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Neat East University
Institute of Graduate Studies
Department of Business Administration.
Topic:
The use of Financial Ratios to Evaluate the Performance of Supply Chain
Management
Course Title: MAN 596
Thesis Proposal (Seminar)
Name: Bandar Yaslam Bin Afi
Student Number: 20224555
Supervisor: PROF.DR.SERIFE ZIHNI EYUPOGLU
NICOSIA
JANUARY 2024
1
Table of Contents
1.1 Background …………………………………………………………………………………………………………. 3
1.2 Statement of the Problem ……………………………………………………………………………………… 5
1.3. Research Objectives …………………………………………………………………………………………….. 5
1.4 Significance of the Study ………………………………………………………………………………………. 6
1.5 Research Questions ………………………………………………………………………………………………. 7
1.6 Research Hypothesis …………………………………………………………………………………………….. 7
CHAPTER 2: LITERATURE REVIEW ……………………………………………………………………….. 8
2.1 Financial Ratios with supply chain ……………………………………………………………………….. 8
2.1.1 Cost of Goods Sold …………………………………………………………………………………………. 8
2.1.2 Cash Conversion Cycle …………………………………………………………………………………… 9
2.1.3 Return on Investment …………………………………………………………………………………… 10
2.1.4 Return on Equity………………………………………………………………………………………….. 11
2.1.5 Inventory Turnover ……………………………………………………………………………………… 12
2.1.6 Return on Capital Employed ………………………………………………………………………… 13
2.1.7 Asset utilization ……………………………………………………………………………………………. 14
2.1.8 Return on Assets ………………………………………………………………………………………….. 14
2.1.9 Gross Profit Margin and Operating Margin ………………………………………………….. 15
CHAPTER 3: METHODOLOGY ……………………………………………………………………………….. 16
3.1 Introduction ……………………………………………………………………………………………………….. 16
2
3.2 Research Approach …………………………………………………………………………………………….. 16
3.3 Research Design …………………………………………………………………………………………………. 17
3.3.1 Analytical and Comparative Approach …………………………………………………………. 17
3.2.2 Materials and Tools ……………………………………………………………………………………… 20
3.2.3 Target Population and Data Collection …………………………………………………………. 20
3.3 Data Analysis ……………………………………………………………………………………………………… 21
3.5 Conclusion …………………………………………………………………………………………………………. 21
CHAPTER 4: PROPOSED DATA ANALYSIS ……………………………………………………………. 22
4.1 Data Collection Procedures …………………………………………………………………………………. 22
4.2 Limitations and Delimitations …………………………………………………………………………… 223
4.2.1 Limitations …………………………………………………………………………………………………… 23
4.2.2 Delimitations………………………………………………………………………………………………… 23
Chapter 5: IMPLEMENTATION PLAN ……………………………………………………………………… 24
REFERENCES……………………………………………………………………………………………………………. 26
Appendix 1 ………………………………………………………………………………………………………………. 33
3
CHAPTER 1: INTRODUCTION
1.1 Background
Financial ratios enable companies to look at their supply chains through an economic
lens. Liquidity, profitability, and efficiency indicators show how much resources have been
utilized to achieve corporate objectives. These well-developed information technologies have
helped develop global markets in various countries, making them suitable for different industries
(Bennett et al., 2014). However, comparing supply chains among firms, especially the leaders in
an industry such as Aramco or SABIC, with other relevant sub-sector companies is much more
complicated when assessing the operational efficiency and strategic effectiveness of a company’s
activities in supply chain management. In this case, the measures of financial ratios will indicate
whether the company made correct decisions on the amount of resources available at its disposal
or not. Even though exposed to competitive pressures or external threats, Aramco should make
appropriate choices. Research suggests that while SABIC operates distinct yet crucial
petrochemical-based supply chains. This analysis can also help understand other tasks, including
manufacturing and reaching customers via numerous channels. For instance, computation using
current or quick ratios reflected the ability to handle short-term liabilities (as well as operation
flexibility), a crucial element in a fast-moving petrochemical industry (Saleem & Rehman,
2011).
