PROCUREMENT METHODS AND PROCUREMENT PERFORMANCE AMONGST STATE CORPORATIONS UNDER THE NATIONAL TREASURY OF KENYA KARANI BENSON KIRUJA

Transcription

1 PROCUREMENT METHODS AND PROCUREMENT PERFORMANCE AMONGST STATE CORPORATIONS UNDER THE NATIONAL TREASURY OF KENYA KARANI BENSON KIRUJA A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI NOVEMBER, 2014

2 DECLARATION This research project is my original work and has not been presented for a degree award in any other University. Signed:. Karani Benson Kiruja D61/72644/2012 Date: This Research Project has been submitted with my approval as a University supervisor. Signed:. Mr. Michael Chirchir Department of Business administration School of Business - University of Nairobi Date: ii

3 DEDICATION This research project is dedicated to my beloved wife, Lizbeth Karani and our children, Muthomi Karani and Kendi Karani. iii

4 ACKNOWLEDGEMENTS I wish to express my sincere gratitude to all those who contributed towards the completion of this work. My supervisor, Mr. Michael Chirchir and Moderator Mr. Tom Kongere for their tireless encouragement, availability, and overall supervision of this research project. To the Chairman and staff of the School of Business, I owe my gratitude to them for their contribution towards the successful completion of my studies. The criticism, comments and advice from other members of staff in the School and classmates at different stages of the research project are also highly appreciated. The respondents who provided valuable information through their response to the questionnaires administered: without you, the study would not have taken place. The Almighty God for the sufficient grace that saw me through during the entire period of study. Finally I wish to thank my wife Lizbeth Karani and our children Muthomi and Kendi for their patience, encouragement and understanding during my course of study. iv

5 ABSTRACT Procurement largely contributes to spending of the public entities funds, thus the procurement processes must be highly monitored on how the procurements processes are administered to ensure efficiency and effectiveness. The selection of the most appropriate procurement method is critical for state corporations as it is an important factor that contributes to the overall corporations performance. Procurement is an appropriate tool in the organisational performance, yet it has not been given the recognition it deserves in developing countries. Thus the main purpose of this study is to analyse procurement methods and procurement performance amongst state corporations under the National Treasury of Kenya. The study focused mainly on the procurement methods used by state corporations under the National Treasury of Kenya and the relationship between the procurement methods and procurement performance in state corporations. The study adopted descriptive survey design and targeted seventeen (17) state corporations under the National Treasury of Kenya. Moreover, the study used both primary and secondary data whereby both correlation and multiple regressions were employed to determine relationship between and among the variables. A statistical package for social sciences (SPSS) version 20.0 was used for data analysis. From the study findings it was concluded that procurements methods affects procurement performance of state corporations thus recommended that state corporations should apply suitable procurement methods, policy makers in government, practitioners and stakeholders in Kenya should develop their awareness on procurement performance measurement for future procurement endeavors. Awareness on procurement performance should be disseminated to professional bodies, state corporations and governmental agencies so as to monitor procurement performance. v

6 TABLE OF CONTENTS DECLARATION... ii DEDICATION... iii ACKNOWLEDGEMENTS... iv ABSTRACT...v LIST OF TABLES... viii LIST OF FIGURES... ix LIST OF ABBREVIATIONS...x CHAPTER ONE: INTRODUCTION Background of the Study Public Procurement Methods Procurement Performance The National Treasury of Kenya State Corporations under the National Treasury of Kenya Research Problem Research Objectives Value of the Study...10 CHAPTER TWO: LITERATURE REVIEW Introduction Procurement Methods Procurement in State Corporations under National Treasury Competitive Procurement Methods Non - Competitive Procurement Methods Direct Procurement Method Procurement Performance Procurement Performance in State Corporations under National Treasury Empirical Studies Conceptual Framework...24 vi

7 CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research Design Target Population Data Collection Data Analysis...27 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION Introduction Response Rate Demographic Information Analysis Procurement Methods Procurement Methods & Procurement Performance Challenges on the Implementations of Procurement Methods & Performance Relationship between Procurement Methods and Procurement Performance Correlation Analysis Regression Analysis...48 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS Introduction Summary of Findings Conclusion Recommendations Limitations of the Study and Suggestions for Further Research...55 REFERENCES...56 APPENDICES...61 Appendix I: Introduction Letter...61 Appendix II: Questionnaire...62 Appendix III: State Corporations under the National Treasury of Kenya...69 vii

8 LIST OF TABLES Table 4. 1: Extent of Agreement or Disagreement on the Statements about the Use of Procurement Methods in the Organization Table 4. 2: Effects of Quality on Procurement Methods & Procurement Performance Table 4.3: Effects of Quantity on Procurement Methods & Procurement Performance Table 4. 4: Effects of Time on Procurement Methods & Procurement Performance 39 Table 4.5: Effects of Price on Procurement Methods & Procurement Performance 41 Table 4.6: Effects of Place on Procurement Methods & Procurement Performance 41 Table 4. 7: Competitive Methods of Procurement Methods & Performance Table 4. 8: Non- Competitive methods of Procurement & Procurement Performance Table 4.9: Direct procurement & Procurement Performance Table 4.10: Correlation Table 4.11: Model Summary Table 4.12: Analysis of Variance (ANOVA) Table 4.13: Regression Coefficients viii

