Presented by: Vinod R. Singhal College of Management Georgia Institute of Technology Atlanta, GA Cass-Capco Institute Conference April 14, 2011

1. Supply Chain Disruptions and Corporate
Performance
Vinod R. Singhal
College of Management
Georgia Institute of Technology
Atlanta, GA, 30332
E-mail: Vinod.singhal@mgt.gatech.edu
April 2011
1

2. Some thoughts
• Without facts you are just another person with
an opinion
unless
you are at a level of the organization where your
opinion becomes fact.
• When research is limited or absent, anecdotes
prevail.
2

3. Agenda
• The financial consequences of supply chain
disruptions
- shareholder value
- stock price volatility
- profitability
• Drivers of supply chain disruptions.
• Implications for investors.
3

4. Supply chain disruptions are frequent
• Disruptions due to natural disasters
- Hurricane Katrina in USA
- Volcanic eruption in Iceland
- Floods in Australia
- Earthquake in Japan
• Disruptions not due to natural disasters
- Boeing Dreamliner
- Toyota quality problems
- Johnson & Johnson product recalls
- BP Deepwater Horizon oil rig collapse
4

5. Awareness about supply chain risks
• 70% of executives indicated that supply chain risks
have increased over the past three years, and will
increase over the next five years (McKinsey 2010).
• 75% of firms experienced unexpected production
hiccups in the last 12 months and 25% said the
problems are getting worse (Business Continuity
Institute survey 2010).
• Second most important issue (IBM 2009).
5

6. Obstacles to addressing risks
60
50 47
40 36 36
% of firms
30
18
20
14
10 6
0
Insufficent time Inadequate Insufficient Not a priority No reason given Not recognized
personnel budget
Survey done by Harris Interactive in 2005. 6

7. 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
7

8. Sample
 1000+ announcements of supply chain disruptions
(production or shipment delays) from Wall Street Journal and
Dow Jones News from 1990 to 2007.
- Apple Inc. said it will delay shipment of its Apple TV
device until mid-March , Dow Jones News Service,
February 27, 2007.
- Sony to delay launch of Playstation3 because of
manufacturing issues”, The Wall Street Journal, October
6, 2006.
- Boeing has run into delays producing the latest military
navigation satellites, Wall Street Journal, August 23,
2006.
8

9. Stock market reaction to disruption announcements
Perf ormance
Portf olio Matched Size Matched Matched Industry Matched
0
Average shareholder return (%)
-2
-4
-6
-6.81
-8 -7.18 -7.17
-7.81
-10
9

10. Comparison with stock market reaction to other
corporate events
Operational events Marketing events
Increase in capital expenditure 1.0% Change in firm name 0.7%
Increase in R&D expenditure 1.4% Brand leveraging 0.3%
Effective TQM implementation 0.7% Celebrity endorsement 0.2%
Internal corporate restructuring 1.0% New product introduction 0.7%
Decrease in capital expenditure -1.8% Affirmative action awards 1.6%
Plant closing -0.7%
Automotive recalls -0.5%
Information technology events Financial events
IT Investments 1.0% Stock splits 3.3%
IT problems -1.7% Open market share repurchase 3.5%
Proxy contest 4.2%
Increasing financial leverage 7.6%
Decreasing financial leverage -5.4%
Seasoned equity offerings -3.0%
10

11. Average stock returns over different intervals
On
Year before announcement 1st year after 2nd year after
0
Average shareholder return (%)
-3 -1.77
-6
-7.18
-9
-10.45
-12
-13.68
-15
11

12. Average stock returns over three years
Performance
Portfolio Matched Size Matched Matched Industry Matched
0
Average shareholder return (%)
-10
-20
-30
-32.21
-34.77
-40 -38.40
-40.66
-50
12

13. Volatility changes
75
Annualized Equity Volatility (%)
70
65
Disruptions
Control Sample
60
55
50
-24 -20 -16 -12 -8 -4 1 5 9 13 17 21
Event Month
On average 21% increase in volatility
13

14. Broader perspectives
 S&P 500 has returned about 12% annually over the
last 15 years.
 Major disruptions are associated with 35%
underperformance in stock returns.
 One major disruption every 10 years – average
return of 9%
14

15. Profitability impacts of disruptions
Performance Measures
Operating Income Return on Sales Return on Assets
0
-20
Percent change
-40 -32.02
-42.27 -35.82
-60 Mean
Median
-80
-100 -92.24
-107.43
-120 -114.67
-140
15

16. 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.
• Firms do not quickly recover from disruptions.
16

17. Are supply chains more prone to disruptions
today?
• Globalization of supply chains
• Increased reliance on outsourcing and partnerships
• Single sourcing
• Over-concentration of operations
• Little slack in the supply chain – focus on efficiency
• Competition
17

18. 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 18

19. Implications
 Supply chain disruption experiencing firms are
torpedo stocks
 Sell or hedge these stocks.
 Supply chain risk analyses should be an important
part of stock recommendations and selections.
 Educate firms about the consequences of supply
chain risks.
Serve as a catalyst to motivate firms to be proactive
in mitigating supply chain risks.
19

20. Final Thoughts
• Can you afford the risk of a major supply chain
disruption?
• What is the easiest way to create shareholder
value or make money? Stop losing it!
20