It's earnings season once again, with executives and shareholders hanging on the numbers of revenues, profits and market growth. Yet, there's another area of business operations that experts have said should be examined more closely to not only improve corporate performance, but boost shareholder value as well: the supply chain.
In a new report from Maine Pointe and the Global Supply Chain Institute, researchers laid out the correlation between the development of a holistic supply chain strategy and an increase in shareholder value. With only 16 percent of businesses reporting that they already have a multi-year supply chain management strategy, according to the Global Supply Chain Institute, this indicates that this area is probably overlooked come time to report on earnings.
"Many CEOs come from a finance, commercial or marketing background, and may not have a formal process in place for managing the global supply chain," explained Maine Pointe Chairman and CEO Steven Bowen in a statement last week, according to Consulting.us.
Authors J. Paul Dittmann, professor at the University of Tennessee, and Dan Pellathy, professor at Grand Valley State University, said this could be due to the fact that CEOs are not prioritizing supply chain excellence — but they should.
"Supply chain excellence will translate into balance sheet, income statement and cash flow improvements yielding more economic profit for the firm," the authors said in the report.
Economic profit — profit minus the cost of generating that profit — drives shareholder value and stock prices higher, the authors added. The report listed three ways that a strategic approach to supply chain "excellence" could drive economic profit: the support of revenue increases as a result of improved delivery to customers, the reduction of costs, and the lower capital requirements linked to lower inventory holdings, lower working capital and streamlined networks.
Risk management is also an essential component to driving shareholder value via supply chain optimization, the report stated, as supply chain disruptions can have a significant impact on shareholder value.
Large Conglomerates Demonstrate
Some of the largest (and most profitable) organizations in the world have demonstrated the link between supply chain management and shareholder value as of late. Last November, Apple saw a temporary nosedive in share prices after analysts at Nikkei assessed that the latest iPhone sales were slumping, pointing to rumors of product cuts through the supply chain.
Tesla has also seen its own share of shareholder woes, linked to supply chain challenges. Last year, analysts said delayed and late vendor payments were causing supply chain disruptions for the automaker. Safkhet Capital Founder and Chief Investment Officer Fahmi Quadir warned in October that a lack of diversification in Tesla's supply chain could significantly impact Tesla if some of those vendors went out of business.
"We question the ability for Tesla to actually deliver on [its] promises to [its] customers when [the company is] on the brink of [a potentially] massive supply chain disruption," Quadir told Bloomberg at the time.
In both of these cases, share values were negatively impacted — in the short term. However, according to analysts, supply chain management strategies can have a longer-term effect on shareholder values.
Professors Dittmann and Pellathy highlighted the case of one unnamed manufacturer, which reduced inventory by 50 percent without an effect on product availability through more effective supply chain strategies, causing an increase in economic profit and, subsequently, shareholder value.
The report added that talent management and logistics management in supply chain are essential components to improving supply chain operations, as is the adoption of new technologies. Organizations must also prioritize their supplier bases and deploy a win-win scenario — for instance, increasing payable terms and, in return, offering longer-term contracts and the open sharing of data, as the aforementioned manufacturer did. Finally, the authors said, businesses must break down supply chain siloes to match supply with demand.