The purchasing function contributes
directly to the operating results, cost reduction and profitability of an
organization. It has been argued out that, the fact that purchasing is
responsible for spending more than 70 percent of an organization's sales capital
highlights the profit enhancing potentials of the purchasing on an
The purpose of this research is to
describe the role purchasing played in cost reduction and its impact on the
profitability of Nigeria Distilleries Limited.
Primary and secondary data
collected were collected in order to fulfil the research work; the primary data
was gathered directly from relevant sources in, Nigeria Distilleries Limited
through one on one interview and questionnaires. The secondary data was obtained
from indirect sources, such as textbooks, articles, and websites. Due to
population size of the entire staff which was 200, 10% of the entire population
was chosen which amounted to 20 staff to administer the questionnaires.
These findings revealed so many
problems encountered by the study which includes the problems of stock out,
overstocking which had devastating effects on cost and profitability of the
company. Recommendation was made to correct all the problems in the concerned
TABLE OF CONTENTS
1.1 Problem statement of research
1.2 Brief background of company of study
1.3 Staff Strength/Structure
1.4 Vision and mission statement
1.5 Purpose of research
1.6 Significance of research
1.7 Research questions
1.8 Limitation of research
1.9 Definition of terms
2.0 Literature review
2.1 Definition of purchasing
Role of purchasing in an organization
Function of purchasing department
Centralized and decentralized purchasing strategy
2.1.4 Centralized and decentralization purchasing
Supplier sourcing and evaluation
2.1.6 Supplier sourcing strategy
Partnership sourcing strategy
2.2 concept of cost
Program of Controlling Cost in an Organization
Importance of purchasing in cost reducing and
Contribution to profitability
2.2.3 Profitability program recommendation
Published pricing lists
Process of Negotiation
NDL Material Management Division
Purchasing function in NDL
Procedures for procurement
Procedure for Receipt of Materials from
Procedure for payment/invoice treatment
Process for Vendor Development and
Choice of Company
How data was collected
Method of data Analysis
Reliability and Validity tests
Internal and External Validity Test
Frame of Reference
Presentation Analysis and
interpretation of data
Presentation of Data
Analysis of Result
Purchasing and purchasing Strategy in
NDL Supplier Souring Strategy
NDL Supplier Souring Evaluation
LIST OF TABLES
Table 4.1 Analysis
of respondents on who buys for the Organization
Table 4.2 Analysis
of the qualification of these responsible for purchasing of Materials
4.3 Analysis of Whether the Purchasing
Purchasing is a relatively new
profession in Nigeria, in comparison with other professions like Accounting,
Administration, Banking, Law and Business Administration. Its acceptability by
many organizations is slow and gradual. In many organizations, the buyers are
not professionals; they do not therefore know the principles and techniques
involved in purchasing. The trained professionals are now finding it difficult
to find jobs in most organizations, as their positions have been occupied by
the administrators, accountants and other allied professionals. To be a practicing
buyer, one has to be trained in the art and science of buying effectively to
the profitability of the organization.
Many people even in other
disciplines think that casual or domestic buying is the same as organizational
purchasing. Buying is, however not the same as purchasing. Obtaining quotation,
placement of purchase orders or contracts after negotiation and scheduling of
deliveries constitute a composite professional practice. Buying is a static
concept and does not imply fostering of economies of scale.
PROBLEM STATEMENT OF THE RESEARCH
It is very clear that in most organizations,
non- professionals are the one occupying purchasing position. This is expected
to result in sub-optimization and loss of profit in most cases, because
non-professionals are neither well trained in buying skill nor skilful in the
cost reduction and profitability decision- making, which are major contributory
factor to mismanagement of the purchasing departments in most organizations. It
is very clear that the ethics of the purchasing and supply management are not
often followed and this shall have negative effects on the organizational
In most organizations, there is the
need to achieve continuous process improvement, in order to produce products or
services more effectively, which would enable them to give their customers
better value, in an efficient and cost effective manner. According to Fearon et
al (1997:25), "one of the keys to accomplishing this, is working with key
suppliers to help them provide high quality, faster and more reliable delivery,
innovative design, production, distribution ideas and a lower total product or
According to Court et al (1997: 1)
in many organizations, purchasing remains the least understood and most
ineffectively managed of all the business processes. Quite apart from the loss
and devastating effect on profit forecasts, mistakes can consequently threaten
the viability of the enterprise by allowing costs to rise or delaying the
introduction of new products or services into the marketplace, leading in tum
to a loss of competitiveness. He further explained that, 'in spite of this,
management in most organizations still persists with outmoded and out of place
BRIEF BACKGROUND OF COMPANY OF STUDY
Nigeria Distilleries Limited (NDL)
was the first company set up by Lexcel Group in the year 1973 to manufacture
alcoholic and non-alcoholic beverages. LEXCEL group comprises of six companies
under the Chairmanship of Mr. Ola Rosiji, one of the sons of the founder, Late
Chief Ayo Rosiji and a six member Board of Directors headed by the Group
Managing Director, Mr.Anil Aluwaliya. NDL is an ISO 9001: 2000 certified
Company committed to creating a total quality environment for manufacturing and
delivery of both alcoholic and nonalcoholic beverages.