9 LIST OF FIGURES Figure 2.1: Conceptual Framework Procurement Methods & Procurement Performance...25 Figure 4.1: Highest level of Education...30 Figure 4.2: Professional Qualification...31 Figure 4.3: Position Held...32 Figure 4.4: Number of Years Worked in the Corporation...33 Figure 4.5: Whether Involved in Any Way in Corporation s Procurement, Supplies or Administrative Function...34 ix

10 LIST OF ABBREVIATIONS CPI - Consumer Price Index GDP - Gross Domestic Product PPDA Public procurement & Disposal Act 2005 PPDR Public procurement & Disposal Regulations 2006 PPOA - Public Procurement Oversight Authority RFQ - Request for Quotation x

11 CHAPTER ONE INTRODUCTION 1.1 Background of the Study In the recent past, there has been a significant effort to improve public sector procurement strategies and procedure. These efforts have mainly focused in improving efficiency and cost savings by developing a number of measurable tools which assist public sector bodies in their procurement activities (Knudsen, 1999). Procurement largely contributes to spending of public entities funds thus the procurement processes must be highly monitored on how procurements processes are administered to ensure efficiency and effectiveness. Unless the procurement process is administered effectively and efficiently, the performance of the procurement entities will be highly affected (Wanjiru, 2013). The selection of the most appropriate procurement method is critical for both the client and other project participants as it is an important factor that contributes to the overall client s satisfaction and project success. This selection will be dependent upon a number of factors such as cost, time and quality which are widely considered as being the most fundamental criteria for clients seeking to achieve their end product at the highest quality, at the lowest cost and in the shortest time Kumar, A., Ozdmar, L., and Peng, N.C (2005). The existence of a wide variety of procurement methods available to project developers on the market today has led to several comparisons being made on how the different procurement methods have performed at the end of the construction phase. 1

12 In the heart of the procurement reforms is the open tendering system. Asian Development Bank (2006) observes that, open tendering is the method of choice in many countries accounting for the largest share of goods and services procured. Though other procurement methods such as restricted tendering and request for proposals are provided for, they entail risks of abuse and corruption (Asian Development Bank, 2006) Public Procurement Methods Procurement methods are the procedures used by the procuring entity to acquire goods, services and works. These methods can be competitive or non-competitive. There s preference of using competitive procurement methods given that they tend to promote transparency, economy efficiency and limit favouritism. Procurement encompasses the whole process of acquiring goods, works or services. It begins when an agency has identified a need and decides on its procurement requirement (Mithamo, Iravo and Mbithi, 2013). Public procurement is concerned with how public sector organisations spend taxpayers money on goods, works and services (Hall, 2009). Globally, in many developed nations, Governments and organizations across the world tend to spend between 8 per cent and 25per cent of Gross Domestic Product (GDP) on goods and services (Organisation for Economic Co-operation and Development [OECD], 2006). Procurement continues through the process of risk assessment, seeking and evaluating solutions, contract award, delivery and payment for the goods, work or service, ongoing management of the contract and consideration of options related to the contract and extends to the ultimate disposal of property at the end of its useful life (Leenders, 2006). 2

13 There are seven procurement methods that can be used in public procurement each with different condition for use. These are internationals competitive tender, national competitive tender, restricted tender, request for proposal, direct procurement, request for quotation and low value procurement. They can further be broken down into three main methods. Thus, the Competitive procurement methods which include international competitive tender procedure, open national tender procedure, and request for proposal procedure. The non-competitive methods or negotiated procurement methods which include restricted tendering procedure, request for quotation procedure and low value procurement procedure. The final method is direct procurement procedure or direct sourcing. Contracting authority can choose amongst the methods provided. The factors that determine the procurement method of use are the estimated value of goods within the specified threshold, works or services, urgency of requirement, limited number of suppliers or service providers amongst others (Kadima, Musiega, Kibet and Manase, 2013) Procurement Performance Purchasing performance evaluation may be defined as the quantitative or the qualitative assessment over a given time towards the achievement of corporate and operational goals and objectives relating to purchasing economies, efficiency and effectiveness. Quantitative objectives are measurable using such measures as number of orders placed, reduction in lead times, price savings and reduced administrative costs and will tend to be used when purchasing is regarded mainly as a clerical and transactional activity (Knusden, 1999). According to Bailey P, Farmer D, Crocker B, Jessop D, and Jones D (2008), one way of measuring performance metrics could be by dividing procurement function into strategic functions where the total supply chain cycle time, order lead times, supplier 3

14 lead times against industry norms, delivery lead times and delivery performance. Tactical where purchasing orders cycle time, supplier ability to respond to quality problems, supplier cost savings initiatives, delivery reliability, operational functions consisting of total inventory, supplier rejection rate, quality of delivery documentation and quality of delivered goods. Christopher (1992) stated that in the past it was often the case that price was paramount as an influence on the buying decision. He went on to suggest that, while price is still important, a major determinant of choice of supplier or brand is the cost of time. The cost of time is simply the additional costs that a customer must bear while waiting for delivery or seeking out alternatives. To evaluate procurement performance using time one would seek to know the timing of supplier s actual delivery performance against promised, time taken to process requisitions and time taken up with remedial action.pricing in nearly all types of business is affected by what economist call the price mechanism, which is the theory of supply and demand The National Treasury of Kenya The National Treasury of the Republic of Kenya is a Government Ministry which was previously Ministry of Finance before the new constitution and subsequent renaming by the president of Kenya. The Ministry formulates financial and economic policies and oversees effective coordination of Government financial operations. It derives its mandate from the Constitution of Kenya, Cap VII Sections which provides for proper budgetary and expenditure management of Governments financial resources. In addition, Parliament, over the years has enacted 49 Acts to which the Ministry of Finance is a custodian thereby adding more responsibilities to the Ministry ( 4

