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Chapter I: Introduction
1.1 Background to the Study
Purchasing departments are increasingly seen as highly valued strategic contributors to the organisation because of their ability to impact product design and quality, cost of goods sold, cycle time, and hence, the firm’s reputation, profitability, and competitive position (Wisner, Tan & Leong, 2008).
Searching for the right sources of supply is often seen as one of the core responsibility of procurement and supply managers. Because this purchasing function poses a great deal of risk and reward if effectively executed, it represents one of the most challenging of all procurement tasks.
Over the past decades, a lot of factors have combined to drive the organisations to approach sourcing more strategically. These factors include changing global economic climate, increasing number of global competitors, demands by customers and government for organisations to become more environmentally focused, rising cost of materials and energy, and the desire to deliver new products quickly and cheaply.
With these trends, the recognition that tactical sourcing will not succeed in developing a supply base that will yield the benefits of strategic sourcing became clear. Strategic sourcing takes the concept of sourcing a step further to go beyond just source identification and selection to include managing the firm’s external resources in ways that support the long-term goals of the firm. Its scope includes the make-or-buy decision, supplier identification and selection, managing and improving supplier relationships and capabilities, monitoring and rewarding supplier performance, and developing supplier tiers.
Effective strategic sourcing decisions will only be made when all relevant factors have been considered and weighed against the risks and opportunities which apply.
It would be possible that the most important purchasing decisions is not only concerned with selecting the right sources of supply; but also developing and managing a collaborative relationship that is beneficial to both parties in the long run.
If the correct source decision is made in a particular instance, then the buying company’s need should be met perfectly. In such circumstances, it would receive the required goods and services at all times. However, the very simplicity of this statement conceals the complexity of source decision making, for in arriving at the right decision, many factors have to be considered.
Strategic sourcing thus involves much more than simply picking a supplier or contractor for each requirement in isolation. It involves continuing collaborative relationships both with preferred and potential sources. It involves decisions on how to allocate the available business, and what terms to do business on. Development of collaborative relationships and eventually world-class supply management requires concerted strategic planning.
Strategic sourcing deals with planning, designing, and building a reliable and competitive supply base, determining the strategy for procurement, defining pricing strategies and supply chain requirements. The strategy involves integrating of its objectives in line with or conforming to the objectives of stakeholders in operations, finance, marketing and distribution. Operating at this level requires procurement, manufacturing, and technology groups to work together to establish the best possible supply network, and to develop optimal supplier capabilities.
Strategic sourcing decisions are not just made based on the procurement managers’ whims and caprices. They represent astute business judgment and thus involve the consideration of several factors.
Profitability in simple terms is the ability to make profit. Profit is a function of cost minimization. Finding the best suppliers means that an organisation will be able to get greater value, lower prices, supplier involvement in production efficiency, high quality materials, discounts, and better relationships. All combining to reduce the costs of doing business and add to the profitability of the organization. Also, by developing strategies that will make the organization have fewer suppliers, purchasing costs can be reduced, saving some few coins for the profit.
Organisations that seek to acquire quality materials and services at reasonable costs or produce quality products at affordable price must first develop strategies that will help find credible sources of supply of materials, equipment and services, and build strong sustainable relationships. Sourcing is a very important part of procurement manager’s job. Most supply professionals espouse the idea that the entire procurement function is string around sourcing.
The risks of buying the wrong items, services or from the wrong supplier can have major impacts and ripple throughout a business. Consequences can range from late delivery to total service failure liability and can even affect market competitiveness. In addition, if the selected suppliers cannot provide opportunities to reduce costs, improve and upgrade product/service offerings or provide other market-facing advantages, then an organization can quickly find itself losing market share. To help solve this dilemma, businesses are beginning to develop sourcing strategies that can create supply chain solutions offering insights into the optimum approach to buying. Often known as strategic sourcing, it begins the critical process and lays the foundation for creating value through the purchasing process.
