Negotiation As A Cost Reduction Tools In Materials Purchases
This research work on negotiation as a cost reduction tools on materials purchases a case study of Asaba Tex Nig. Ltd. The scope of this research work covers every activity which has to do with negotiation problems, background to the subject matter, rationale for the study and the limitations of the study. The research reviews the related literature about the topic under discussion by gathering from distinguished authors and scholars, facts and opinions the finding of this study through the administration and oval interview of some employees of the company, revealed that effective negotiation lead to cost reduction and also contributed to the company’s profitability.
Finally, based on the findings a number of recommendations were made that Asaba Tex Nig ltd should ensure that all staff should under g professional training in the field. Also the company should amend their policy and responsibity for transportation and inspections during negotiation because this is not a good policy. The seller is suppose to be responsible since in is the one to sell his products to the organisation.
1.1 Background of the Study
It is natural for any company that engages in buying and selling to use negotiation techniques in its buying strategies.
Negotiation is an important aspect of purchasing and supply. Negotiation in purchasing is the process, which provide a legitimate and ethical means for the buyer and the seller through give and take, or eliminate unjustified or unnecessary increment n cost.
It should not be construed as a means of stripping the trend or a fair profit or an opportunity for extracting unreasonable concession. In reliability the most successful negotiations are those which produce result to satisfy both side and which to provide the framework long-term mutually beneficial relationship. In my own understanding Negotiation is nothing but an act and science for arriving at common understanding through bargaining on the essential of contract in purchasing context.
Negotiation technique varies from one company to another depending on the type and policy of that company.
In most companies and organizations today materials are consideration as vital tools to the success operations.
The purchasing of materials take a lion share of the financial budget in a trading period almost 75% of the Asaba textile mill total expenditure goes on material procurement. This makes prompt negotiation a function of purchasing. This project work is a case study of Asaba tex Nigeria limited. I have chosen Asaba for two reasons.
First, it is a manifesting company and they have acquired a lot of knowledge about purchasing function secondly, so that I can critically examine how they carryout local and international negotiation practices in the company and its effect on profitability.
Asaba Textile mile was income prorated on June 18th 1964. The name of the company at that time was Midwest textile mile limited and was the brain child of the partnership of the Midwestern region government and continue card and company ltd of Hamburg, western Germany with 90% and 10% share holding respectively. The authorized and fully paid capital of the company is N2.5m.
Location. Asaba textile mile is situated at Asaba on the west bank of the legendary Rive Nigeria. The choice of the form as location of the mill was on double influenced by the fact of the being new river water is crucial to mills therefore this proximity to the river is a good insurance since public water supply is erratic. Locating the mill at Asaba.
Also ensured proximity to the bustling town of Onitsha just across the river.
Onitsha has about the largest industrial market in the country.
Raw materials and spare parts for the mile machinery are usually available there. Quite importantly too, there is a large market for the dispose of finished textile product. Though incorporated in 1964, production did not start until 2nd October 1965.
Incidentally the disastrous Nigeria civil war started barely a year after this and the company was heavily damaged as a result of the ravages a cropping blow I its infancy. The period during which it had operated before the war broke out was far too short to establish a convenient system of production so that in reality it was faced with having to make a fresh start in 1970 when the war ended.
Saddled with burden of damaged infrastructure, shortage of water, capital and the resultant low out put, the company plodded on for thirteen years after that with little to show for the share holders aspirations.
In those times production level was at an all – time low of about 4000 metres daily, and to survive we had to lean heavily on the Bendel state Government congresses. With the inception a new brand of directors under V. Okia – Anie however, administrative and operational strategy was over handed, a new energy injured, many forereaching decisions taken in chiding the agonizing one of pruning staff strength by 50% to reduce overheads.
Immediately production level increased from dismal ranges of 4000 meters daily, giving the company the impetus to short repaying most of their loans and subventions.
