Supply glitches cause shares to fall 20 per cent
Supply chain glitches SUCH AS THOSE THAT CAUSE production and shipping delays are wiping 20 per cent off the value of company shares, a new study reveals.
Mr Sinclair said the three-year study investigated the stock market reaction around the time when firms publicly announced they were experiencing supply chain glitches and are based on 861 supply chain glitch announcements over the 1990s.
“On the day of the formal announcement, glitches are associated with nearly a 9 per cent decrease in stock price, which is a major blow in anyone’s yardstick,” Mr Sinclair said.
“But when stock price performance is examined from 60 trading days (90 calendar days) before formal announcement of the glitch to 60 days after the formal announcement, there is an average loss in shareholder value of about 20 per cent,” he said.
Mr Sinclair said another way to view this data was to consider the fact that on average stocks have gained 15 per cent annually in the last two decades.
“If effective supply chain management avoids one major supply chain glitch every 5 years, the average annual shareholder return would be about 19 per cent, a 27 per cent increase in average annual terms,” he said.
The key finding of this in-depth report is that ineffective management of supply chains destroys significant shareholder value.
These results also prove the importance of why senior management should be actively involved in, be concerned with and be fully aware of the performance of their firm’s supply chain.
Senior management must be on top of issues that affect the performance OF their supply chains.
“Avoiding or reducing the probability of glitches will prevent shareholder destruction, which is the flip side of shareholder creation.”
Although academics, consultants and logistics managers have widely talked about the compelling bottom line benefits of developing effective supply chains and the growth in shareholder value, few hard facts have been able to support these claims until now.
Significant losses occur irrespective of which link in the supply chain (SUPPLIER/MANUFACTURER OR CUSTOMER) is responsible for the glitch.
Supply chain glitch examples
Report on Supply Chain Glitches and Shareholder Value Destruction by Kevin Hendricks, The University of Western Ontario and Vinod Singhal, Georgia Institute of Technology
Firms that experience supply chain glitches caused by supplier or customers still lose about 9 to 12 per cent of their market value.
Parts shortage announcements were associated with a loss of 7.5 per cent in shareholder value.
If customers change their orders, a non-responsive and inflexible supply chain can be costly.
The importance of rapid ramp-up of new technologies and rapid rollout of products is underscored by the penalties incurred by firms when there are delayed.
The average loss in shareholder value in these delays is about 11 per cent.
The bottom line is get your supply chain synchronised and be careful how sensitive information is announced.
It is logical to assume that supply chain success stories should have the opposite affect and actually increase shareholder value. The larger the company the larger the savings from an inefficient supply chain. Reviewing the supply chain of a company that has an annual spend of say $800m – $1b (including make cost) it would be reasonably expected that savings in the order of $3-5% are possible. This has a substantial impact on shareholders investment as it maximises return on funds employed through reducing operating cost.
Many of our multi national customers are focusing on improvements to their supply chains as a way of improving competitive advantage.
The rewards are high for those willing to bite the bullet and tackle the hard issues.