Working Paper | HBS Working Paper Series | 2012

When Supply-Chain Disruptions Matter

by William Schmidt and Ananth Raman

Abstract

Supply-chain disruptions have a material effect on company value, but this impact can vary considerably. Thus, it is important for managers and investors to recognize the types of disruptions and the organizational factors that lead to the worst outcomes. Prior research remains unsettled as to whether improvements to firm operational efficiency aggravate or alleviate the impact of disruptions. Improved operational efficiency may leave firms more exposed when a disruption occurs, or it may improve firms' agility and allow them to respond more effectively to a disruption. We hypothesize that the impact of improved operational efficiency depends on whether the disruption is due to factors that are internal versus external to the firm and its supply chain. We use a sample of over 500 disruptions collected from company press releases and find empirical evidence that a higher rate of improvement in operating performance aggravates the impact of internal disruptions but not external disruptions. By taking advantage of an exogenous policy shock regarding corporate disclosure rules, we also find that managers show systematic bias in the disruptions they choose to announce, and we control for this effect in our model specifications.

Keywords: Supply Chain; Operations; Performance Efficiency;

Citation:

Schmidt, William, and Ananth Raman. "When Supply-Chain Disruptions Matter." Harvard Business School Working Paper, No. 13-006, July 2012. (Revised January 2013.)