The company endeavour to be the
preferred manufacturer of quality products meeting international standards. NDL
started business by bottling imported "bulk products" and through its
extensive Research and Development, developed its own formulation and processes
for a variety of alcoholic drinks (Schnapps, Gin, Liquor, etc). NDL is the
largest company in the wine and spirits industries in Nigeria, manufacturing
fourteen (14) brands in thirty five (35) pack sizes. The company brands
includes; Seaman Schnapps, Bacchus Tonic wine, Calypso Coconut Liquor, Dark
sailor rum, Regal and Lord's Dry Gin etc. The company started the manufacturing
of non-alcoholic beverages in the year 1999 and all manufactured products are
registered with the National Agency for Food and Drug Administration Control.
Its manufacturing plant is located on a large expanse of land in Sango Ota,
Ogun state of Nigeria.
NDL is focused on sustaining its
leadership position by introducing more products and pack sizes. It strongly
believes in providing quality services to its consumer and safe environment for
its staff by following regulation and safety training on a regular basis.
Nigeria Distilleries Limited's
staff strength stands at approximately one thousand five hundred (1,500). With
one Managing Director, and a six (6) member Board of directors who constitute
the policy maker; then the divisional heads and Managers who are the policy
operators; and then the Assistant Managers and Principal Officers below who are
the policy recipients.
VISION AND MISSION STATEMENT
Our company shall service the
growing economies of Africa and beyond by producing international quality
drinks for the mass market whereby creating value for our stakeholders.
To be Nigeria's foremost
manufacturer of quality beverages by employing best people, using modern
technology and equipment’s for producing products of unsurpassed value to the consumers.
PURPOSE OF THE RESEARCH
The purpose of this research is to
however, describe how purchasing can contribute to cost reduction and impact on
the profitability of Nigeria Distilleries limited.
SIGNIFICANCE OF THE RESEARCH
This research work would be of
importance to the management of manufacturing firm like Nigeria distilleries
limited and other service providers which deals in industrial purchasing. The
research will also give suggestion towards the improvement of purchasing
activities, cost reduction and hence improve on the profitability within the
The following questions will be
answered by the research study:
What pricing method does the
Does NDL experience shortages of
materials / stock out? Does stock out cause fluctuation in the production
What method of sourcing for
suppliers is used by the company among others?
LIMITATION OF THE RESEARCH
During the course of this work, a
number of factors militated against the researcher, which include her:
to get timely approval from Management of the Material management department.
relevant literature materials for the research work.
timely feedback on questionnaires distributed for the purpose of this study.
DEFINITION OF TERMS
Is the continuous management process that is responsible for the anticipation, identification
and provision of goods and services that are required by an organization with
the objective of helping profitability or services provided.
ISSUES: Where the placement of capital goods is a normal
day to day feature or where a capital development or reconstruction programme
is in operation, special attention is usually given to the control and
recording of the issues of capital material from store house.
ENQUIRY: This is a note that is sent by the purchasing department
to the supplier which contains types of needs needed by the department.
MANUALS: This typifies a handbook that contains operational
procedures in the purchasing department with the utmost adherent to practice.
LIST: This is the guide to check and control the whole
activities of the programme whether value analysis or value engineering.
OF MATERIAL: This is a process of seeking and
selecting materials from suppliers at the least ultimate cost.
Is the process by which two or more parties arrive at a mutually acceptable solution,
agreement or resolution to a commonly recognized issue. Or it can also be said
to be any form of inter-personal communication which participants or parties
involved seek to state their relative competitive advantage and needs to
achieve implicit objectives or goals within the overall purpose of seeking to
resolve problems which are barriers to agreement or mutually acceptable
resolution (Lysons, 1993)
ATION: This is defined as a statement of the attributes of
a product, process or service.
BUDGET: This involves knowing the total quantity of
materials needed or required and their prices and give an estimate financial
value of what an organization will expend on goods and services in a given
PURCHASE: This is an agreement which bails goods to the
intending purchaser, the property in the goods passing to bailee which the term
of agreement are fulfilled.
ISSUES: In accordance with manufacturing schedules, some
materials may be received on a programmed delivery basis and kept for use only
on the production line for which they have been purchased.
ISSUES: An impress system is one whereby a list of certain
type of materials of given qualities are approved to be held either in a
sub-store or on a product ion line elsewhere.
TIME: This refers to the period between the time an order
is placed and when it is received into the store.
DISCOUNT: This are often referred to as an incentive to the
buyer to give the vendor a larger share of the available business and vendor
may also pass on to the buyer proportion of saving accruing from large
quantities such as reduction in production, selling transportation and administrative
REBATE: This is an allowance or abatement made from a bill
or in the price of goods.
refers to the award of part or some of other concern work by a buyer of the
contact to a third party.
ANALYSIS: This is an organized procedure for the
identification and elimination of unnecessary cost without impairing
performance reliability or safety or marketability. Lawrence. D. Miles of
General Electric Company describes value analysis as; a philosophy implemented
and a group of learned skills, it is an organized, creative approach, which has
for its purpose the efficient identification of unnecessary cost.
ENGINEERING: Is the application of value analysis at
the pre-production or developmental stage (Lysons, 1996). The programme focuses
on new specification developed at the engineering design stage and is usually
led by Engineering department or function. ARISING: This is the material
management term given to all material, goods, plant and other supplies which
are from production or elsewhere and are scrap or waste.
Not all material issued to production are fully consumed or used up in the
production process, the excess or left over from the production floor is called
scrap and it can be disposed or sold.
The surpluses recovered due to inefficient use of production machinery or
equipment, carelessness, inefficiency and poor purchasing.
These are materials that are recovered, recycled and re-used. Salvaging is the
system of recovering and recycling a material for use and is usually done
through a system called "backward integration".