THE IMPORTANCE OF PURCHASING DEPARTMENT TOWARDS ORGANIZATIONAL PROFITABILITY (A CASE STUDY OF NIGERIAN BOTTLING COMPANY)
CHAPTER ONE
1.1 INTRODUCTION
Purchasing refers to the process of ordering and receiving goods and services. It is a subset of the wider procurement process. Purchasing refers to the process involved in ordering goods such as request, approval, creation of purchase order record (P.O) and the receipting of goods. Purchasing is the function that describes the activities and process to acquire goods and services. It involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts.
The purchasing function is a supporting activity that during the last few years has been gaining recognition as a strategic activity for the company. It is therefore to know and understand how this function can provide value for the organization. The purchasing function has three interactions that can be identified: the interaction that exists between purchasing department itself, the interaction that exists between purchasing department and other departments in the organization and the interaction between purchasing department and the suppliers.
Although the relationship between purchasing department and the supplier is currently subject to research and proposals for improvement, the relationship buyer-internal customer are not commonly addressed by researchers.
1.2 STATEMENT OF THE PROBLEM
The purpose of an organization is to achieve its objectives, and to achieve this, not has to have effective and efficient purchasing department. This however is not the case in most organization, what we see are purchasing departments that are not well equipped, slow to act unconcerned about their job. They are said to lack the zeal, the brightness and the motivation of hardworking people, and they dislike hearing anybody talk about efficiency, dedication, honesty, competence and productivity, all which characterize achievement of people in an organization (the guardian, 2004).
1.3 OBJECTIVES OF THE STUDY
The objectives of the students are as follows:
A. To analyse and explain how the purchasing department regarding factors of value creation coincides with the perception of internal customers.
B. Identify which factor influence the value added by purchasing department to the internal organization.
C. Evaluate the internal customer’s satisfaction level for these factors at the purchasing department of the organization.
D. Suggest improvement options for the purchasing department of the organization.
E. Perform a gap analysis for the organization subject of the empirical study.
1.4 SIGNIFICANCE OF THE STUDY
This project work will serve as a study to those who have no knowledge of purchasing department and its importance in an organization. It will also help to know how important the purchasing department is in achieving organizational profitability.
At the end of this project work, the readers will be able to understand the meaning and concept of purchasing as well as be able to know how important the purchasing department is in an organization towards their profit maximization objective.
1.5 SCOPE AND LIMITAIONS OF THE STUDY
This project work is limited to the importance of purchasing department towards organizational profitability (a case study of Nigerian Bottling Company). It aims at analyzing the importance of purchasing department towards making profit in an organization.
One of the limitations of this research work comes from the restriction of approaching personnel inside the organization without previous authorization from the chief of purchasing. This resulted in the fact that the samples for interviews and survey were not determined by statistical methods but the head of the department. Although this had a positive impact, making it possible to contact relevant people inside the firm but it would be better to use a bigger sample especially for confirmation purposes.
Another limitation is the financial commitment involved in this research work which militates against wider coverage. Scarcity of resources in our depressed economy made it extremely difficult to conduct this research work in a wider scope and area. Also, data and information about the importance of purchasing department towards the organization profit realization was difficult because of the secrecy in their product as a result of market competition from the competitors, therefore they are reluctant in giving real data.
This research work is also limited by time constraints in my schedule. The time to visit the company and the time for lectures in school are both within the same range, making it difficult to leave lectures in school and attending to the project by visiting the company. The closing hours in school lectures is the only free time available and before getting to the company after school, the organization has also closed for the day’s activity
Inspite of its limitations, the study contribute to the better understanding on how to measure the value added provided by the purchasing department to its internal client. It also constitute a detailed analysis of the current operation of the purchasing department and a strong source of ideas where to focus the effort, having identified several improvement opportunities.
1.6 DEFINITION OF TERMS
1. Profitability: the state or conditions of yielding a financial gain. It is often measured by price to earnings ratio.
2. Organization: a social unit of people that is structural that determines relationship between the different activities members. Subdivides and assigns roles, responsibilities and authorities to carryout different tasks. Organizations affects and are affected by their environment.
3. Discrepancy: this is the different in stock record and stocktaking discrepancy occurs when there is different between the physical quantity and the record. It is surplus when the physical quantity is more than the record while it deficit if the physical quantity is not up to the stock record.
4. Scrap: these are materials that can no longer be used in production process as they are cut out from the raw material used in production.
5. Store requisition: it is a document used by the user department to make request from the user department to make request from the stores.
6. Obsolescence: this can be referred to as materials that are out of fashion but can be alternatively used in maintenance.
7. Spare Parts: these are product used in completion of another products.
8. Quotation: this is the document used by the supplier informing the buyer telling him or her the price and the detail composition of the price. It shows the cost breakdown of the specification required by the buyer.
