IMPROVING INDIRECT PURCHASING COMPETITIVENESS IN MANUFACTURING FIRMS THROUGH STRATEGIC PURCHASING GCOBISA MAKUBALO

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1 IMPROVING INDIRECT PURCHASING COMPETITIVENESS IN MANUFACTURING FIRMS THROUGH STRATEGIC PURCHASING GCOBISA MAKUBALO Submitted in partial fulfilment of the requirements for the degree MAGISTER IN BUSINESS ADMINISTRATION in the Faculty of Business and Economic Sciences at the Nelson Mandela Metropolitan University PROMOTER: Professor CA Arnolds DATE: JANUARY 2011

2 ii DECLARATION I, Gcobisa Makubalo, hereby declare that: - the work in this dissertation is my own original work; - all sources referred to have been documented and acknowledged; and - this dissertation has not been previously submitted in full or partial fulfilment of the requirements for an equivalent or higher qualification at any other recognised educational institution. Gcobisa Makubalo Date

3 iii ACKNOWLEDGEMENTS The completion of this dissertation would not have been possible without the support and encouragement of many others. I would like to extend my gratitude to the following persons for their support, assistance and encouragement. Professor C. Arnolds for all his guidance, support, encouragement and unfailing patience throughout the preparation of this dissertation. My grandmother Marhoyi Ntanzi Dedeza, my mother Thembie, sisters, Fundiswa and Luyanda and my brother Luyolo, who have been my pillars of strength and my biggest cheer leaders whose prayers and encouragement have sustained me throughout my MBA studies. A special thanks to Bhut Lukhanyo and TakaBoo. There are not enough words to express my gratitude except ndiswele imilomo eliwaka luthando nenkxaso yenu. A big thank you to all my other family members and friends for support. Cwayita, Kwezi, Mphilisi, Sazile, Rozzane, Lungi, Bruce, Jackie, Asanda, Babalwa and Marilyn - God could not have given me better friends to walk this road with. A special thanks to all the MBA group members I have had the privilege of working with it has been challenging, but great, keep on keeping on. My colleagues and everyone who assisted with the empirical study. Most importantly, all honour and glory be to God Almighty, for His grace, mercy, wisdom and enablement and for seeing me through my studies in the face of many challenges.

4 iv ABSTRACT The advent of the global financial recession, its impact on the economy with respect to market turbulence and the increase in customer demands have put organisations under intense pressure to increase the efficiency and effectiveness of their operations. By virtue of it not being business as usual in the business arena, organisations are forced to constantly devise strategies that are geared towards growth, transformation and continuous improvement. This cuts across all spheres of organisational structures, which means that every division has a role to play. The importance of the study can be attributed to the need for organisations to put structures in place to reduce costs, improve efficiency and service delivery and to enhance performance at business and functional levels. Indirect purchasing as a business function has over the years gained recognition as a key success factor in the attainment of strategic objectives regarding revenues, costs and supply chain relationships. The primary objective of this study was to improve the indirect purchasing competitiveness (IPC) of manufacturing firms in the Nelson Mandela Metropole by investigating how the effectiveness of the purchasing function can be increased through strategic purchasing. More specifically, the study investigated how indirect purchasing competitiveness (the dependent variable) of firms is influenced by strategic purchasing and supply, as measured by supplier relationship management (SRM), supply base reduction (SBR), customer relationship management (CRM), organisational communication (COM), managing resistance to change (RTC) and system efficiency (SYS), the independent variables. The sample consisted of 50 out of a possible 60 purchasing and supply chain practitioners in the manufacturing industry in the Nelson Mandela Metropole. The empirical results revealed that although all the above-mentioned independent variables play a role in achieving indirect purchasing competitiveness, supply base reduction and systems efficiency exert the most influence. The study also highlights areas in indirect purchasing that should be improved, as well as recommendations on how to improve them. Recommendations for future research are also provided.

