When Alan Greenspan talks about the supply chain, is anybody listening?

Business leaders treat the Federal Reserve Bank chairman like a modern-day Delphic oracle. They scrutinize his every utterance for clues as to the direction of the American economy. Yet Greenspan's message about the importance of the supply chain doesn't appear to have sunk in with all investors.

Greenspan, who addressed the Council of Logistics Management more than 20 years ago, has long touted the wisdom of efficient supply-chain management. More recently, he cited corporate investment in electronic commerce and supply-chain technology as powerful mitigating factors in the current economic slowdown.

He has been particularly vocal about the need to control inventories, notes Robert V. Delaney, vice president of St. Louis, Mo.-based Cass Information Systems. Many of his pronouncements have been borne out; witness the inventory woes experienced by high-tech producers such as Lucent, Nortel and Cisco when they failed to adjust production levels following a sales slump late last year.

For the most part, statistics appear to show that corporate efforts at supply-chain reengineering have been a success. Despite the slowdown, Delaney says, overall inventory levels have increased only marginally - to 1.36 months' worth of supply last December, versus 1.32 months' at the beginning of 2000. That compares with 1.44 months' during the last economic "soft landing," in 1995-96.

Still, analysts say, the supply chain isn't fully understood as a driving force behind business success. "There's a difference between the effect that the supply chain has on the economy, which is very substantial, and awareness of it, which is very insubstantial," says Jeff Kauffman, global logistics coordinator with Merrill Lynch in New York City.

"It's reasonably obvious that Wall Street does value supply-chain prowess," says Bill Helming, a director of management consultancy PRTM in Waltham, Mass. "But I don't think Wall Street understands very well what supply-chain management encompasses." For the most part, the term is used in reference to logistics and delivery prowess, not all of the functions that make up the order cycle.

Some of corporate America's biggest success stories - Wal-Mart Stores, Dell Computer, Compaq Computer and Hewlett-Packard - are celebrated for their supply-chain innovations. But others are having a hard time making the necessary investment in technology and business process reengineering, as investors press for short-term results.

Accentuate the Negative
Ironically, it's the supply-chain failures that garner the most attention. Companies such as Apple Computer and Toys R Us have paid dearly in recent years for failing to have enough product to satisfy demand. "Supply-chain glitches can result fairly immediately in punishment with regard to stock price," says Helming.

Nowhere is that link more evident than in a new study by the University of Western Ontario and the Georgia Institute of Technology. It concludes that supply-chain glitches can result in a 9 percent drop in stock price, and stock devaluation of up to 20 percent, within six months of the problem being publicly revealed. During that period, the surveyed companies each suffered losses of $120m or more in shareholder wealth. Their combined losses ranged between $103bn and $120bn, depending on which of three different models were used to adjust for normal market movements.

A glitch is defined as a delay in production or shipment. Causes include parts shortages, customer order changes, product rollout problems, quality problems, bad weather, labor shortages or administrative snags. Since most companies prefer not to publicize their mistakes in press releases, the study's authors drew on articles in the Wall Street Journal and Dow Jones News Service, concerning 861 glitches from 1989 to 1998.

Businesses were punished even if the glitches weren't their fault. Stock value fell 8.29 percent when the problem was caused by the company in question, 11.97 percent when caused by a supplier, and 8.48 percent when by a customer.

Co-author Vinod R. Singhal, associate professor of operations management at Georgia Tech, views the study as ammunition for convincing the investor community that the supply chain matters. He plans to market it to stock analysts and mutual fund managers, among others. But he hopes to go beyond the detailing of negative impacts that arise from supply-chain failures. A subsequent study could attempt the tougher task of identifying the positive results of investing in systems for better supply-chain efficiency.

Singhal could start with a survey conducted in 1999 by the Performance Measurement Group, LLC, a subsidiary of PRTM. In its first-ever look at performance among best-in-class companies, PMG found that leading companies had reduced supply-chain management costs to between 4 and 5 percent of sales - 5 to 6 percent less than median performers. For those with at least $500m in annual sales, that single percentage point translated into a yearly cost advantage of $25m to $30m. What's more, PMG said, companies with a record of strong supply-chain management performance were likely to have 60 percent to 100 percent better asset utilization.

A Lack of Patience
The need for optimizing one's supply chain isn't in dispute. The challenge lies in attracting investors who are patient enough to wait around for the results. That halcyon, short-lived age of backing ventures without black ink on the horizon has come to an abrupt halt. Burned by hundreds of dotcoms that possessed everything but a rational business model, investors are now adopting a more realistic view of the landscape.

"Companies have less time to show a return on investment today," says Delaney. "Investors are very impatient and very unforgiving. They see big investments in information technology, and they expect them to perform."

To some extent, shareholder patience depends on the reason behind the expenditure, says Kauffman. Companies that break away from the pack are more likely to encounter a receptive investment community. Those that spend millions merely to catch up with the leaders will encounter a different attitude.

That's one possible reason why Dell Computer has had an easier time of implementing its direct sales model than rival Compaq. "Investors stood more anxiously over Compaq than Dell," says Kauffman. It may also explain why Kmart Stores is struggling to pull even with Wal-Mart Stores, the pioneer of point-of-sale inventory controls.

Many businesses that have made huge investments in IT, especially pricey enterprise planning resource (ERP) systems, have gone about it the wrong way, Helming argues. They have failed to match those expenditures with broad-scale business process reengineering. And they may have bitten off too big a piece of multi-functional software packages. Instead, he says, they ought to be examining which modules they really need. They should also be forming solid ties to supply-chain partners, in order to ensure the smooth flow of product both inbound and outbound.