15 Further, the Ministry coordinates Government Ministries / Departments in the preparation of the annual national budget. It is the responsibility of the Ministry to initiate and guide all Ministries / Departments to prepare their ministerial budgets. The Ministry also provides Accounting, Auditing, Information Technology, Insurance, Pensions, Procurement, Clearing and Forwarding services, and divestiture services among others to other Government Ministries / Departments. It has also established an elaborate network through its established departments, and sector institutions, to effectively deliver on its mandate ( State Corporations under the National Treasury of Kenya The state corporations act cap 446 of the laws of Kenya defines a state corporation as a body corporate established by order of president; a body corporate established before or after the commencement of the act of parliament or other written laws; a bank or other company licensed under the banking act or other company incorporated under the companies act, the whole or the controlling majority of the shares or stocks is owned by the government or by another state corporation (The Kenya Constitution, 2010). The state corporations advisory committee (SCAC) under the office of the president is mandated with advising the Government on all matters pertaining to the general administration of state corporations. It has them categorized as follows: Financial Corporations, Commercial and manufacturing, Regulatory Corporations, Public universities, Training and research Corporations, service corporations, regular development authorities, tertiary Education and training corporations (SCAC, 2004). The Government forms state corporations to meet both commercial and social goals. They exist for various reasons including, to correct market failure, to exploit social 5

16 and political objectives, provide education, health, redistribute income or develop marginal areas. At independence in 1963 parastatals were retooled by sessional paper no. 10 of 1965 into vehicles for the indigenization of the economy. The majority of the parastatals that exist today were established in 1960 s and 1970 s. By 1995 there were 240 parastatals. The number today stands at 127 with national treasury of Kenya having seventeen (17) state corporations as its parent ministry (Abdi, 2012). 1.2 Research Problem Procurement is one department that can contribute tremendously to the organizations efficiency effectiveness. If the procurement department bought all that is required into the organization at the right price, time, place, quantity and quality all other department within the organization would drive great benefits from this and would be able to serve their customers (both internal and external) better. If the procurement department is inefficient in its acquisition of goods and services or even works, other departments would be affected and sometimes the consequences can be grave (Snider and Rendon, 2001). The basic presumption in public procurement in all public institutions is that contracts of a specified type and value will be procured using an advertised, competitive procedure that is open, fair and transparent, ensuring equality of opportunity and treatment for all candidates and tenderers. There are only limited circumstances where a procedure without advertised competition is permitted. The public procurement entities are legally bound to ensure this is achieved through the Public Procurement and disposal Act of 2005 (Buuri, 2013). 6

17 Kakwezi and Nyeko, (2013) asserts that the proliferation of procurement methods used for construction projects has inevitably resulted in comparisons being made between the performances associated with each of them. The challenge for researchers in this field has been largely to do with how to compare procurement systems on a like-for-like basis. The procurement function has not been given the recognition it deserves in developing countries, in most public entities, regardless of the effort by the partners like the World Bank, the International trade organization, the United Nations on trade and development, the world trade organization and others. The need to have coherent methods of performance of the procurement function in the public entities, particularly in the developing countries, has never been as sound as it is now. Delaying will worsen the current situation. Several researches have already been carried out on procurement methods and procurement performance. However, these studies are limited in scope because they were conducted in different national culture. According to Cobra, (2010) in the study on a comparative analysis of procurement methods used on competitive tendered office projects in UK, the study mainly compared the empirical information related to the successful tender for procurement methods used in competitive tendering of office projects in the United Kingdom (UK). It used numeric/quantitative indicators such as construction costs, construction speed, construction time and intensity of construction. This study did not look at all the procurement methods on a like to like basis against the overall procurement performance. Andrew B. (2011) published a research report that presented a comprehensive, industry-wide view into what is happening in the world of procurement today by drawing on the experience, performance, and perspective of nearly 250 Chief Procurement Officers and other procurement executives. The report included the main 7

18 procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure commonly called "spend under management" refers to the percentage of total enterprise spend (which includes all direct, indirect, and services spend) that a procurement organization manages or influences. The average procurement department also achieved an annual savings of 6.7% in the last reporting cycle; sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%. However this study dwelled more on performance measurement and did not take into account the procurement methods used. Kwakezi et al., (2002) in their study on procurement processes and performance efficiency and effectiveness of the procurement function mainly in Uganda found out that for a public entity in a developing country to conduct procurement performance there are numerous challenges that are encountered. These include: many ways of measuring performance that may be in use; most measures are irrelevant, there is no way of standardizing the measurement and conducting performance measurement is costly. The reasons for these challenges were given by a journal for procurement measurement by Ken C., (2006) centre for excellence London, as being inaccurate information, lack of link between procurement measures and corporate objectives; measurement of procurement performance is regarded as an overhead and not an integral part; people do not understand the benefit of measuring procurement performance and interference of stake holders and mainly the measures were developed in a different environment. 8

