Empirical Evidence Of The Procedures And Criteria Used By Small And Medium-Sized Investment Company
An increased number of manufacturing companies that are purchasing labour-intensive items turn their attention towards reducing their costs by sourcing from various geographical places. The price of goods and services purchased from the emerging or low cost countries represents an excellent reason for considering international purchasing as an efficient solution. A low price for materials purchased from a foreign supplier can be counterbalance by company’s loose in quality standards or even financial instability. On the other hand, more technologically advanced products, which are sourced from international suppliers, can carry high purchasing costs and excessive tariffs. In these given conditions, besides the actual cost of an acquired item, it is a question regarding the complexity of the purchasing process in the international trade context since factors like availability of suppliers, substitute source of supply, market uncertainty or other major changes in the international environment are able to influence the involvedness in international purchasing activities. As a consequence, it is a matter to examine these problems in order to understand what the key factors for a successful international sourcing process are.
1.1 Background of the Study
During the last decades, purchasing has received special attention in many companies. The multitude of actions, like mergers and acquisitions, outsourcing and off shoring to low-cost countries have been considered by organizations in order to search for new ways of achieving competitive advantage. All these measures have changed the role and objective of purchasing function inside companies and increased its importance in firms’ overall strategy. As a result, the complexity of the purchasing function evolved from an operational function to a strategic source of cost reduction and increased competitiveness.
Traditionally, the supply chain of the firm incorporates a network of functions such as product development, marketing, operations, distribution, finance, customer service, all involved directly or indirectly in fulfilling the customers’ requests (Bozarth & Handfield 2007). But in order to fulfiLkl these requests, firms must create value by tailoring their value propositions to clients’ expectations. The activities developed inside the companies range from the procurement of raw material to the distribution of the final product to the customer and after sales service.
Lysons and Gillingham (2005), define purchasing from the standpoint of its objectives: “to obtain materials of the right quality in the right quantity from the right source, delivered to the right place at the right price”. In order to achieve these objectives, companies must focus on activities associated with purchasing like: selecting qualified suppliers, rating suppliers performance, negotiating contracts, comparing price, quality, lead times, services and terms of sales, evaluating the value received, predicting prices and demand modifications, etc.
As an integrant part of a company’s value creation system, purchasing commands a significant position in the overall organization. De Boer, Labro and Morlacchi (2001), referring to the study of Telgen (1994), who has found out that in industrial companies, purchasing share of the total turnover typically ranges between 50-90%, stated that making decisions about purchasing and operations are the primary determinants of profitability.
The importance of purchasing function in the organization is also underlined by the increased amount of resources invested by companies in the purchasing process and as well as by the time allocated to strategic purchasing. It is already acknowledged that the goods and services purchased by companies have a key influence on costs, productivity and quality level. Therefore, the sources of supply and the amount of time and money invested in the purchasing process have a capital influence on firms’ performance. One of the most important elements of the purchasing function is the selection of suppliers. The goal of supplier selection and evaluation is to reduce the risks involved in transactions and to maximize the total value for the buying firm. Successful supplier selection processes are dependent on a series of strategic variables like the choice between domestic and international sourcing, type and the intensity of the relationship with the suppliers, the number of suppliers from which to source (single or multiple sourcing) and finally but not the least important, the type of the products supplied. Throughout time, many researchers have identified numerous criteria for supplier selection and assessment such as net price, quality, delivery, supplier reputation, capacity, communication systems, services or geographic location. All these criteria represent critical issues in the supplier assessment procedures in view of the fact that they measure the performance of suppliers.
The main purpose of this research is to provide empirical evidence of the procedures and criteria used by small and medium-sized Doyin Investment Company when selecting international suppliers. In addition, the paper aims to investigate the types of relationships developed by Doyin Investment Company buying companies with their foreign partners as well as supplier-base structure options and types of products purchased from international suppliers.
1.2 Statement of Research Problem
The present study has also several limitations, which will be further described. The first limit of the paper comes from its scope. According to Talluri & Sarkis (2002), the business processes of the purchasing function within organizations include supplier evaluation and selection, negotiation of supply contracts, monitoring supplier performance and creating an interface between company and its suppliers. Therefore, inside the core process of sourcing, the study narrows its scope by analyzing only the supplier evaluation and selection process.
Secondly, the research will be limited to analyze the small and medium-sized manufacturing companies operating within Nigeria.
The main business sectors evaluated will be manufacturing of food products and beverages because the examined business categories are not comparable due to a range of legal and technical aspects.
1.3 Objectives of the Research
The thesis is based on the following hypothesis: “SMEs in a small country such as Denmark are highly import intensive and source not nly from regional suppliers, but also from suppliers far across the globe (Overby & Servais, 2005) ”. As a result of the amplified interest in purchasing internationally, it becomes important to assess the sourcing practices among small and medium enterprises. In the context, the research question of the study will be:
– What are the most important selection criteria that Doyin Investment Company Ilorin consider when choosing their foreign suppliers?
