Importance Of Purchasing Department Towards Organizational Profitability

Project and Seminar Material for Purchasing and Supply PS

Importance Of Purchasing Department Towards Organizational Profitability

Chapter One


1.1 Background of the Study

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:

  1. To analyse and explain how the purchasing department regarding factors of value creation coincides with the perception of internal customers.
  2. Identify which factor influence the value added by purchasing department to the internal organization.
  3. Evaluate the internal customer’s satisfaction level for these factors at the purchasing department of the organization.
  4. Suggest improvement options for the purchasing department of the organization.
  5. 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 Limitations 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 Five

5.0 Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings

The analysis in the previous chapter revealed that all the adding value factors presented to the respondents during the questionnaire have a high degree of importance in the creation of value. This is the deducted from the fact that during the evaluation of the importance, every one of the questions regarding the importance of the values added by the purchasing department received a grade higher to 4, in a scale from 1 to 5. Therefore it was concluded that all these factors are relevant for the performance evaluation of the purchasing department.

However, slight difference in ratings positioned some factors above others indicating that after all they have more as the most important ones are presented in tables; 4.7; 4.10; 4.11; 4.19; 4.20; 4.21; 4.22; 4.23; 4.24 and 4.26 along with the obtained grade. Customers were more critical evaluating the different stages of the purchasing process and the range of ranking was bigger.

The global level of satisfaction of the internal customer with the value provided by purchasing department is around 69%. This figure was obtained first through an open question in interview and they were confirmed but the result from the survey given that in both occasions, similar conclusion were obtained.

The individual analysis of driver and dimension of value added proved that the main contribution to dissatisfaction due to low performance are the dimension “purchasing model” and “proactivity” in addition, although “efficiency” was not bad rated as dimension, its components process responses time received one of the work evaluation and it has to be considered critical.

5.2 Conclusion

The objective of this chapter is to minimize the result of the researcher, explain its limitation and provide recommendations for further studies. In first place, a summary of findings is obtained is presented along with further examination of the critical variable for customer satisfaction. In addition, other problems of the purchasing department identified through direct observation is commented are measured for improvement is suggested. Finally, a reflection is done in possible ways to continue the research.

The author carried out analysis of the worse rated dimension and driver, in order to identify the causes of poor performance and being able to suggest improvement measures. The author identified several problematic situation through direct observation and experience some of their overlap with the ones formal through the analysis, confirming their importance. Those problems are listed below.

The objectives of the different department is not aligned, which is a source of conflict.

The silo view and functional culture prevail in the department, each area looks only after its own interest and there is no real cooperation among them. There is not a customer centric culture although the purchasing personnel provides an adequate treatment to customer inside the purchasing department there is a general tendering to see the user areas as opponent.

User area are not aware of the standard time needed to complete a purchase, some of the users do not know the rules imposed by the purchasing model or they are not aware of the recent changes to them.

Internal customers start calculating the duration of the purchase since they identify and communicate their needs but the process for the purchasing department starts only when the request order is received.

In many occasions, user areas do not want to involve the purchasing department in the planning phase of their products resulting in subsequent difference between buyers and suppliers. Though the members of the purchasing department/team recognize the disadvantage of the purchasing model, they think that nothing can be done to improve it because it is defined by the corporate office.

Buyers does not have enough time to internal customer. The purchasing personnel could provide more value to the operation if they had the possibility to look for different options in the market and compare them.
In general, the high administrative work prevents purchasing personnel from doing more strategic tasks.

5.3 Recommendations

Based on the researcher findings, the following measures are hereby recommended to ease the situation. There should be proper layout in the purchasing to enable easy location and identification of material purchasing skill which are of immense benefit to any organization especially oriented organization.

They should encourage the purchasing staff to make useful suggestion and advice on the matter arising to purchasing. The purchasing department should improve on its performance through regular seminars, in order to ensure efficiency and therefore make tangible contribution to organization profit and promote its goodwill in the eye of the management. Purchasers should be cost conscious and must strive in all ways to eliminate unnecessary cost. In the course of reducing cost.

Storage facilities should be provided to ensure that materials purchased retains their quality overtime. Finally, it must be emphasized here that, if all measures and suggestions proffered efficiency of the purchasing department will increase for their product.

Importance Of Purchasing Department Towards Organizational Profitability

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Importance Of Purchasing Department Towards Organizational Profitability


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