19 Locally Abdi A. (2012) studied on the procurement practices in Kenya s public corporations. The study concluded that state corporations in Kenya have almost a similar pattern in terms of procurement activities. Though Abdi studied on the procurement practices he did not look at the performance measurement of the procurement process. While Ngari (2012) studied on the effects of Public Procurement and Disposal Act, 2005 on procurement in parastatals in Kenya she concluded that PPDA, 2005 improves competitiveness, quality of goods and services delivered. The researcher focused on the use of the public procurement law and regulations in achieving good procurement results. However, the researcher did not show any aspect of procurement performance measurement. Other studies by Mburu (2012) took a deliberate look at the factors inhibiting implementation of public procurement and disposal act (PPDA, 2005) and public procurement and disposal regulations (PPDR, 2006) in Kenya. A case study of Kajiado North District. The study concluded that the factors inhibiting implementation of PPDA, 2005 and PPDR, 2006 in Kajiado North District included lack of adequate resources, resistance to PPDA, 2005 and PPDR, 2006, lack of professionalism and lack of procurement planning. The researcher did not show any aspect of procurement performance measurement. A study conducted by Kamaru (2012) on lean supply chain practices in road construction projects: A case of class A construction companies in Nairobi County Kenya focused on the actual roads construction rather that procurement entities and the procurement process. The study concluded that benefits accrued from implementation of lean supply chain included cost reductions, waste elimination and profit maximization. The study did not deal with the procurement methods used and the aspect of procurement performance measurement. 9

20 In his study on electronic procurement and organizational performance among commercial state corporations in Kenya, Abdi, K. (2012) dwelt a lot on the e - procurement. The study findings on organizational performance concluded that e - procurement assists the commercial state corporations in reducing costs and improves on competitive bidding and sourcing. However, this study did not touch on procurement methods and procurement performance in public entities. Many researchers have researched on the procurement process and individual procurement methods but little studies have been done linking the various procurement methods to procurement performance. This study will to seek establish the preferred procurement method used by state corporations under the National Treasury of Kenya and to determine the relationship between procurement methods and procurement performance. 1.3 Research Objectives i. To establish the preferred procurement method by state corporations under the National Treasury of Kenya ii. To determine the relationship between procurement methods and procurement performance in state corporations under the National Treasury of Kenya 1.4 Value of the Study The study findings will benefit management and staff of state corporations under the National Treasury of Kenya who will gain insight on how institutions can effectively manage the procurement process to improve their procurement performance. The study is bound to create a cost benefit analysis of the use of procurement methods and procurement performance outcome of the systems that could be geared towards improving the entities performance based on the nature of procurements. 10

21 The study will benefit the management of state corporations under the National Treasury of Kenya by providing data and information on better strategies that can be used in order to eliminate bottlenecks and improve efficiency. This will enlighten and educate the employees on benefits of using the right procurement methods for effective and efficient performance of their duties. Lastly, the study will benefit institutions of higher learning in Kenya as guideline of the study of procurement. The study will contribute to the field of knowledge in public procurement and other researchers wishing to carry out further research and contribute to existing literature in the field of Public procurement. The research findings, will help other researchers who would want to undertake the same study to come up with more comprehensive research work or highlight the necessary adjustment that were not dealt with in depth by this research. 11

22 CHAPTER TWO LITERATURE REVIEW 2.1 Introduction This chapter details a review of literature on procurement methods and procurement performance in state corporations under the National Treasury of Kenya 2.2 Procurement Methods Procurement methods are the procedures used by the procuring entity to acquire goods services and works. Procurement methods are many, and they go by different names depending on the procurement category. These methods can be divided into three broad categories namely competitive methods, which include open tendering, restricted tendering, request for proposals, non-competitive or negotiated methods request for Quotations and single sourcing procurement methods. There is preference of using competitive methods procurement given that they tend to promote transparency, economy efficiency and limit favouritism. Procurement encompasses the whole process of acquiring goods, works or services. It begins when an agency has identified a need and decides on its procurement requirement (Mithamo et al., 2013). From the above-mentioned procurement methods, open tendering, request for proposals, and two-stage tendering are considered competitive procurement methods because the solicitation documents are advertised and open to any qualified firm interested in competing for the assignment. In contrast, request for quotations and single-source procurement are considered non-competitive procurement methods because the invitation to submit offers is not advertised, and it is sent only to firms or individuals specifically invited by the procuring entity. With respect to restricted 12

23 tendering, there s debate as to whether it is a competitive or non-competitive procurement method (Cooper et al., 2008). Open tendering as per the Kenya Gazette Supplement No. 92, 2006 involves invitation of prospective suppliers to compete for an advertised contract where the lowest tenderer in terms of price will be accepted. However, the lowest bidder should be deemed qualified to perform the contract (Buuri, 2013). The Public Procurement Regulations of 2006 part IV states that for each procurement, the procuring entity shall use open tendering or an alternative procurement procedure under Part VI (National Council for Law Reporting, P.20). However, such alternate procurements are subject to written approval by the tendering committees and documented reasons should be provided (Kenyanya et al, 2010). According to the act part VI the tendering entity should among other things advertise the tender providing the name and address of the procuring entity indicate where to obtain and submit the tender documents and enough information to allow for fair competition among the participants (National Council for Law Reporting, 2010). Restricted tendering is mostly used when the value and the conditions are not justifiable to the open tendering where by bids are obtained directly without floating the tender to the public. Here the procuring entity uses its database of pre-qualified providers who are directly invited to tender. However, the procuring entity must demonstrate that open tendering is not applicable and for a procuring entity to use this method of procurement the tender committee must consent to its use (Ngari, 2012). An invitation to quotation is a simplified tendering methodology where the procuring entity seeks to limit transactions costs, thus preferring to contact the firms that have proven track, when calling for quotations. Request for quotations should be addressed 13

