CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Considering the increasing significance of purchasing role and with the idea that this function has the ability to influence corporate profitability favorably, the way purchasing function develops within organizations over time has been a topic of great interest. The evolution of the purchasing function is well acknowledged in the literature. Departing from the passive, re-active clerical viewpoint of the 70’s, the purchasing function has the ability to develop itself in a strategic pro-active function contributing, as much as other business functions, to the creation of sustainable competitive advantages (Versendaal et al, 2005).Cavinato and Freeman (1990) in their studies declared that in today’s changing and dynamic global markets, organizations stressing on the high quality production must focus their purchasing and supply on planning, development and operation. They realized that purchasing groups of many organizations have been slowly developed without a specific plan in response.

In response to today's unprecedented economic uncertainty, supply managers have adopted a "wait-and-see" attitude. Many are wary of spending their company's most valued asset: cash. And since inventory is cash's evil stepchild, companies continue to aggressively reduce inventory levels. In fact, current inventory management practices have regressed beyond "Lean" and are anorexic. As a result, popular Christmas gifts, such as electronics and appliances, may be in short supply. The Institute of Supply Management's Purchasing Managers Index (PMI) tells a strange and interesting story about today's supply chain management. The data suggest that today's organizations have deliberately whittled their inventories down to dangerously low levels. At its surface, uncertainty is straight forward to manage. Factory physics, the science of manufacturing, teaches us that manufacturers have three buffers to manage variability in their businesses: capacity, time and inventory. It is clear when looking at the PMI that most companies are using only one of these buffers: time. ISM reports a long trend of contracting inventories with little or no noticeable increase or investment in capacity.

As a result, lead times for supplies gradually (and now dramatically) increased in the face of a steady trend of increased demand (new orders). The recent and striking increase in lead time is a reflection that much excess capacity is being put to use, leaving time as the only remaining buffer. Lead times have ballooned from 10 to 12 days to 53 days.Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture products. Many people are ignorant of what purchasing is all about. “Purchasing” is the term used in industries, commerce, public corporations to denote the act of and the financial responsibility for procuring material, supplies and services. It simply describes the process of buying. However in a broader sense, the term involves determining the needs, selecting the supplier, arriving at a proper price, terms and conditions, issuing the contract or order, and following up to ensure proper delivery. It focus is to purchase or obtain materials in the right quantity, in the right quality, at the right price, at the right time, and from the right supplier and delivering to the right place.

Global markets are expanding beyond borders and re-defining the way demand and supplies are managed. Global companies are driven by markets across continents. In order to keep the cost of manufacturing down, they are forced to keep looking to set up production centers where cost of raw materials and labor is cheap. Sourcing of raw materials and vendors to supply the right quality, quantity and at right price calls for dynamic procurement strategy spanning across countries.

With the above scenario you find companies procuring materials globally from various vendors to supply raw materials to their factories situated in different continents. The finished goods out of these different factory locations then pass through different chains of distribution network involving warehouses, exports to different countries or local markets, distributors, retailers and finally to the end customer.

In simple language, managing all of the above activities in tandem to manage demand and supply on a global

scale is Supply Chain Management. As per definition SCM is the management of a network of all business

processes and activities involving procurement of raw materials, manufacturing and distribution management of

Finished Goods. SCM is also called the art of management of providing the Right Product, At the Right Time,

Right Place and at the Right Cost to the Customer.

Why SCM strategy is important for an Organization

Supply Chain Strategies are the critical backbone to Business Organizations today. Effective Market coverage, Availability of Products at locations which hold the key to revenue recognition depends upon the effectiveness of Supply Chain Strategy rolled out. Very simply stated, when a product is introduced in the market and advertised, the entire market in the country and all the sales counters need to have the product where the customer is able to buy and take delivery. Any glitch in product not being available at the right time can result in drop in customer interest and demand which can be disastrous. Transportation network design and management assume importance to support sales and marketing strategy.

Inventory control and inventory visibility are two very critical elements in any operations for these are the cost drivers and directly impact the bottom lines in the balance sheet. Inventory means value and is an asset of the company. Every business has a standard for inventory turnaround that is optimum for the business. Inventory turnaround refers to the number of times the inventory is sold and replaced in a period of twelve months. The health of the inventory turn relates to the health of business.

In a global scenario, the finished goods inventory is held at many locations and distribution centers, managed by third parties. A lot of inventory would also be in the pipeline in transportation, besides the inventory with distributors and retail stocking points. Since any loss of inventory anywhere in the supply chain would result in loss of value, effective control of inventory and visibility of inventory gains importance as a key factor of Supply Chain Management function.

1.2 STATEMENT OF PROBLEM

Strictly, this project is a case study of the effective purchasing and supply management and corporate profitability. The impact for efficient negotiation in purchasing function in manufacturing company cannot be over stated. This is because when fairly in contract management result from poor negotiation. The problem of

the study therefore are as follow:

1.                   Firms or organization fair to see the element of pricing and negotiation as a vital element in contract management.