On 7th April 1987 a new board of directors under the chairmanship of it, COLEBOMA (rto) was sworn in to run the company. The high production level has been maintained so that today the mile Tums out between 10,000 – 12,000 meter daily. The buoyancy resulting from the production level has made it possible for the new board to reabsorb 140 previously rethreaded workers. The company looks at the further with great expectation hope and determination to keep the customers satisfied.
The mill is equipped with facilities for a full production circler. This means that the mill is capable of taking all production steps necessary to:
- Spin raw cotton limit into yarn
- We have the yarn to produce grey baft.
- And consequently bleach engrave and print the grey baft into the finished product we see in the market.
There are four departments that handle start the production of those fine quality prints that the company is increasingly being noted for. The departments are.
(A) Wearing: In this department, the yarn that has been turned out by the spinning department is woven into grey baft by our export team of weavers the machine with which this process is carried out is know as pirn chancing hoom, of which the mill presently has over five hundred.
(B) Engracing: Engracing the designs that have been chosen for particular prints into the grey baft is carried out by this department.
(C) This is done by the use of copper rollers and screens though the company turns out its own design, the customers can as well bring forward their own specifications for engraving.
Finishing: This department processes the cloth with chemicals dyeing, printing and finishing and then making it into the attractive quality production level is encouraging and the incessant demand for the company’s product is an attestation to their high quality. This is a far – cry from the period of how production before 1983 when as we had said production as how as 4,000 meters daily and the company had to spend heavily on government publication Today we an able to say that things have definitely taken a tune for the better and we would like you to depart of that rejuvenation.
At the moment, the mill has the capacity to produce African prints, dress prints and poplin. However every effort is being made by the management to polyester garments and other more sophisticated textile products as may be demanded by the market.
A good management and a good staff are pre – requisites to a successful industrial growth. A company cannot do without its management neither can it so without its staff. These two aims of the organization, proceeding from their positions of individual strength must mutual dependence. The Asaba textile mill stridently pursues an industrial utopia whereby cordial relation & between management and staff make them partners in progress and not adversaries. It as a result of that pursuit that production levels have been high and sustained in recent times, making possible the re-absolution of 146 previously retrenched staff of the company since last year.
The broad of directors had also established a gratuity / retirement scheme for all categories of staff by arrangement with Bended insurance company limited. There was no such scheme. It therefore highlights the board’s relentless pursuit of avenues of achieving industrial accord.
The staff union exists in the company, which serves as a medium for exchange of views, which may be conveyer to the board if necessary.
4% is the capital of the company, reserved for staffs that wish to be shareholders.
Asaba Textile Mill And The Future Of The Textie Industry In Nigeria.
With the ban on importation of textile into the country, a new horizon opens to genuine textile mills with the sort of production capacity which Asaba textile has. Since Nigerians must now buy locally – produce textile the market possibilities for a competitive company become bright. However this security of the competing mills in the country to ensure that quality of is a priority.
Production will go a long way to re-assure skeptical consumer who have been used to foreign importer one. This is why Asaba textile mill spares on efforts to ensure that the consumers get real nature satisfaction.
With the relative industrial superiority of Nigeria on the west Africa sub-region, mark possibilities could quite likely arises in other countries of the sub-region it was partly in recognition of the quality of the company production to popularized the products in the sub-region, that the red. Government especially selected Asaba textile mill represent Nigeria in Sitha– 986, a textile exhibition organized by the European economic community (EEC) at Abidjan, Cotedevoire.
Response to the company’s product was good and far reaching connection.
It may be said in conclusion that the future generation will go far in the national textile industry in general and particularly for Asaba textile mill Ltd. Which is very mindful of its risibility in terms of quality to customers.
The company sells its designs to its numerous customers on a cash and carry basis. As the demand far the company’s products steadily increases, it is not only necessary, but fair that special preference be given to customers of Delta state origin in the event of short supply.
This is not to say, however that sufficient preference is not made to customers from other parts of the country.
Asaba textile mill has customer, who are categorized according to their respective turnovers.
1.2 Background of the Study
The chosen research topic in negotiation as a cost reduction tool in material purchase. A case study of Asaba textile mill Nigeria limited Delta state.