24 to not less three or more candidates (Ngari, 2012). A study on the assessment of the procurement systems in Kenya, conducted by the Public Procurement Oversight Authority, PPOA, (2007) where seven procurement entities participating in the Consumer Price Index (CPI) survey undertook a total of 11,046 procurements during the assessment period confirmed the trend of procurement entities relying excessively on procurement through quotations. It was clear that the procurement functioning needs to be developed and considerable effort needs to be put into defining strategies on how to make open tendering the default method of procurement in the future. Direct or single sourcing is used where circumstances do not allow for competitive bidding. It is used for small quantities in case where time may not allow for competitive bidding. Mokaya (2004) states that Direct Procurement Method is only applicable on ground of urgency or emergency when life and property are threatened and other methods are not practical. Lack of reasonable substitutes does not hold any water. According to Section (74), a procuring entity may use direct procurement if the following are satisfied There is only one person who can supply goods, works or services or there is no reasonable alternative or substitute or there is urgency (life and property threatened) and other available Procurement Methods are impractical ( Procurement in State Corporations under National Treasury Procurement in state corporations in Kenya must be guided by the provisions of the public procurement Act PPDA (2005). There is in place a public procurement oversight PPOA whose work is to oversee that the procurement processes among public entities in Kenya. The work of the PPOA is to ensure that due diligence is undertaken when carrying out state procurement activities through abiding by the laid 14

25 down policies and procedures, state corporations can be able to achieve good practices in procurement (GoK, 2005). There are seven procurement methods that can be used in public procurement each with different condition for use. These are internationals competitive tender, National competitive tender, restricted tender, request for proposal, direct procurement, request for quotation and low value procurement. They can further be broken down three main methods. The Competitive procurement methods which include international competitive tender procedure, open national tender procedure, and request for proposal procedure. The non-competitive methods or negotiated procurement methods which include restricted tendering procedure, request for quotation procedure and low value procurement procedure. The final method is direct procurement procedure or direct sourcing. Contracting authority can further choose amongst the methods provided. The factors that determine the procurement method of use are the estimated value of goods within the specified threshold, works or services, urgency of requirement, limited number of suppliers or service providers amongst others (Kadima, et al., 2013). According to Abdi, A. (2012), the items involved in procurement range from simple goods or services such as clips or cleaning services to large commercial projects, such as the development of infrastructure, including roads, power stations and airports. In public procurement, the economic results must be measured against large more complex and long term criteria. Furthermore, public procurement must be transacted with other considerations in mind, besides the economy. These considerations include the accountability, on discrimination among potential suppliers and respect for international obligations. For these reasons, public procurement is subjected in all countries to enact regulations, in order to protect the public interest. Since public 15

26 procurement is a business process within a political system, it therefore has a significant consideration of integrity, accountability, national interest and effectiveness Competitive Procurement Methods Competitive procurement methods include open tendering, two stage tendering and request for proposals. The open tendering is the preferred public procurement method used for acquiring goods services and infrastructure works. It is presumed that this method encourages effective competition and adds value for money. However there are arguments on the contrary given that the open tendering method is strictly procedure based and was primary designed for the procurement of simple goods. As a result it is not suitable for complex procurement where the focus is more on the output and outcome of the process rather than on strict adherence to standards. Open tender process has been crirtised for the lengthy period Lengthy timeframe for completion of the procurement action; requires strict adherence to procedures; assumes existing internal capacity for the completion of clear and precise specifications; restricts suppliers participation in determining the technical specifications; limits the possibility of building long-term relationship with suppliers; focuses only on a leastcost solution; suppresses innovation, and excessive formalism may limit supplier participation in the tendering process (Kumar et al., 2005). The Request for proposal or two stage tendering has the advantage of more flexible approach to awarding contracts because it allows participation of prospective bidders in the definition of the technical specifications and scope of work potentially reduces risks in the implementation of the contract. Prospective bidders are able to make suggestions for improvement of the technical specifications and scope of work of the assignment, through their technical proposal and clarification discussions and the 16

27 second stage tendering time is reduced. The technical approach and methodology can be adjusted to suit the agreed technical specifications and scope of work. A financial proposal is submitted only after reaching agreement on the technical specifications and scope of work. Contract is negotiated on the basis of the agreed technical specifications and scope of work. This method has also been critised due extended procurement lead-time due to two stage submission process. Second stage negotiations with the highest ranked bidder could prove difficult and protracted. There is risk of price escalation, and negotiations becoming adversarial in the second stage. Once a firm is selected for negotiations, competition is lost, and this may impact price (Nyeko, 2004) Non - Competitive Procurement Methods The request for quotation procurement methods has the benefits of significantly reduced Procurement lead-time is given that there s no need to prepare solicitation documents, or to advertise requirements and the period for quotations submission is also equally reduced. The number of quotations received is limited to the number of bidders quotations were requested from, so the selection process time is also reduced. The procuring and/or requesting entities would usually have a pretty good idea of where and from whom the goods, services or works can be procured, so there s a higher probability of response to the request for quotations (PPOA, 2007). The use of request for quotation as a procurement method procurement entity Lends itself to irregularities because the procuring entity decides which suppliers, contractors or service providers to send request for quotations to, and competition is very limited. This method could be abused as a result of the breaking of requirements into smaller sizes in order to apply this method of procurement. Further, buyers easily 17

