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1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management.

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Presentation on theme: "1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management."— Presentation transcript:

1 1 Supply Chain Disruptions and Shareholder Value Kevin Hendricks Richard Ivey School of Business Ontario, Canada Vinod R. Singhal DuPree College of Management Georgia Institute of Technology Atlanta, GA, 30332

2 2 Shareholder Value = Create - Destroy Poor supply chain performance destroys shareholder value Practices that prevent poor supply chain performance create value by avoiding value destruction Supply chains and shareholder value

3 3 Effect of disruptions on shareholder value Effect of disruptions on profitability – growth in operating income, sales, cost, assets, and inventory Effect of disruptions on risk – share price volatility - cost of capital (discount rate) - more expensive and difficult to raise capital - can affect investment/acquisition plans - increase the cost of factors of production - conflict between various stakeholders Issues examined

4 4 Sample Measurement time period Methods to estimate the impact of disruption on performance Statistical tests Results Implications Approach

5 announcements of supply chain disruptions (production or shipment delays) from Wall Street Journal and Dow Jones News Sun Microsystems delays shipments of workstations and servers, Dow Jones News Service, December, 14, Sony Sees Shortage of Playstation 2s for Holiday Season, The Wall Street Journal, September 28, Boeing pushing for record production, finds parts shortages, delivery delays, Wall Street Journal, June 26, Hershey will miss earnings estimate by as much as 10% because of problems in delivering order, Wall Street Journal, September 14, Sample

6 6 Distribution of disruptions by sales volume

7 7 Responsibility for disruptions

8 8 Reasons for disruptions

9 9 Compare performance of disruption experiencing firms with portfolios of similar type of firms -Size (created 14 portfolio) -Book to market value (subdivided each of the 14 into 5 ) -Prior performance (subdivided each of the 70 into 3) 210 portfolios of firms Simulated 1000 benchmark portfolios Used the simulated distribution to test statistical significance Estimating stock price performance implications

10 10 One to one matching -Closest in size -Closest in performance -Closest in SIC match Estimate the difference in stock price performance between the sample firm and its benchmark Estimate the difference in change in volatility of the sample firm and its benchmark Estimating stock price performance and risk implications

11 11 Methodology for estimating the profitability impacts Create benchmark samples to adjust for the effect of economy and industry Three different benchmark samples created by matching on Sales Assets Standard Industry Classification (SIC) Codes Prior Performance

12 12 Average stock returns on disruption announcements

13 13 Average stock returns over different intervals

14 14 Average stock returns over three years

15 15 Year to year changes in equity volatility

16 16 Profitability impacts in the year before the disruption

17 17 Profitability impacts in the year before the disruption

18 18 Profitability impacts in the year after the disruption

19 19 Profitability impacts in the 2 nd year after the disruption

20 20 Average stock returns by responsibility

21 21 Average stock returns by reason

22 22 Average stock returns by size

23 23 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 Market always took a dim view of supply chain disruptions Firms do not quickly recover from disruptions Summary

24 24 Consequences are not known Low frequency events Resource shortages Requires cross-functional effort Short tenure of managers You dont get credit for fixing problems that never happened You have not experienced one Why enough attention is not paid to the possibility of disruptions?

25 25 Globalization of supply chains Increased reliance on outsourcing and partnerships Single sourcing Little slack in the supply chain Competition Are supply chains more prone to disruptions today?

26 26 Reduce the frequency (probability) of disruptions - better forecasting - better planning - communicate, collaborate, and share Develop ability to predict disruptions (business intelligence) - select, define, and track key performance indicators - analyze disruptions to develop key leading indicators - track leading indicators - need visibility Dealing with disruptions

27 27 Elapsed time between the occurrence and detection of glitch - aim for zero elapsed time - real time visibility of the extended supply chain - event management systems Time it takes to resolve the glitch - quick resolution, prevent escalation and worsening - a process for dealing/responding to disruptions - developing capabilities to react and respond Dealing with disruptions

28 28 Traditional approach – create shareholder value - efficiency driven (impacts on cost and capital cost) - cost-benefits analysis (ROI) of potential solutions - ignores revenue, indirect benefits, and intangibles Augment the traditional approach - need to preserve value and avoid value destruction - value of reliable, responsive, and robust supply chains - prevention role of effective SCM - effective SCM buys insurance against value destruction Implications for making business case

29 29 Additional Results

30 30 Distribution of sample announcements

31 31 Comparison with stock market reaction to other corporate events Financial events Stock splits3.3% Open market share repurchase 3.5% Proxy contest4.2% Increasing financial leverage 7.6% Decreasing financial leverage -5.4% Seasoned equity offerings -3.0% Marketing events Change in firm name0.7% Brand leveraging 0.3% Celebrity endorsement0.2% New product introduction0.7% Affirmative actionawards 1.6% Delay introduction ofnew -5.3% products Information technology events IT Investments1.0% B2C e-commerce10.5% B2B e-commerce 3.3% IT problems -1.7% Operational events Increase in capital expenditure 1.0% Increase in R&D expenditure 1.4% Effective TQM implementation 0.7% Internal corporate restructuring 1.0% Decrease in capital expenditure -1.8% Plant closing -0.7%

32 32 Average stock returns by industry groups

33 33 Profitability impacts by industry groups

34 34 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 Consequences of disruptions

35 35 Median profitability impacts by responsibility

36 36 Median Profitability impacts by reason

37 37 Median Profitability impacts by size

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