Comparative analysis using financial ratios between these two industry leaders uncovers
diverse approaches to supply chain management. Besides a broad outlook concerning effective
strategies within related industries, such weaknesses in the delivery chain and strengths at each
firm emerge through this avenue. According to the literature, this comparative analysis is helpful
in demystifying supply chain dynamics in today’s economy as it considers financial performance
4
as an indication of supply chain efficiency (International Journal of Supply Chain Management,
2019).
This research aligns with the growing recognition of financial analysis as a strategic
management tool. Financial scrutiny and ratio analysis are increasingly acknowledged as the
basis for business units’ planning and control. This perception further helps one know why
organizations would like to improve their operational performance using the company’s financial
ratios. Financial ratios are crucial indicators to evaluate a company’s performance through its
supply chain systems. The present study shows that findings from such an examination can be
helpful to Aramco and SABIC in determining their effectiveness level, and tomorrow’s results
will help them change if needed. By understanding the finance involved concerning energy and
petrochemical operations, firms may make informed decisions that enhance sustainable growth
and competitiveness. Using financial ratios to assess SCMP is very important today in modern
business life. The method is best utilized when analyzing SCMP through case studies involving
separate but interconnected industry sectors such as Aramco and SABIC. This paper contributes
significantly to understanding supply chains by explaining what industry leaders need to survive
in different circumstances (Siaila & Rumerung, 2022).
Additionally, to further demonstrate the degree of variance in companies included under
its purview, a table containing all 40 selected firms is presented in Appendix Table 1. The table
lists the companies by sector, company name, start year, and end year. Besides providing a clear
picture of what sectors have been included in this research endeavor, this list also gives you an
idea about which industries are being compared.
5
1.2 Statement of the Problem
The main drawback of SCM research is that things would have been easier if the
researchers had merely asked how well people think their companies performed in supply chain
management (SCM). But no, they’ve decided to look at it from a higher level with financial
ratios because those are simpler. However, these leading companies, such as Aramco and
SABIC, are excellent case studies for customs importers. We need to ask whether financial ratios
can be used as a performance measure. This presents methodological problems due to these
differences in operations and economic structures among industries. Though such an approach
has its complexities, evaluating SCM performance across the board is worthwhile by looking for
examples of companies that can keep these financial ratios high. For instance, Inventory
turnover, ROCE, Asset utilization/Return on assets (ROA), Gross profit margin, Operating
margin, and Return on equity (ROE)/return or investment. They can illuminate competitive
advantages or deficiencies within firms despite a world market where political considerations
rule the day (Brewster & Nowak 2020).
1.3. Research Objectives
This research aims to fill the gap in knowledge about how effective financial ratios are at
evaluating SCM performance across different industrial sectors. Their initial focus is just on how
to compare the supply chains of manufacturing firms, but ultimately, they want their findings to
be generalizable throughout other sectors. To accomplish this objective, the following financial
ratios will be used in the study of a broader range of companies representing differing industries:
By using the data for a larger sample and comparing our results with those from Aramco and
SABIC, we hope to find some common patterns and relationships between financial ratios that
are associated with superior performance in SCM across different contexts. This multi-faceted
6
approach will help us better understand the applicability and limitations of financial ratios in
gauging SCM effectiveness and facilitate the development of a more complete set, less tied to
specific industries, supply chain performance indicators.
1.4 Significance of the Study
The potential significance of this study lies in its ability to fill two significant voids–in
finance and supply chain management. Firstly, it will investigate the applicability of financial
ratios as a tool that effectively measures supply chain performance between different but related
industries. This is especially true for giant transnationals like Aramco and SABIC. Through a
series of calculations based on these ratios, this research can provide insight into the strengths
and weaknesses of their respective supply chains. This information can improve both enterprises’
operations and decision-making, perhaps becoming more efficient and profitable.
Second, this study will enrich the academic dialogue by linking financial performance
measures and operating efficiency to supply chain literature. This research examines the complex
interplay between financial ratios and supply chain processes, establishing industry-agnostic
standards for evaluating excellent order fulfillment. This is useful not only for huge entities like
Aramco and SABIC but will also help smaller players raise their competitiveness on the
international stage.
Also noteworthy are the broader economic implications of this research. Boosting the
efficiency and sustainability of supply chains in enterprises such as Aramco or SABIC will set
off a chain reaction reverberating throughout the world industry. Through this research, they
hope to align with the trend of international efforts for responsible business operations and serve
as a reference point toward an efficient, sustainable future global supply chain (Shi & Yu, 2013).
