Improving the manufacturing performance by using the appropriate purchasing strategy

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1 Improving the manufacturing performance by using the appropriate purchasing strategy Dr. Ahmed Attia Assistant Professor OPIM Department Effat University Jeddah, Saudi Arabia Abstract: the purchasing strategy as one of vital functional strategies have an effect on the company success, but a few number of practical research have tested such an effect. The purpose of this paper is to examine the effect of different purchasing strategies on manufacturing performance by collecting and analyzing data from the household appliance industry in Egypt. The proposed research model describes the impact of purchasing strategy on manufacturing performance. The proposed research model and hypotheses were tested using Correlation Analysis and structural equation modeling based on data collected from 112 companies in the Egyptian household appliance industry. According to the results of the study, purchasing strategy has a positive significant effect on manufacturing performance. Keywords: purchasing strategy, manufacturing performance. I. INTRODUCTION In today s business world, most companies face continuous and rapid changes which, force them to concentrate on reducing the cost to stay in market. This has driven manufacturing to try to achieve a sustainable competitive advantage through the corporate and functional level strategies [1]. Purchasing is one of the key supporting activities for manufacturing which, enable the company to create value through purchase of inputs, services and facilities needed to produce a firm s product and in the same time key up the maintenance of manufacturing facilities. The historical evolution of the purchasing function can be divided into seven periods: emerging of purchasing as a separate cooperate function, development of basic purchasing procedures and ideas, recognition of purchasing function as determining sources of supply, sustaining purchasing role to reduce overall product cost, revive of material management as solution to material problem inclusive sourcing, globalization era where its observed the development of supply chain management and its effect on purchasing structure and behavior, and the last period is restructuring and reformatting of purchasing and SCM to face new era of challenges in global competition plays an important role for organizations [2].The evolution of purchasing shows the transformation of purchasing from a routine task to a strategic one, helping in exchange the information with the top management level to possess the best products and service with lowest possible total cost [3],[4]. The new role of purchasing extended from only obtaining the right material to acquisition of product in the right quantities, with right delivery time and place, from the right source and at the right market place. Also, on average manufacturing firms spend about 50 percent of their sales revenue in the purchase of raw materials, components, supplies and services [5]. This enables purchasing function to increase profits by reducing the expenses of raw materials, parts, and services. As a result, the reduction of purchasing cost has bigger impact in increasing the profit of the companies compare to other functional activities in the companies [6]. Most extant research studying the purchasing strategy is either conceptual or based on a small number of case studies [7],[8],[9], and those that collect data from a large number of firms do not utilize any statistical analysis to support their findings [7],[10],[11]. Therefore, in this study we expect to extend this stream of research by focusing on testing the effect of purchasing strategy on manufacturing performance. This paper is divided into six sections. The first two sections include the introduction and the literature review. The third and fourth sections cover the development of the research hypotheses and the research design methodology. The fifth section discusses the data analysis and results. The last section presents the discussion and conclusion. 166