28 lead to requesting quotes from a limited number of firms even if the goods, services or works are available from a greater number (PPOA, 2007) Direct Procurement Method Acquiring goods, services and construction works from only one source is referred to as: sole-source procurement, single-source procurement, sole-source selection, direct procurement, among others. This is clearly a non-competitive procurement method, and it should be used only under exceptional circumstances, namely: for emergency situations; when only one firm or individual is qualified to fulfill the requirement; for the continuation of previous work, or additional work, that cannot be acquired from another firm or individual due to patent, compatibility issues, or exclusive rights; the use of this method represents a clear advantage over the use of a competitive method; the total cost is within the threshold set for this method of procurement; for the procurement of related items that are available only from one source for other situations contemplated in the procurement legal and regulatory framework. The use of this method should be preceded by a rigorous approval process (PPDA, 2005). 2.3 Procurement Performance Purchasing performance evaluation may be defined as the quantitative or the qualitative assessment over a given time towards the achievement of corporate and operational goals and objectives relating to purchasing economies, efficiency and effectiveness. Quantitative objectives are measurable using such measures as number of orders placed, reduction in lead times, price savings and reduced administrative costs and will tend to be used when purchasing is regarded mainly as a clerical and transactional activity (Knusden, 1999). 18

29 Kakwezi et al., (2012) asserts that measuring purchasing performance is important as the purchasing department plays an ever increasingly important role in the supply chain in an economic downturn. A reduction in the cost of raw material and services can allow companies to competitively market the price of their finished goods in order to win business. An obvious performance measure of the success of any purchasing department is the amount of money saved by the company. However there are a number of performance measurements that businesses can use when they measure purchasing performance Lysons et al, (2006) defines purchasing performance evaluation as the quantitative or qualitative assessment over a period of time towards the achievement of corporate or operational goals and objectives relating to purchasing economies, efficiency and effectiveness. Some common areas of measurement of operational procurement performance according to Baily p. et al, (2008) are; Quality which can be viewed into performance quality where supplies staffs are concerned with quality of design or specifications. They are interested in specifying the right material for the job, and communications to the supplier in clear and unambiguous manner. Conformance quality is concerned with the supplier providing materials in accordance with the specifications which are usually inspected to evaluate the procurement performance on quality one would seek to know the percentage of rejects in goods received, percentage of goods rejected in production and percentage of raw materials rejected in production. Further, Baily p. et al, (2008) opines that every organization holds some things in stock. Stocks can be a nuisance, a necessity or convenience. Retailers and wholesalers see stock as the central feature of their businesses. What they sell is what they buy, and they aim to sell from stock rather than from future deliveries which have yet to arrive. Organizations such as some manufacturers, healthcare institutions and other 19

30 service providers place stock in subsidiary rather than a central position, but it is still an important element in operational effectiveness and often appears on the balance sheet as the biggest of current assets locking up a lot of money. To evaluate procurement performance using quantity one would seek to know the quantity percentage of stock that has not moved over a specified period, number of stock outs and the number of small value orders, number of emergency orders, and comparison of stock with the target stock. Christopher (1992) stated that in the past it was often the case that price was paramount as an influence on the buying decision. He went on to suggest that, while price is still important, a major determinant of choice of supplier or brand is the cost of time. The cost of time is simply the additional costs that a customer must bear while waiting for delivery or seeking out alternatives. To evaluate procurement performance using time one would seek to know the timing of supplier s actual delivery performance against promised, time taken to process requisitions and time taken up with remedial action. Pricing in nearly all types of business is affected by what economist call the price mechanism, which is the theory of supply and demand. There is the notion of an equilibrium price which proposes that at the equilibrium or market price exactly the same quantity is both demanded. In most free market economies the process of equilibrium helps to decide what is produced and what is not produced. To evaluate the procurement performance using price one would seek to know if the price paid against standard market price, price paid for key items compared with market indexes, price paid against budget cost and the price at the time of use against price at the time of purchase (Baily P. et al, 2008). 20

31 Lysons et al, (2006) observed that in search of cost savings, companies are looking for ways to standardize and automate their operational processes. Standardization combined with automation of the operational procurement processes relieves the purchasing department of a huge administrative burden. Not only does this lead to a reduction in operating costs, it also frees up time in the purchasing department, which can then be spent on more strategic tasks (spend analysis, supplier evaluation, sourcing projects, etc.). Through automation, components of the process can be either removed or deskilled improving efficiency and reducing costs. Buyer and supplier work collectively to add competitive advantage in the supply chain for mutual benefit. To evaluate the procurement performance using operation costs one would seek to know the cost of processing an order, progression costs as a percentage of the total, and communication costs (Baily P. et al, 2008) Procurement Performance in State Corporations under National Treasury The procurement departments of public entities in Uganda are faced with the problem of not having enough information about the procurement procedure, its inputs, outputs, resource consumption and results and are therefore unable to determine their efficiency and effectiveness (Kakwezi, et al., 2002). This problem requires establishment of clear procurement procedures and performance standards. Performance when adopted will provide the decision-makers in the procurement department with unbiased and objective information regarding the performance of the procurement function (Knudsen, 1999). 21

