Viewpoint: Supply Chain Results Affect Bottom Line
April 1, 2004
Less inventory, lower operating costs, higher productivity - these will no longer be the strategies driving just your largest customers. And this will have an impact on everyone within a trucking fleet, from the president to the driver.
Less inventory, lower operating costs, higher productivity – these will no longer be the strategies driving just your largest customers. And this will have an impact on everyone within a trucking fleet, from the president to the driver.
Smaller companies have been reluctant to invest in the major changes to supply chain management practices already favoured by the Fortune 500, citing a lack of resources. And they rightly ask, “At our size does it really matter? Are the returns really there?”
Until recently, to be honest, it was difficult to answer such questions. The best we could do was provide anecdotal evidence. Companies that have superior supply chains – the Dell’s, Wal-Marts, Toyotas and Home Depots – tend to have superior financial performance. But we really couldn’t prove the link existed, particularly for smaller companies.
That proof is starting to materialize, however, in the shape of some impressive studies showing a direct link between supply chain performance and financial performance. Studies whose results even your smaller customers won’t be able to ignore.
The most recent one was conducted by Accenture and Stanford University and looked at data from more than 600 Global 3000 companies across 24 industries – so they spread the net wider than previous studies that just looked at the largest companies. The study looked at companies considered supply chain “leaders” and at companies considered supply chain “laggards,” calculating financial performance for each company based on its change in stock market capitalization during the study period, compared with other companies in its industry.
The results were eye openers: The compound average annual growth in market value of the leaders was 10 to 30 percentage points higher than the laggards. Not only did they outperform their direct competitors by a considerable margin; they also outdistanced stock market performance. The supply chain leaders beat the market by an annual average of 26 points from 1995-1997 and seven points during 1998-2000.
Another study, conducted by the University of Western Ontario and the Georgia Institute of Technology, looked at the link between supply chain management and financial performance from the other end – what happens when you screw up. It tracked the stock market performance of 861 public companies announcing a supply chain glitch to analyze the stock market’s reaction. (A glitch was defined as anything that leads to a major production or shipment delay.) The findings were just as eye-opening as the Accenture/Stanford U. study: The stock market penalized companies fessing up to a major supply chain glitch with nearly a nine per cent drop in stock price. The average destruction in shareholder value for the 861 glitches analyzed ranged from $120 million to $140 million. Nor was this a hole that was easy to climb out of. The study found no evidence of recovery in stock price for the next 60 trading days.
As I said, results that are impossible to ignore. How will they change what your customers expect from you? Tune in next month.