E-PROCUREMENT IMPLEMENTATION AND SUPPLY CHAIN INTEGRATION AMONG LARGE SCALE MANUFACTURING FIRMS IN NAIROBI, KENYA

E-PROCUREMENT IMPLEMENTATION AND SUPPLY CHAIN INTEGRATION AMONG LARGE SCALE MANUFACTURING FIRMS IN NAIROBI, KENYA

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ABSTRACT

The purpose of this study was to establish the effect of e-procurement implementation and business integration among large scale manufacturing firms in Nairobi. In order to fill this gap the study sought answers to the following three important questions: what is the extent of e-procurement implementation among large scale manufacturing firms in Nairobi? What are the barriers of e- procurement implementation among large manufacturing firms in Nairobi? And what is the impact of e-procurement implementation on supply chain integration among large scale manufacturing firms in Nairobi? This study took the form of a descriptive research design and data was collected through a structured questionnaire from supply chain managers of large scale manufacturing firms in Nairobi. Frequencies and percentages, factor analysis and regression analysis were used to analyse the data. It was revealed that the firms share information among departments and centralization of procurement activities is also evident among them. However, it is clear that a number of important e-procurement aspects have not been implemented by these firms. Five barriers to e-procurement implementation were revealed and they include: getting users to accept the system; lack of internal integration of functions; resistance from suppliers; lack of willingness from other stakeholders and lack of enough finances to support the system implementation. Finally, e-procurement implementation explains 57% of supply chain integration among large scale manufacturing firms in Nairobi. The study recommends that large scale manufacturers in Nairobi should link their suppliers. It will also be important to conduct a comparative study to establish the similarities and differences.

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CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

The invention of the internet has completely transformed the way most business organizations operate. Initially the internet was used only as a scientific network but in the contemporary world, it has relevant and very important applications in most business aspects. Other innovations in information technology have also necessitated the development of electronic ways or systems of carrying out various transactions. These electronic systems of handling transactions have left most modern organizations with few alternatives other than implementing them if they have to remain in business. Electronic commerce or E-commerce as it is commonly known is one of the most prominent applications of internet and information technology that has transformed the scope and speed of business transactions in many organizations across the globe. E-commerce has also enabled many organizations to carry out specific supply chain functions such as procurement online (Essig and Ulli, 2001).

In today’s competitive business environment, procurement is seen as one of the most important and critical subsets of supply chain management. It has transformed the fundamental business process through improved information technology. Organizations are now transacting large volumes of procurement transactions through the internet and this is viewed as a strategic advantage to the organizations that have already embraced the practice (Kauffmann and Mohtad, 2002). Information technology is very essential in the implementation of e-procurement since it includes web technology-based purchasing

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solutions aimed at simplifying commercial transactions within and between organizations and information technology solutions for ordering, logistics and handling systems as well as for payment systems (van Weele, 2010).

Introduction of E-procurement systems is a reflection of the important developments in the purchasing process ( Neef 2001). E-Procurement is now able to offer benefits to organizations through purchase process efficiency gains and price reductions; enhanced collaborative relationships and significant opportunity for improving the internal service and statutes of the purchasing function (Croom & Johnston, 2003).

1.1.1 E-Procurement Implementation

Procurement encompasses all activities involved in obtaining material and services and managing their inflow into an organization toward the end user. It includes obtaining manufacturing supplies for an assembly line as well as obtaining paper and pencils for a bank (Zenz and Thompson 1994). Procurement is one of the most important functions of supply chain management that is positioned between an organization's internal customers in need of material to fulfill their tasks and external suppliers providing goods and services. The main purpose of this function is to bridge multiple gaps in order to simultaneously manage external and internal relationships, and to balance participants' different goals and objectives. Procurement provides a chance for organizations to exercise the best control over the cost and quality of purchased goods through operating integrated systems of procurement (Neef, 2001).