With the purpose of answering the research question, the following research objectives will be addressed:
- To identify the challenges to international purchasing along with the main strategic options available for purchasers. According to this objective, the paper aims to investigate the drivers and barriers to purchasing from foreign countries. Furthermore, the strategic factors behind the sourcing process such as supplier-base structure, buyer-supplier relationships and types of products supplied will be explored in order to understand the tactical decisions related to purchasing.
- To analyze the supplier selection process and to identify the most important selection criteria in the international context. In regards to supplier selection criteria, the aim of the study would be to describe the process of supplier selection by highlighting the most critical supplier selection criteria considered by companies when acquiring their products from international countries.
- To investigate the international purchase behaviour of Doyin Investment Company Ilorin and to find to find out what are the selection criteria that drive them in choosing their foreign suppliers.
The empirical objective of the study has the role to analyze the international purchasing practices developed by Doyin Investment Company Ilorin. Moreover, the influence of strategic options on selection criteria will be tested in order to understand the selection decisions according to different purchasing situations.
1.4 Significance of the Study
The outcome of this study will provide on adequate understanding on the application of international purchasing in an organization which includes;
1. Reducing Costs
Many business today final importing products, parts of the products and resources more affordable than purchasing them locally.
There are numerous cases when entrepreneurs final products of good quality which are inexpensive even when the overall import expenses are included. So instead of investing in modern expensive machinery, entrepreneurs choose to import goods and reduce their costs. In most cases, they end up ordering large quantities in order to get a better price and minimize the cost.
2. Becoming a Leader in the Industry
One of the key importances of international purchasing products is the opportunity to become a market leader in the industry of interest. Since manufacturing new and improved products is a never-ending process, many business worldwide use the chance to purchase new and unique products before their competitors do. Being the first to purchase a fresh product can easily lead to becoming a leader in a certain industry.
3. Providing High Quality Products
A lot of successful entrepreneurs travel abroad, visit factories and other highly professional suppliers in order to find high quality products and purchase them into their own country.
Moreover, manufacturers may provide informative courses and training as well as introduce standards and practices to ensure the company abroad is well prepared to sell their products.
4. Introducing New Products to the Market
If a product produced in China seems attractive/useful to organizations in Nigeria, they can purchase it and intro duce it to their potentials consumers, thanks to the internet expansion, organizations can conduct purchase research prior to purchasing a certain product. This will help them determine if there is an actual need on the organization for such an international product, so they can develop an effective purchasing strategy in advance.
1.5 Scope of the Study / Limitation of the Study
This study focuses on the significance of international purchasing on the organization productivity, the research was limited to the study of particular company known as Doyin Investment Company, Ilorin, it examines the operation of international purchasing activities in the industry.
- The attitudes of the respondents towards the researcher. Some of the respondents who were given the questionnaire to complete did not give their full cooperation, some were reluctant to collect the questionnaire while some gave false information.
- Financial constraint, the researcher was faced with problem of limited finance to carryout detailed study on the subject matter.
- Time constraint, the time allowed for the research study did not permit an indepth study into the research topic.
- Lack of access to standard purchasing library to get adequate information to carry out the research.
1.6 Research Questions
In this chapter the research questions will be answered one by one, suggestions for the future research will also be given.
1. What are the main driving forces and challenges for companies conducting international purchasing?
The main driving forces for conducting internal purchasing are; cost, quality, efficiency, increase competition in the domestic market and cut lead times. Corporate Social Responsibility (CSR) ad sustainability can also be regarded as driving forces since purchasing directly from suppliers instead of using a reseller could create control over the supply chain. There is a shift going on regarding the driving forces for internal purchasing.
Previously, cost focus has been absolute dominant. Now it has replaced more and more by other factors such as quality and Corporate Social Responsibility (SCR). The challenges connected to international purchasing are language barriers, cultural differences, documentations, transforming norms and standards, trade barriers, imposition of tariff-quotas, exchange rates caution, finding the best suppliers, potential resistance, CSR and sustainability issues and logistics.
2. What factors determine which purchasing markets that are relevant?
The factors determine relevant purchasing markets are varying depending on industry. in general the most important factors are, cost-level, capability to produce the required products, infrastructure and stability on the market. CSR (Corporate Social Responsibility) and sustainability issues are getting increasingly important and will affect these decisions even more in the future.
3. How are companies affected by CSR (Corporate Social Responsibility) in their work with international purchasing?
The importance of CSR growing and it definitely affects companies in their work with international purchasing especially, it affects how they work with suppliers. CSR have made it increasingly important to work more together with the suppliers and by that increase the suppliers knowledge about these issues, strengthens supplier relationship could also have positive effects on cost, quality and efficiency. Companies are of course also affected by the challenges connected to CSR, such as the definition and “how far should you go” problem.
4. How could NCC handle driving forces, challenges and Corporate Social Responsibility (CSR)?
Based on their own capacity and their customer’s requirements they need to prioritize, it is not possible to get anything, low price, high quality and full traceability throughout the supply chain is a tough equation to solve.
1.7 Formulation of Research Hypothesis
The following hypotheses were tested to guide the study.
- Ho1: There is no challenge to international purchasing with main strategic options available for the purchasers.
- Hi1: There is challenge to international purchasing with main strategic options available for the purchasers.