7
1.5 Research Questions
1. Utilization of Financial Metrics: How can financial metrics, such as Inventory Turnover
Return on Capital Employed (ROCE), Asset Utilization, Return on Assets (ROA), Gross
Profit Margin and Operating Margin, Return on Equity (ROE), Return on Investment
(ROI), Cost of Goods Sold (COGS) and Cash Conversion Cycle (CCC) be effectively
employed to comparing supply chains between firms of the manufacturing sectors such as
subsectors companies as SABIC, ARAMCO and other related sub-sector companies?
2. Key Performance Indicators: Within the financial metrics, which key performance
indicators most comprehensively capture the effectiveness and efficiency of strategies
employed in Supply Chain Management?
3. Financial Criteria in Energy and Petrochemical Sectors: In the energy and petrochemical
sectors, how do companies like Aramco, SABIC, and other companies utilize financial
criteria to evaluate and enhance the success of their supply chain management practices?
(Shi & Yu, 2013).
1.6 Research Hypothesis
The following proposed hypotheses will guide this research:
1. SABIC and Aramco, compared to the broader industry average, demonstrate efficient
supply chain management techniques.
2. Companies with effective supply chain management, such as SABIC and Aramco, tend to
have a shorter Cash Conversion Cycle (CCC).
3. Financial ratios serve as valuable tools for evaluating the effectiveness of supply chain
management, particularly when considering industry-specific patterns and approaches.
8
CHAPTER 2: LITERATURE REVIEW
2.1 Financial Ratios with supply chain
2.1.1 Cost of Goods Sold
The most important thing about COGS is that it measures the cost of goods sold and can
be used to assess a company’s supply chain efficiency. These are costs directly related to
production, such as raw materials, direct wages and salaries paid to workers, and overhead
expenses like electricity, machine depreciation, and factory rent. These include production
inefficiencies, which are how different methods and technologies make products. For example,
an organization could save much on labor and overhead costs through lean manufacturing
techniques, partially automating some activities, or improving labor productivity. However, these
measures may not only result in the ability to produce more but also enhance the quality of
output, affecting the COGS. Also, part of COGS is logistics expenses coupled with
transportation. For instance, when route plans are optimized, chances for a significant reduction
in transport and warehousing costs arise due to consolidated shipments and appropriate inventory
control. In addition to this, JIT (Just-In-Time) inventory systems might lower the holding
charges arising from storage insurance premiums as well as obsolescence. Any delays in these
areas, such as failure to procure on time due to late delivery requirements necessitating overnight
shipping or premium deliveries, might result in higher total costs for COGS. This happens when
bottlenecks during the entire process caused by equipment breakdowns, employee issues, or
ineffective procedures increase labor rates. This may also lead to inadequate routing or nonoptimal inventory control, hence high transit and warehouse fees.
High COGS are significant because they reduce gross margin (sales – COGS).
Significant increases in the cost of goods sold diminish gross profit margins quickly. This is
9
especially crucial in sectors with low-profit margins where effective cost management is
essential for competitiveness. Therefore, it is apparent that COGS plays a significant role in
determining whether a company successfully applies its supply chains. Thereby pointing out
where inefficiencies lie within an enterprise’s supply chain, COGS. Companies can detect and
remove inefficiencies in their supply chains if they track COGS. Such an approach to COGS can
improve earnings, increase market efficiency, and strengthen a company’s general financial
position (Cannon et al., 2020).
2.1.2 Cash Conversion Cycle
The cash conversion cycle is another important financial measure that shows how well a
company uses its working capital and liquidity in every supply chain operation. This means it
takes time for inventories and other assets to be converted into cash flows from sales. This is the
inventory conversion period, the time taken for merchandise to be sold; the receivables collection
period, the period within which receivables are collected; and the payables deferral period
(Wang, 2019).
CCC= ITD + RTD – PTD
ITD: Inventory turnover in days.
RTD: Receivable turnover in days.
PTD: Payable turnover in days.
