An Excellent Report on the Cost of Supply Disruptions

As many of you know, I consider supply risk management one of the most important Spend Management issues in today's global business environment. But despite it's importance, the topic is understudied and not well understood by many Spend Management professionals. I recently came across an excellent academic study on the subject authored by Prof. Vinod Singhal which might help change this. Singhal is Professor of Operations Research and Area Coordinator of Operations Management at the Georgia Institute of Technology.

His report, The Effect of Demand/Supply Mismatches (or Supply Chain Disruptions) on Corporate Performance, has a number of fascinating findings. It will be especially useful for organizations looking to justify investments in supply risk management solutions from vendors like Open Ratings. Singhal's study is based on analysis of nearly 800 instances of supply disruptions experienced by publicly traded companies. Some of the key findings are:

- "Disruptions have a significant negative effect on profitability. In the year leading to the disruption, the average effect is 107% drop in operating income, 93% drop in return on assets, 7% lower sales growth, and 11% growth in cost.

- Over a three year time period around the disruption, disruption experiencing firms report 33 to 40% lower stock returns relative to their competition.

- In the year after the disruption the share price volatility is 13.50% higher when compared to the volatility in the year before the disruption.

- Firms do not quickly recover from disruptions. Firms continue to operate for at least two year at a lower performance level after experiencing disruptions."

I'm also looking forward to reading Aberdeen's forthcoming report on supply risk management as well. I'll post more details on this report as it becomes available.

Jason Busch

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