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15 2011

Risk to Revenue from Sudden Supply Chain Disruptions

Syndicated from: Bob Willard's Blog

Every company faces a particular set of physical and operational risks from severe weather, or political uprisings, or other snags in its value chain. Sustainability strategies lead to more local supply chains and a focus on local markets. Doing so may mitigate risks associated with far-flung supply chains which events like earthquakes in Japan, floods in Tailand, or uprisings in Greece could severely disrupt. Further, when a company reduces its carbon footprint, it mitigates future severe weather events. Extreme weather events are happening more frequently, can damage the company’s facilities, and may require extensive time and money to rectify. The homes of employees may be severely damaged, or infrastructure providing access to the company site may be destroyed. Supply chain resilience after severe weather events is a growing issue for companies with far-flung global operations and suppliers. Storms at supplier locations or en route can jeopardize supply and force the company to use more expensive alternative sources. Adverse weather conditions can severely curtail a company’s supply. Weather-related supply chain disruptions cause revenue flow disruptions.This excerpt from Chiquita Brand’s International’s 2010 10-K report provides insights into how adverse weather conditions can severely curtail a food company’s supply. “Our results of operations have been significantly impacted in the past by a variety of weather-related events. For example, as a result of flooding which affected some of our owned farms in Costa Rica and Panama in December 2008, we incurred approximately $33 million of higher costs, including logistics costs, related to rehabilitating the farms and procuring replacement fruit from other sources. “From time to time, we have experienced shipping interruptions, port damage and changes in shipping routes as a result of weather-related disruptions. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption, an extended interruption in our ability to ship and distribute our products could have a material adverse effect on us.” At the other end of the value chain, customers who are affected by weather may be in no position to require further products. They may be just trying to survive and rebuild. If the company has not diversified its revenue streams, prompted by sustainability product and service opportunities, the resulting loss of revenue could be financially catastrophic, even though the company’s own facilities are unaffected by severe weather. Replace “severe weather event” in the preceding paragraphs with “rioting in the streets” and the arguments apply equally well. If a company’s suppliers and / or customers have been disrupted by natural disasters or civil unrest, we conservatively assume the top-line loss is 2% of revenue. What are the odds of these disruptions or delays occurring? Of course, it is difficult to say. The frequency and severity of natural and political disasters seems to be increasing. Nevertheless, we conservatively assume that the probability that the revenue stream will be interrupted in the next three to five years is only 5%. If we assume the company’s current revenue is $500 million, the revenue impact multiplied by its probability results in $500,000 of the company’s revenue being in jeopardy. We have now looked at seven threats to revenue if a company decides to not embrace sustainability strategies. In 5 Reputational Risks to Revenue without Sustainability Strategies, we calculated that a company with $500,000,000 revenue could be jeopardizing $20,250,000 of that revenue from a poor reputation on 1) energy and carbon management, 2) water management, 3) materials and waste management, and 4) eco-system damages, as well as 5) the risk to revenue from poor reputations of the company’s suppliers. In The Risk to Revenue from Less Competitive Prices, we found that another $5,000,000 could be at risk. Today, we found that sudden disruptions in the supply chain could threaten another $500,000. All told, the seven threats to revenue add up to $25,750,000, or 5.2% of today’s revenue. Is that a big deal? Yes. Is it big enough to cause a company to rethink how sustainability strategies could help avoid this risk? Maybe. Do all these assumptions apply to all companies? No, which is why having worksheets that can be tailored to each company’s situation is helpful. A new, re-calibrated, and more compelling business case for sustainability strategies will be described in the 10th anniversary edition of The New Sustainability Advantage that will be released next spring. Its accompanying Sustainability Advantage Simulator Worksheets will help a company of any size in any industry sector monetize its potential decreased revenue without sustainability initiatives. Stay tuned … Please feel free to add your comments and questions using the Comment link below. For email subscribers, please click here to visit my site and provide feedback. Bob    

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