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Electronic procurement is the utilization of information technologies to facilitate business-to-business (B2B) purchase transactions for materials and services (Wu et al.; 2007). Electronic procurement has been made possible by the development of such platforms like the internet and the worldwide web that have made it possible to communicate and share information between various stakeholders in both the upstream and downstream sides of the supply chain. For organizations to reap the benefits of e-procurement implementation, they must meet the critical success factors of e-procurement such as employees and management commitment to success of adoption; reliability of information technology and supplier performance (Mauti, 2012).

Organizations that have embraced e-procurement enjoy a number of benefits such as the importance of leveraging the capabilities of the Internet for procurement activities. Among the most attractive features of B2B procurement transactions on the Internet is the fact that buyers do not need to make costly long-term commitments to dedicated and hard-wired procurement systems associated with electronic data interchange (Dai and Kauffman, 2002).

As much as the proponents of e-procurement argue that it is very significant in business, it is also clear that even though buyer-supplier coordination is an attractive feature of proprietary EDI systems that may keep firms from switching to the open B2B supply chain and procurement platforms, these delays may be reinforced by the supply risks and uncertainties that are associated with this new generation of Internet-based systems support. An important aspect of the value that a buyer might place upon Internet-

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based procurement can be tied to the extent to which procurement activities occur on a regular or irregular basis, involving the same or different trade partners, for supply items whose prices are relatively stable or tend to float in a wide enough band so as to create financial risk in procurement. In addition, other concerns relate to the potential for Internet security breaches, supply discontinuities due to the bankruptcy of a smaller on-line supplier, and procedural difficulties in financial settlement (Kauffmann and Mohtad, 2002).

1.1.2 Supply Chain Integration

According to Snow (2011) Supply chain integration is a performance-improving approach that develops seamless linkages between the various actors, levels, and functions within a supply chain to optimize customer service. The objectives of supply chain integration are to improve efficiency and reduce redundancy while also enhancing product availability. Supply chain integration strives to better connect demand with supply, which can both improve customer service and lower costs. However, it is not always possible to simultaneously achieve all these various objectives; a designer may need to make tradeoffs and balance competing priorities while working toward the ultimate goal of better serving customers.

Supply chain therefore entails cooperation among organizations in order to avail a product or service to a customer. These relationships have always involved some degree of collaboration to solve bottlenecks in the supply chain and overcome bumps in demand or supply. The relationships however took the form of primarily human-to-human meetings to facilitate supply chain activities in traditional organizations. The speed with

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which information travelled limited the utility of that information (Westbrook, 2002). As communication and Information Technology (IT) solutions became more common and user-friendly from the 1960’s to the present, the FAX machine and computer enabled companies to extend the reach of information at faster speeds. Coupling this with more efficient means of transportation, goods were able to move greater distances at higher rates of speed. Increased reach and speed of information and the physical flow of goods shortened inventory cycle times, as well as time to market. The supply chain was becoming more fluid, but was far from being integrated. Today, the Internet has allowed companies to move these functions to web-based networks where clusters of businesses that typically do business with each other come together via the connectivity of the Internet. Companies can collaborate and communicate with each other through a single Internet interface. When all the participants in the supply chain become connected electronically, allowing the unfettered flow of information, the supply chain becomes fully integrated (Westbrook, 2002).

Utilizing web-based technologies, companies are starting to integrate their supply chains in a system-to-system manner, minimizing the need for human contact, human data entry or any sort of human involvement. Moreover, data can move in real-time and disparities in size of companies are becoming less critical as software providers come up with solutions that allow small companies to connect with large customers through the Web. While the applications to connect companies with their trading partners are far from free, the Internet is a relatively inexpensive medium, unlike a value-added network (VAN) that charges a per-transaction fee for data transmission. E-Commerce is driving a

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revolution of the supply chain, as we have known it. With processes that once took days or week now taking minutes to perform, the potential for cost savings through improved efficiency is greater than ever. Fortuitously, e-Commerce solution providers have come forward with new tools that enable supply chain participants the opportunity to connect and collaborate via web-based networks. While analysts, consultants, solutions providers and enterprises continue to debate how companies ultimately will integrate those new tools into their operations and the shape of the supply chain of the future, there is a consensus forming around one vision for the next-generation supply chain. The underlying theme is connectivity (Westbrook, 2002).

