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The Business Case for Preparedness
Impacting Costs and Operating Income
May 23, 2008 11:56 PM
Supply chain disruptions have substantial impacts on firms including 33 to 40% lower stock returns relative to their benchmarks, 13.5% increase in share price volatility, 107% drop in operating income, 7% lower sales growth, and 11% increase in costs.
Source: "The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility", Kevin Hendricks and Vinod Singhal, The Logistics Institute, June 2005
Key Points:
* The evidence presented in this report makes a compelling case that ignoring the risk of supply chain disruptions can have serious negative economic consequences. Based on a sample of more than 800 supply chain disruption announcements, the evidence indicates that firms that suffer supply chain disruptions experience 33 to 40% lower stock returns relative to their benchmarks, 13.5% increase in share price volatility, 107% drop in operating income, 7% lower sales growth, and 11% increase in costs. By any yardstick these are very significant economic loses. More importantly, firms do not quickly recover from these losses."
* The average effect of disruptions in the year leading to the disruption is: 107 percent drop in operating income 114 percent drop in return on sales 93 percent drop in return on assets 14 percent growth in inventories These negative performance metrics often continue for two years after the disruption announcement.
* The evidence presented in this report is based on an analysis of more than 800 supply chain disruptions that were publicly announced during 1989-2000. These announcements appeared in the Wall Street Journal and/or the Dow Jones News Service, and were about publicly traded companies that experienced production or shipping delays."