An efficient CCC indicates that an organization can manage its inventory well, collect
money owed fast enough, and pay off its bills on time. Low CCC is recommended because it
shortens asset-to-cash conversion, thus improving business liquidity and leading to faster
reinvestment for growth and operations. To do so, one would need the right level of control
regarding stock management. Instead, this would result in holding more stock, meaning there
10
would be more time between purchase and sale. For this balance, advanced forecasting
techniques with efficient stock replenishment systems besides just-in-time inventory approaches
should be implemented. Minimizing CCC depends heavily on effective logistics and distribution
systems. Thus, companies could minimize their receivable collection periods if they ensured
timely delivery of products to customers. For companies to achieve this, they must improve
order-to-delivery cycles by optimizing supply chain logistics, thereby utilizing technology in
quick order processing into fast shipping facilities. On the other hand, good customer relations
combined with effective credit management policies may speed up receivables collections by
firms. However, a longer CCC may indicate an inefficiently managed supply chain, implying
that working capital has been tied up longer than required. Effectively making it difficult for the
firm’s cash position, thereby hindering any chances that could have occurred or expanding its
market share. More stocks mean slow-moving inventory, which means more time between
purchase and sale. Finally, poor distribution policies, including logistics, may have an effect
when it comes to the delivery of products, which may increase the length of time taken to collect
receivables. As such, the payables deferral period might be caused by inefficient processes or
weak supplier relationships resulting from missed negotiation opportunities and mismanagement
of cash flows (Chang, 2022)
2.1.3 Return on Investment
In making any decision to invest, ROI is a significant aspect. This concept can be used in
various areas like supply chain management. The following formula is used for calculating
Return on investment (ROI).
ROI = Net income / Cost of investment x 100.
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ROI measuring refers to the profitability of procurement, logistics, and inventory
activities within the supply network using ROI ratios. High returns mean that putting money into
the supply chain was an appropriate decision; low ROI signifies that something has gone wrong
with the process. The importance of ROI in supply chain management must be considered. Firms
can use it to check whether they are making profits from their supply chains to make appropriate
decisions on resource allocation. For example, ROI can help organizations test if they should
invest financially in emerging logistic technologies or enter new markets.
Furthermore, it allows one to compare their operations with similar businesses using
performance indicators to know where they are doing better operationally and where
improvement is needed. It indicates how well the company performs on average since this
reflects returns generated by different activities along supply chains. In such cases, optimization
of an organization’s financial health requires operational strategies aligned with long-term goals.
Strategic planning and long-term investment decisions need firms to understand how they will
achieve optimal returns on investments in their supply chains. These theories form the basis of
profit optimization methods supported by rational analysis. As said above, the Return on
investment is a crucial ingredient during decision-making processes concerning selection and
implementation in various aspects of supply chain management. Such practices enhance
operational efficiency and inform tactical decisions, producing superior outcomes for the entire
firm (Chopra & Meindl, 2013).
2.1.4 Return on Equity
Return on Equity (ROE) indicates how much profit a corporation can generate from the
money shareholders put into it. The formula for calculating ROE is as follows;
ROE= Net Income / Shareholders’ Equity
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Supply chain management uses ROE to measure its performance. This means that high
ROEs indicate effective utilization of equity resources, which can only be achieved through
effective supply chain operations. On the other hand, this metric could measure how well a
company manages its inventory, procurement logistics, and other asset investments in a supply
chain that affect profitability. ROE can also be applied to compare the financial performances of
different companies within one industry to determine the capital efficiency levels in their supply
chains. The latter helps identify the best approaches to attain high ROEs. This is because they
may increase a company’s Return on equity (ROE). This shows that if there were any returns
from such investments, they would have reflected in growing net income. Otherwise, a business’s
long-term viability regarding its supply chain strategy may be questioned. Consistently retaining
high levels of Return on equity implies that the firm’s supply chain operations are profitable and
possess sustainable characteristics that contribute positively towards its development. Supply
chain managers find this critical ratio very important because it relates to the profitability and
efficiency of a firm. It indicates whether or not shareholders’ funds are being utilized efficiently
by way of distribution system operations, hence supporting strategic choices in interpretation for
managers among Supply Chains (Saputra, 2022).