It came about as of careful observations made by the researcher on the ways business organizations in the manufacturing sector of our economy have been operating.
This makes procurement important, which definitely affects an organization profit position. Most industries produce at a very high cost due to high price of material in taken but thy sell only at production cost without making profit in order to meet competition and remain in business.
Presently, text tile industries are becoming increasingly sophisticated with difficult product appearing Daily in our market.
These are locally made in Nigeria and have to be sold along side with imported wax product. All are competing for almost the same products.
The relevance of negotiation is a cost reduction tool on materials purchase in textile industries is that sales revenue is generated after sales.
However, the firm can still make profit by ensuring proper negotiation on all materials bought from numerous suppliers source both locally and internationally from forgetting it can be seen that for textile industries and Asaba Tex which is a new textile to survive in this present business environment and economy, it needs a clear understanding and effective application to techniques in all its purchases.
1.3 Statement of the Problem
In 184 the company started experiencing problems as a result of level of production in the company till 1987 when the company was short down.
Bendel state was divided into Edo and Delta state, and assets were share including government parastatals. At the end of the sharing processes, Asaba textile mill was share to Delta state.
In 1994, when Aiecdr Ibrahim Kefas was the military Administrator of the state all government owned Para stators including the textile mills were sold and church Gate Nig Limited took over the management of the company with state government controlling 20% shares.
In Nigeria economy is currently undergoing quite a number of problems.
Principal among these are. The depreciation of the naira and the invariability of foreign exchange, these combine to affect business positively or negatively.
The textile industries have also added responsibility to the present government policy of producing locally. Chemical cottons tools and equipment. In order to discouraged importation which is due to the current exchange rate in the exchange market. The textile industries is now competing with imported wrappers like Hollandaise, English wax and many others, which are either the same high quality.
From the above it can be seen that only efficient and innovative firms can survive and satisfy its customers.
This makes life difficult for manufacturers who are now forced to be more scientific in order to obtain results, which can be efficiently merged with the organization goal.
1.4 Research Objective
- To study how negotiation amount to cost reduction in materials purchases.
- To identify proper negotiation skills and how it is associated with cost reduction in materials purchases.
1.5 Research Questions
- Does negotiation amount to cost reduction in materials purchases?
- Proper negotiation skills is associated with cost reduction in materials purchases
1.6 Hypothesis of Study
- Proper negotiation is not a good cost reduction tool in materials purchases
- Effective negotiation is associated with high level of cost reduction in material purchasing
1.7 Significance of Study
The work will provide opportunity for the researcher to compare the theoretical aspect of the importance of purchasing with the practical aspect of it.
The study will also be of a benefit to the researcher because it will widen her knowledge on negotiation as practiced in a company as opposed to what is written in textbooks. Also it is a pre-requisite for the award of Higher National Diploma (HND) in purchasing & supply. For the company, it will serve as a reference text and provide probable suggestions to identified problems.
Finally, it will be a benefit to future researchers since almost all aspect of negotiation will fully discussed in this study, hence it will serves as a base for future studies.
1.8 Definitions of Terms
This is the process of planning receiving and analyzing used by the buyer and the seller to reach an acceptable compromise in an aspect of business transaction such as price delivery, specification, terms of payment etc. also it is the act of attiring at a common understanding between the buyer and the seller through bargaining on essential of the contract:
This term is also here as the process of buying in the market. But in a broader sense, it is a professional term used when buying goods and services by an industries, commerce and co-operation by a professesional buyer
Since negotiation is sometime mistaken to means the same thing as haggling it is good at this juncture to point out that haggling means arguing about price.
It is also referred as follow up.
This is the process of obtaining by legal means materials supplies, services and equipment required in the operation of organization.
This is the process of defining an item in terms of it brand or trade name chemical analysis sample standard, performance or any other relevant characteristic suitable in all aspect for the purpose for which it is intended.
Is an agreement to discussion in order to arrive at a compromise.
Is calling for bids and evaluating the bids to arrive at the best price.
Both Side Wins Something:
Invariably one side wins, more than the other, this is how it should be in business, superior skills mentis superior records.
