Financial Dimensions of Agility in the Supply Chain of Oil Industry

In continuation with the preceding articles, this article extends the discussion and presents some fundamental insights into supply chain management within the oil industry. The focus in this article sheds light on the concept of agility and various financial health metrics applied in supply chain contexts. This is followed by drawing some insights from recent literature dedicated to this specific topic.

Introduction

The relationship between agility and financial health is a critical aspect of a company's overall performance and resilience. Agility refers to an organization's ability to adapt and respond swiftly to changing circumstances, opportunities, and challenges. Financial health, on the other hand, reflects the stability and viability of a company's financial structure.

Supply chain agility adopts a multifaceted strategy, incorporating real-time visibility, agile planning, and lean inventory optimization to navigate dynamic markets and disruptions. Collaboration with suppliers, coupled with technology integration like digitization and cloud-based solutions, further enhances flexibility and resilience, addressing the challenges of an evolving business landscape.

On the other hand, different terms could be used to evaluate the financial health of corporates as following:

• Cash and Cash Equivalents: it represents highly liquid assets that can be quickly converted into cash. This category includes physical currency, bank deposits, and short-term investments.
• Current Ratio: the current ratio is a liquidity ratio that measures a company's ability to cover its short-term liabilities with its short-term assets. A current ratio above 1 indicates a company has more assets than liabilities in the short term, suggesting good liquidity.
• Free Cash Flow / Total Revenue: a measure of how efficiently a company converts its revenue into cash that can be used for operations or other strategic initiatives.
• Liability Asset Ratio: the debt ratio, which measures the proportion of a company's assets financed by liabilities. A higher ratio indicates higher financial risk, as a significant portion of assets is funded by debt. A lower ratio suggests a lower financial risk.
• Liability Equity Ratio: it compares a company's total liabilities to its shareholders' equity.
• Quick Ratio: the Acid-Test Ratio, is a liquidity ratio that measures a company's ability to cover its short-term liabilities with its most liquid assets, excluding inventory.

Relationship between Agility and Financial Health

The connection between agility and financial well-being is intricate. It involves various financial metrics such as Cash Equivalents, Current Ratio, Liability Asset Ratio, Liability Equity Ratio, and Quick Ratio. Improved levels of cash equivalents, an elevated current ratio, and a heightened quick ratio typically suggest enhanced short-term liquidity, fostering agility. This liquidity facilitates prompt adaptation to evolving circumstances. Conversely, heightened liability asset and liability equity ratios bring about heightened financial risk and potential long-term constraints, despite potentially offering short-term agility through resource leveraging.

Yusuf et al. (2014) emphasized the critical significance of the agility of enterprises within the oil and gas value chain and the impact of their performance on enhancing the competitiveness of the entire value chain. They highlighted the importance of understanding and optimizing these factors to achieve overall value chain competitiveness.

Supply Chain Agility in Literature

Yusuf et al. (2012) carried out statistical tests (Kolmogorov-Smirnov statistical test for normality, ANOVA, and t-tests) to paper assesses the link between dimensions of agile supply chain, competitive objectives and business performance in the UK North Sea upstream oil and gas industry. They condensed the agility themes in the supply chain into categories including cooperating to compete, mastering change and uncertainty, impact of people and information, and customer enrichment. In their study:

• They established a relationship between the key dimensions of agility in the oil and gas supply chain and various business performance metrics, such as turnover, net profit, market share, customer loyalty, and performance relative to competitors. Notably, "cooperating to compete" demonstrated a significant correlation solely with turnover, while "impact of people and information" and "mastering change and uncertainty" exhibited a robust positive correlation with all business performance measures.
• Additionally, the researchers examined the relationship between agility dimensions and competitive objectives, revealing that "customer enrichment" had the highest significant positive correlation with dependability and delivery, followed by proactivity and flexibility. "Cooperating to compete" correlated positively with quality, proactivity, and speed. "Mastering change and uncertainty" showed the highest correlation with innovation and speed, followed by quality and proactivity. Lastly, "leveraging the impact of people and information" displayed significant positive correlations with innovation and speed, followed by quality and proactivity.

Shqairat and Sundarakani (2020) utilized techniques such as factor analysis, ANOVA, and hypothesis testing to examine the agility of oil and gas value chains in the UAE. Their study aimed to assess the influence of implementing strategies such as safety stock and transport capacity planning for supply disruptions, cost and quality considerations for outsourcing, and information sharing and risk mitigation for management on the agility of oil and gas value chains. The research, conducted through a survey with 106 participants from oil and gas companies, confirmed that maintaining adequate safety stocks is crucial for ensuring continuous supply during disruptions. The results highlighted that enhancing agility involves pre-arranging critical stocks, reducing dependence on key suppliers, improving contingency planning, managing contracts effectively, and engaging with suppliers. The overall conclusion was that strategies for supply disruption, management, and outsourcing positively contribute to the agility of the value chain.

References:

1. Shqairat, A. and Sundarakani, B., 2018. An empirical study of oil and gas value chain agility in the UAE. Benchmarking: An International Journal, 25(9), pp.3541-3569.
2. Yusuf, Y.Y., Gunasekaran, A., Musa, A., Dauda, M., El-Berishy, N.M. and Cang, S., 2014. A relational study of supply chain agility, competitiveness and business performance in the oil and gas industry. International Journal of Production Economics, 147, pp.531-543.
3. Yusuf, Y.Y., Musa, A., Dauda, M., El-Berishy, N., Kovvuri, D. and Abubakar, T., 2014. A study of the diffusion of agility and cluster competitiveness in the oil and gas supply chains. International Journal of Production Economics, 147, pp.498-513.