ROLE OF PURCHASING IN COST REDUCTION AND CONTRIBUTION TO PROFITABILITY - AN APPRAISAL OF A MANUFACTURING COMPANY (CASE STUDY OF NIGERIA DISTILLERIES LIMITED)
ABSTRACT
The purchasing function contributes directly to the operating results, cost reduction and profitability of an organization. It has been argued out that, the fact that purchasing is responsible for spending more than 70 percent of an organization's sales capital highlights the profit enhancing potentials of the purchasing on an organization.
The purpose of this research is to describe the role purchasing played in cost reduction and its impact on the profitability of Nigeria Distilleries Limited.
Primary and secondary data collected were collected in order to fulfil the research work; the primary data was gathered directly from relevant sources in, Nigeria Distilleries Limited through one on one interview and questionnaires. The secondary data was obtained from indirect sources, such as textbooks, articles, and websites. Due to population size of the entire staff which was 200, 10% of the entire population was chosen which amounted to 20 staff to administer the questionnaires.
These findings revealed so many problems encountered by the study which includes the problems of stock out, overstocking which had devastating effects on cost and profitability of the company. Recommendation was made to correct all the problems in the concerned company.
TABLE OF CONTENT
Title Page………………..i
Certification………….…ii
Dedication………………iii
Acknowledgement……….iv
Table of content……...…v
Abstract.......................vi
CHAPTER ONE
1.0. Introduction
1.1 Problem statement of research
1.2 Brief background of company of study
1.3 Staff Strength/Structure
1.4 Vision and mission statement
1.5 Purpose of research
1.6 Significance of research
1.7 Research questions
1.8 Limitation of research
1.9 Definition of terms
CHAPTER TWO
2.0 Literature review
2.1 Definition of purchasing
2.1.1 Role of purchasing in an organization
2.1.2 Function of purchasing department
2.1.3 Centralized and decentralized purchasing strategy
2.1.4 Centralized and decentralization purchasing strategy
2.1.5 Supplier sourcing and evaluation
2.1.6 Supplier sourcing strategy
2.1.7 Partnership sourcing strategy
2.2 concept of cost
2.2.1 Program of Controlling Cost in an Organization
2.2.2 Importance of purchasing in cost reducing and
Contribution to profitability
2.2.3 Profitability program recommendation
2.3. Published pricing lists
2.3.1 Negotiation
2.3.2 Process of Negotiation
2.3.3 NDL Material Management Division
2.4 Purchasing function in NDL
2.5 Centralized purchasing
2.5.1 Centralized Purchasing
2.6 Procedures for procurement
2.7 Procedure for Receipt of Materials from suppliers
2.8 Procedure for payment/invoice treatment
2.9 Process for Vendor Development and selection
CHAPTER THREE
3.0 METHODOLOGY
3.1 Research strategy
3.2 Choice of Company
3.3 Sample Size
3.4 Data collection
3.4.1 How data was collected
3.5 Primary data
3.5.1 Questionnaires
3.5.2 Oral Interview
3.6 Secondary data
3.7 Method of data Analysis
3.7.1 Literature search
3.8 Reliability and Validity tests
3.8.1 Internal and External Validity Test
3.9 Frame of Reference
CHAPTER FOUR
4.0 Presentation Analysis and interpretation of data
4.1 Presentation of Data
4.2 Analysis of Result
4.3 Purchasing and purchasing Strategy in NDL
4.4 NDL Supplier Souring Strategy
4.5 NDL Supplier Souring Evaluation Criteria
CHAPTER FIVE
5.0 Conclusion
5.1 Recommendation
5.2 Conclusion
References
Appendixes
LIST OF TABLES
Table 4.1 Analysis of respondents on who buys for the Organization
Table 4.2 Analysis of the qualification of these responsible for purchasing of Materials
Table 4.3 Analysis of Wheather the Purchasing Manager
CHAPTER ONE
1.0 INTRODUCTION:
Purchasing is a relatively new profession in Nigeria, in comparison with other professions like Accounting, Administration, Banking, Law and Business Administration. Its acceptability by many organizations is slow and gradual. In many organizations, the buyers are not professionals; they do not therefore know the principles and techniques involved in purchasing. The trained professionals are now finding it difficult to find jobs in most organizations, as their positions have been occupied by the administrators, accountants and other allied professionals. To be a practicing buyer, one has to be trained in the art and science of buying effectively to the profitability of the organization.