HEINRITZ AND FARREL (1981, P.265) define negotiation as the act of arriving at a common understanding through bargaining on the essential of contract such as delivery terms, specification, price and others terms. Because of the interaction of these factors and many others, it is a difficult act and requires the exercise of judgment, fact and common senses. The effective negotiation must be a real shopper, alive to the possible of bang aiming strength. A negotiation knows where to be firm or make pessimistic concession on prices and other terms.
According to Baily and farmer (1981, P.237) negotiation form substantial part of the jobs of most purchasing people with any measure of responsibility. Like sales men, buyer needs to be proficient in such skills as asking good question listening, interpreting, terms in negotiation pre – planning a negotiation ensuring that what is agreed is implemented. They need to be able to analyses and interpret information, and be aware of dangers, making unwarranted assumptions, since negotiation is an interpersonal process, they need to understand something about human behaviors, needs and motivations and the need to develop interactive skills.
WESTING J.HC 1976, P-198) commented in established concerts sources of supply that have proved satisfactory in quality, services and prices have been developed over the years. These sources tend to be regularly utilized when the sources are found to be lighter in price or to offer delivery terms that are nor as desirable as those offended by a completion, the buyer will frequently negotiate, with the regular success for better price and delivery terms.
Negotiation may be conducted with the suppliers, sales men or they may sell or buy. It permits a more personal approach to the problem of agreeing on the terms of sales than does the formal invitation method.
LYSON (1989,P.208) defines negotiation as any form of verbal communication in which the participant seek to exploits the relative strength of the respective bargaining position to achieve exploit or implicit objectives within the overall purpose of seeking to resolve the identified areas of disagreement.
According to UGBANA (1987, 9.102) negotiation is seen as the art and science of arriving at a common understanding through bargaining on the essentials of a contract since as delivery price terms and conditions of services within the purchasing context.
It is essentially a technique of communication of interchanging ideas and information as a result of which buyers and sellers arrives at a mutually acceptable bargain. To be successful the purchasing manage should do some home work well by planning his objectives and stages before hand entails the session with a position attitude of success, collecting and sending all relevant facts before the meeting and developing on agenda for the meeting.
Since the essential element in negotiation is bargaining between individuals. The process involves personalities, human motive people strength and weakness and a great deal of psychology.
Again Baily (1987, P-197-198) asserted that the scientific aids of operations research the elaborate calculations and the expensive computer hard with supplier after the fact
Discussion of Findings, Recommendations and Conclusion
5.1 Discussion of Results
The analysis of results in chapter four shows that effective negotiation is a good cost reduction tool in materials purchasing.
That Effective negotiation help to achieve high cost reduction in materials purchasing
However, negotiation is only a tool for achieving cost reduction in materials purchasing.
There are several different strategies and tools that a buying organization can use to reduce the cost of purchased services. Each buying organization will have to determine the best strategies to use based on its own unique factors, strategic goals, and core competencies. Strategies that work well for one organization may not work effectively for another.
Carefully evaluate the options available to you and choose the strategies that fit the particular needs and situations of your organization.
Some of the money saving strategies identified in this paper include tracking spend more closely to identify opportunities to take advantage of volume aggregation; being involved in supplier development efforts to improve relationships with key suppliers; developing integrated sourcing strategies that decrease maverick buying by promoting purchasing compliance, increasing contract compliance, increasing the level of financial controls and improving payment efficiencies; assigning the tasks of services purchasing to the most appropriate staff members; exploring group or consortium buying opportunities; outsourcing some or all of the services purchasing responsibilities to a third party; and using reverse auctions appropriately. By effectively using some or all of these strategies, any organization can begin to realize significant savings on its services spend.
Negotiation skills are important to organisations, but cant substitute for good management of materials to reduce cost, they can assist management but do not replace management of provide an excuse for poor management. The following recommendations are adopted.
There should be a continue control on the part of management and low level of wastage to ensure adequate cost reduction.
There should be adequate management system to ensure proper accountability.
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