Procurement Practices and Organizational Performance PDF

PROCUREMENT PRACTICES AND ORGANIZATIONAL PERFORMANCE OF MANUFACTURING FIRMS ABSTRACT Procurement is a management function responsible for the anticipation, identification and provision of materials, supplies equipmen4 services and projects required by an organizati...

PROCUREMENT PRACTICES AND ORGANIZATIONAL PERFORMANCE OF MANUFACTURING FIRMS ABSTRACT Procurement is a management function responsible for the anticipation, identification and provision of materials, supplies equipmen4 services and projects required by an organization for its operations. Procurement takes more than 65% of the total expenditure of an organization. Procurement practices are vital activities in both public and private sectors of the economy, since procurement function is a critical part 41 management function1s in an organization. The relationship between procurement and organizational performance makes the embracing of best practices imperative to the success of organizations. This study was conducted to examine the effect of procurement practices on organizational performance using Flour Mills of Nigeria (FMN) PLC, Lagos as a case study. Descriptive survey design was adopted for the study and the population consists of all the employees in procurement and finance department of FMN PLC. Simple random sampling was used to select 46 respondents as a sample size for the study and percentage, table and charts were used to process and analyze the data collected. Findings of the study revealed that procurement practices have significant positive effect on the performance of an organization due to the fact that best procurement practices brings on efficiency, effectiveness and on time delivery to enhance the overall organizational performance. Based on findings, this study recommends that the key procurement staff should come up with viable ways of managing procurement process. Revitalization of the entire procurement process should be a requirement as it can help in ensuring that organization adopts modern technological means and trends in handling procurement operations and issues. Therefore, procurement best practice should be implemented in both public and private organizations. Keywords: Procurement, Procurement Practice, Organizational Performance, e-Procurement, Ethical Practices. Introduction Regardless of the effort by the private and public institutions in Nigeria to improve performance of the procurement function, poor implementation and non-compliance to procurement regulations still pose as key challenges (Hussein & Shale, 2014). They are burdened with delays and occasional inability to deliver the goods to the designated organizations (World Bank, 2010). This problem has led to a decline of procurement and supply performance of many organizations (Schiele, Horn & Vos, 2011). With the present estimated spending of about 70% in purchasing and the importance of procurement functions in the profitability of an organization by over 25%, it will be essential for organizations to come up with a decision on how practices of procurement could assist in meeting organizations goals (Jibrin et al, 2014). Therefore, the current practices of procurement needs revision as well as strengthening to consequently improve performance of procurement in organizations. Based on the foregoing, it is crucial to evaluate the effects of procurement practices on the performance of organizations and to find out the existing procurement practices among the manufacturing organizations in Nigeria with focus on Flour Mills of Nigeria Plc. The main objective of this study is to examine the effects of procurement practices on organizational performance, and specific objectives of the study are: i. To examine how supplier selection procedures affect organizational performance in Nigeria. ii. To find out the effects of buyer-supplier relationships on organizational performance in Nigeria. iii. To evaluate the role of c-procurement on organizational performance in Nigeria. iv. To examine the effects of ethical practices on procurement procedures in Nigeria. Based on previous studies, the application of appropriate procurement practices positively and strategically has effect on the performance of organizations and national economy in general. Therefore, study is indisputably useful to both manufacturing and service organizations as well as business managers and procurement personnel. The study is also important to future researchers conducting similar studies. Conceptual Review Procurement Practice Procurement practices can be described as activities which involve procurement planning, procurement controls, procurement monitoring and training workforce and inventory management (Makabira & Waiganjo, 2014). 1  According to Kaufmann (2009), an organization’s procurement functions are guided by practices and activities that are entirely different hence divided into strategic and operational processes. The importance of procurement in an organization has made some organizations to improve procurement processes of new systems such as, e-procurement that relates well with the varied technologies of electronic commerce such as document imaging, workflow management, bulletin boards and e-mail enabling business process remodeling (Wanyama, 2012). Proper application of procurement practices give rise to many benefits to an organization and to the strategic plans of organizations that could lead to acceleration and flow of important information between the buyer and supplier, and also helps to respond quickly to highly competitive new market entrants (Dong, Xu & Zhu, 2009). On the other hand, improving financial control by making it easier to match orders, improving auditing and better security are the operational benefits of procurement practices (Ordanini & Rubera, 2008). Conceptual Framework Independent Variables Dependent Variable Supplier Selection Procedures The study’s aim was to determine how supplier selection procedures influence the effectiveness of procurement practices in organizations. The study tries to find out whether there is adherence to procurement laws and regulations and if there is Just In Time delivery of products and services, proper pre-qualification of suppliers, Request for Quotations and ensuring all suppliers have achieved ISO 14001 certification. Dangote Cement Plc is the Case Study. 