When toy manufacturer Mattel was forced into a series of bruising product recalls last summer, its stock price plummeted by some 25% from its year-to-date peak. Boeing’s share price has hit turbulence since it announced last summer that supply problems are delaying initial deliveries of its new 787 Dreamliner aircraft. The plane maker’s stock has fallen by an estimated 20% in that time. Examples of how supply chain disruptions affect stock price and hence shareholder value abound, yet the specific risk factors involved are not well understood.
Although more research is needed into the relationship between supply chain risk and financial performance, there is a growing recognition-spurred to some extent by incidents such as those mentioned above-that companies need to make the connection and incorporate it into their corporate strategies. Some analysts and investors are beginning to appreciate the importance of a robust supply chain to company profitability.
In response, corporate leaders, including those who oversee supply chains, need to gain a better understanding of how they can make their enterprises less prone to the risks that undermine investor confidence.
Star Performers
Product recalls and supplier problems are just two examples of how supply chain-related issues can sully a company’s reputation in the eyes of investors. For example, “There is a growing school of thought that says lean is not necessarily a friend of resiliency,” said Darryl Moody, COO of Resilient Corp., a Washington, DC-based company that offers business intelligence solutions.
Poorly planned and executed product launches, and breakdowns in just-in-time distribution networks are other problems that can shift market sentiment against an enterprise.
The implication is not that companies should junk well-established supply chain practices. Rather, they should be prepared to view their supply chains through a shareholder value lens and, if necessary, make adjustments that make the organization a better and more secure investment prospect. As Moody pointed out, the investment community is starting to question whether there is something about an organization’s supply chain or logistics strategy that makes the organization a riskier investment.
Columbia Partners LLC, an investment management company based in Chevy Chase, MD, has gone a step further by creating portfolios of companies that “We think are doing a better job at supply chain or that are resilient to disruption,” said K. Dunlop Scott, Columbia’s president and COO. By using stock market modeling and a number of “crude external indicators,” Columbia generated lists Hospital IT Supplier of companies that have outperformed the S&P 500. “Several of the portfolios performed much better than the broader indices in 2007,” said Scott.
A lot more work is needed to hone the performance indicators Columbia used to evaluate companies for resiliency, but its initial foray into picking stock market winners according to their ability to withstand supply chain shocks looks very promising.
The types of capabilities that determine resilience levels and hence a company’s ability to cope with adversity include the proportion of its manufacturing base that is outsourced and which countries it operates in. Corporate attitudes toward eliminating risk and recovering from disruptions is another important consideration. From an investor’s standpoint, a company that is aware of its risk profile and is actively pursuing ways to increase resiliency “is likely to have a lower degree of volatility in their earnings stream and should therefore be valued more highly,” explained Scott.
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