1.2 Statement of the Problem
For its proper performance sourcing requires supply market research. It has however been observed that a lot of organizations overlook the need to carry out market research on supply, and if they do, it is not extensive enough to get a true picture of the supply market structure and dynamics, identify potential and actual sources, investigates their capabilities, examine market trends and long-term supply prospects, and generally keep an ear to the ground. Successful sourcing strategy requires sound market information. For lack of such information, several failures have been recorded in terms of implementing the right strategy.
Many organizations fail to develop the right objective criteria which would help in proper assessment of potential suppliers before final selection. Designing the right set of parameters will help to properly evaluate suppliers and create a basis for sourcing decision. When these criteria are not developed, these organizations will eventually select suppliers who may not deliver the right materials.
Companies also fail to design their sourcing strategies in line with the objectives of the organization. Supply managers must not lose sight of the corporate and functional objectives their decisions can help to achieve. This important aspect is in some cases not considered when strategizing, thus resulting in a implementation of sourcing strategies that are suboptimal.
Purchasing managers are often not given the autonomy to make sourcing strategies and decisions in some organizations. It is observed that top management who are rookies in the field, often interfere with the sourcing process because they have selfish interests. Such practices are capable of reducing competition as the contract may not be awarded to the best supplier.
Another problem is the absence of cordial relationship between buyers and suppliers. Many companies favour transactional instead of collaborative relationships with their vendors. This will only result in short term benefits for both parties as there won’t be free exchange of information, lack of trust, and one party seeking to win at the expense of the other.
1.3 Objectives of the study
The general objective of the study is to measure the extent to which strategic sourcing affects profitability in listed NBC Plc in Nigeria. Specific objectives of the study are:
i. To examine the factors that influence strategic sourcing decisions in NBC Plc
ii. To identify the performance criteria used for evaluating and selecting capable suppliers by NBC Plc
iii. To understand the strategies for improving supplier relationships in NBC Plc
iv. To establish the relationship between strategic sourcing and profitability of NBC Plc
1.4 Scope of the study
The research work centers around the strategic sourcing and its impact on profitability. The study is conducted among selected NBC Plc in Kaduna. The researcher restricts the work on selected units of these firms whose operations are relevant to the subject under study. These departments include procurement, finance, stores and production departments. The content scope of the study covers relevant areas such as: The conceptual framework of strategic sourcing; the strategic sourcing process; sources of supplier information; supply evaluation; supplier selection; sourcing strategies; supply base rationalization and optimization; collaborative procurement and supply alliances; and Profitability.
1.5 Significance of the study
The study is expected to benefit the following groups and individuals. The study will assist organizations whether manufacturing and service to understand, appreciate and make decisions as regards sourcing and supplier selection. The study will reveal concepts that will be helpful for organization in their sourcing polices by revealing the sources of information of supply the various approaches to sourcing and sourcing polices, the factors to be considered in making sourcing decisions etc. The study will also identify the problems associated with sourcing and proper solutions to them at the end.
For students in Purchasing and supply and other related discipline, this study will come in handy for them in their research works and will help broaden the existing knowledge base for them. The project work can double as both a study material and a foundation for further research.
Vendors are also not left behind as this study will enable them understand the importance that institutional, industrial or individual buyers attach to source selection. Suppliers will also understand the criteria used to rate them by these groups of buyers and how they can improve to meet the requirements of buyers.
For future researchers in business, management, and financial studies and other related areas of study, this work can be used as a reference material for their research. Other individuals who are not students but are in one way or the other involved in research, will also find this work useful.
This study is also a requirement for the partial fulfillment for the award of Post Graduate Diploma in Procurement and Supply Chain Management from Kaduna State University.
1.6 Research Questions
For the purpose of guiding the researcher into finding workable solutions to problems identified some questions have been developed, answers to which will form the basis for solving the problems.
1 What are the factors that influence strategic sourcing decisions in the selected NBC Plc?
2 What are the performance criteria used for evaluating and selecting capable suppliers by the selected NBC Plc?
3 What are the strategies for improving supplier relationships in selected NBC Plc?
4 What is relationship between strategic sourcing and profitability of NBC Plc?
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