32 According to Ocharo (2013) on a journal on factors affecting procurement performance, a case study of ministry of mining Rotich (2011) admits that the evaluation or measurement of procurement performance has always been a vexing problem for procurement professionals. He asserts that traditionally, firms concentrate on analyzing their own internal trends which does not portray the true picture on how they compare well with competitors. Such an approach ignores what the competitors are doing. Lenders (1997) reveals that a firm does not wish to make known to its competitors how or what it is doing for obvious competitive reasons. This has been the case in the public sector where procuring entities have not been making available their procurement data due to the sensitive nature of the data. Ocharo (2013) argues that traditional government contracts worldwide have tended to focus on inputs rather than outputs. He suggests that the focus should instead be on what projects can deliver rather than how much the project costs which calls for high level of performance management in the entire process. In Kenya, to manage effectively and more efficiently the procurement process, procuring entities through the existing legal framework are required to firstly consolidate departmental procurement plans to provide the entity s corporate procurement plan which before its implementation must get the accounting officer s approval. 2.4 Empirical Studies Kumar (2005) conducted a study on procurement performance measurement systems in the health care industry. The results of the study showed that there is no one method that covers every purchasing department in any organisation, and a number of key measures were found to be common in evaluating performance, these include, cost saving, vendor quality, delivery metrics, price effectiveness and inventory flow. Although these key measures are common, the weight placed on these measures was 22

33 by no means uniform and will vary between industry to industry and business to business. In addition, the importance of these measures to the overall effectiveness of a purchasing department will change over time and therefore need to be assessed and modified on a periodic basis. For a public entity in a developing country to conduct procurement performance there are numerous challenges that are encountered including: many ways of measuring performance that may be in use, most measures are irrelevant, there is no way of standardizing the measurement and conducting performance measurement is costly Kakwezi et al (2002). The reasons for these challenges were given by centre for excellence London, (2006) as being inaccurate information, lack of link between procurement measures and corporate objectives, measurement of procurement performance is regarded as an overhead and not an integral part, people do not understand the benefit of measuring procurement performance and interference of stake holders and mainly the measures were developed in a different environment. Mamiro (2010) in his findings underscores these facts and concludes that one of the major setbacks in public procurement is poor procurement planning and management of the procurement process which include needs that are not well identified and estimated, unrealistic budgets and inadequacy of skills of procurement staff responsible for procurement. Similarly, Kakwezi et al., (2010) argue that procurement performance is not usually measured in most procurement entities as compared with the human resource and finance functions. They conclude in their findings that failure to establish performance of the procurement function can lead to irregular and biased decisions that have costly consequences to any public procuring entity. Therefore, this study was conceived by the limited scientific literature documenting the relationship 23

34 between procurement performance and factors such planning, resource allocations, staff competency and contract management more specifically at Ministry of Energy. Public procurement is generally conducted through competitive tendering, which occurs when suppliers make written quotations or bids to supply goods, services or works. Unlike single tendering, competitive tendering helps to avoid favoritism and to discourage the emergency of monopolies and cartels. Competitive tendering underpins contemporary procurement markets and differs substantially from pure competition found conventional demand supply exchange situations. The latter aims to achieve the lowest bid price while the former aims to achieve the lowest cost of ownership. This is accomplished through life cycle costing, a key contract award technique that balances price and quality considerations against all other costs to be incurred during an item s life. This life cycle costing has become the basis of sustainable procurement and helps in realizing values for money (Kipchillat, 2006). 2.5 Conceptual Framework Based on the literature review, a theoretical framework for this study was developed as shown in Figure 2.1, the major objective of the study being to determine the value of using certain procurement methods and the procurement performance outcomes for procurement entities that use the procurement method. 24

35 Figure 2.1: Conceptual Framework of Procurement Methods and Procurement Performance Independent Variables Dependent variable PLACE(X 1 ) TIME (X 2 ) QUANTITY(X 3 ) Procurement Performance QUALITY (X 4 ) PRICE (X 5 ) Source: Author, (2014) The independent variable in this research is the factors attributed to the use of Procurement methods while dependant variable is the procurement performance in the procurement entity. The use of various procurement methods by the procurement entities will act as the moderating variable. The dimensions include in this variable are place, time, quantity, quality and price. 25

36 CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction The chapter presents the procedures and strategies used in the study. Research design, location, target population, the sample and sampling procedures, data collection, data analysis and presentation methods are also discussed. 3.2 Research Design The study adopted a descriptive survey design and sought to establish and describe the prevailing phenomena. The design allows for collection of extensive data within a short time on issues based on the variables of study. The design is justified because it describes the current use procurement methods as influenced by the prevailing practices (Mugenda O. and Mugenda A., 1999). 3.3 Target Population The population of study is all the seventeen (17) state corporations under the National Treasury of Kenya. A census was used because the population size of 17 was deemed relatively small sample appropriate to accommodate a census. 3.4 Data Collection The study involved primary data which was collected using a self-administered structured questionnaire (refer to appendix II) distributed through drop and Pick method. In the population only three (3) respondents was targeted to provide responses to the questionnaires and a total of fifty one (51) questionnaires were distributed to Procurement Managers, Supply Chain Managers and Administration Managers. 26

37 The questionnaires used were closed ended questions. Section I of the questionnaire sought the general information of the respondents; Section II of the questionnaire sought answers of the first research objective about the preferred procurement method amongst state corporations under the National Treasury of Kenya. Section III of the questionnaire sought to answer the second research objective by determining the relationship between the use of procurement methods and procurement performance amongst state corporations under the National Treasury of Kenya. Section IV sought answers to the challenges on the procurements methods and procurement performance. 3.5 Data Analysis Prior to processing the responses, the completed questionnaires were edited for completeness and consistency. Cronbach s alpha was calculated to measure the internal consistency within the collected data, and test it for reliability, thus avoiding the unreliable results dilemma (Leedy and Ormrod, 2003). Quantitative data collected was then be analyzed and interpreted in line with the study objectives through the use of statistical package for social sciences (SPSS). The confidence level was set at 0.05 (95%) as recommended for most descriptive researches (Field, 2005). Data analysis was based on research questions. The primary data was collected by use of the questionnaire which has quantitative data (for the use of closed ended questions). The first objective was answered using descriptive statistics from data collected from Section II of the questionnaire. The expectations and performance for each of the statement was calculated. The means and standard deviations for each of the dimension were determined. The score for each of the dimension represented the level of expectation or perception in relation to the dimension. 27

