Purchasing Research As A Tool For Profitability In The Service Industry

Project and Seminar Material for Purchasing and Supply PS

Purchasing Research As A Tool For Profitability In The Service Industry


Abstract


Purchasing departments are at the center of successful supply chain management. Typically, they help other departments identify their needs, manage the requisition process and source competitive prices, and generally act as controllers to ensure adherence to budgets. To ensure quality and to prevent unethical practices, purchasing is usually separate from receiving and accounts payable. This has necessitated the researcher to investigate the efficacy of purchasing research as a tool for profitability in a service industry.


Chapter One


Introduction

1.1 Background of the Study

Organizations uses many types of resources to function. One of the most valuable, often the least understood, is their knowledge base. Management is unable to take formed decisions without knowledge and the quality of that organization knowledge, skills, resides primarily in employees but can also be collected in data bases, reports patents, plans, budgets, memoranda and a variety of other documents. The knowledge base covers all aspects of the organizations activities products, technology, human resources, finance, sales and purchasing and is a wasting asset requiring constant dating, improvement and extension to keep abreast with changes in the operational environment.

Nowhere is the need for detailed, accurate and up to date knowledge more evident than in the purchasing function. The markets have two characteristics, which distinguished them from the other environments in which companies operate. They are:

In variable dynamic and are tending to become more so in response to increasing pace of technical development, competitive pressure and a continual uplift n customers’ expectations.

Change is caused by a wide diversity of factors most of which are beyond the control of any single supplier.

Purchasing therefore operate in an inherently unstable environment and it is all too easy for companies to lose touch with conditions in the market they service.

Furthermore, in the quest for growth or even to defend existing market positions, the problem tends to be exacerbated by the fact that companies continually need to do something new. They develop new strategies launch new product, target new market and initiate new service packages – all of which push them into increasingly unfamiliar purchasing territory.

Purchasing knowledge is created from a number of inputs experience and expertise are critical, as are experimentation and analysis, but the key dynamic ingredient purchasing information derived from sources within the market place itself, notably customers, competitors and distributors.

Purchasing research is the purchasing information. It is defined by the American purchasing association as the systematic gathering, recording and analyzing of about problems relating to purchasing of goods and services. Purchasing research can also be defined Kolter (20003:129) as the systematic design, collection, analysis and reporting of data and findings relevant to a specific purchasing situation facing the company.

Purchasing research is very important to any organization or company because it is through it that we know the feelings, wants, needs, perceptions and preference of customers/consumers knowing that consumer/customer is the focal point of purchasing and every organization or company will always want to satisfy their customers/clients in other to continue in the business. It is a link between the customer and the general public to the individual, organization of the business firm and also identify and define purchasing opportunities, trends, threats and measurements.

Therefore, this study try to find out how purchasing research is carried out in the service industry – people always believe that purchasing research is more suitable in product/goods offering company and it is not well practice in the service industry due to its certain characteristics.

Service can be defined as any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership anything. (Kotter 2003) services have four major characteristics that greatly affect the design of purchasing programs: intangibility, inseparability, variability and perishability. Services also vary as to whether they are equipment based or people based. It requires the client’s presence and differs as to whether they meet a personal need or business need. Services provided differ in their objectives (i.e. profit or non profit) and ownership (as to private or public).

These have made people believe that purchasing research in the service industry – insurance company, has resulted from the growth of purchasing management and purchasing concept. The basic purpose of applying purchasing research is to reduce purchasing management risks and consequently embrace higher purchasing efficiency. Purchasing research is also used in situation of disagreement or uncertainty amongst the purchasing decision or where the available purchasing research techniques will increase the amount or reliability of purchasing information decision in service industry.

There are certain factors in service industry especially in insurance companies that affect the profitability of the firm such as the impact of legislation and tax concession, size and distribution of population, national income, competition, inflation, use f mass merchandising, packaging policy approach etc it is through purchasing research that these problems will be solved and thus bring profit to the company. The success of any business firm depends to a great extent on the efficiency and aggressiveness of the entire purchasing organization operations, and the effectiveness of the management, working together as a team, towards the accomplishment of the specific and broad corporate goals and objectives.