2 II. LITERATURE REVIEW A. purchasing strategy In general, Purchasing play a major role in supporting manufacturing through making sure of the availability of raw materials, spare parts for tools and factory maintenance as well as services for daily operation. The importance of purchasing role forced the manufacturing sector to start using an effective purchasing strategies in order to gain a competitive advantages and stay in market [12]. [13] Developed the main elements of purchasing strategies by developing six purchasing strategies. Later [5] developed and tested Kiser strategies but [12] combined three strategies into one and tested the new four purchasing strategies in Malaysia. The current study used the same approach developed by [12] to test the purchasing strategies. According to [13], six different purchasing strategies could be identified as follows: negotiation, developing and maintaining good relations with suppliers, sourcing, developing suppliers, protecting the cost structure of company and minimizing cost. [5], modified and mixed the suggested six strategies to have by the end only four strategies for purchasing (effective negotiation, collaborative relationship and interaction, effective cost management, and supply base management).the current study depended on [5] suggested four strategies to measure and test the purchasing strategy in Egypt. B. Effective negotiation strategy The main success factor in business is negotiation, and how to negotiate could be taught [14]. The companies need to discover ways to gain a bargaining power with supplier to create by the end competitive advantage. The negotiation process with the suppliers depend on influencing and persuasion, understand business condition and customer focus [15]. We could distinguish between two major approaches in negotiation, the first had known as cooperative negotiation which stress on win-win formula between both parties, both parties in cooperative negotiation assumes that all aspects of their interest been taken care well in order to maximize their cooperative value and benefit [16],[17]. The second approach in negotiation had known as competitive negotiation, the aim of the approach is to reach common understanding as each party tries to maximize self-gain through aggressive cost competition tactics, enforce time pressure, lack of flexibility and threatening lots of business in order to gain advantage against the other party [17]. The cooperative negotiation strategy according to [5] presented a third approach for negotiation based on win-win relationship which could be achieved by increasing supplier loyalty and improve supplier relations as all parties involved strongly believed, satisfied and agreed with mutual understanding and their common interest well protected [12]. C. Collaborative relationship and interaction strategy The culture is a major element in building buyer-supplier collaboration, the culture made of trust, mutuality, information exchange, openness and communication [18]. Also [19] pointed out that trust, commitment for long-term cooperation, and willingness to share risks are major elements for creating collaborative relationship. Collaborative relationship between buyer and supplier is not easy to build as it need both party to committing their resources towards improvements in order to achieve cost, quality, delivery, and time improvements. In addition Information sharing on timely manner is a critical element in creating flexible supply chain and initiate the collaborative relationship [20]. Also, [21] mentioned several practices to develop the partnership which are trust, information sharing, and joint problem solving. D. Effective cost management strategy Cost management associated with supplier partnership could be examined in three dimensions: total cost of ownership, understanding supplier cost and target costing. Total cost of ownership is critical for buyer in order to make a decision of make or buy raw material through analysis and assess the cost factors involved in acquisition, possession, utilize and subsequently disposition of a product or services [22]. The second dimension of cost management is understanding supplier cost which could described as breakdown of cost element which used to explore cost reduction opportunity or process improvement, and the last dimension is target costing which could be defined as value chain analysis influenced by involvement of other members of value chain. In term of engineering effort, value chain elaborates the important of design the right products at the right price during the pilot release of product [23].Target cost is the point organization willing to spend on the purchase of product and services which ultimately determine the price that market willing to pay and backs out the desired profits [22]. 167

3 E. Supply base management strategy Supply base management key decision is determining the optimum number of suppliers to deal with. The company need to reach the right number of suppliers to effectively manage and continuously develop of its supply base. Effective and efficient supply base will contribute in cost, quality, delivery and information sharing improvement between buyer and supplier [2].in addition [24] supported that large supply base or large number of suppliers will hinder the interaction between buyer and supplier. Therefore the buyer need to minimize the number of suppliers in order to build a long term partnership and reduce the cost of improving and maintaining its supplier s performance and competencies [20]. F. Manufacturing performance Before 1980s the researchers used to measure the manufacturing performance by using only financial measures or indicators [25] but most of the recent studies used multiple performance measurement as using financial measure alone been exposed to the critics that other non-financial indicator which contribute towards organization performance been neglected and will only lead to short-term thinking [26]. According to [25] we could identify different approaches for measuring manufacturing performance, one of the approaches stressed on using process and tasks flexibility for evaluating the manufacturing performance as the flexibility is needed for deal with the market volatility and to fulfill the changing customer needs. In addition a group of researchers suggested describe the performance in a term of attaining sustainable achievements. Also [20] explained the importance in measuring manufacturing performance through evaluating the key competitive priorities such as quality, delivery and flexibility. [27], used different elements to measure the manufacturing performance such as quality, cost of production and rework, finished goods delivery and the inventory level of work in production goods. In their study, they highlighted the relationship between different purchasing strategies and manufacturing performance. III. DEVELOPMENT OF RESEARCH HYPOTHESES [5] Results showed that using a cooperative negotiation helps in creating win-win relationship between the buyer and the supplier. Such a relationship helps in improving the manufacturing performance as a final result. Also the elements of collaborative and in interaction strategy such as adaptation, trust, and communication have a positive and significant effect on manufacturing performance [28]. In addition understanding the supplier cost structure and the supplier participation during product design helps in reducing the total cost and improving the manufacturing performance [29]. Based on the above we propose the following hypotheses: H1: Effective negotiation strategy has a direct and significant effect on manufacturing performance. H2: Collaborative relationship and interaction strategy has a direct and significant effect on manufacturing performance. H3: Effective cost management strategy has a direct and significant effect on manufacturing performance. H4: Supply base management strategy has a direct and significant effect on manufacturing performance. Effective negotiation strategy H1 Collaborative relationship and interaction strategy H2 H3 Effective cost management strategy Manufacturing performance H4 Supply base management strategy Fig. 1. The suggested research model 168

