Natural Disasters can Shock the Supply Chain

If you want to know just how sensitive today’s supply chains are, look no further than this recent article in Fortune about how much natural disasters cost corporate America.

It looks at what happens when a supplier is hit by a financial crisis or a natural disaster. Just how much damage happens on average? They studied the affects of natural disasters on the supply chains of 2000 large corporations and 4000 suppliers over a 30 year period and came up with the following findings. When a natural disaster directly hits a seller of goods and services, the sales growth of the firm drops on average by around five percentage points. This is an astonishingly large amount.

This causes ripple effects throughout physical and financial supply chains.

The customers or buying organizations of these suppliers see an average drop in sales growth of two percentage points. Customers with lower inventories are more exposed than companies with excess inventory. More troubling, the other seller of a customer who has its supplier affected by a disaster also suffer greatly. The disruption causes a drop in sales growth around three percentage points for these other suppliers. The amount of equity value drop in a company that relies on a supplier that is hit by a natural disaster is about one percent, but the effect can be twice as large if that supplier produces differentiated goods, has high R&D expenses, or holds patents.

The efficiency and interconnected nature of supply chains makes problems in one area echo through the chain. Businesses must be ready to handle these shocks by knowing their supply chains well and developing strategies when a disaster strikes. Breakdowns in the financial supply chain, such as the credit crisis in 2008 and the following can have negative effects on the overall financial health of the market constituents.