Glitches in the supply chain can cost much more than might be imagined. The impact can even affect a company’s stock price or shareholder return on investment. The impact can be huge as experienced in terms of share price and shareholder value. When shareholders are not happy, look out, and organizations need to be prepared with effective crisis management planning.
The cost of supply chain problems
Researchers Singhal and Hendricks (1) analyzed a sample of 861 profit warning announcements from publicly quoted companies linked to supply chain difficulties. They coined the term ‘glitches’, which in many cases can be just another word for ‘full-scale disaster’. Their research found that:
Announcement of supply chain crises was associated with an 8.62% market adjusted reduction in shareholder value; if a period of 60 days before and after the announcement is included the effect is about minus 20%.
In other words, an average 20% loss of loss of in shareholder value within 60 days of a glitch. Supply chain problems for the purpose of their research were classified as including parts shortages, changes by customers, ramp and roll out problems, production problems, development problems and quality problems.
No random occurrence
So-called glitches are occurring frequently enough and for a wide enough range of causes that it’s clear that issues are not isolated problems, and they erode shareholder value to an extent that must be stomach-churning for the CEOs involved. The glitches affect the company, customers and suppliers alike, often with serious consequences. What is more, supply chain value is perishable. Any problem will have a recovery period during which the performance of the organization is sub-optimized in terms of either or revenue, cost or both. Capacity and performance, however, can be lost forever. Boards, therefore, are having to start to make more structured choices about the exposure to risk that they will mitigate through design and that which they elect to deal with “if it happens”. It was not always this way—the profit motive and investor short-termism has been such that profit today was better than sustainability in the future.
Protecting the supply chain
Governance and sustainability are now the watchwords, and as such, compliance and transparency are dictating the need for new approaches to risk management. The risk agenda is a matter of corporate and executive survival. The unexpected is lying in wait at every junction. “A business is its supply chain—risk and dependency is built in.” Supply chain crisis management planning is a critical need for any organization that depends heavily on their supply chain, or is a supplier in the chain. In reality, nearly every organization will be affected by a supply chain glitch, and should have a plan. By Professor Alan Braithewaite, Cranfield University and LCP Consulting
For more information on supply chain crisis management, read the author’s white paper, “Supply Chain Recovery is a Competitive Capability.”
MissionMode’s smarter mass notification and incident management applications enable organizations to take control of crises, and reduce the time and cost of the response. Contact us today for more information or to schedule a demonstration.