Supply Chain Disruptions and Shareholder Wealth

In last weeks article (Hendricks and Singhal, 2005) I described the effects of supply chain glitches on supply chain performance. This week should be viewed an update to that.

Already in 2003 Hendricks and Singhal showed in an article the devastating effects supply chain glitches can have on the shareholder value. Up to that time a strong correlation between excellence in supply chain management and shareholder value has always been presumed. Many have alluded to the compelling bottom-line benefits and tremendous payoffs that accrue to firms from developing effective supply chains, but hard evidence to support this has been very limited.

Metrics

Supply chain glitches are found by browsing through press releases in search for announcements of a demand / supply mismatch.
Increases or decreases in the shareholder value are assessed using the stock price of the company.

Results

The analysis of the empirical data results in the following conclusions:

• Glitch announcements decrease shareholder value on average by 10.82%
• For larger firms, the negative stock market reaction is less pronounced
• The higher the growth prospects, the more negative is the stock market reaction.
• Finally, irrespective of who is responsible for the glitch or what caused the glitch, shareholders of firms that experience glitches pay dearly

Implications

The evidence clearly indicates that ignoring the possibility of supply chain glitches can have severe negative economic consequences, the goal therefore must be to prevent glitches as much as possible. This can be done by improving forecasting and developing the ability to predict glitches.
Furthermore the elapsed time between the occurrence and detection of glitches should be reduced and of cause reduce the time it takes to resolve glitches.

Conclusion

A loss in shareholder value of over 10% is huge. The fact that it seems to be irrelevant who is responsible for the disruptions further aggravates the need for a supply chain risk management, which comprises not only the on company and the internal chain but also the means to monitor and control supply and demand side risks.