Purchasing As A Cost Saving Function In A Manufacturing Company

Project and Seminar Material for Purchasing and Supply PS

Purchasing As A Cost Saving Function In A Manufacturing Company

Chapter One

1.0 Introduction

This work has introduced purchasing as a cost saving function in a manufacturing company. It has endeavored to provide a breef insight to the readers and managers and students and professional men and woman in purchasing and supply management, what purchasing as a cost saving function should internal relationship that leads to understanding and harmony among the various units of the expected goal of the company.

The researcher should not or cannot conclude the introduction with out giving a brief description of one of the companies that is been used in this research. All basic produces Nigeria Limited Umuahia, producers of juice, Bottled water and satchet water is one of the numerous groups of companies owned by Basre Services Nigeria Limited at No: 14 Umugima Road, P. M. B 1736, Aba, Abia State which is controlled by an overall general manager. The umuahia factory is the researcher’s area of concentration, at all the types of soft drinks and bottle/sachet water ranging from Viral Sachet Water, Nnela Bottle Water 0.5., 0.7 and 1.5cl

The organization operates the purchasing department as follows.

  1. Department A Buying unit
  2. Department B Buying unit
  3. Department C Buying unit
  4. Department D Buying unit

The chief – raw – materials are sugar, water, chemicals, crown corn and lemon. The company started operation in 2002 with a single production line, producing only Vinel sachet water, Nuela bottle water 1.5 and later on, the company added the 0.7 and 0.5 bottle water being the current number of products. The company has depots in every state. For instant in Imo state, the depots are situated at No 2 Mbaise Road Owerri, Achingale Obowo, Isinweke Ihitte – Uboma, e t c. the products are distributed through two types of distribution system, group one are those appointed right from umuahia and are called first class white the second group are appointed by the distributors a second class under normal conditions and all things being equal, the company produces an average of (2) two thousand bags of sachet water per day 10 crates (carton) water per day working on two shifts.


The company is made up of five sections namely,

The production section, accounting section, purchasing Sections, stores section and marketing sections and which is headed by a general manager as the Administrative officer.

Nb: The Production Section

The production department is headed by the production manager who plans the production process and controls the Inventory analysis. The work section which is under spare parts manager, performs the following functions

  1. Maintenance and founding
  2. Laborating and quality control
  3. Industrial safety and Auxiliaries departments
The Finance Section

The chief accountant is at the helm of affairs and he is popularly called (fm) finance manager who in addition performs the following functions.

  1. Plans the financial aspect of the company
  2. Plans budget and control
The Purchasing Section

The purchasing officer or the chief purchaser is at the helm of affairs in purchasing section and his activities covers.

  1. Management
  2. Buying
Follow up / Expediting
  1. Strategic planning and Research work
  2. Chemical activities
The Stores Section

The person that sees the helm of affairs of the stores unit is the chief stores officer affair. He performs the following activities

  1. Holding, controlling and issuing stocks.
  2. Control of all store house, materials handling functions
  3. Quality control activities
  4. Chemical Administration of stores operations.
The Marketing Section

This section is headed by the marketing manager, who is in charge of sales activities as follows.

  1. Plains the marketing and sales of products.
  2. Logistics planning and
  3. Sales forecast.

The aim of this section is for efficient in this organization. Thus the purpose of operating purchasing is to make sure that materials are bought at the right quality, right quantity, from the procedure is formed the 5RS OF purchasing or the purchasing mix.

Organizational Chart

1.1 Historical Background Of The Study

Purchasing as input, whether direct indirect materials. It is the duty purchasing to properly select and apply cost reduction techniques so as to achieve greater satisfaction in terms of profit.

In an average company, it will amount to about 60% of all cash expended. In a marketing concern where goods are bought for resale. This proportion is of course much greater since all goods produced by a company or any establishments pass through the purchasing department.

The surest way of measuring the success of a business enterprise is by the profit it makes purchasing the first cost reduction center in any business concern. If the cost of input is very high definitely, the cost of output will also be very high. The potentials of a typical purchasing department need not be fully harnessed especially now that the worldwide movement from a local market to a universal economic system aimed at unification of the world market (globalization) has become the in-benefit of the new millennium. The opportunities, benefits as well as challenges offered by these movements are numerous. The ability of any establishment to face this movement will depend on a sound organizational structure that produces good performance.

To Illustrate

An entrepreneur who produces and distributes bread uses flour, sugar, yeast, butter etc. as raw materials, the amount spent on these items constitute part of the cost of production. The packaging and labeling is another added cost plus other selling expenses. All this make up the cost of producing a batch or a specific number of loaves. In determining the profit made from the batch. The entrepreneur simply finds the difference between the cost of production and this income realized from sales.

1.2 State Of The Problems

The problem of purchasing as a cost savings function has been identified as enormous. In industrial firms, one of the problems is that of designing as organization as organization/structure that is suitable for the purchasing as accost savings functions. The failure of those has been, lack of co-operation and cohesiveness among the various workers of the department. Other problems, range from lack of finance to procure equipment mostly movement of goods from one place to another. This is mostly noticed in public section that is ministries and parastals. In several cases, the purchasing has been regarded as an unnecessary expense. It has been of an event and a non-producing department which must suffer.

In another development, the purchasing management has not actually been accorded in to recognition it deserves. This is to say that, most of the purchasing officers are own-professionals, men with knowledge of procurement techniques.

Consequently, in those sections of the business like where large items are being required mainly (in the distribution industry). The problem has been under the care of administrations. The approval which they have employed has not been administrative “one’ for instance, in all basic products. There is no single officier who is trained as a purchasing officier. For this reason, they have no authority whatsoever to procure or to raise requisiting rather the owner representative does the procurement and supply.