2  Buyer — Supplier Relationships This study ascertains to what level buyer-supplier relationships influence procurement practices of companies and Dangote Cement Plc specifically. The study determines the level of buyer-supplier relationship in terms of cost control, seamless information sharing, long-term relationships and dependability in terms of service and product delivery. Organizational Capacity This determines the level of experience and efficiency of the procurement and finance staff and how they contribute to organizational performance through procurement-Their qualifications will contribute to function effectiveness. This research reveals the uptake of information technology tools in the organization as a whole and specifically in the finance and procurement departments. Ethical practices The study establishes the level of integrity in the procurement and finance departments. The elevation of procurement as a core task empowers purchasing managers to spend huge amounts of money in the purchase of products and services. This has in turn presented a range of moral predicaments concerning dubious procurement procedures. The research examines the proactive measures taken by the company to prevent any unethical practices in the procurement and the finance departments. Good ethical practices enhance an organization’s integrity and reputation, it also creates relationships that are mutually beneficial with fair practice and trust. Green Purchasing This involves procuring products that contribute to better environmental conservation. Companies with better environmental practices realize higher profits compared to those which disregard environmental conservation. Environmental practices enhance a firms profits (Reinhardt, 1999). Tangible benefits achieved by embracing green purchasing include reduced environmental risk, market share gained, enhanced reputation and overall cost efficiency. This can be achieved by reducing supplier generated wastes and surplus production and this savings are in turn passed along to the end users in terms of reduced prices. Originality differentiates one company from the rest and suppliers can achieve this through the use of cleaner technologies. Supplier Partnering This is the relationship between organizations and its suppliers and it helps organizations achieve strategic and operational ongoing benefits. This is a long-term partnership that encourages problem solving and mutual planning among the parties concerned. Increased reliance on suppliers 3 has its drawbacks in terms of delayed deliveries and also inferior quality products. Strategic supplier partnerships are an added value to the organization, whose main aim is to meet the needs of the customer. Buyer-supplier collaborations ensure products are delivered just when they are needed so as to reduce on costs of storage and security. Benefits that result from collaborative relationships come in the form of an organizations ability to engage suppliers and other partners in mutually beneficial activities (Chong & Ooi, 2008). Procurement Ethics The procurement process must be done in an ethical manner by being fair to all involved rigorous compliance with rules and all set guidelines should be mandatory. Employment of professionals in the procurement department will go a long way in making sure ethical standards are followed. Organizational Performance Organizational performance is the actual output or outcomes of an institution and its intended outputs or goals and objectives (Upadhaya, Munir & Blount, 2014). Organizational performance can be measured through reduction in cost, quality of goods/services delivered, productivity, lead time (Mchopa, Njau, Ruoja, Huka & Panga, 2014). Organizational performance is measured by how an organization realizes its objectives, including increasing productivity and reduction of inventory in the short-run and increasing market share in the longer duration. Performance in procurement is linked to resources having naturally different levels of efficiency that enable firms to deliver in a better way to their customers at a given cost or have the same benefit at a lower cost, Barney (2003). Organizational performance here is compared to performance of other organizations in the same industry. Organizational performance can be measured using return on investment and increase in market share (Rono, 2017). Theoretical Review The study is anchored of Resource Based Theory which is dismissed as follows: Resource Based Theory Resource based theory identifies and analyzes an organization’s strategic advantages that will in turn be a source of competitive advantage. These competitive advantages may be organizational, human or financial and their advantages are conferred based on their rareness, uniqueness and value. Resource Based Theory emphasizes that competitive advantage in organizations is determined through proper planning and functioning of procurement. Peteraf (2003) states two assumptions used in analyzing competitive advantage using this theory; one, firms within the same industry may have 4 diverse resources and the other, believes this dissimilarity in resources may continue for a long duration. A resource becomes a competitive advantage when it is inimitable. If all organizations in an industry have the same resources there would not be any competitive advantage available Cool et al (2002). Resource efficiency enables procurement achieve more with less. According to Barney (1991), resources enable firms improve efficiency and save on unnecessary costs. Procurement practices should be uncommon and difficult to imitate, for example sourcing processes. Both operational and organizational functioning are incorporated in Resource Based View. Organizations that purchase internationally, function well at the business level. Uncommon resources keep away the competition and enable organizations achieve