The Business Case for Preparedness

Impacts on Physical Costs and Losses Due to Downtime and Wages

May 24, 2008 12:11 AM

Supply chain disruption events can have significant physical costs (e.g. damage to facilities, inventory, electronic networks, infrastructure) and subsequent losses due to downtime, wages for employees who cannot work and loss of customer goodwill. Significant declines in sales growth, stock returns and shareholder wealth can be expected for two or more years following the event.

Source: "Managing Disruptions to Supply Chains", Lawrence V. Snyder, Zuo-Jun Max Shen, The Bridge (National Academy of Engineering), winter 2006

Key Points:

* Supply chain disruptions can have significant physical costs (e.g., damage to facilities, inventory, electronic networks, and infrastructure) and subsequent losses due to downtime. A recent study (Kembel, 2000) estimates the cost of downtime (in terms of lost revenue) for several on-line industries that cannot function if their computers are down. For example, the cost of one hour of downtime for Ebay is estimated at $225,000, for Amazon.com, $180,000, and for brokerage companies $6,450,000. Note that these numbers do not include the cost of paying employees who cannot work because of an outage (Patterson, 2002) or the cost of losing customers' good will. Moreover, a company that experiences a supply chain disruption can expect to face significant declines in sales growth, stock returns, and shareholder wealth for two years or more following the incident (Hendricks and Singhal, 2003, 2005a, 2005b). The huge costs of disruptions show that business continuity is vital to business success, and many companies are actively pursuing strategies to ensure operational continuity and quick recovery from disruptions."
* One important area for future research is the development of analytical tools for understanding the interdependence of risks faced by a supply chain. A single event (e.g., an economic downturn or a bird-flu pandemic) might cause multiple types of disruptions (e.g., a shortage of raw materials and absenteeism among the firm's own workforce), and these risks may be subtly related. In other words, the supply chain's total risk may not be a simple sum of its parts."

Link: http://www.lehigh.edu/~lvs2/Papers/SnyderShenBridge.pdf