AIICO insurance company a service industry was established in 1963 as a collection centre, and incorporated in 1970, converted to a public liability company in 1989 and was listed on the Nigeria stock exchange with effect from 3rd December, 1990. To date, AIICO has become the highest life insurance in Nigeria and a major underwriter for general insurance business. The company’s success has been the result of its ability to evaluate its potential set realistic goals and take necessary action to achieve them. They have a separate purchasing department and a research department that undertake the purchasing research work. These activities have to a large extent influenced the overall performance of AIICO insurance company Nigeria.


1.2 Statement of the Problem

Despite the large market potentials in service industry and its competitive nature in Enugu State, many companies and business still find it difficult to develop an appropriate offering that will serve the market satisfactorily.

ALLCO insurance company faced very stiff opposition from other insurance companies especially other foreign owned insurance brokers and agents at its on set due to fear of the uncertain effects that its entry into the industry might cast on their business prospects, thus were reluctant to assist the company.

Also, the level of insurance awareness in the country is still very low, at present about 10-15 percent of the Nigerian population are insured, unlike developed countries this resulting in low productivity and profitability.

Consequently, there have been allegation of AIICO insurance company not compensating the unfortunate policy holders, all these have resulted in negative attitude towards their services, thus have resulted to loss in profit. This research takes an in-depth look at this allegation and other pro problems in other to proffer an amenable attitude towards AIICO insurance company.


1.3 Objective of the Study

The objectives of this study are to ascertain,

  1. What type of purchasing research activities are available to companies especially those activities that AIICO insurance company is interested in conducting?
  2. What proportion of purchasing budget is allocated to the purchasing activities in a given period in AIICO insurance company?
  3. Whether the company has its own established purchasing research department or if they hire the services of purchasing research consultants.
  4. The source of their purchasing data and the method used in analysis such data from which information is derived.
  5. Whether purchasing research creates awareness in AIICO insurance company.
  6. If purchasing research increases the policy holders in AIICO insurance company
  7. Whether purchasing research contributes to increase profit in AIICO insurance company.

1.4 Formulation of Hypotheses

The following hypotheses were formulated and tested.

  1. Ho: Purchasing research does not create awareness of AIICO insurance company
    HI: Purchasing research creates awareness of AIICO Insurance Company.
  2. Ho2: Purchasing research does not increase the number of policy holders.
    HI2: Purchasing research increases the number of policy holders.
  3. Ho3: Purchasing research does not increase profit of AIICO Insurance Company.
    HI3: Purchasing research increases profit of AIICO Insurance Company.

1.5 Significance of the Study

Olakunori (1997:20) defined purchasing research as the planned and systematic investigation and collection of relevant facts, the analysis and interpretation of those facts through objective and verifiable methods, for the purpose of arriving at solution of problems or deducing broad principles or laws”. Putting it another way, the research is a planned process of conducting investigations in other to achieve a determined objectives.

The objective is usually a solution to one or more problem or an addition to current knowledge in particular field. It is against this background that the researcher believes that the study f this nature is necessary. The outcome of this study will provide an adequate understanding on the application of then various purchasing research to service business/industry.

Also this research work will help to ensure an improvement in the quality of service rendered to customers and the public by AIICO insurance company and could as well help the management design strategies and programmes which will enable them to remain competitive.

The research work also helps other service firms to understand more correctly the basic principles of purchasing research and its place in the service business/industry so as to influence future purchasing operations.

Finally, the researcher will benefit immensely in this study because he will learn a lot through the stages of study by passing through all the critical and difficult tasks required in gathering necessary information and the subsequent analysis, interpretation and presentation of the research findings.


1.6 The Scope of the Study

The study takes a look into the purchasing research activities of insurance firms in service industry. Because of time and other factors involved, the researcher was limited to the study of particular insurance firm known as AIICO insurance company operating at Enugu metropolis. It examines the conduct/operations of purchasing research activities in the industry.