It is the general situated that made the researcher to take up the study with a view to determine what can be done to arrest the ugly situation and improve the organization of purchasing as a cost savings function as to these ideals especially the earlier quoted statement that is purchasing is an evil and not a producing ones the researcher wants to correct that impression.

1.3 Purpose Of The Study Or Objective

The purpose of this study is to evaluate ascertain and find out.

  1. The extent to which purchasing has helped in cost reduction for the company.
  2. The method of reducing overall costs through wise buying.
  3. The calibre of staff involved in various activities of purchasing those areas of activites includes follow-up/Expediting, negotiation etc.
  4. Ways of remolding the recurring problems associated with purchasing.
  5. To offer recommendation when appropriate.

1.4 Significance Of Study

To probe into the phenomenon as to elicit facts/figures which morgue help in achieving objectives of the study. It is imperative that this significance and validity of this research project be succinctly stated the objective of this study is to provide a comprehensive and indebt study of the role of purchasing as a cost savings functions as a applicable to soft drink processing industry exploring vast possibilities of improvement importability through cost reduction and an increase in material productivity.

The study is essential particularly for principles; techniques and application that have outlined will be useful to the soft drink producing organization from top management and professional purchasers.

Also, the study is essential for the students of purchasing and supply for further research work.

1.5 Research Question

In the research study, the research wants to

  1. Find out what are the functions of purchasing
  2. Find out how the purchasing department contributes the cost savings profitability of the organization.
  3. How does information flow among the major functions and training schemes adopted.
  4. How does the major units that make-up purchasing relate with others.

1.6 Hypothesis

In a bid to determine the above research question are the following tentative QUESTION to be tested.

Null Hypothesis

Ho: purchasing does not serve as a cost savings and does not function as a source for profit making for the company.

Alternative hypothesis

H1: Does purchasing serve as a cost saving so as to source profit making for the company.

Null Hypothesis

Ho: purchasing is not a socio-economic force in our company

Alternative Hypothesis

H1: purchasing is a socio-economic force in our company.

1.7. Scope And Delimitation Of The Study

Scope of this study was conducted to cover all the general aspects of all Basics products (Nig) ltd umuahia. The coverage highlighted of all general Industry for and formation of the company all basre products from the date of inception fill date. The scope of coverage is focused on establishing and good business relation, soliciting sources of supply and factors in supplies sections. Manufacturing capacity of the supplier, financial strength, ethical behaviors of supplier, sourcing techniques and information, suppliers deployments, need for efficient and effective communication programmed between buyers and suppliers in a competitive market among others.

1.8 Limitations Of The Study

Among other things, the researchers encounter, are the following limitations in carry out the research work on the mid for the development of source of supply in manufacturing industry as it related to all product Nig. Limited umuahia.

  1. Research biases
  2. Finance constraint
  3. Time constraint
  4. Transportation
  5. Attitude of Nigerians to research
  6. NEPA/PHCN power outs
  7. Official protocols

Research Baises:

Most research biases are seen because the researcher is faced with a total of seven other lectures to attend complied with assignment and mid-semester test.

Financial Constraint:

This Has Been Out of The Problems Facing Researchers that is finding it extremely difficult to generate the required capital that is involved to carry out an excellent research job.

Time Constraint:

Based on time, it is said to be money. The problems of inadequate of time to visit. Revisit the company as well as the finance to enhance the frequency of movement.


Inadequate movement of the research has been one of the problems because of some constraint that are made to be so.

Attitude Of Nigerians To Research:

Here are talks about environmental factors, like political instability, economic problem, and government regulations. Etc.

NEPA/PHCN Power Outs:

Because of the low power supply given by the NEPA/PHCN has formed one of the problems facing the researcher.

Official Protocol:

Before any of the officier attends to you, all the protocol must be observes in your case study organization that is, filling of form, response from the secretary before officier attends to the researcher. Based on this the researcher is faced with the limitation

1.9 Definition Of Terms / Abbreviations

I. Cost Plus:

Is a constraint where the purchaser agree to pay the vendor an amount equal to his actual costs plus a fixed fee or percentage of costs

II. Purchase Order:

This is a purchaser’s document used to formalize a purchase transaction with a supplier on acceptance by the supplier. It becomes a legal constraint between the two parties and hence it must specify all terms of the constraint (oyeoku 1993).

III. Terms Of Payment:

This is the agreed made of payment for goods purchased. It can be in advance cash, deferred in installment etc.

IV. Specification:

This is the area in which it becomes very difficult to ensure that the supplier understands exactly what required (oyeoku 1993) is.

V. Economic Order Quantity (EOQ):

Is the theory that represent a mathematical technique used in finding a entry point at which the re-ordering quantity of scale and yet designed to minimize the diseconomies of the higher carrying or holding cost.

VI. Dunnage:

These are the various materials used to protect goods loaded in a vehicle or ship. Examples are hay, boards, planks etc.

VII. Discount:

In an allowance granted by vendor to buyer. There are various types of discounts. For instance, cash discount, quality discount, cumulative discount, trade discount. Etc.

VIII. Bought-Out Item:

Items that are not manufactured/fabricated by the organization but purchased and used with or without further processing in assembly the finished product.

IX. Buyers Market:

This is a situation where goods are available in plenty and the buyer has a choice and can influence the price. The opposite is the sellers market where goods are in short supply and the seller has an upper hand.

Purchasing As A Cost Saving Function In A Manufacturing Company

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