Reducing inventory can disrupt supply chain, say some experts

“Historically, disruptions can lead to seven percent lower sales and 11 percent higher costs”
By Patrick Burnson, Executive Editor
October 05, 2010 - SCMR Editorial

Businesses that scaled back on supply during the recession may find themselves or their suppliers suddenly unable to accommodate increased demand as the economy begins to recover, some experts warn.

“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 needed to deliver when the economy begins to turn around,” said Michael Kerner, CEO for Zurich Global Corporate in North America. “As one of the largest property and casualty insurers globally, Zurich urges its customers to evaluate their supply chains now so as not to be caught off guard in the weeks and months to come.”

A similar point was raised by Carlos Gutierrez, chairman of Global Political Strategies. Speaking at the Council of Supply Chain Management Professional’s (CSCMP) annual meeting in San Diego last week, he stated that U.S. trade protectionism is also keeping shippers from making any bold decisions.

But businesses waiting for an “all-clear” to resume pre-recession production and supply inventories may be missing the boat, said Dr. Robert P. Hartwig, economist and president of the Insurance Information Institute (III).

“There likely won’t be a universal signal indicating that the economy is recovering, so businesses may not know when to adjust their models back to pre-recession levels,” he said. “Businesses often consider the costly consequences of facing a supply chain interruption, but having a supply chain that is not sufficiently prepared for increased demand can also present financial and reputational costs.”

Those costs can add up. A recent study by Vinod Singhal of Georgia Tech and Kevin Hendricks of Wilfrid Laurier University, Canada, indicates that companies experiencing a supply chain disruption suffered between a 33 percent and 40 percent decline in stock price, compared with industry peers over a three year period.

“Historically, disruptions can lead to seven percent lower sales and 11 percent higher costs,” cited Linda Conrad, director of strategic business risk, Zurich Global Corporate. “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 interruptions never recover from supply chain disruption.”



About the Author

image
Patrick Burnson
Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at .(JavaScript must be enabled to view this email address).

Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Even though some of its key metrics dropped sequentially from August to September, the outlook for manufacturing over all remains strong, according to the most recent edition of the Manufacturing Report on Business issued today by the Institute for Supply Management (ISM).

Company officials said that these planned changes, which will take effect on January 4, 2015, will provide for increases in current pay rates and reduce the time it takes for its nearly 15,000 drivers to reach top pay scale.

While the economy has seen more than its fair share of ups and downs in recent years, 2014 is different in that it could be the best year from an economic output perspective in the last several years. That outlook was offered up by Rosalyn Wilson, senior business analyst at Parsons, and author of the Council of Supply Chain Management Professionals (CSCMP) Annual State of Logistics Report at last week’s CSCMP Annual Conference in San Antonio.

Matching last week, the average price per gallon of diesel gasoline dropped 2.3 cents, bringing the average price per gallon to $3.755 per gallon, according to the Department of Energy’s Energy Information Administration (EIA).

A number of key topics impacting the freight transportation and logistics marketplace were front and center at a panel at the Council of Supply Chain Management Annual Conference in San Antonio last week.

About the Author

Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review. Patrick covers international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. Contact Patrick Burnson

Comments

Post a comment
Commenting is not available in this channel entry.