1.7 Definition of Terms

Purchasing:

This is the process of planing and executing the conception, pricing, promotion, and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational goals. Peter D. Bennett (1988).

Service Purchasing:

The purchasing process involving organization that buy in other to provide services or these purchasing activities or processes which involve the provision of services to customers through exchange process. Hart N.A and Stapleton, J (1986)

Services:

They are activities or benefits that one party can offer to another that is intangible and does not result in the ownership of anything. Kotter P. (2003).

Insurance:

This is one of the social sciences designed essentially for taking risk and risk taking involves uncertainty of loss. Benaeth C. (1980)

Insurance:

This is the party who agrees in turn for a premium to pay money to another party known as the insured or the assured on the happening of a stated event. Benneth C. (1980).

Insured:

Is the other patty to the insurance contract who is entitled to be indemnified or compensated in monetary turns on the happening of event or contingency insured against. Brandmaire M. (1986).

Policy:

Is the written or typewritten document which evidence the terms of insurance contract between the parties. Itukwu, J.O (1988).

Premium:

This is the financial consideration a paid by the insured to the insurer in return for the promise of the insurer. Itukwu J.O. (1988)

Insurance Market:

Refers to all the facilities available for the placing of insurer and the different kinds of professional risk beers (insures) available. (Ayankoyi R. (1988).

Purchasing Research:

The systematic and objective design, collection, presentation, analysis and interpretation of data (information) to enable managers deal with specific problems facing any organization. Adirika, E.O. (1996:332).

Market Research:

Is the process of making investigation into the characteristics of a given market Baker. J. Michael (1991).

Purchasing Services:

Is the term sometimes used to cover all purchasing activities in a company other than the sales function of purchasing research, advertising etc. Hart, N.A. and Stapleton J. (1986).

Purchasing Function:

This is all embracing term overing every contributory factor in the process or consideration to be the responsibility of purchasing management. Hart N.A. and Stapleton (1986).

Purchasing Information:

The data and news relevant to purchasing operations. Ifezue A.N. (1990).


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain efficacy of purchase research as a tool for profitability in service industry.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of purchase research and profitability.


5.2 Summary

The significance of the purchasing function, which is a fundamental function in the designing of purchasing strategies by an organization, cannot be over-emphasized. In Nigeria service industry, the function incorporates the officer responsible i.e. Chief Officer/Shared services (COSS) in its management at the top management of the company. This is because it is significant to the entire organization, and must therefore be integrated into the companies planning process. Technical procurement and General Procurement Manager reports to the (COSS), who in turn reports directly to the chief executive Officer (CEO). This gives evidence to the paramount importance accorded to the department by the service and insurance sector, so that its activities are considered in the corporate planning process.


5.3 Conclusion

An organization’s purchasing strategy is becoming recognized as a strategic weapon equal in importance to its marketing, conversion and finance strategies as pointed out by Dobler et al. AIICO insurance company strategic approach to buying include multiple sourcing, short-term contracting and competitive bidding as a measure towards increasing its profitability by being able to source at the lowest cost, and having other sourcing alternatives, which leads to cost reduction. An organization’s profitability is determined and defined largely, by its sourcing strategy. Thus, sourcing strategically has been considered as one of the key drivers for an organization’s survival and growth as stated by Hui et al. In Nigeria service and insurance sector the multiple sourcing strategies which includes competitive bidding and short-term contracting contributes largely to its profitability, and is a key driver to its survival and growth.


5.4 Recommendations

The strategic purchasing strategy adopted by an organization depends on the nature and industry it belongs to, and should suit its activities. In Nigerian insurance sector, the strategic approach to buying implemented in the company is in line with its nature and well befits its activities. In addition, the profitability created by the impact of the strategic purchasing approach of AIICO insurance extends beyond the monetary gain, and includes large discounts for bulk purchases, competitiveness among suppliers leading to production of high quality products, and hiring of highly qualified personnel which enables it to stand toe to toe with suppliers are all steps in the right direction.


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