Many people even in other disciplines think that casual or domestic buying is the same as organizational purchasing. Buying is, however not the same as purchasing. Obtaining quotation, placement of purchase orders or contracts after negotiation and scheduling of deliveries constitute a composite professional practice. Buying is a static concept and does not imply fostering of economies of scale.
1.1 PROBLEM STATEMENT OF THE RESEARCH
It is very clear that in most organizations, non- professionals are the one occupying purchasing position. This is expected to result in sub-optimization and loss of profit in most cases, because non-professionals are neither well trained in buying skill nor skilful in the cost reduction and profitability decision- making, which are major contributory factor to mismanagement of the purchasing departments in most organizations. It is very clear that the ethics of the purchasing and supply management are not often followed and this shall have negative effects on the organizational concern.
In most organizations, there is the need to achieve continuous process improvement, in order to produce products or services more effectively, which would enable them to give their customers better value, in an efficient and cost effective manner. According to Fearon et al (1997:25), "one of the keys to accomplishing this, is working with key suppliers to help them provide high quality, faster and more reliable delivery, innovative design, production, distribution ideas and a lower total product or service cost".
According to Court et al (1997: 1) in many organizations, purchasing remains the least understood and most ineffectively managed of all the business processes. Quite apart from the loss and devastating effect on profit forecasts, mistakes can consequently threaten the viability of the enterprise by allowing costs to rise or delaying the introduction of new products or services into the marketplace, leading in tum to a loss of competitiveness. He further explained that, 'in spite of this, management in most organizations still persists with outmoded and out of place theory.
1.2 BRIEF BACKGROUND OF COMPANY OF STUDY:
Nigeria Distilleries Limited (NDL) was the first company set up by Lexcel Group in the year 1973 to manufacture alcoholic and non-alcoholic beverages. LEXCEL group comprises of six companies under the Chairmanship of Mr. Ola Rosiji, one of the sons of the founder, Late Chief Ayo Rosiji and a six member Board of Directors headed by the Group Managing Director, Mr.Anil Aluwaliya. NDL is an ISO 9001: 2000 certified Company committed to creating a total quality environment for manufacturing and delivery of both alcoholic and nonalcoholic beverages.
The company endeavour to be the preferred manufacturer of quality products meeting international standards. NDL started business by bottling imported "bulk products" and through its extensive Research and Development, developed its own formulation and processes for a variety of alcoholic drinks (Schnapps, Gin, Liquor, etc). NDL is the largest company in the wine and spirits industries in Nigeria, manufacturing fourteen (14) brands in thirty five (35) pack sizes. The company brands includes; Seaman Schnapps, Bacchus Tonic wine, Calypso Coconut Liquor, Dark sailor rum, Regal and Lord's Dry Gin etc. The company started the manufacturing of non-alcoholic beverages in the year 1999 and all manufactured products are registered with the National Agency for Food and Drug Administration Control. Its manufacturing plant is located on a large expanse of land in Sango Ota, Ogun state of Nigeria.
NDL is focused on sustaining its leadership position by introducing more products and pack sizes. It strongly believes in providing quality services to its consumer and safe environment for its staff by following regulation and safety training on a regular basis.
1.3 STAFF STRENGTH/STRUCTURE
Nigeria Distilleries Limited's staff strength stands at approximately one thousand five hundred (1,500). With one Managing Director, and a six (6) member Board of directors who constitute the policy maker; then the divisional heads and Managers who are the policy operators; and then the Assistant Managers and Principal Officers below who are the policy recipients.
1.4 VISION AND MISSION STATEMENT
Vision Statement
Our company shall service the growing economies of Africa and beyond by producing international quality drinks for the mass market whereby creating value for our stakeholders.
Mission Statement
To be Nigeria's foremost manufacturer of quality beverages by employing best people, using modern technology and equipment’s for producing products of unsurpassed value to the consumers.
1.5 PURPOSE OF THE RESEARCH:
The purpose of this research is to however, describe how purchasing can contribute to cost reduction and impact on the profitability of Nigeria Distilleries limited.