2.                   Most firms adopt the concept of I will” when you lose attitude this result into poor project execution.

3.                   Most people involving in purchasing of capital and management do not possess the right skill and knowledge of negotiation.

4.                   The economic situation of the country has serious effect on the quality of negotiation purchasing function in manufacturing company firm attempt.

5.                   There is no serious attempt on the part of firms to empower negotiation contract managers.

1.3 OBJECTIVE OF THE STUDY

1.  To evaluate the effectiveness of purchasing and supply management on company’s profitability.

2.  To know the strategies of managing supply of a product depend on the level of effective demand.

3.  To pay reasonably low prices, negotiating and executing all company commitments.

4.    To develop satisfactory sources of supply and maintain good relationships with available customers.

5.  To secure optimal supplier performance, sometimes by seeking process improvements across boundaries between trading partners.

6.  To keep inventories throughout the supply chain as low as is consistent with company needs.

7.  To keep acquisition costs at the minimum compatible with optimal performance of corporate organizations

1.4 RESEARCH QUESTION

1.  How can one  evaluate the effectiveness of purchasing and supply management on company’s profitability?

2.  What are the strategies of managing supply of a product depend on the level of effective demand?

3.    Can this research work help to develop satisfactory sources of supply and maintain good relationships with available customers?

5.  Is it possible to secure optimal supplier performance, sometimes by seeking process improvements across boundaries between trading partners?

6.  Can corporate organizations keep the nventories throughout the supply chain as low as is consistent with company needs?

1.5 RESEARCH HYPOTHESIS

H0: One cannot evaluate the effectiveness of purchasing and supply management on company’s profitability.

H1: One can evaluate the effectiveness of purchasing and supply management on company’s profitability.

H0: There are no strategies of managing supply of a product depend on the level of effective demand.

H1: There are strategies of managing supply of a product depend on the level of effective demand.

H0: This research work cannot help to develop satisfactory sources of supply and maintain good relationships with available customers.

H1: This research work can help to develop satisfactory sources of supply and maintain good relationships with available customers.

H0: It is impossible to secure optimal supplier performance, sometimes by seeking process improvements across boundaries between trading partners.

H1: It is possible to secure optimal supplier performance, sometimes by seeking process improvements across boundaries between trading partners.

H0: Corporate organizations keep the inventories throughout the supply chain as low as is consistent with

company needs.

H1: Corporate organizations keep the inventories throughout the supply chain as low as is consistent with company needs.

1.6         SIGNIFICANCE OF THE STUDY

The primary significance of this study is for partial fulfillment of the requirements for the award of Batchelor Degree in Purchasing and Supply Management.

The secondary significance is also geared towards exploring the academic relationship between classroom theory and what is practically attainable in industries and government establishment thus the carefulness in choosing the research topic.

The third significance of the project is to help and guide the younger ones on what to do when writing project or carrying out any research.

The fourth significance of the project is to guide industrial purchasing s to effective and efficient negotiation to enable them to obtain the “best buy which is the ultimate goal of the purchasing function.

1.7 SCOPE OF THE STUY

This research work is on the effectiveness of  purchasing And Supply management and corporate profitability.

1.8 LIMITATION OF STUDY

Despite the limited scope of this study certain constraints were encountered during the research of this project.

Some of the constraints experienced by the researcher were given below:

i.                    TIME: This was a major constraint on the researcher during the period of the work. Considering the limited time given for this study, there was not much time to give this research the needed attention.

ii.                  FINANCE: Owing to the financial difficulty prevalent in the country and it’s resultant prices of commodities, transportation fares, research materials etc. The researcher did not find it easy meeting all his financial obligations.

iii.                INFORMATION CONSTRAINTS: Nigerian researchers have never had it easy when it comes to obtaining necessary information relevant to their area of study from private business organization and even government agencies. Women in Mina, Niger state find it difficult to reveal their internal operations. The primary information was collected through face-to-face interview getting the published materials on this topic meant going from one library to other which was not easy. Although these problems placed limitations on the study, but it did not prevent the researcher from carrying out a detailed and comprehensive research work on the subject matter.

1.9 DEFINITION OPF TERMS

E-Procurement: . E-procurement (Electronic Procurement) is the business-to-business (B2B) purchase and sale of supplies and services through the Internet as well as other information and networking systems, such as electronic data interchange (EDI) and Enterprise Resource Planning (ERP).

PURCHASING: Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture products.

The master schedule: master schedule also refers to as mater production schedule, states which end items are to be produced, when they are needed, and what quantities.

Bill-of-Materials file: BOM contains a listing of all the assemblies, subassemblies, parts, and raw materials that are needed to produce one unit of a finished product. Thus each finished product has its own bill of materials.

Inventory Record file: This is used to store information on the status of each item by time period. This includes gross requirements, scheduled receipts, and expected amount on hand. It also includes other details for each items, such as supplier, lead-time, and lot-size, changes due to stock receipts and cancelled order, withdrawals and similar events are also recorded in this file.

Hardware and Software: Computers and appropriate software program to handle computations and maintained records.

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