5 v TABLE OF CONTENTS Page DECLARATION ACKNOWLEDGEMENTS ABSTRACT TABLE OF CONTENTS ii iii iv v CHAPTER 1 SCOPE OF THE STUDY 1.1 INTRODUCTION PROBLEM STATEMENT RESEARCH OBJECTIVES Primary objective Secondary research objectives Research design objectives METHODOLOGY Research paradigm The sample The measuring instruments HYPOTHESES DEFINITIONS OF KEY CONCEPTS Strategic purchasing Indirect purchasing Direct purchasing Supply chain Supply chain management Supplier relationship management Supply base reduction Customer relationship management Organisational communication Resistance to change Systems efficiency Indirect purchasing competitiveness OUTLINE OF THE STUDY 11

6 vi CHAPTER 2 LITERATURE REVIEW ON STRATEGIC PURCHASING 2.1 INTRODUCTION THE NATURE OF PURCHASING The objectives of purchasing Purchasing categories Centralised purchasing Decentralised purchasing Centralised-decentralised (hybrid) purchasing Direct purchasing Indirect purchasing Purchasing evolution: paradigm shifts in purchasing Automation Globalisation Communication and information technology Transition to supply management Purchasing trends and future projections THE ROLE AND IMPORTANCE OF PURCHASING Purchasing focus The role of purchasing in the value chain Leveraging purchasing in the value chain OVERVIEW OF THE PURCHASING PROCESS Needs analysis Make or buy decisions Identify the type of process New buy Straight re-buy Modified re-buy Select supplier Product and service delivery Post-purchase vendor evaluation CHAPTER SUMMARY 39

7 vii CHAPTER 3 THE THEORETICAL FOUNDATION FOR THE HYPOTHESISED MODEL TO IMPROVE INDIRECT PURCHASING COMPETITIVENESS 3.1 INTRODUCTION INDIRECT PURCHASING COMPETITIVENESS STRATEGIC PURCHASING Environmental monitoring Integrated supply strategy Category or commodity strategies Data management Strategic actions Strategic supply alliances Supply chain networks Social responsibility Understanding key supply industries OPTIMISING INDIRECT PURCHASING ACTIVITES 48 THROUGH STRATEGIC PURCHASING Supplier relationship management (SRM) Supply base reduction (SBR) Customer relationship management (CRM) Organisational communication Resistance to change Systems efficiency CHAPTER SUMMARY 70 CHAPTER 4 THE METHODOLOGY OF THE STUDY AND EMPIRICAL RESULTS 4.1 INTRODUCTION RESEARCH PARADIGM THE SAMPLE THE MEASURING INSTRUMENTS AND DATA ANALYSES 81

8 viii 4.5 THE PILOT STUDY THE RELIABILITY OF THE MEASURING INSTRUMENTS THE VALIDITY OF THE MEASURING INSTRUMENTS THE EMPIRICAL RESULTS Multiple regression analysis The influence of supplier relationship management (SRM) on 87 indirect purchasing competitiveness The influence of supply base reduction (SBR) on indirect 88 purchasing competitiveness The influence of customer relationship management (CRM) on 88 indirect purchasing competitiveness The influence of organisational communication (COM) on 89 indirect purchasing competitiveness The influence of systems efficiency (SYS) on indirect 89 purchasing competitiveness The influence of resistance to change (RTC) on indirect purchasing competitiveness CHAPTER SUMMARY 90 CHAPTER 5 PRESENTATION AND DISCUSSION OF DESCRIPTIVE STATISTICS RESULTS: INDUSTRY-RELATED PERCEPTIONS 5.1 INTRODUCTION DESCRIPTIVE STATISTICS: INDUSTRY-RELATED PERCEPTIONS Supplier relationship management Supply base reduction Customer relationship management Organisational communication Systems efficiency Resistance to change Indirect purchasing competitiveness THE QUALITATIVE RESPONSES Supplier relationship management Supply base reduction 109

