Investing in Supply Chain Agility Now Will Pay Dividends Later, According to New Research

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University of Tennessee, Knoxville's Haslam College of Business

Mar 10, 2022, 09:37 ET

KNOXVILLE, Tenn., March 10, 2022 /PRNewswire/ -- Supply chain disruptions can severely impair a company's financial health. One well-known study analyzing more than 800 supply chain disruptions between 1989 and 2000 showed firms that suffered major supply chain disruptions experienced devastating consequences, such as sales declining by 93 percent and operating income dropping by 107 percent.^{^¹} Companies take years to recover from disruptions' aftershocks, straining every facet of their operations.

Investing in your supply chain's agility will help it withstand disruptions.

Investing in supply chain agility – that is, the ability to quickly adjust tactics and operations to respond to changes, opportunities or threats – can help firms avoid or significantly lessen catastrophic supply chain disruptions, according to a new white paper produced through the Advanced Supply Chain Collaborative (ASCC). "Understanding and Valuing the Impact of Agility in Your Supply Chain" argues that investing in supply chain agility will increase companies' profits in the long term by giving them the flexibility to continue operations in adverse conditions and seize opportunities in advantageous situations. (ASCC is an undertaking by the Global Supply Chain Institute, working with faculty from the Department of Supply Chain Management and other departments in the Haslam College of Business at the University of Tennessee, Knoxville.)

Based on dozens of interviews with industry leaders, the paper reviews key barriers to investing in agility, offers guidance on identifying and valuing agility projects and presents best-in-class practices for building a more agile supply chain with multiple examples of successful supply chain agility initiatives and practical advice on implementation.

The interviews revealed that many companies believe their risk management strategies are sufficient protection against supply chain upheavals. But risk management reacts to negative events, while agility proactively addresses possible dangers, helping organizations minimize or avoid problems altogether. Further, agility allows companies to focus on the potentials – such as increasing sales when a disruption forces competitors offline – rather than the risks of operating in a dynamic environment.

"It's understandable that companies focus on risk management because it's not easy to quantify the benefits of agility, given that it is preparation for a wide spectrum of potential events," co-author Dan Pellathy, a supply chain management professor with Grand Valley State University says. "Supply chain managers can use the tools we share in this paper to build the case for investing in agility projects as an essential component of overall business success."

These tools include a broadly applicable, quantitative approach to analyzing agility projects based on real options valuation, which can help managers make the business case for investment. To inform this analysis, the paper also presents a fast-start checklist and a detailed supply chain agility self-assessment table that guides managers' discussions on their agility level to help identify target areas for investment.

"Instead of focusing on risk of supply chain disruptions, in our interviews, most of the supply chain executives pointed to lost opportunities to take advantage of gaps in the market when discussing agility during the COVID-19 crisis," co-author J. Paul Dittmann, assistant head of Haslam's supply chain management department, says. "That's why, in the paper, we emphasize strategic advantages supply chain agility offers."

Events like the 2008 global financial crisis and the 2020 pandemic exposed the vulnerability all firms face, and a company that believes such calamities will not befall it – along with lesser disruptions – is indulging in wishful thinking. In such a volatile environment, the authors say, a firm's ability to create an agile supply chain may be key to gaining a competitive advantage. So, all companies should develop the agility to respond to unexpected future events that inevitably will occur.

"Understanding and Valuing the Impact of Agility in Your Supply Chain" is GSCI's 28th industry-focused white paper. Bruce Behn, Haslam's associate dean for Graduate and Executive Education, and Pradeep Charath, a technical staff member at Seidman College of Business, are co-authors of the paper with Pellathy and Dittmann. Copies of GSCI's other white papers also are available for download.

About the Advanced Supply Chain Collaborative
The Advanced Supply Chain Collaborative works as a collaborative think tank, engaging industry experts with UT faculty to explore advanced concepts in supply chain management. ASCC seeks to enhance the understanding of advanced digital applications and strategies to maximize impact; provide a technology think tank and subject matter expertise to explore issues related to advanced supply chain analytics tools and techniques; grow a talent base of students with applied technical and supply chain knowledge; and establish ROI for digital supply chain applications through a variety of tactics, processes and metrics. In pursuit of these goals, ASCC strives to create and grow a coalition of business practitioners and scholars focused on understanding how companies can leverage advanced innovations, such as cloud-based computing, machine learning and big data and analytics to build the supply chains of the future.

Hendricks, Kevin B., and Vinod R. Singhal. "An empirical analysis of the effect of supply chain disruptions on long–run stock price performance and equity risk of the firm." Production and Operations Management 14.1 (2005): 35-52.

SOURCE University of Tennessee, Knoxville's Haslam College of Business