4 IV. RESEARCH DESIGN METHODOLOGY The current research focuses on the household appliance industry in Egypt, in which 159 working companies are involved, according to the CAMPAS website ( The questionnaire was presented to the purchasing and production managers of the 159 companies working in the field of Home Appliance. The questionnaire was sent by mail and was followed up by a phone call to make sure that the questionnaire was fulfilled by the purchasing and production managers in the targeted companies and to answer the managers' enquiries related to the questionnaire. A total of 112 questionnaires have been returned with a response rate 70.4% but the rest of companies refused to participate. TABLE I. THE EGYPTIAN HOUSEHOLD APPLIANCE INDUSTRY Number of working companies Total number of employees Production value ( calculated by the selling price) Net added value 2011/ / Source: CAMPAS website. (Numbers in table evaluated by1000). 169

5 TABLE II. VARIABLES MESASURES Purchasing : Please indicate the extent to which you agree with each statement (1=strongly Disagree, 6=strongly agree). Effective Negotiation 1. Seek for win-win outcome. 2. Spend longer time on negotiation process. 3. Reach mutual agreement on discussed issue. 4. Require bidders to provide cost data. 5. Powerful enough to ask supplier to readjust their pricing strategy. 6. Solicits ideas and suggestions. 7. Explore supplier-oriented solutions. Collaborative Relationship and Interaction 1. Feels our supplier as part of the business partner in this relationship. 2. Present strategic information to suppliers. 3. Involve in extensive formal and informal communication with suppliers. 4. Treat suppliers as our customers. 5. Retain the same supplier(s) for more than two years. 6. Place orders on current supplier(s) for an item. 7. Involve vendors in product improvement. 8. Extend current contract(s) with suppliers. 9. Knows the strength and weakness of our supplier. 10. Let vendor access our technical and managerial knowhow. 11. Supplier willing to share confidential information. 12. Perceives that our supplier is perfectly honest and truthful. Effective Cost Management 1. Reduce inventory level by engaging supplier with JIT, VMI and consignment. 2. Make or buy decision through cost measurement. 3. Monitor poor deliver performance by suppliers. 4. Provide target costing for suppliers to be meet. 5. Request suppliers to provide the cost breakdown to analyze the cost drivers. 6. Control internally on order processing costs. 7. Minimize the storage and transportation cost. 8. Monitor poor quality performance by suppliers. 9. Measurement on supplier s ability to eliminate waste as cost reduction. 10. Control of suppliers on price increases. Supply Base Management 1. Involve suppliers on the new product development. 2. Devote time to improve suppliers productivity. 3. Prefer to purchase from single source. 4. Provide training support to suppliers as part of supplier development. 5. Select qualified suppliers through standard supplier selection process. 6. Avoid supplier dependence. 7. Deal many suppliers for the item. 8. Purchase items from many suppliers in one location. Manufacturing Performance: Please indicate the extent to which you agree or disagree with each statement as the statement relates to your organization s supply chain management practices (1 = strongly disagree, 6 = strongly agree). 1. The extent to which the company has been able to meet its cost reduction goals. 2. The extent to which the company has been able to meet its product introduction time goals. 3. The extent to which the company has been able to meet its delivery goals in term of delivery speed and dependability. 4. The extent to which the company has been able to meet its quality improvement goals. 5. The extent to which the company has been able to meet its customization responsiveness goals. 6. The extent to which the company has been able to meet its manufacturing cycle time reduction goals. Source : adapted from [12] 170

