Kevin B. Hendricks

Supply Chain Disruptions and Shareholder Wealth

Daniel Dumke — Wed, 19 Jan 2011 12:34:00 +0000

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.

Reference:

Hendricks, K., & Singhal, V.R. (2003). The effect of supply chain glitches on shareholder wealth Journal of Operations Management, 21 (5), 501-522 DOI: 10.1016/j.jom.2003.02.003

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empirical research

Supply Chain Disruptions and Operating Performance

Daniel Dumke — Wed, 12 Jan 2011 09:39:00 +0000

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.

Reference:

Hendricks, K.B., & Singhal, V.R. (2003). The effect of supply chain glitches on shareholder wealth Journal of Operations Management, 21 (5), 501-522 DOI: 10.1016/j.jom.2003.02.003

Hendricks, K., & Singhal, V. (2005). Association Between Supply Chain Glitches and Operating Performance Management Science, 51 (5), 695-711 DOI: 10.1287/mnsc.1040.0353

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Research Issues for Managing Supply Chain Disruptions

Daniel Dumke — Thu, 06 May 2010 06:37:00 +0000

What do professionals in the domain of supply chain management think about disruptions? How do they prepare for them, how do they act when a disruption occurs?

Blackhurst et al. (2005) answer these questions in their work about “An empirically derived agenda of critical research issues for managing supply-chain disruptions”.The authors are using three different empirical methods to achieve this goal empirically: Case study, surveys and focus groups.

Disruptions

As you would expect from a theoretical article they start with the question: What are disruptions anyway? They can show themselves in different forms: eg. transportation delays, natural disasters, part shortages, quality issues. The common theme is, that disruptions are costly and can trigger stock-outs, which leads to the inability to meet customer needs.

Other authors like Hendricks and Singhal (2003) show that supply chain disruptions can cause huge cost.

And disruptions are on the rise due to global sourcing, which increases the potential for disruptions and the movement towards increased responsiveness, higher levels of agility and lower inventories.

Results

The empirical study results in the following three steps to master supply chain disruptions.

Disruption discovery
Visibility and predictive analysis are most important to discover disruptions, the update of risk measures therefore has to be more dynamic (up to real-time) to be useable.
Disruption recovery
Recovery starts with damage control, it should be build on a model to understand hwo disruptions will affect the supply chain
Supply chain redesign
The goal for redesign is to include all relevant (hidden?) costs of a global supply chain and to aim for a flexible and robust supply chain optimization

Conclusion

The article builds a framework to think about disruptions within a supply chain. As the title already suggests this article only points at the issues researchers are/should be working at the moment. And there is still a lot of work to do.

Reference:

Blackhurst, J., Craighead, C., Elkins, D., & Handfield, R. (2005). An empirically derived agenda of critical research issues for managing supply-chain disruptions International Journal of Production Research, 43 (19), 4067-4081 DOI: 10.1080/00207540500151549

Hendricks, K., & Singhal, Vinod (2003). The effect of supply chain glitches on shareholder wealth Journal of Operations Management, 21 (5), 501-522 DOI: 10.1016/j.jom.2003.02.003

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