FACTORS THAT INFLUENCE STRATEGIC SOURCING DECISIONS IN THE SELECTED NBC PLC

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?