- Ho2: Supplier selection criteria are not important in the international context.
- Hi2: Supplier selection criteria are important in the international context.
- Ho3: International purchasing has no significant effect on small scale industry.
- Hi3: International purchasing has no significant effect on small scale industry.
1.8 Historical Background of the Case Study
Doyin investment limited Ilorin, was incorporated in as the first indigenous manufacturer of soap and detergent, the company is situated along Asa-Dam road Ilorin, Kwara State of Nigeria.
Doyin Group of Company started as a small trading business, it has grown tremendously were the years consolidating its first hold in the leadership of industry, the organization has received many national and Africa accolades for the best practice and the production of consistently high value brands, over the years, the group transformed from a trading concern to a manufacturing outfit.
The company has consistently paired up with existing multinational detergent manufacturing company in healthy competition towards enhancing the growth of the Nigeria economy.
The enhancement of Kwara State, Doyin Investment Company existence has provided employment opportunities for thousand of Nigerians such as suppliers, manufacturer, contractors, transporters, distributors etc.
In addition, necessary machineries have been put in place and negotiations have also reached in advanced stage to introduce the company’s products to countries within ECOWAS sub-regime as a way of mobilizing foreign exchange into the country.
1.9 Definitions of Terms
Bill of lading:
A document which provides the terms of the contract between the shipper and the transporter company to more freight between started points at a specified charge.
Air way bill:
Bill of lading that covers both domestic and international flights transporting goods to a specified destination. It is a non-negotiable instrument of air transport that serves as a receipt for a shipper, indicating that the carrier has accepted the listed goods.
Certificate of Origin (COO):
It is a signed statement required in certain nations attesting to the origin of the export.
Consular Invoice: Document required in some countries that describes the shipment of goods and shows information such as consignee, and value of the shipment.
Cost, Insurance and Freight (CIF):
Cost, insurance and freight to a named overseas post. In Cost, Insurance and Freight (CIF) the seller quotes a price for the goods shipped by ocean (including insurance), all transportation costs, and miscellaneous charges to the point of debarkation from the vessel.
Document used to clear goods through customs in the importing country by providing evidence of the value of goods.
Certificate of Inspection:
A document in which certification is made as to the good condition of merchandise immediate prior to shipment.
A duty (or tax) levied on goods transported from one customs area to another.
This is a company offering the service of transportation of goods from one place to another.
A note accompany consignment of goods indication quality, description, number of package in the consignment.
Cost and Freight (C&F):
The exporter pays the costs and freight necessary to get the goods to the named destination. The risk of loss or damage is assumed by the buyer.
Free Alongside Ship (FAS):
The seller quotes a price for the goods that includes charges for delivery of the goods alongside a vessel at the port. The seller handles the cost of unloading and wharf age, loading, ocean transportation, and insurance are left to the buyer.
Free on Board (FOB):
The goods are placed on board the vessel by the seller at the part of shipment specified in the sales contract, the risk of loss or damage is transferred to the buyer.
Letter of Credit:
An instrument issued by a bank on behalf of an importer that guarantees an exporter payment for goods and services, provided the terms of the credit are met.
Summary, Conclusion and Recommendations
5.1 Summary of Findings
From the research findings international purchasing is an activities which involves sourcing and obtaining needs or requirement from foreign country for use in another country. Among the reasons for purchasing from abroad includes lower cost, favourable exchange rates, consistent quality, faster delivery and availability on domestic market have been identified. In regards to barriers, the research recognized risk of non delivery, supplier’s non-performance, currency fluctuations, credit risks and legal difficulties has been the main constraints perceived by companies when sourcing from foreign countries. Further, the strategic options in international purchasing we discussed. The research presented three types of decisions considered critical to sourcing, namely; type of products supplied, supplier based structure and buyer-supplier relationships.
Regarding the supplier base size, two types of strategies we identified, namely single and sourcing, buyer-supplier relationships were further discussed, a classification based on the degree of integration between the parties involved.
In conclusion this research work shows the main reasons why countries engage in international buying.
- It enables the nations of world enjoy product which they cannot produce within their own boarders.
- It enables countries to take advantages of lower production in other countries, in other to obtain goods more cheaply.
- It provides countries greater variety of commodity and gives a wider services for which resources are available locally.
Finally with more goods and services to enjoy the standard buying of each country is raised.
Based on the research, the following are recommended for various management in the Doyin investment Ilorin.
- Document should be designed, prepared, reviewed and distributed with care. They should comply with the relevant parts of product specification files, manufacturing and marketing authorization dossiers, as appropriate. The reproduction of working document from master document should not allow any errors to be introduced throughout the production process.
- Document containing instruction should be approved, signed and dated by appropriate and authorized persons. Document should have un ambiguous content and uniquely identifiable. The effective data should be defined.
- Specific requirement apply to batch documentation which must be kept for one year after expiry of the batch to which its relates or at leas five years after certification of the batch by the qualified person.
- Documents within the quality management system should be regularly reviewed and kept up to date.
- Records should be made or completed at the time each action is taken and in such a way that all significant activities concerning the manufacture of products are traceable.
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