2.1.5 Inventory Turnover
This section will adequately understand the inventory turnover ratio as it is crucial in
managing supply chains and shows its importance in assessing how well inventory has been
addressed. The other standard measure known as “inventory turnover” is COGS divided by
average inventory and depicts how quickly a company can sell its merchandise and replace it.
However, this is more important in some industries since they use it to evaluate themselves
against others. Inventory turnover goes beyond operational metrics and affects issues such as
13
liquidity and profitability. For instance, high turnover ratios indicate that the inventories are
managed properly, which leads to improved liquidity and reduced storage and obsolescence
costs(Henry et al., 2023).
In contrast, low turnover rates may suggest overages or obsolescence situations, resulting
in limited liquidity and increased carrying costs. Inventory turnover becomes relevant in
decision-making circumstances. It assists managers in deciding on stock levels, production
planning, and marketing strategies. This ratio also helps companies through time as they engage
in trend analysis to assess if changes in the supply chain have any effect on the performance of
their firms while enabling them to adapt as well as optimize their activities (Gaur et al., 2005)
2.1.6 Return on Capital Employed
It’s a necessary math tool for measuring a business’s profitability and utilization. This
ratio shows how well a company is doing with its funds in terms of profit. These sectors, which
rely heavily on plant, property, and equipment, fall into such categories as manufacturing. On the
other hand, high ROCE means that management has been efficient at using capital, attracting
investors, and making sustainability possible. ROCE also drives strategy decisions and
investment plans. Such companies can create superior investments because they produce more
earnings relative to their level of invested capital. Besides, this efficiency can increase market
value since it represents what the firm can make on each dollar it supports. Firms can also use
ROCE to compare themselves against their peers within industries concerning capital efficiency.
This means businesses can identify areas for improvement or whether optimal asset usage is
needed through such comparisons. Consequently, ROCE establishes whether or not a company is
profitable and evaluates the effectiveness of resource utilization on that profit (Camelia, 2013).
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2.1.7 Asset utilization
Asset Utilization ratio is a critical metric that determines the extent to which assets
generate revenue. This section defines Asset Utilization and explains how it can be used to
measure the effectiveness of asset use in driving top-line growth. The formula for Asset
Utilization is straightforward: Net Sales divided by Total Assets. This ratio shows how
efficiently the company extracts value from its assets. Higher Asset Utilization ratios have their
bright side. This means that these organizations perform best in turning assets into sales, which
implies high operational efficiency. Cost control is also associated with asset effectiveness
because companies can put resources into good use, reducing waste and idle resources. As much
as it focuses on being cost-conscious, this approach can potentially increase profitability or
competitive advantage for companies in the marketplace. Highly competitive industries have
better-performing companies based on their Asset Utilization ratios. In other words, more
financial stability exists owing to greater Return on investments with additional revenue coming
from every unit of assets available. Consequently, one would argue that this may not be only
financial but also a strategic measure indicating whether any firm can win the market
competition by effectively utilizing its assets (Rahayu, 2019).
2.1.8 Return on Assets
Return on Assets (ROA) is a financial metric often used to determine how much profit a
company can generate from its asset base. For this reason, ROA is defined as net income divided
by total assets, which shows whether the firm has been able to increase profits through physical
capital investment. Thus, higher ROA implies that the assets generate more returns. It portrays
how efficiently firms utilize their resources while converting their asset holdings into revenues.
This view by most shareholders and investors makes ROA a good yardstick for gauging the
15
efficiency of operations and financial health. ROA is significant in business analysis not only
due to one reason. First, it helps to understand how efficiently the company’s management
optimizes using assets that add shareholder value. Therefore, compared to those who poorly
administer these investments, companies with high ROAs will offer greater returns on them.
ROA is critical in reaching industries within a sector or across sectors. Different sectors have
different asset needs and operational models. Hence, they can measure the operational efficiency
of their assets by using ROA to benchmark against similar ones to identify weak areas that
require improvement at organizational levels (Husna & Satria, 2019).
2.1.9 Gross Profit Margin and Operating Margin
Two key financial ratios that we can now concentrate on are Gross Profit Margin and
Operating Margin, which are crucial in comprehending cost management and profitability
assessment of a company’s financial performance. Gross profit margin is gross profit over
revenue. This shows the proportion of revenues above the price of goods sold. It looks at how
well a firm can put its products out there and still make money. Relying on high gross profit
margins means that the company has cost control, pricing strategies, and competitive advantage.