higher profits. ERP systems are expensive to install and not all companies have embraced their use, this means that companies that have already installed it are a step ahead of the competition. Effective Collaboration contributes to sourcing performance by capturing additional value for end users through effective collaboration with suppliers and supplier involvement in the development of product specifications. Sourcing positively impacts procurement by enabling better performance. This is achieved by casting the net wide enough so as to achieve the best possible deal. As products mature and value shifts innovation takes place (Rono, 2017). e-procurement E-procurement benefits come from deliberate moves by the organization to promote the complete use of this technology (Ramayah et al: 2006). More investment in training and skills enhancement should be provided by the organization to members of staff so as to fully achieve the benefits brought about by the adoption of this technology. Many challenges facing the development of skills and knowledge of the procurement team manifest itself clearly under cultural factors externally and internally especially when the employees exhibit resistance towards using an electronic system that takes away some of the negotiation powers in dealing with regular suppliers and fear of losing their job as a result of the process automation (Mabert et al, 2003). Procurement Practices and Organizational Performance A system of procurement is an essential element of supply chain system in any given organization or institution. Usually, procurement process of an organization includes operational and strategic processes as priorities in operations of the two entities which tend to differ (Turban et al., 2000). 5  However, Singhal (2011) observed that disruptions in procurement practices at any level affects organizational performance. Poorly coordinated procurement practices do long- lasting damage to organizations’ stock prices and profitability and need to be more thoroughly addressed by supply chain continuity planners (Thai, 2010). Thus, for leading organizations like Flour Mills of Nigeria Plc to respond to the current dynamic purchasing environment, it is required to embrace efficient procurement, since the entire procurement processes can work well in the improvement of the procurement systems, which enhances organizational performance. Procurement Best Practices Considering today’s competitiveness on the market, it’s crucial that firms adopt new philosophies, methods, and processes in procurement. Organizations should constantly be thinking of new, better ways to contain costs and produce results despite challenging circumstances on the market. According to Robert. (2019), the following are some of the procurement best practices. a. Procurement automation Automation plays a critical role in making businesses more efficient by enabling them to save time and money. In procurement, automation helps reduce repetitive operational processes and amplifies the strategic role. Unfortunately, only 18% of procurement leaders have a digital procurement strategy supported by a complete business case. But the digital transformation for procurement activities is inevitable, so you need to embrace automation and make your procurement processes efficient and seamless. As a best practice, you should first review the processes that need improvement, and only then select the technology that best satisfies those process needs. Best-in-class companies find a way to use technology to produce beneficial information without having to perform various “workarounds” to extract and view the data. They recognize the importance of an efficient purchase- to-pay process and have adopted strategies and mechanisms to get the most significant benefits from technology. b. Procurement transparency A transparent procurement process ensures that all the team members, as well as the qualified suppliers, have access to procurement methods, evaluation criteria, technical specifications, etc. By harnessing the power of data analytics and automation, organizations can eliminate dark purchasing and aberrant spending behavior. The benefits of procurement transparency include the following: i. No more duplication of requests; ii. Better record management; 6 iii. Bulk processing; iv. Cost reduction; v. Advanced strategic planning; vi. Increasing accountability and improved performance. 7 c. Supplier engagement Every organization has suppliers who deliver essential products, perform regular maintenance, or complete one-time urgent repairs. Effectively collaborating and partnering with vendors is a key enabler as it improves business expectations and value contribution. Best-in-class companies work closely with suppliers long after a deal has been signed. One thing to keep in mind is that one-way communication (telling suppliers what to do and how to do it) is not as effective as two-way communication that requires both buyer and seller to mutually manage the relationship. But how do you determine which suppliers to engage? You look at where your main risks and opportunities are across all sourcing categories. Next, you’ll determine the 20% of the suppliers that can make 80% of the difference to your risk profile, costs, and reputation. d. Optimized inventory More and more CFOs have put inventory on their radar screens, and their financial teams are constantly looking for new ways to improve the bottom line and reduce working capital. Leading supply chain organizations are constantly reviewing their inventory quantities and striving to keep them at an optimal level. For most organizations, however, determining the optimal stock levels seems like an impossible numbers game. Inventory managers are faced with the challenge of managing tens or hundreds of thousands of items, each with their own characteristics, requiring complex and time- consuming calculations. As profit margins shrink, organizations are constantly looking for ways to control their spend and improve the bottom line, so procurement teams need to constantly review their inventory and strive to ensure they stay optimal. e. Digital contract management Contract management is an integral part of the procurement cycle. A well-established plan assists contract managers to properly manage contracts by addressing transition management, performance monitoring, and by helping to ensure that both parties fulfill their commercial and contractual commitments. Still, 81% of organizations don’t use any Contract Lifecycle Management (CLM) software. As a result, they face several pain points, including lack of consistency across contracts (53%), cumbersome processing (45%), and supply chain continuity problems (36%). 