NEW YORK, Dec. 9, 2008 (GLOBE NEWSWIRE) -- Supply chain integrity is a risk management issue that affects not only business operations but also long-term shareholder value, according to a new report from PricewaterhouseCoopers LLP: From vulnerable to valuable: how integrity can transform a supply chain. The report found that the average stock return of companies suffering from disruptions was almost 19 percentage points lower over a two-year period relative to the benchmark group.
Copies of From vulnerable to valuable: how integrity can transform a supply chain can be obtained at: pwc.com/SupplyChainIntegrity.
When compared to benchmark groups, three material consequences were consistently found in the study of 600 companies that experienced supply chain disruptions between 1998 and 2007: average shareholder value plummeted; stock prices experienced greater volatility; and return on sales and return on assets declined.
"The traditional emphasis in supply chain management has been to squeeze out costs," says Dave Pittman, US advisory operations leader, PricewaterhouseCoopers. "But the very practices that drive costs out also open the door to increased risks. No longer can supply chain management be viewed solely as an operational issue, since disruptions directly affect financial performance and decrease shareholder value."
Importantly for c-suite business executives, more than half of the affected companies experienced greater volatility compared to benchmark stocks for at least two years, a sign of diminished confidence among stakeholders. After controlling for normal market movements, the share price volatility in the year after the disruption of affected firms was around 8 percentage points higher than the benchmark. Two years after the disruption, the affected firms were underperforming the benchmark by an even higher 10 percentage points.
Disruptions also take a significant toll on profitability as reported by standard accounting measures. More than 60 percent of affected firms experienced lower returns on assets and sales. After controlling for normal industry and economic effects, the average return on assets for disruption-experiencing firms was found to be down by five percentage points.
From vulnerable to valuable offers business leaders several prescriptive recommendations. Notably, responsibility for supply chains should be broadened to include a cross-functional team of executives who understand all the operational and reputational aspects of the supply chain.
Businesses must also focus on developing leading rather than lagging risk indicators. These can be derived from continuously monitoring and analyzing changing conditions. Such indicators reflect an understanding of risk interdependencies in supply chains and provide early warnings that can prevent potential breakdowns.
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