They can't take forever to do it. "A patient investor limit is probably around 12 months," says Helming. More often, investors demand to see tangible benefits within six to nine months, even for a three- to four-year project. By that time, a company should be able to share at least some benefits of its supply-chain reengineering effort.

The key lies in establishing long-term goals up front, then creating a series of measurable milestones that informs investors of a company's progress all along the way, Helming says. A supply-chain "dashboard" can keep track of crucial metrics, both for cost-control and customer service.

Top executives, including the chief executive officer and chief financial officer, should be able to articulate the company's mission to analysts and shareholders. "Just saying this is a strategic investment means we have no idea how to calibrate the rate of advance," Helming says.

For companies eager to catch up with the competition, the best strategy may be not to pull even, but to leapfrog over the leader. In the automotive sector, Ford Motor Co. is generally viewed as the trendsetter in designing processes for supply-chain management, Delaney says. Recently it signed a $200m-plus contract with United Parcel Service for the management of rail moves, and the tracking and tracing of finished cars. In Europe, UPS and Exel are overseeing Ford's inbound and outbound shipments.

Not to be outdone, General Motors has joined with CNF Inc., the multimodal logistics provider, to create a separate entity known as Vector SCM. The dedicated joint venture will manage more than 180 million pounds of material from 12,000 origin points around the world, delivering more than 8 million vehicles a year. "I've never seen anything like this," says Kauffman.

New supply-chain partnerships are forming on the e-commerce side as well. Transora, which claims to be the world's largest business-to-business e-marketplace for the consumer packaged goods industry, has entered into a strategic alliance with Transplace.com, the internet-based logistics provider formed from six truckload carriers. The deal creates a single source of web-enabled transportation management. Similar ones are likely to pop up as dozens of trading exchanges contract, merge or go out of business.

The Outsourcing Wave
Third-party providers are in good position to benefit from business-process reengineering. The rush for measurable solutions is fueling the concept of outsourcing. Most companies have neither the time nor resources to overhaul their supply chains at a pace satisfactory to the investment community. They are seeking established experts to take over functions that once were jealously guarded in-house.

Logistics is the most obvious candidate for outsourcing, although the industry is still relatively young. Kauffman suggests that investors would have a more enlightened view of the supply chain if more "pure-play" third-party logistics providers (3PLs) were traded publicly. Most are owned by conglomerates with warehouses or transportation equipment, obscuring the value of the non-asset-based units.

That's likely to change as 3PLs take on a broader role in managing the supply chain, and gain critical mass. New players, along with spin-offs by existing parents, will serve to educate investors about the growing sector. Already there are mutual funds built around logistics providers, notes Kauffman. Within five years, he predicts, that area will become "a multi-tiered investment industry," with between 10 and 20 companies trading on the open market as pure plays. They will foster a stable of Wall Street analysts who will do a better job of explaining the supply-chain story to the public.

Investors can get a glimpse of the viability of logistics by looking at the performance of more traditional freight forwarders. Leaders include Expeditors International, C.H. Robinson, EGL Eagle Global Logistics, and Hub Group. Their total market capitalization was up 39 percent in 2000 and 99 percent in 1999, according to analyst Marty Bescow with U.S. Bancorp Piper Jaffray in Minneapolis.

More companies in that space are going public and extending their reach into the logistics field. They benefit from a lack of equipment on their balance sheets. "When the economy softens," Bescow says, "they don't need to fill fixed assets with volume."

Problem of Pricing
First, though, logistics providers must present a compelling business model to investors. Currently they don't charge enough for their services, Kauffman says. Even the leaders haven't found a way to get fully compensated for their extensive menu of services, which may include costly information systems.

Capital requirements are falling as 3PLs move from in-house systems to off-the-shelf software that can be modified slightly to fit their needs. Some have formed their own outsourcing arrangements with major software houses acting as application service providers (ASPs).

One positive step would be for logistics companies to adopt a more accurate measure of their success, Kauffman says. He suggests return on invested capital, a formula that could favor low-margin businesses with relatively small capital costs, and give investors a better idea of where to put their money. For now, he says, the industry hasn't settled on a way to evaluate its performance.

Logistics providers, especially those with e-commerce applications, also must confront the skepticism of investors who are weary of big claims that never seem to materialize.

Investors must look beyond the vague claims of many dotcoms and software providers to discover what services they actually perform. Kauffman recalls the story of the shipper who was promised a "48-foot logistics solution." When it arrived at the loading dock, "it looked awfully like a truck."

There's little doubt about the potential of the new breed of providers; Bescow estimates annual growth of 15 to 20 percent over the next few years. "What investors are questioning," Kauffman says, "is whether their potential is going to live up to the advertising."

Like most business trends, outsourcing is to some extent cyclical. In recent years, there have been sporadic accounts of companies firing their 3PLs and taking the logistics function back in-house. But Kauffman doesn't believe the move toward outsourcing will be reversed to any great degree. The reasons, he says, are twofold: transportation deregulation of the late 1980s created a more efficient system that reduced the need for internal control by its customers, and advances in IT have allowed for closer monitoring of one's product without having to book its movement or storage personally.

Notwithstanding the vital role of third parties, the burden of spreading the gospel of supply chain rests on the shoulders of manufacturers, distributors and retailers. In the end, companies focusing on supply-chain excellence must steer a narrow course between satisfying their customers and the investment community. They must cut costs internally without jeopardizing flexibility and customer service. "If you pursue only one dimension," says Helming, "you do so at your peril."