6 V. DATA ANALYSIS AND RESULTS A. Measures validity and reliability: The variables measures must reflect three types of validity; convergent, discriminant and predictive validity and reliability [30]. According to [31] the Normed-Fit Index (NFI) coefficient should be used to measure the convergent validity, the NormedFit Index (NFI) coefficient with a value greater than 0.90 representing strong validity; NFI values for all variables exceeded 0.9, indicating strong validity for the measures.(table 3). The second measure for validity is discriminant validity, poor discriminant validity means the correlation between two variables equals or is very close to one or minus one [32]. Table 4 indicates that the range of correlation coefficient between two variables is between and 0.597, showing high discriminant validity. The last type of validity is predictive validity which mean all the study measure should be correlated, according to Table 6, all study variables are correlated, indicating the predictive validity [30],[31]. Moreover Cronbach s alpha has been used to measure the reliability of the variables, According to [30], all variables which exceed 0.9, indicate sufficient reliability. Also the study s three variables were evaluated by conducting confirmatory analysis to evaluate the fit between the measurement model and the data. The results of the analysis shown in Table 5 were: chi-square=2.235; SRMR=0.075; RMSEA=0.096; NFI=0.935; NNFI=0.942; CFI=0.948; IFI= The results indicate good fit between the measurement model and the data according to [32], [33]. TABLE III. SCALE ASSESSMENT RESULTS Dimensionality and convergent validity assessment results Scale Relative SRMR χ² Purchasing Collaborative Relationship and Interaction Effective Cost Management Supply Base Management Effective Negotiation Manufacturing performance Reliability assessment results Scale Purchasing Collaborative Relationship and Interaction Effective Cost Management Supply Base Management Effective Negotiation Manufacturing performance Cronbach s alpha RMSEA NNFI CFI NFI GFI Construct reliability Variance extracted

7 TABLE IV. CORRELATION RESULTS Scale Collaborative Relationship and Interaction Effective Cost Management Supply Base Management Effective Negotiation Manufacturing performance Purchasing Collaborative Relationship and Interaction Effective Cost Management 1 1 Supply Base Management 1 Effective Negotiation 0.481** 0.475** 0.597** 1 Manufacturing performance 0.592** 0.385* 0.488** 0.524** 1 Correlation is significant at *0.05 and * *0.01 levels (two-tailed) 172

8 TABLE V. MEASUREMENT MODEL RESULTS Chi-square=2.235; SRMR=0.075; RMSEA=0.096; NFI=0.935; NNFI=0.942; CFI=0.948; IFI= Construct/ measures Standardized coefficients t-value Purchasing Collaborative Relationship and Interaction PS1 PS2 PS3 PS4 PS5 PS6 PS7 PS8 PS9 PS10 PS11 PS Effective Cost Management PS13 PS14 PS15 PS16 PS17 PS18 PS19 PS20 PS21 PS22 Supply Base Management PS23 PS24 PS25 PS26 PS27 PS28 PS29 PS30 Effective Negotiation PS31 PS32 PS33 PS34 PS35 PS36 PS37 Manufacturing performance MP1 MP2 MP3 MP4 MP5 MP6 MP7 173

9 B. Correlation Analysis: Correlation analysis is used to describe the strength and direction of the linear relationship between the dimensions of the conceptual model. As shown in Table 6, the correlations presented demonstrate a positive relationship with a confidence level at 99% and 95% between all dimensions. The results illustrate a positive relationship between purchasing strategy and manufacturing performance. C. Structural equation modeling results: The suggested research model to be accepted the chi-square must be over 2.00 [33]. The chi-square value for the research model IS equal to Moreover, the model NNFI value is and the model CFI value is 0.948, indicating the validity of the suggested model according to [30], [34]. The hypothesized relationship between effective negotiation strategy and manufacturing performance (H1) is positive and significant with an estimate of 0.58 and a t-value of The estimate of 0.53 for the relationship between collaborative relationship and interaction strategy and manufacturing performance (H2) is positive and significant with an associated t-value of 5.2. The relationship between effective cost management strategy and manufacturing performance (H3) is positive and significant with an estimate of 0.55 and a t-value of 4.82, moreover The hypothesized relationship between supply base management strategy and manufacturing performance (H4) is positive and significant with an estimate of 0.53 and a t-value of 5.3. According to the previous results the research three hypotheses were accepted. Effective negotiation strategy Collaborative relationship and interaction strategy Effective cost management strategy 0.58 (5.61) 0.53 (5.2) Manufacturing Performance 0.55 (4.82) 0.53 (5.3) Supply base management strategy Chi-square= 2.235; SRMR=0.075; RMSEA=0.096; NFI=0.935; NNFI=0.942; CFI= 0.948; IFI= Fig. 1. The structural equation modeling with standardized coefficients and (t-value) 174

