Sun Tzu, the noted Chinese general, military strategist and author of The Art of War, famously wrote that it is best to prepare for war during peace. I’m reminded of that advice by a story I recently read stating that businesses that scaled back on supply levels during the recession may find themselves or their suppliers suddenly unable to accommodate increased demand as the economy recovers.
In the article, which ran in Supply and Demand Chain Executive (SDCExecutive), Michael Kerner, North America CEO for Zurich Global Corporate, which offers supply chain insurance, said that while reducing supply inventory during the recession may have been an economic necessity, many businesses are now faced with the risk of being unable to reestablish the supplies they may soon need.
What’s more, if businesses wait for an “all-clear” to resume pre-recession production and supply inventories, they may miss out on opportunities, says Dr. Robert P. Hartwig, economist and president of the Insurance Information Institute (III). The problem, Hartwig says, is that since there won’t be a universal signal indicating that the economy is recovering, many executives don’t know when they should adjust their business models.
While business leaders often consider the costly consequences of facing a supply chain interruption, few consider the flip side of the coin. That is, having a supply chain that is not sufficiently prepared for increased demand can also present financial—and even reputational—costs, Hartwig says. Those costs can obviously add up quickly.
Vinod Singhal, professor of operations management at Georgia Tech College of Management, goes so far as to say that disruptions in the supply chain devastate corporate performance. Singhal recently conducted several related studies of supply-chain failure in collaboration with Kevin Hendricks, associate professor of operations management at the University of Western Ontario. Their research shows that disruptions do long-lasting damage to companies' stock prices and profitability.
For example, firms continue to operate for at least two years at a lower performance level after experiencing a disruption, says Singhal. Furthermore, it doesn’t matter who caused the disruption, what the reason for the disruption was, what industry the disruption occurred in or when the disruption happened. Small businesses in particular are particularly vulnerable to the effects of disruptions because they’re focused on fewer products and wield less clout with supply-chain partners, Singhal says.
According to Singhal and Hendricks’ research, companies experiencing a supply chain disruption suffer a decline in stock prices that ranges between a 33 percent and 40 percent decline compared with industry peers over a three year period.
Linda Conrad, director of strategic business risk at Zurich Global Corporate, offers additional metrics. Historically, she says, disruptions can lead to 7 percent lower sales and 11 percent higher costs. Combined with the increased costs of securing additional supply at the last minute, it’s not surprising that approximately 40 percent of companies with extended supply chain disruptions never recover, Conrad says.
All of this makes me wonder: When is the last time your company completed a supply chain risk assessment? Is your supply chain prepared for a possible surge in business? I’d like to hear from you.