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Procurement & the value chain. A tool for acheiving effective organizational goal

A study of electricity company of Ghana Limited

by Dr. David Ackah (Author) Makafui R. Agboyi (Author)

Scientific Essay 2014 20 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Content

ABSTRACT

BACKGROUND OF THE STUDY

LITERATURE REVIEW

Overview of Public Procurement

Procurement Cycle in Ghana

MEASURING PROCUREMENT EFFECTIVENESS

VALUE CHAIN

MATERIALS MANAGEMENT

LOGISTICS MANAGEMENT

SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN STRATEGIES

RESEARCH METHODOLOGY

PRESENTATION AND ANALYSIS OF DATA

RANSPARENCY IN PROCUREMENT

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

Conclusion

REFERENCE

ABSTRACT

Value chain management (VCM) is more than a theory. It is a strategic business approach that is helping a growing number of businesses increase their long-term competitiveness. It would be extremely difficult, to achieve such competitiveness by operating as an individual business within fragmented value chain. The primary purpose of this research is to address procurement and value chain impact on organizational performance. The project provides an informed, objective perspective on VCM by demonstrating how value chains and procurement operate at the business level rather than the sector or sub-sector level.

Major changes are currently taking place within procurement functions of manufacturing firms. Procurement is shifting its focus from daily purchasing activities to long term, value-adding procurement and supply chain activities. At the same time, it is responding to the challenges and opportunities of electronic procurement (e- procurement), which refers to the utilization of the internet to buy and sell products and services. The responsibilities of procurement have changed over the last few decades, procurement focused heavily on the transactional elements of the purchasing process. Procurement was accepted as a support function that provides for the sourcing needs of other departments within the organisation

Key word: Procurement & The Value Chain; A Tool For Achieving Effective Organizational Goal

BACKGROUND OF THE STUDY

Many organizations today are forced to increase their global market share in order to survive and sustain growth objectives. At the same time, these organizations must defend their domestic market share from international competitors. The challenge is how to expand the global logistic and distribution network, in order to ship products to customers who demand them in a dynamic and rapidly changing set of channels. Strategically positioning of inventories is essential, so that the products are available when the customer wants them.(Handfield, et al. 2002)

Changes in the economic and competitive environments over the last twenty years have resulted in new ways of thinking within companies, in their search for competitive advantage. Many changes have occurred in the way that firms view the function of Purchasing. The movement away from the philosophies of mass production has led to new approaches to the traditionally operational task of purchasing; this has resulted in the concept of purchasing as a part of the strategic function of ‘supply chain management’, which is aligned to the overall corporate strategy. (Finch, 2004)

According to (Knudsen, 2003), increased global scope of operations, increased usage of outsourcing, and the buyers’ increased dependence on suppliers’ capabilities, make procurement work a vital undertaking for corporations to master.

Within the last ten years, the lowly, back-end procurement process has been transformed into a strategic resource. Procurement is now seen not only as a strategic player in the value chain, but as a major driver in the extended supply chain. There are many reasons for its popularity. Specific drivers may be traced to such areas as trends in global sourcing, emphasis on time to market, product quality based competition, customer uncertainty and the need to improve bottom-line costs. (Kalakota & Robinson, 2001)

Every industry player has a value chain, which in some parts may have some connections with others. Porter states that, suppliers have value chains that provide the purchased inputs to the firm's chain; channels have value chains through which the firm's product or service passes; buyers have value chains in which the firm's product or service is employed (Porter, 1985: P22). In the value chain context, an internal value chain within the boundaries of an organization and an external value chain where partners perform activities can be identified. (Chaffey, 2004).

According to Charles C Prorier in the supply chain manager`s problem solver, to get a firm to adopt Value Chain for organizational effectiveness, and use their listed tools collaboratively, companies like the Electricity Company of Ghana (ECG) must re-evaluate their position in an industry and market, find what further improvements are feasible, determine just what is needed to change the organizational mindset to take a leadership position.

LITERATURE REVIEW

Procurement encompasses all activities involved in obtaining goods and services and managing their inflow into an organization (Segev, 1998). Traditionally the corporate function of procurement is divided into strategic and operational tasks. Whereas the strategic tasks include sourcing activities, supplier management, and design and implementation of buying procedures, operative tasks embrace all transaction-oriented activities such as the excitement of purchase orders. (Kaufmann, 1999; Gebauer and Segev, 2001)

` Procurement is the term most commonly employed to refer to the purchasing of goods and services for the day-to-day operation of a business. Procurement is an essential part of any organization’s ability to function effectively and efficiently. (Steven R Leonard, 2000). Procurement management includes the processes to purchase or acquire the products, services, or results needed from outside the organization to perform the work. Procurement management also includes administering any contract issued by an outside organization (The Buyer) that is acquiring the organization from the performing organization (the seller), and administering contractual obligations placed on the organization by the contract. (George Belev, et al., 2004).