8  The digital transformation for procurement activities is inevitable. You can stay clear of procurement pitfalls by moving your contract management process to the cloud. If contracts are created, stored, and maintained in a centralized data repository, your organization can reduce costs and risks. Contract management plans should be developed for all medium to high-risk contracts. A public authority should ensure that contracts are managed following the contract management plan and that plans are kept current. f. Focus on TCO (total cost of ownership) Strategic sourcing pushes you to shift your focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. Leading companies are considering many other factors that affect the total cost of ownership. Establishing a “total cost of ownership” mindset is a goal that the supply management organization needs to embrace and perpetuate throughout the entire enterprise. Identifying this cost requires looking at the entire process of procuring and consuming the product or service, something that can only happen with cooperation and input from both the buyer and the seller. g. Appropriate levels of control Supply chain management policies and procedures should follow an appropriate sequence and structure. They should also be reviewed frequently (if not constantly) and brought up to date. Keeping them realistic and easy to understand also helps ensure compliance. It’s certainly possible to go too far in establishing policies and procedures! Risk mitigation goes hand-in-hand with policies and controls, and best-in-class supply chain organizations integrate risk-mitigation methodologies into their sourcing decision process. Methods Descriptive research was used in this study. The study addresses effects of procurement practices on organizational performance. The population consists of staff from the Supply Chain Department, Procurement Department, Operations Planning and Logistics, ‘Stores, Weighbridge and the staff from the Finance Departments with a total number of one hundred and eleven (111). Stratified random sampling technique was used to choose the sample. This is an estimate with precision. This is a sampling technique that relies on probability where the whole population is divided into subsections. Then unsystematically selecting the final features uniformly from unlike sections. Simple random sampling technique was used for this study, and a sample size of 50 respondents was selected from a population of 111. Samples of approximately 10% can provide 9 useful reliability (Kothari, 2004). The sample selected was more than 45% of the entire population and therefore appropriate for the study. Primary data were gathered. The primary data were collected using questionnaire with closed and open ended questions which have five sections; demographic characteristics of respondents, supplier selection procedures, buyer-supplier relationships, organizational capacity and lastly ethical practices. Data Analysis/Results Analyzing data involves organization, regulation and clarification of data collected. This study established the level at which independent variables influence dependent variable. Collected data were summarized and put into table form, graphs and pie charts for easier presentation and analysis. Organization’s Operations Effects of Supplier Selection Procedures on Organizational Performance The respondents were asked specific questions on methods they used to select suppliers. Each of the questions asked was assigned the following values; 1 for no extent, 2 for less extent, 3 for moderate extent, 4 for great extent and 5 for very great extent. The table below shows the analysis of the responses obtained from the respondents. Figure 1: Effects of Supplier Selection Procedures on Organizational Performance Source: field survey (2023) From the analysis in figure 1 above 86% of the respondents agree that indications of supplier quality play a big role in the selection of suppliers, 14% did not agree with this statement. 88% of the respondents believed the ability to meet specifications was a major factor in the selection of 10 suppliers, 12% of the respondents were of the contrary opinion. 91% of the respondents believed financial status checks were not important when selecting suppliers, 9% believed this is an important requirement when selecting suppliers. 89% of the respondents were of the opinion that supplier’s ability to bring in extra deliveries on short notice was trivial, 11% believed this to be an important factor. Effects of Buyer-Supplier Relationships on Organizational Performance The research sought to establish how buyer-supplier relationship affects organizational performance. The findings are shown in figure 2 below. Figure 2 Effects of Buyer-Supplier Relationship on Organizational Performance Source: Field survey (2023) The research findings in figure 4.4 above revealed that 80% of the population sampled were of the opinion that joint improvement activities positively influenced the operations of the organization, 20% disagreed with this. 57% believed sharing of information intensively but selectively increased organizational performance, while 43% disagreed. 76% of the respondents disagreed that supervising suppliers impacts positively on organizational performance, only 24% agreed with this statement. 