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The Business Case for Preparedness
Sales Growth
May 23, 2008 11:58 PM
Firms that experienced bad supply chain disruptions experienced stock returns approaching -40%
Supply chain glitches lower sales growth (-6.92%), increase growth in costs (+10.66%), and result in a high growth in inventories (+13. 88%). Furthermore, these negative effects linger.
Source: "Association between Supply Chain Glitches and Operating Performance", Kevin B. Hendricks and Vinod R. Singhal, Management Science (Journal), May 2005
Key Points:
* This paper empirically documents the association between supply chain glitches and operating performance. The results are based on a sample of 885 glitches announced by publicly traded firms. Changes in various operating performance metrics for the sample firms are compared against a sample of control firms of similar size and from similar industries. In the year leading up to the announcement, the control-adjusted mean percent changes in operating income, return on sales, and return on assets for the sample firms are -107%, -114%, and -92%, respectively. During this same period, the control-adjusted changes in the level of return on sales and return on assets are -13.78% and -2.32%, respectively. Relative to controls, firms that experience glitches report on average 6.92% lower sales growth, 10.66% higher growth in cost, and 13.88% higher growth in inventories. More importantly, firms do not quickly recover from the negative economic consequences of glitches. During the two-year time period after the glitch announcement, operating income, sales, total costs, and inventories do not improve.
* ...it does not matter who caused the glitch, what the reason was for the glitch, or what industry a firm belongs to-glitches are associated with negative operating performance across the board."
Link: http://mansci.journal.informs.org/cgi/reprint/51/5/695