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Supply chain: Reducing inventory can disrupt supply chain, say some experts

Disruptions can lead to 7% lower sales and 11% higher costs.
October 05, 2010

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 Yossi Sheffi of MIT indicates that companies experiencing a supply chain disruption suffered between a 33% and 40% decline in stock price, compared with industry peers over a three year period.

“Historically, disruptions can lead to 7% lower sales and 11% 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% of companies with extended interruptions never recover from supply chain disruption.”

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