The effective procurement management should acknowledge complexity, find the right skills & organize the work, develop a sound strategy, manage time effectively, Follow sound bid evaluation method and develop a smart, fair contract. Effective procurement requires organized teamwork: authorities, responsibilities, schedule, and resources. (Eduardo Talero, 2004).

The term public procurement refers to the purchasing by governments and local authorities of the works, goods and services they need to operate ranging from simple office items to sophisticated high-tech equipment. (Public Procurement Research Group). With the day-to-day transaction traffic delegated, the focus will be on training and education, performance measurement, dispute resolution, system oversight, streamlining of the acquisition and business process, and embedding the best of supply chain management techniques in statewide policy and process. Some of this cannot be done well, or done at all, without incorporating procurement reform into Government law to institutionalize change, (Rosa Wilkinson, 2005).

In many cases, increased costs and delays in project implementation can be attributed to lack of familiarity with the procurement procedures of the funding agencies combined with inadequate command of the essential day-by-day “business skills” needed to manage international procurement operations, (ILO and WB). At each of the procurement process, failure can almost be built in if there is insufficient attention paid to the process. It helps to consider each stage of the process and to analyse the possible causes of failure as a first step to taking preventative action, (Stephen Cannon, 2006).

Overview of Public Procurement

The Public Procurement Law, 2003 (Act 663) is a comprehensive legislation designed to eliminate the shortcomings and organizational weaknesses which were inherent in public procurement in Ghana. The government of Ghana, in consultation with its development partners had identified the public procurement system as an area that required urgent attention in view of the widespread perception of corrupt practices and inefficiencies, and to build trust in the procurement system. A study by the World Bank (2003a) reported that about 50-70% of the national budget (after personal emoluments) is procurement related. Therefore an efficient public procurement system could ensure value for money in government expenditure, which is essential to a country facing enormous developmental challenges.

To ensure sanity and value for money in the public procurement landscape, the government of Ghana in 1996 launched the Public Financial Management Reform Programme (PUFMARP). The purpose of the programme was to improve financial management in Ghana. PUFMARP identified weaknesses in the procurement system. Some of these weaknesses included: lack of comprehensive public procurement policy, lack of central body with technical expertise, absence of clearly defined roles and responsibilities for procurement entities, absence of comprehensive legal regime to safeguard public procurement, lack of rules and regulations to guide, direct, train and monitor public procurement. The programme also identified that there was no independent appeals process to address complaints from tenderers. These findings led to the establishment of the Public Procurement Oversight Group in 1999. The aim of this group was to steer the design of a comprehensive public procurement reform programme which led to the drafting of a public procurement bill in September 2002 that was passed into law on 31 December 2003.

Procurement Cycle in Ghana

Procurement cycle is the direction of the procurement process. It establishes the main activities required at every stage of the procurement process. It does not only direct the approach to the implementation of the procurement activities but also provides a road map for monitoring and evaluation of procurement activities effectively

illustration not visible in this excerpt

Figure 1: (Procurement Cycle)

Source: (Public Procurement Act, 2007).

From figure 1, it is seen that procurement starts from planning and ends at evaluation. It indicates the key activities needed at every level in the procurement process. It does not only give the direction of implementation process but also a yardstick for monitoring and evaluation. At the planning stage the following activities are required: contract packages, source of fund, cost estimation, technical and performance specification. Sourcing stage deals with procurement method, supply sources, criteria for evaluation and negotiation.

At the contracting stage, the following activities are needed: notification of award, contract document and communication channels. At the contract management stage, the following activities are considered: selection of a contract manager, allocation of responsibilities and performance benchmarks, communication channels, expediting and dispute resolution and contract modification. Storing activities include inventory control and management, storage requirements and material handling. Distribution includes available storage and transportation facilities; these facilitate the delivery of goods, works and services. Evaluation stage activities include review of performance of procurement function, to assess compliance, efficiency and effectiveness and procurement audits.

MEASURING PROCUREMENT EFFECTIVENESS

Measuring procurement effectiveness can be explained through three important factors; the effect on organisation’s economic performance, the effectiveness of supplier relationship management and how procurement correlates with the organisation’s corporate strategy.

