In a study, professor Vinod Singhal of Georgia Institute of Technology compared the overall performance of 600 public U.S. companies that experienced supply chain disruptions between 1998 and 2007 with benchmark groups. The research, which was sponsored by PricewaterhouseCoopers, found that the affected companies’ share prices, on average, dropped 9% below the benchmark group immediately following the announcement of the disruption. A majority of these same companies also experienced greater volatility for up to two years, a sign of diminished confidence among stakeholders (and profitability as measured by the average return on assets). Interestingly, return on sales for these companies decreased as well.
The Japan earthquake and tsunami last year provides a good example of just how important supply chain risk management can be, and how resiliency in your supply chain may not be what you think it is. Here is a real-life example involving two companies.
Two U.S.-based manufacturing companies, Company A and Company B, rely on a similar, complex global supply chain that includes the delivery of silicon wafers, which are essential to manufacturing semiconductors. Both companies are at risk if a continuous supply of wafers is disrupted, and any disruption will impact their manufacturing operations.
When the earthquake and tsunami hit Japan in March 2011, the primary suppliers of silicon wafers to both Company A and Company B were located along the eastern coast of the island nation. Suppliers suffered extensive damage to manufacturing operations and were unable to meet their procurement obligations to both companies.
Both companies had taken steps to protect their supply chains, with secondary suppliers in place for such contingencies. Problems for Company A arose, however, when they realized their secondary supplier was located in the same area of Japan as their primary supplier. That supplier company also suffered major damage and couldn’t fulfill Company A’s need for silicon wafers.
Company B, however, took its planning one step further. Company B thought beyond its basic business continuity plan and recognized the need for geographic diversification of alternate suppliers. Company B had decided to partner with a secondary supplier in Canada to substantially increase its silicon wafer supply if the primary supply from Japan experienced interruption.
Within a week, Company B was able to advise the markets that, despite the current global scarcity of silicon wafers, there would be no material impact on production. There would be no disruption to the supply of end products to consumers. Company B was receiving all the wafers it needed from Canada.
Company A, in the two quarters following the Japan earthquake, attributed nearly $100 million of losses to disruptions resulting from the quake, and realized a loss of approximately 3% of market share over the same period. Meanwhile, Company B reported a 10% rise in net profit and a market share increase of 1.9% in the second quarter of 2011 alone.
Risk is everywhere within a supply chain, regardless of who “owns” it. Given the increased scope and complexity of supply chains, the key to creating supply chain resiliency lies in taking a more strategic approach to deal with the causes of disruption (i.e., the vulnerabilities) rather than purely the symptoms (i.e., crisis management and insurance).
Once those vulnerabilities are identified, they can be managed appropriately. This requires companies to change their mind-set toward supply chain risk: resiliency must become a organization-wide effort. Company management must view supply chain risk management as a way to earn competitive advantage.
As the world continues to rapidly change, uncertainty is the norm. Those who manage that uncertainty will be the winners.