38 The second objective was answered using quantitative statistics by data collected from section III of the questionnaire. Linear regression model was used to realize the second objective. The mathematical expression for the regression model is given as follows; Y= α + β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + β 5 X 5 + ε Where, Y is the dependent variable representing procurement performance, whereas X 1, X 2, X 3, X 4, and X 5, are the independent variables that is place, time, quantity, quality and price, while α is a constant (the intercept of the model) and βis are the regression coefficients of X is which indicates the amount of change in Y given a unit change in Xi variables where ε is the error term. 28

39 CHAPTER FOUR DATA ANALYSIS, RESULTS AND DISCUSSION 4.1 Introduction This chapter covers data presentation and analysis. The main objective of the study was to analyze the procurement methods and procurement performance amongst state corporations under the National Treasury of Kenya. In order to simplify the discussions, the researcher provided tables and figures that summarize the collective reactions and views of the respondents. 4.2 Response Rate The sample size of this study was 51 respondents. Those filled and returned questionnaires were 47 respondents making a response rate of 92.16%. According to Mugenda and Mugenda (1999), a response rate of 50% is adequate for analysis and reporting; a rate of 60% is good and a response rate of 70% and over is excellent. This means that the response rate for this study was excellent and therefore enough for data analysis and interpretation. 4.3 Demographic Information Analysis The study sought to establish the demographic information in order to determine whether it had influence on the procurement methods and procurement performance amongst state corporations under the National Treasury of Kenya. The demographic information of the respondents included levels of education, professional qualification position held, number of years worked in the corporation and also whether the respondents are involved in any way with the corporation s procurement, supplies or administrative function. 29

40 Figure 4.1: Highest Level of Education Secondary School certificate 1 Diploma Bachelors Degree Master s Degree Frequency Percentage Source: Research Data (2014) 2.1% % % The researcher sought to find the highest level of education of the respondents. Education is an important factor because it makes a person to efficiently execute the charged roles and functions effectively. According to the analysis of the findings, it emerged that a majority (78.7%) of the participants had undergraduate degrees while 19.1% had a master s degree. The study also revealed that a small percentage of 2.1 had college diploma. Therefore the results of findings conclude that most respondents were university graduates thus, were much more aware of the latest technologies to embrace pertaining to procurement methods and procurement performance amongst state corporations. 30

41 Figure 4.2: Professional Qualification % 48.9% % MCIPS MKISM KNEC CPA / CPS Frequency % 5 Other (specify Percentage Source: Research Data (2014) The study required the respondents to indicate their respectful professional qualification. From the findings of the study, it emerged that most of the participants are members of Kenya Institute of Supplies Management (MKISM) who accounted for 48.8% followed by 38.3% who indicated to be Members of Chartered Institute of Purchasing and Supplies (MCIPS). Moreover, the findings revealed that 10.6% had a qualification in Chartered Public Accountants / Chartered Public secretaries (CPA/CPS) and the remaining 2.1% had a Kenya National Examinations Council (KNEC) qualification. Therefore the findings of the study conclude that most of the respondents are members of MKISM. The findings are illustrated in figure 3. This is in line with the study by Mburu (2012) which took a deliberate look at the factors inhibiting implementation of public procurement and disposal act (PPDA, 2005) in Kenya. A case study of Kajiado North District. The study concluded that the factors inhibiting implementation of PPDA, 2005 and PPDR, 2006 in Kajiado North District included lack of professionalism. Thus professionalism is vital to effective service delivery. 31

42 Figure 4.3: Position Held % Senior Middle level Management management Frequency Low level management Percentage % 1 2.1% Source: Research Data (2014) The researcher also wanted to establish the positions held by the respondents. Based on the findings, it was revealed that most (74.5%) of the participants are middle level managers while 23.3% were senior managers. Also the findings revealed that only 2.1 were in lower level management. The findings are as shown in Figure

43 Figure 4.4: Number of Years Worked in the Corporation % % years 4 6 years 7 9 years Over 12 years years Frequency Percentage Source: Research Data (2014) % % 4 8.5% The researcher also found it of paramount importance to determine the number of years worked in the corporation. Based on the findings of the study, it was revealed that 34.0% have worked for 7-9 years who comprised the majority of the respondents followed by 27.7% who indicated years, 19.1% indicated 4-6 years. In addition, it was revealed that 10.6% have worked in their respectful corporation less than 3 years while 8.5% indicated that they have worked over 12 years. The findings of the study conclude that most of the respondents have in the respectful corporations for 7-12 years as illustrated in Figure

44 Figure 4.5: Whether Involved in Any Way in Corporation s Procurement, Supplies or Administrative Function 80.9% Frequency Percentage Yes No % Source: Research Data (2014) The researcher further wanted to investigate whether the participants are involved in any way in corporation s procurement, supplies or administrative function. According to the findings of the study, it emerged that overwhelming majority (80.9%) indicated affirmative while only 19.1% were on the contrary view. The findings of the study conclude that majority of the respondents are involved in corporation s procurement, supplies or administrative function as illustrated in Figure