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

Intermodal units, at 278,767 containers and trailers were up 6.7 percent compared to the same week last year and marks the third best week for intermodal ever recorded based on AAR’s data.

LM Group News Editor Jeff Berman recently conducted a wide-ranging interview with Bobby Harris, President and CEO of non asset-based 3PL BlueGrace Logistics about various aspects of the freight transportation market.

It’s small, but senior brass at YRC Worldwide will take it. After nearly seven years of continuing losses in excess of $2.6 billion, the parent of the nation’s second-largest LTL carrier posted a narrow net profit in the third quarter ended Sept. 30.

As was the case for the second quarter, third quarter earnings results for publicly-traded less-than-truckload (LTL) carriers are again strong. Signs of solid earnings results from carriers that have posted earnings to date include tonnage increases, gains in weight per shipment and average daily shipments, higher yield, and revenue per hundredweight.

While the holiday season is known to bring good tidings and cheer to all, it may also come with another thing that is not so pleasant: higher rate freights. That was the thesis of a commentary written by Mark Montague, industry pricing analyst and chief market-watcher for DAT, a Portland, Ore.-based subsidiary of TransCore.

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.