THE IMPORTANCE OF PURCHASING AND SUPPLY FUNCTIONS TO THE PROFIT PERFORMANCE OF SME’S ( A STUDY OF THREE SELECTED SMALL BUSINESS)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Considering the high importance of purchasing and supply role and with the idea that this functions has the capacity to affect the small and medium scale enterprises profitability favorably, the way purchasing and supply functions grows within an enterprise over time has been a topic of high interest. The evolution of the purchasing and supply function is well acknowledged. Departing from the passive, re-active clerical viewpoint of the 70’s, the purchasing and supply function has the tendency to develop itself in a strategic pro-active function contributing, as much as other business functions, to the creation of sustainable profitability advantages (Versendaal et al, 2005). According to Cavinato and Freeman (2010) who declared that in recent changing and changing global markets, small and medium enterprises stressing on the high quality production must pay attention to their purchasing and supply on planning, development and operation. They realized that purchasing and supply groups of many small and medium scale enterprises have been slowly developed without a specific plan in response. In reaction to nowadays unpredictable economic uncertainty, purchasing and supply managers have adopted a "wait-and see" attitude. Many are tired of spending their company's most valued asset: cash. Purchasing is the act of purchasing of goods and services that an enterprise needs to operate and/or manufacture products. Many individuals are ignorant of what purchasing is talking about. The term purchasing is used in industries, commerce, public corporations to show the act of and the financial responsibility for buying material, supplies and services. It simply analyzed as the process of buying. In a wider sense, the concept involves identifying the needs, selecting the supplier, arriving at a proper price, terms and conditions, issuing the contract or order, and following up to ensure proper delivery. Its major focus is to buy or procure materials in the desired and right quantity, at the right amount, at the right period, and from the right supplier and delivering to the right location. Global markets are developing beyond borders and re-defining the way demand and supplies are managed. Global companies are driven by markets across continents. In order to keep the cost of production down, they are forced to keep seeking to set up production centers where prices of raw materials and labor are low. Sourcing of raw materials and outlets to supply the right quality and at right cost, calls for dynamic purchasing strategy cutting across countries. Managing all of the activities in demand and supply on a global scale is Supply Chain Management. Purchasing and supply function management is the management of a network of all business processes and activities involving procurement of raw materials, manufacturing and distribution management of Finished Goods. Purchasing and supply management is also called the art of management of providing the Right Product, At the Right Time, Right Place and at the Right Cost to the Customer. Why Purchasing and supply management strategy is important for an enterprise Supply Chain Strategies are the critical backbone to Business enterprises today. Proper Market coverage, Availability of goods at locations which hold the key to revenue recognition depends upon the effectiveness of purchasing and Supply Chain Strategy rolled out. Very simply stated, when product awareness is created in the market and advertised, the whole market in the country and all the sales counters need to have the product where the customer is able to purchase and take delivered product. Any hindrance in product not being available at the right time can lead in withdraw in customer interest and demand which can be disastrous. Purchasing and Supply chain management represents one of the most noticeable shifts of modern business enterprise management by realizing that small businesses no longer compete as solely lonely entities, but rather as  purchasing and supply chains (Lambert and Cooper, 2000). Purchasing and supply management, along with a number of other upcoming areas in management, is however, still in its embryonic stage. The scientific development of a coherent purchasing and supply chain management discipline requires that advances be made in the development of measurement instruments of its profitability of small scale enterprises as well as in theoretical models to improve our understanding of purchasing and supply function phenomena.

1.2 STATEMENT OF THE PROBLEM

Despite the increasing attention being paid by all modern enterprises to supply chain management practices globally, small and medium-sized office supplies firms still lag behind in embracing the SCM practices. Supply chain management issues are more comprehensively explored in the context of large enterprises but less attention is paid to SMEs. Office Supplies firms have been slow in recognizing the benefits that come with purchasing and supply management. Due to the current competitive business environment and global market place, customers are more demanding to have better and cheaper products, higher service levels, more product varieties and faster delivery than ever before.  It has been established that SMEs are disadvantaged when it comes to accessing business opportunities from large scale enterprises because of the perceived lack of cooperation with the large enterprises. Most firms adopt the concept of I will” when you lose attitude this result into poor project execution. Most people involving in purchasing of capital and management do not possess the right skill and knowledge of negotiation. The economic situation of the country has serious effect on the quality of negotiation purchasing function in manufacturing company firm attempt. There is no serious attempt on the part of firms to empower negotiation contract managers.

1.3 AIMS OF THE STUDY

The major aim of the study is to examine the importance of purchasing and supply functions to the profit performance of small and medium scale enterprises.  Other specific objectives of the study include;

1. To examine the effectiveness of purchasing and supply management on company’s profitability.

2. To examine the role and objectives of purchasing and supply functions.

3. To examine the impact of purchasing and supply functions on profit performance of small and medium scale enterprises.

4. To examine the importance of purchasing and supply functions on profitability of small and medium scale enterprise.

 5. To examine the relationship between purchasing and supply functions and profit performance of small and medium scale enterprises.

6. To examine ways in which small and medium scale enterprises can utilize purchasing and supply functions to enhance their profitability.

1.4 RESEARCH QUESTIONS

1. What is the effectiveness of purchasing and supply management on company’s profitability?

2. What are the role and objectives of purchasing and supply functions?

3. What is the impact of purchasing and supply functions on profit performance of small and medium scale enterprises?

4. What is the importance of purchasing and supply functions on profitability of small and medium scale enterprise?

 5. What is the relationship between purchasing and supply functions and profit performance of small and medium scale enterprises?

6. What are the ways in which small and medium scale enterprises can utilize purchasing and supply functions to enhance their profitability?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant impact of purchasing and supply functions on profit performance of small and medium scale enterprises.

H1: There is a significant impact of purchasing and supply functions on profit performance of small and medium scale enterprises.

Hypothesis 2

H0: There is no significant relationship between purchasing and supply functions on profit performance of small and medium scale enterprises.

H1: There is a significant relationship between purchasing and supply functions on profit performance of small and medium scale enterprises.

1.6 SIGNIFICANCE OF THE STUDY

The study would be of benefit to guide industrial purchasing to effective and efficient negotiation to enable them to obtain the “best buy which is the ultimate goal of the purchasing function. The study would also be of immense benefit to students, researchers and scholars who are interested in developing further studies on the subject matter

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the importance of purchasing and supply functions to the profit performance of small and medium enterprises.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

PURCHASING: IS the act of buying the goods and services that a company needs to operate and/or manufacture products.

SUPPLY: Is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

PROFIT:  Is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business. Profit is calculated as total revenue less total expenses.