Supply Chain Metrics 2 - How to Prevent a Supply Chain Heart Attack

Here's an example of how sabermetrics-style supply chain analysis can frame Nike's problems as part of a trend that goes far beyond the apparel industry. Two researchers—Vinod Singhal of the Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario—looked at more than 800 announcements of supply chain problems from public companies over an eight-year period (1992—1999). These problems included things like inventory write-offs, parts shortages, shipping delays, and the like. The researchers then tracked the price of these companies' stock one year before and two years after the announcement.

So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107 percent, return on sales fall 114 percent, and return on assets decrease by 93 percent. And that's not all: These companies also typically saw 7 percent lower sales growth, 11 percent higher costs, and a 14 percent increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.

"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 explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company's health.

It doesn't really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51 percent drop. Retailers experience an average decrease of 42 percent, while high-tech manufacturers will see a 27 percent decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150 percent for small companies, 86 percent for large.

"When people talk about supply chain management, they may agree that it's important, but they're not investing in solutions," Singhal points out. However, even when companies do spend on solutions, they're not 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. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices.


Part 3 coming soon....