1.1.3 Large scale Manufacturing Firms in Kenya

Kenya has a large manufacturing sector serving both the local market and exports to the East African region. The manufacturing sector which is dominated by subsidiaries of multi-national corporations, contributes an average of 15% towards the Gross Domestic Product (GDP) of Kenya (PricewaterhouseCoopers, 2006).

The contemporary business environment has forced many large scale manufacturing firms in Kenya to focus on becoming efficient and flexible in their manufacturing methods and supply chain management in order to handle the changes that are brought by the dynamic business environment. Manufacturing firms also need strategies that can enhance supply chain integration for the sole purpose of managing efficient flow of goods from the point of production to the end user. Firms in the manufacturing sector in Kenya can be classified using different methods. According to Parker and Torres (1994) manufacturing firms in Kenya can be classified based on the

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quality of service or production, the size of the work force, and the numbers of facilities. Awino and Gituro (2011) also indicate that manufacturing firms in Kenya can be classified on the basis of the number of employees they have engaged. They further assert that large scale manufacturing firms have more than 100 workers; medium firms have from 51 to 100 workers while small scale manufacturing firms have between 11 to 50 workers.

1.2 Statement of the problem

E-Procurement is more than just a system for making purchases online. It provides an organized way to keep an open line of communication with potential suppliers during a business process. E-Procurement helps with the decision-making process by keeping relevant information neatly organized and time-stamped (Ginner, 2011). Most contemporary organizations are faced with a lot of competition and there is need for them to reduce costs and increase their profitability. E-procurement has not only the ability to reduce the costs and increase profitability but also to enhance integration both within the firm and across the entire supply chain (Pearcy, Parker and Giunipero, 2008).

Manufacturing firms play a very significant role of serving the entire East African region. With such a wide market, there is need for these companies to have in place an efficient and effective procurement system that can enhance their production activities. Manufacturing companies in Kenya need to source for cheaper raw materials from any market and this can only be made possible if the firms embrace the concept of e-procurement. Collaboration with other firms who part of their supply chain is also very

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essential since it leads to integration of the supply chain. Implementation of e-procurement is therefore the only remedy towards supply chain integration by manufacturing firms.

There are a number of studies that have been conducted on e-procurement both locally and globally. For instance Giner (2011) confirmed that a properly implemented e-procurement system can connect companies and their business processes directly with suppliers while managing all interactions between them. A good e-procurement system helps a firm organize its interactions with its most crucial suppliers. It is evident that although this study focuses on e-procurement, it fails to address the role played by the web based technologies in supply chain integration.

Another study carried out by Mauti (2012) found out that there are five main factors that determine the success of e-procurement implementation: employees and management commitment to success of adoption; reliability of information technology and supplier performance; monitoring the performance of e-procurement systems; user acceptance of e-procurement systems and top management support. The study also confirmed that challenges such as resistance to change from employees, lack of e-procurement approval by company board, existence of old IT equipment among the firms that need overhaul and lack of managerial support affect e-procurement implementation by large scale manufacturing firms in Nairobi. This study however did not indicate how e-procurement can assist in both internal and external integration of the supply chain.

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Kabuga (2012) also in his study revealed that the methodologies adopted by large scale firms included lean thinking, e-procurement, good supplier relationship management and the control movement of materials using the Kanban system and the benefits of implementing lean procurement methodologies also include eliminating waste in all procurement cycles, reduce lead time, reduce inventory, reduce cost, improved customer satisfaction and improved demand management. The major focus of this study was on lean procurement hence falls short of substantial literature on e-procurement and supply chain integration.

Despite the numerous studies on e-procurement, none of the reviewed studies have focused on the extent of e-procurement implementation and its impact on supply chain integration. This is a gap that needed to be filled hence this study s




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