The Weakest Link: New Study Quantifies Financial Fallout from Supply-Chain Malfunctions

A shortage of parts or other production and supply problems that delay production and shipping can take a big bite from a company's bottom line, according to a new study by Vinod Singhal, professor of operations management at the Georgia Institute of Technology's DuPree College of Management, and Kevin Hendricks, associate professor of operations management at the University of Western Ontario.

The researchers recently presented a paper on the subject at the Council of Logistics Management's 2003 annual conference in Chicago, and have submitted two papers for journal publication.

"Although it seems obvious that a supply-chain glitch would affect profitability, little has been done to measure the fallout," Singhal says.

In earlier research, Singhal and Hendricks had discovered that announcements of supply-chain failures were linked with a 10 percent decrease in stock-market prices. The researchers were curious if this price deterioration was due to the stock market overreacting or a true reflection of fallout from supply-chain disruptions.

With that in mind, the researchers studied 885 public companies that announced supply-chain problems during an eight-year period (1992 to 1999), examining those firms' operating performance one year before the announcement and two years after.

In the year leading to the announcement of a supply-chain disruption, average operating income of companies dropped 107 percent, return on sales plummeted 114 percent and return on assets dropped 93 percent.

What's more, the study revealed that companies with supply-chain problems averaged about 7 percent lower sales growth, 11 percent higher costs and a 14 percent increase in inventories.

To control for economic and industry influences, Singhal and Hendricks benchmarked the results of affected companies with firms of similar size that hadn't suffered supply-chain problems. The verdict: The supply-chain glitches were, indeed, responsible for the atrophy in earnings.