33% of the respondents believed the organization turned supplier rivalry into opportunity, 67% of the respondents did not believe this statement to be true. 61% of the respondents believed the organization understood how suppliers work and 39% did not believe this statement to be true. Effects of e-procurement on Organizational Performance The study sought to know how organizational capacity impacts and enhances procurement. The respondents indicated to what extent the following procurement practices contributed to organizational performance. The results obtained are contained in figure 3 below. 11 Figure 3 Effects of e-Procurement on Organizational Performance Source: Field survey (2023) From the analysis in figure 3 above, 93% of the respondents agree that ERP has made procurement faster, cheaper and transparent; while 7% disagree with this statement. 59% of the respondents also agree that integrated procurement systems enhance accountability and improve organizational performance while 41% of the respondents do not agree this statement to be true. Regarding the making of requisitions online, 54% of the respondents do not agree all the organization’s staff follow this procedure, 46% on the other hand are of the affirmative. 24% of the respondents are of the opinion that prospective suppliers use the online platform to submit their proposals, while 76% of the respondents disagreed with this statement. On the issue of real time response to the market through the use of ERP, 60% of the respondents did not believe ERP contributed to this while 40% believed ERP has made great steps towards the achievement of this. Impact of Ethical Practices on Procurement Procedures Ethical practices in procurement involves transparency, accountability, fairness and proactivity. Accountability constitutes a central pillar of every procurement system. Transparency in procurement means information must be available to all stakeholders, and fairness means decision making should be unbiased and all bids considered on the basis of their compliance with the terms of the requested documents. 12 Figure 4: Impact of Ethical Practices on Procurement Procedures Source: field survey (2023) The study results illustrated in figure 4 above, show that 78% of the population sampled agree that strict codes of conduct ensure purchasing procedures are followed, 22% disagree with the statement. 30% of the respondents believe that punishing corrupt behavior increases staff performance, 70% don’t believe this to be true. 93% believe limits of authority are adhered to, 7% believe limits of authority are not adhered to. In regards to conflict of interest, 30% of respondents concur that they are declared and 70% believe they are not declared. 7% of respondents agree that businesses are done in good faith, but 93% believe there is no good faith when conducting businesses. When dealing with supplier information 85% of respondents believe confidentiality is key, 15% disagree with this statement. Findings From the study, the respondents indicated that financial status checks were not important. This mentality should be changed as suppliers with cash flow problems will find it difficult obtaining materials and late delivery times may be experienced. Supplier’s ability to bring in extra products or offer additional services at short notice received an approval rate of 11%. This rating should be increased because of the dynamic nature of business so as to keep the business competitive. The most important purchasing decisions focus on selecting the right suppliers. Findings of this study revealed that through strategic partnerships in the form of joint improvement activities and understanding supplier capabilities, the organization has been able to enhance continuity of supply. Continuous improvement of processes along the supply chain has led to cost reduction and better relationship that has in turn reduced conflicts in the supply chain, and when they occur due to unavoidable circumstances, they are solved amicably. 13 This study confirmed that procurement practices actually contribute to increased organizational performance. Procurement practices enable organizations achieve differentiation through better customer service and reduced lead times. The findings also reveal how the use of Enterprise Resource Planning (ERP) has made it easier for the procurement department to handle purchases and both internal and external customers in a more efficient and cost effective way. The study further revealed that the ERP software is not being used to its optimum. Some employees still find it challenging to use the system and more internal training needs to be performed to improve on this. Procurement has enhanced the need to purchase the products according to the detailed specifications and required quality standards. This has increased the efficiency of the supply chain by reducing costs incurred from unmet specifications and the return or use of goods of poor quality. Conclusions This study has brought to light the connection between procurement practices and the performance of an organization. Proper structures and systems in procurement ensures transparency, accountability, reduced costs and improved quality and specifications. Therefore, efficient and effective procurement practices have significant positive effect on organizational performance. Recommendations Based on the objectives and findings of this study, the following recommendations are proffered: i. The key procurement personnel should come up with viable ways of managing procurement process. To ensure better performance, organizations should not only focus on planning and training but also on efficient procurement, inventory management and monitoring of procurement activities. ii. Critical revitalization of procurement process is a requirement as it can assist in ensuring that organizations embrace modem technological ways and trends in handling procurement functions and activities. iii. More training on ICT is still needed for the personnel procurement department. Continuous improvement of skills especially in the Information Technology should be promoted. iv. Finally, for an organization to expect its workforce to uphold ethical values, it should itself lead by example and uphold the same values with equity and fairness. 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