10 VI. DISCUSSION AND CONCLUSIONS The structural equation modeling has been used to test the hypotheses in this study. The statistical results have suggested accepting all hypotheses, and the validity of the suggested research model. It also suggested accepting the effect of the four purchasing strategies on manufacturing performance. In spite of the differences between the economic situation in Egypt, as one of the developing countries, and the economies of the developed countries, the current research results comply with the results of the other studies by [5], [20], which have been applied in developed countries. Furthermore, the findings of this study support the effect of purchasing strategy on manufacturing performance. Which is similar to the research result of [12], which has been applied in Malaysia. We could therefore reach a general conclusion that the Egyptian context is similar to that of the developing countries regarding the relationship between purchasing strategy and manufacturing performance. As a matter of fact, the results of this study suggest the acceptance of the hypothesized relationship between purchasing strategies, manufacturing performance. However, there is still a need to test the following: a) the hypothesized relationship within the different industrial sectors in Egypt and in different countries; b) the effect of different environmental variables on the hypothesized relationship in the Egyptian household appliance industry and in different industries. One of the limitations of this study is the size of the sample which is 112 respondents from a total of 159 companies working in the household appliance industry. In order to support the current study results, it is necessary to conduct further studies to obtain more responses from employees in the household appliance industry. Finally, it is recommended to will be useful to use different time series to justify the hypothesized relationship between the variables over a long period. REFERENCES [1] Hitt, M.A., Hoskisson, R.E. and Ireland, R.D. (2007) Management of, Thomson Corporation, South-Western, Mason, OH. [2] Monczka, R., Trent, R. and Handfield, R. (2004) Purchasing and Supply Chain Management, 3rd ed., Thomson Corporation, South-Western, Mason, OH. [3] Cousins, P.D. (2005) The alignment of appropriate firm and supply strategies for competitive advantage, International Journal of Operations & Production Management, Vol. 25 No. 5, pp [4] Giunipero, L., Handfield, R.B. and Eltantawy, R. (2006) Supply management s evoluation: key skill sets for the supply manager of the future, International Journal of Operations & Production Management, Vol. 26 No. 7, pp [5] Janda, S. and Seshadri, S. (2001) The influence of purchasing strategies on performance, Journal of Business & Industrial Marketing, Vol. 16, No. 4, pp [6] Arnold, J.R.T. and Chapman, S.N. (2004) Introduction to Materials Management, Prentice-Hall, Upper Saddle River, NJ. [7] Cavinato, J.L. (1999) Fitting purchasing to the five stages of strategic management, European Journal of Purchasing and Supply Management, Vol.5, No.2, pp [8] Monczka, R.M., Integrating purchasing and corporate strategy. NAPM Conference Proceedings, 1 6. [9] Reck, R.F., Long, B.G. (1988) Purchasing: a competitive weapon, Journal of Purchasing and Materials Management, Vol.24, No.4, pp.3 6. [10] Freeman, V., Cavinato, J.L., Fitting purchasing to the strategic firm: frameworks, processes and values, Journal of Purchasing and Materials Management, Vol.26, No.16, pp [11]Van Weele, A.J. (1984) A purchasing performance measurement and evaluation, Journal of Purchasing and Materials Management, Vol.20, No.4, pp

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12 [31] Ahire S. L., Golhar D. Y., Waller M. A. (1996) Development and validation of TQM implementation constructs, Decision Sciences, Vol.27, No.1, pp [32] Kenny DA. (2012) Multiple factor models: Confirmatory factor analysis. Available at [33] Kline R. B. (1998) Principles and practice of structural equation modeling, New York, NY: Guilford Press. [34] Koufteros X. A. (1999) Testing a model of pull production: A paradigm for manufacturing research using structural equation modeling, Journal of Operations Management, Vol.17 No.4, pp BIOGRAPHY Ahmed Attia is currently working as an Assistant Professor in Operations and Information Management Department at the Effat University. Dr. Attia holds a master and PhD degrees in operations management from Alexandria University. The present research interest of the author is in the area of supply chain management and operations management. Dr. Attia can be contacted at: ahattia@effatuniversity.edu.sa 177