9 ix Customer relationship management Organisational communication Systems efficiency Indirect purchasing competitiveness Resistance to change CHAPTER SUMMARY 111 CHAPTER 6 FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 6.1 INTRODUCTION ANALYSIS OF RESEARCH FINDINGS Supplier relationship management (SRM) Supply base reduction(sbr) Customer relationship management (CRM) Organisational communication (COM) Systems efficiency (SYS) Resistance to change (RTC) Indirect purchasing competitiveness (IPC) CHAPTER SUMMARY 123 LIST OF REFERENCES 127 ANNEXURES: Annexure 1: The questionnaire covering letter 135 Annexure 2: The measuring instruments 136

10 x LIST OF TABLES TABLE 3.1 REASONS FOR RESISTANCE TO CHANGE 63 TABLE 4.1 POSITIVISTIC VERSUS PHENOMENOLOGICAL 74 RESEARCH TABLE 4.2 DEMOGRAPHIC COMPOSITION OF THE SAMPLE 77 TABLE 4.3 LEVEL OF EDUCATION AND YEARS OF EXPERIENCE 79 TABLE 4.4 CRONBACH ALPHA VALUES OF THE MEASURING 85 INSTRUMENTS TABLE 4.5 MULTIPLE REGRESSION ANALYSIS 87 TABLE 5.1 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 95 PERCEPTIONS ON SRM TABLE 5.2 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 97 PERCEPTIONS ON SBR TABLE 5.3 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 99 PERCEPTIONS ON CRM TABLE 5.4 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 101 PERCEPTIONS ON COM TABLE 5.5 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 102 PERCEPTIONS ON SYS TABLE 5.6 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 105 PERCEPTIONS ON RTC TABLE 5.7 DESCRIPTIVE STATISTICS: INDUSTRY-RELATED 107 PERCEPTIONS ON IPC

11 xi LIST OF FIGURES FIGURE 1.1 THE MODEL TO IMPROVE INDIRECT PURCHASING 7 COMPETITIVENESS THE NULL HYPOTHESES FIGURE 2.1 PURCHASING INTERFACES 15 FIGURE 2.2 PORTER S VALUE CHAIN 32 FIGURE 2.3 THE PURCHASING PROCESS 36 FIGURE 3.1 RELATIONSHIP BETWEEN THE NUMBER OF 55 SUPPLIERS AND THE TYPE OF BUYER-SUPPLIER RELATIONSHIP FIGURE 3.2 CROSS-FUNCTIONAL TEAM APPROACH TO NEW 58 PRODUCT DEVELOPMENT FIGURE 3.3 THE SIGMOID CURVE 61 FIGURE 3.4a PRACTICAL EXAMPLE OF THE IMPORTANCE OF 67 SYSTEMS EFFICIENCY FIGURE 3.4b COMPANY X S PROCESS IMPROVEMENT PROCESS 69 THROUGH SAP FIGURE 3.5 THE HYPOTHESISED MODEL TO IMPROVE INDIRECT 70 PURCHASING COMPETITVENESS FIGURE 4.1 SURVEY QUESTIONNAIRE RESPONSE RATE 76 FIGURE 4.2 RESPONSE RATE BY GENDER 77 FIGURE 4.3 RESPONSE RATE BY AGE GROUP 78 FIGURE 4.4 RESPONDENTS INFORMATION SYSTEM PACKAGES 81 FIGURE 5.1 SUPPLIER RELATIONSHIP MANAGEMENT 94 FIGURE 5.2 SUPPLY BASE REDUCTION 96 FIGURE 5.3 CUSTOMER RELATIONSHIP MANAGEMENT 98 FIGURE 5.4 ORGANISATIONAL COMMUNICATION 100 FIGURE 5.5 SYSTEMS EFFICIENCY 103 FIGURE 5.6 RESISTANCE TO CHANGE 104 FIGURE 5.7 INDIRECT PURCHASING COMPETITIVENESS 106