On the other hand, operating margin refers to operating income divided by revenue. It includes
not only the cost of goods sold but also operating expenses. Again, this ratio expands on
efficiency in operations and profitability in an organization. A well-optimized business model
with high operating margins will have adequate cost controls beyond production. Both these
ratios help companies position themselves strategically in the market. They give decision-makers
insights into their costing structures, pricing strategies, and overall operational efficiency. Gross
profit margins and operating margins show that companies are better placed to withstand volatile
16
economic conditions, pursue growth opportunities, and deliver value for shareholders (Bilal et
al., 2019).
CHAPTER 3: METHODOLOGY
3.1 Introduction
This chapter provides a detailed explanation of the precise technique used to unravel Sabic
and Aramco’s financials and management processes and these not-so-easy choices for 38
carefully selected companies representing different industries. This chapter takes the expanse of
supply chain management as its topic. It is very fine-grained, looking at how these crucial
organizations can use quantitative approach in their research paradigms.
3.2 Research Approach
This study employs quantitative analysis to comprehensively examine the complex financial
and operational relationships in supply chain management—intricate supply chain performance
metrics. The core of the quantitative analysis is a detailed economic model.
The proposed model is articulated as follows:
Y1(COGS)= f(X1,X2,X3,…,Xn)
Y2(CCC)= f(X1,X2,X3,…,Xn)
This model has two dependent variables: COGS (Cost of Goods Sold) and CCC (Cash
Conversion Cycle). These factors are essential in supply chain efficiency, influencing low costs
of goods sold, production liquidity and inventory/receivables management. Independent
17
variables include returns on capital employed, asset turnover ratio, gross profit margin and
operating margin, return on assets & inventory turnover rate. This was because of the long
tradition that they have always taken both a financial and an operational view of a company.
Therefore, as far as quantitative analysis is concerned, regression techniques will be used to
characterize the magnitude and quality of relationships between these variables. As a result, it is
possible to determine the most significant factors influencing supply chain performance and how
changes in financial ratios can impact the effectiveness of company operations (to improve them
or worsen them).
3.3 Research Design
3.3.1 Analytical and Comparative Approach
The study uses an analytical and comparative research design involving financial data analysis of
strategic supply chain in two world-leading energy companies (Aramco) and a petrochemicals
company (SABIC), combined with examples from 38 other firms spanning various
industries. This design is a better choice because it illustrates how financial ratios function under
different circumstances and what they signify for the efficiency of the supply chain.
Table 1: List of Companies Included in the Study
no.
Sector
Company
Start
End
Year
Year
1
Energy
Saudi Arabia refineries co
2014
2022
2
Energy
Aramco
2016
2022
18
3
Energy
PETRO RABIGH
2013
2022
4
Materials
Takween Advanced Industries Co
2017
2022
5
Materials
Middle East Paper Co
2012
2022
6
Materials
Basic Chemical Industries Co
2012
2022
7
Materials
Saudi Arabian Mining Co
2010
2022
8
Materials
United Wire Factories Co
2010
2022
9
Materials
Saudi Steel Pipe Co
2015
2022
10
Materials
National Industrialization Co
2010
2022
11
Materials
Saudi Basic Industries Corp
2010
2022
12
Materials
SABIC Agri-Nutrients Co
2010
2022
13
Materials
Alujain Corp
2010
2022
14
Materials
Arabian Pipes Co
2010
2022
15
Materials
Saudi Aramco Base Oil Co
2018
2022
16
Materials
Zamil Industrial Investment Co
2014
2022
17
Materials
Saudi Industrial Investment Group
2017
2022
18
Materials
Sahara International Petrochemical
2010
2022
19
Materials
Saudi Kayan Petrochemical Co
2010
2022
20
Materials
Hail Cement Co
2014
2022
21
Materials
Umm Al-Qura Cement Co
2015
2022
22
Materials
FIPCO
2016
2022
23
Materials
Al Kathiri Holding Co
2017
2022
24
Materials
Arabian Cement Co
2013
2022
25
Materials
Qassim Cement Co
2010
2022
19
26
Materials
Yanbu Cement
