Chain reactions

Logistically Speaking:
Chain reactions

When the economy started to sputter and then ultimately went sour back in 2000, among the first casualties were supply chain initiatives. I’m not talking about all the fledgling technology companies that flamed out when the dot-com bubble burst; I’m referring to the drastic pullback or outright abandonment of corporate supply chain strategies.

Companies struggling to reach profitability oftentimes react by reducing costs, generally by cutting personnel. And as staff sizes shrink or vanish entirely, realigning departments and investing in supply chain solutions no longer seem very important. Simple survival becomes the order of the day.

Here’s the rub, though — supply chain problems have an immediate and detrimental impact on profitability, and public companies that experience supply chain glitches typically suffer from a depressed stock price for years afterwards.

Two researchers — Vinod Singhal of Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario — looked at 885 public companies that announced supply chain problems over an eight-year period (1992-1999), and examined the stock price of those companies one year before and two years after the announcement. Typical supply disruptions include parts shortages and shipment delays.

So what happened? According to the researchers, companies experiencing supply chain glitches saw their average operating income drop 107%, return on sales fall 114% and return on assets decrease by 93%. There’s more: These companies typically saw 7% lower sales growth, 11% higher costs and a 14% increase in inventories — and that malaise tends to last a long, long time (see chart).

“The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years,” Singhal says. He likens a supply chain glitch to a heart attack in that it cuts off the flow of information and supplies to a company, and has lasting effects on a company’s health.

It doesn’t really matter which industry the company is in, either. Smaller companies do tend to get hit harder than large ones, though in either case the drop in income is enormous — 150% for small companies, 86% for large.

In last month’s Salary Survey, 38% of you indicated that executive management doesn’t understand the role of logistics within your company. If ever there was hard evidence of the real — as in dollars and cents — value of logistics and supply chain management, it would be Singhal and Hendricks’ study.

“When people talk about supply chain management, they may agree that it’s important, but they’re not investing in solutions,” Singhal points out, agreeing with the point I made earlier that investment in technology has dropped precipitously in recent years.

Even those companies that are spending on solutions aren’t necessarily spending wisely. “One reason supply chain problems occur is because there isn’t enough slack in the system,” Singhal notes. “As companies try to make their supply chains more efficient, they take away slack because it’s expensive.”

The answer, though, isn’t to throw a lot of money at your supply chain problems. It’s to get smarter at identifying and tracking key indicators that might indicate potential glitches early on. The way to get smarter sounds like a collection of cliches from a Logistics 101 textbook — better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility. You’ve known for years that those are good strategies, and logistics professionals at companies big and small, in every kind of industry, have been urging their bosses to pay more attention to the supply chain.

If nothing else, you can now point out to your still-unconvinced boss that supply chain problems aren’t just a logistics issue. Wall Street certainly doesn’t think so, and no matter what company you work for, shareholders always have the last word.

Dave Blanchard
editor-in-chief

Logistics Today logo
March, 2004

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