9. L.P.O: the local purchases order is the document used to request for purchases from the local seller or supplier. It is used in local buying only.
10. G.R.N: goods receive note is used to record the details of the goods received from the suppliers. It includes order number, description type of package, method of transport, quantity received e.t.c.
11. E.O.Q: the economic ordering quantity is an inventory model that determines how much to order by determining the amount that will meet customer service levels white minimizing total ordering and holding costs.
12. Re-order Level: a predetermined inventory level that triggers the need to place an order. The minimum level provides inventory to meet anticipated demand during the time it takes to receive the order
13. Lead Time: the total time that elapses between an order`s placement and its receipt. It includes the time required for order transmitted, order processing, order preparation, and transit. Variants are supplier lead time, manufacturing, assembly lead time, and customer order lead time.
14. Stock Out: a term referring to a situation where no stock was available to fill customer or production order during a pick operation. Stock out can be costly, including the profit lost for not having the item available for sale, lost goodwill, substitutions or lost customer.
15. Tally Sheet: a printed form on which companies records, by making an appropriate mark, the number of items they receive or ship. In many operations, tally sheet becomes a part of the permanent inventory records.
16. Velocity: rate of product movement through a warehouse.
17. Value Stream: all activities, both value added and non-value added, required to bring a product from raw materials state into the hands of the customer, bring a customer requirement from order to delivery and bring a design from concept to launch.
18. Value Chain: a series of activities, which combined, define a business process, the series of activities from manufacturers to the retail stores that defines the industry supply chain.
19. Value Analysis: a method to determine how features of a product or service relate to cost, functionality, appeal and utility to a customer.
20. Value Based Return (VBR): a measure of the creation of value. it is the difference between economic profit and capital charge.
21. Value Added: increased or improved value, worth, functionality or usefulness.
22. Value Adding/Non-Value Adding: assessing the relative value of activities according to how they contribute to customer value or to meeting an organization’s needs. the degree of contribution reflects the influence of an activity`s cost driver(s).
23. Purchasing Maturity: it means the level of professionalization in the purchasing function.
CHAPTER TWO
LITERATURE REVIEW
This section contains the review of existing literature about the topic of this research. The value added concept is explained as well as the different categories of the value provided by the purchasing department with the emphasis on the internal customer. Recommendations and best practices are commented as well as the conflict that can arise in the relationship with the internal clients. At the end, information about the purchasing maturity is provided. This information constitute the basis for the research and conclusion obtained, Van Weele Arjan(2010). One of the most traditional purchasing function proposes that it should obtain proper equipment, material,supplies and services of the right quality, in the right quantity, at the right price from the right source/supplier at the right time and place. However in the description, the purchasing function is regarded predominantly as an operational activity and this has been changing over the years.
According to Arjan Van Weele, (2010). Purchasing is the management of the company`s external resources into the organization in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company`s primary and support activities is secured at the most favourable conditions. From this definition, it shows that purchasing does not deal with goods only but also encompasses buying for the company and other services like rentals and leasing.
Therefore, in general terms, the purchasing function involves all the related activities that organize the flows of goods and services and other materials from supplier into an organization (Monezka, Handfield, Patterson and Walter, 2010).
2.1 HISTORICAL BACKGROUND OF NIGERIAN BOTTLING COMPANY
The Nigerian Bottling Company came into existence on the 8th of May 1889, when the late A.G Leventis found the company. It was the first in the century to be offered Franchise by an international `soft drink’ firm, from a humble beginning as a family business, the company has grown to become a predominant bottle of non-alcoholic beverage n Nigeria. The first plant was cited in Lagos, went into operation in March 1953. Coke was the first soft drink to have its own designed shaped bottles in 1992, the company went public by the issuance of 372,580 ordinary shares of 50kobo each. This was in compliance with the Nigerian Enterprises Promotion Decree of 1972.
Some years after, the Ibadan plant was opened though later shut down due to non-availability of good water in Ibadan metropolis. Later that of Port-Harcourt was established and others followed of which Ilorin plant came into existence in April 1979 so as to be able to meet the demand of the customer in the region. Ilorin plant was mainly established to meet the needs of the people in Bida, Jebba, Ogbomosho, Okenne, Oshogbo, Offa, Ijagbo and Ilorin metropolis, the plant has 8 managers.
The range of soft drink bottled in Nigerian Bottling Company, Ilorin plant includes:- Fanta orange, Coke, Sprite, Krest, Bitter lemon, Ginger ale and Eva water. In terms of sales, the company enjoys a wide acceptance of its products. Ranking NBC as a whole, its performance is highly appreciated. The company presently has 13 bottling facilities over 80 distribution warehouse located across the country. Since production started, NBC remained the largest bottler of non-alcoholic beverages in the country. In term of sales volume, with about 1.8billion bottles sold per year.
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