the can have negative impacts on different parts of the company and its supply chain:

• Demand Side
  • short and long-term loss in sales
  • market share
  • lower sales price
  • oportunity costs of unavailability of products
  • customer service (dissatisfaction, lower loyalty)
  • reputation / credibility
• Cost Side
  • expediting
  • premium freight
  • obsolete inventory
  • additional marketing
  • penalties paid
  • increase public relation expenses
  • capital cost
• Assets
  • productivity
  • utilization of assets (over- or underutilization)

Methodology

A sample of public announcements is analyzed for supply chain glitches. 885 glitches are identified and on that basis the performance during a period before (4 quarters) and after the glitch (8 quarters) is assessed for effects of the glitch. A typical glitch announcement looks like this:

“Apple Computer Inc. Cuts 4th-period Forecast Citing Parts Shortages, Product Delays,” The Wall Street Journal, September 15, 1995.

Hypothesis and Results

The following hypothesis are then tested using available data:

• Supply chain glitches will be associated with a decrease in profitability
• Supply chain glitches will be associated with a decrease in net sales
• Supply chain glitches will be associated with an increase in costs
• Supply chain glitches will be associated with negative asset and inventory performance

Single firm performance is compared to a peer company before and after the glitch.
The analysis reveals that before the glitch operating income is down by 107%, return on sales is down 114% and return on assets down by 93%.
After a glitch the authors found that the changes in operating income, sales, total costs, and inventories are insignificantly different from zero.

Conclusion

Hendricks and Singhal also provide an interesting statistic on the responsibilities for the glitches, on the top: internal (then customers and suppliers). This might indicate a priority for supply chain risk management as well: a reduction in internal errors and disruptions can have a huge leverage on company performance.