1.6 SIGNIFICANCE OF THE RESEARCH:
This research work would be of importance to the management of manufacturing firm like Nigeria distilleries limited and other service providers which deals in industrial purchasing. The research will also give suggestion towards the improvement of purchasing activities, cost reduction and hence improve on the profitability within the organization.
1.7 RESEARCH QUESTIONS
The following questions will be answered by the research study:
What pricing method does the company use?
Does NDL experience shortages of materials / stock out? Does stock out cause fluctuation in the production processes?
What method of sourcing for suppliers is used by the company among others?
1.8 LIMITATION OF THE RESEARCH:
During the course of this work, a number of factors militated against the researcher, which include her:
• Inability to get timely approval from Management of the Material management department.
• Incessant power outages.
• Getting relevant literature materials for the research work.
• Getting timely feedback on questionnaires distributed for the purpose of this study.
1.9 DEFINITION OF TERMS
PURCHASING: Is the continuous management process that is responsible for the anticipation, identification and provision of goods and services that are required by an organization with the objective of helping profitability or services provided.
CAPITAL ISSUES: Where the placement of capital goods is a normal day to day feature or where a capital development or reconstruction programme is in operation, special attention is usually given to the control and recording of the issues of capital material from store house.
PURCHASING ENQUIRY: This is a note that is sent by the purchasing department to the supplier which contains types of needs needed by the department.
PURCHASING MANUALS: This typifies a handbook that contains operational procedures in the purchasing department with the utmost adherent to practice.
CHECK LIST: This is the guide to check and control the whole activities of the programme whether value analysis or value engineering.
SOURCING OF MATERIAL: This is a process of seeking and selecting materials from suppliers at the least ultimate cost.
NEGOTIATION: Is the process by which two or more parties arrive at a mutually acceptable solution, agreement or resolution to a commonly recognized issue. Or it can also be said to be any form of inter-personal communication which participants or parties involved seek to state their relative competitive advantage and needs to achieve implicit objectives or goals within the overall purpose of seeking to resolve problems which are barriers to agreement or mutually acceptable resolution (Lysons, 1993)
SPECIFIC ATION: This is defined as a statement of the attributes of a product, process or service.
PURCHASING BUDGET: This involves knowing the total quantity of materials needed or required and their prices and give an estimate financial value of what an organization will expend on goods and services in a given period.
HIRE PURCHASE: This is an agreement which bails goods to the intending purchaser, the property in the goods passing to bailee which the term of agreement are fulfilled.
ALLOCATED ISSUES: In accordance with manufacturing schedules, some materials may be received on a programmed delivery basis and kept for use only on the production line for which they have been purchased.
IMPREST ISSUES: An impress system is one whereby a list of certain type of materials of given qualities are approved to be held either in a sub-store or on a product ion line elsewhere.
LEAD TIME: This refers to the period between the time an order is placed and when it is received into the store.
QUANTITY DISCOUNT: This are often referred to as an incentive to the buyer to give the vendor a larger share of the available business and vendor may also pass on to the buyer proportion of saving accruing from large quantities such as reduction in production, selling transportation and administrative cost.
PURCHASING REBATE: This is an allowance or abatement made from a bill or in the price of goods.
SUB-CONTRACTING: It refers to the award of part or some of other concern work by a buyer of the contact to a third party.
VALUE ANALYSIS: This is an organized procedure for the identification and elimination of unnecessary cost without impairing performance reliability or safety or marketability. Lawrence. D. Miles of General Electric Company describes value analysis as; a philosophy implemented and a group of learned skills, it is an organized, creative approach, which has for its purpose the efficient identification of unnecessary cost.
VALUE ENGINEERING: Is the application of value analysis at the pre-production or developmental stage (Lysons, 1996). The programme focuses on new specification developed at the engineering design stage and is usually led by Engineering department or function. ARISING: This is the material management term given to all material, goods, plant and other supplies which are from production or elsewhere and are scrap or waste.
SCRAP: Not all material issued to production are fully consumed or used up in the production process, the excess or left over from the production floor is called scrap and it can be disposed or sold.
WASTE: The surpluses recovered due to inefficient use of production machinery or equipment, carelessness, inefficiency and poor purchasing.
SALVAGE: These are materials that are recovered, recycled and re-used. Salvaging is the system of recovering and recycling a material for use and is usually done through a system called "backward integration".
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