Effect on organization’s performance

The development of procurement function and its effects on organisation’s performance depend on two factors; the monetary value and the cost saving opportunities. Especially when the value and volume of the purchases is high, the opportunities to save money should be utilised. Efficient development of the procurement function can prove to be very financially profitable and result in higher profits for the organisation. (Iloranta 2008.)

In the simplest terms, defining the value of the purchase is done by calculating the prices of the purchased goods and services together which will result in the total monetary value. (Iloranta 2008.) Procurement activities have a relation to the organisation’s economic performance. This can be divided to effects on turnover, gross profit, efficiency, total costs and organisation’s equity. All of these categories correlate directly with how the supplier relations are controlled and utilized for the benefit of the organisation. (Iloranta 2008.)

When the outsourcing activities account to a large part of the turnover, the influence of procurement function in organisation’s economic performance is also bigger. How the procurement is handled in an organization becomes highlighted when it has an effect on the competitive advantage.

This concerns situations where the prices of materials fluctuate in short term, innovation is involved with the purchased products or the competition of the end-products is intense.

(Iloranta 2008.)

Choosing the supplier, product or subcontractor has an essential role in the potential growth of turnover. How the organisation’s brand is perceived in the market affects the sales numbers. Sometimes the buyer can feel that they are receiving a better product because of a good brand image. This means that the supplier can actually have a positive impact on the decision made by the buyer. It’s important not to forget the power of word of mouth marketing. It’s a factor that can determine whether your product gets chosen over the competitor’s one. (Iloranta 2008.)

Selecting the right supplier can help the organisation to access the newest high technology that will help you to have an edge in sales. For example when an organisation is starting its international business operations, it might be a crucial decision to select local suppliers to ensure its market share in the market. The growth of gross profit can be explained through cost reduction and increased turnover. (Iloranta 2008.)

The faster tempo of the business life has a direct impact on the effectiveness of procurement function. The faster rhythm correlates to faster flow of goods and cash. The competition in the market is growing and largely depends on how the supplier network is organised and utilized. The time frames for product development and product launch are continually shortening.

The ability to use and direct the supplier markets for the benefit of the organisation has an important role on the organisation’s success. (Iloranta 2008.)

The growing needs from the customers for product specialization and tailoring need to be answered without expanding the time frames for delivery.

It’s often thought that the production of products limits the delivery process. This is not the case, the issues concerning supply chain especially moving product raw materials or semi-finished products proves to be a factor that prolongs the delivery time for customers. The organisations that can cut down the time spend for supply chain process is more likely to succeed. (Iloranta 2008.)

Procurement has direct and indirect costs that clearly affect the effectiveness. The organisational structure, division of work and operation efficiency; are components that modify the effectiveness of procurement function. The procurement processes and procedures have a close relation to other functions on the organisation and on their efficiency as well. As an example, improvements in quality issues and on the delivery times reflect to the total costs on the logistics and production side. Reducing the total costs can be perceived as reduced quality of products. Cost efficient procurement doesn’t imply that the quality of products would decrease. (Iloranta 2008.)

The efficient use of procurement methods is an answer to releasing the organisation’s capital. Controlling financial assets can be executed by balancing the payment terms between the sales of assets and purchases of debt providing the economically most advantageous solution. Correct con trolling of components like investment and property management influences the release of capital when the knowhow of procurement staff is used properly. This will result in reduction of invested capital and depreciation of products. Using the supplier network as a tool to outsource parts of production or supply chain to supplier will give an opportunity to release capital. This won’t change the capital structure of the organization in any way. (Beer 2011,).

VALUE CHAIN

According to Christopher (1992) suppliers are looking for strategies that will provide superior value in the eyes of the customer. Porter (1985) introduced the concept of a value chain. Organisations that have successfully introduced a value chain have gained a competitive advantage (Christopher, 1992).

According to Christopher (1992) the competitive advantage of any supplier cannot be understood by merely looking at the organisation as a whole. Organisations performs many discrete activities in designing, producing, marketing, delivering and supporting its product.

Each different activity within the organisation contributes to the cost position and competitive advantage of an organisation. The value chain integrates all these activities and an organisation can gain a competitive advantage by performing these activities more cheaply than its competitors.

The value chain suggests that an organisation’s success is affected by achieving a competitive advantage through cost leadership and differentiation (Saunders, 1997).

The value chain can be categorised into two main activities primary activities and supporting activities. Inbound logistics, operations, outbound logistics, marketing and sales and services form the primary activities while infrastructure, human resource management, technology development and procurement form the secondary activities. The support activities support each of the primary activities within the organisation. An organisation will gain a competitive advantage in the way it organises and performs these activities within the value chain. An organisation can present its customer with superior value in a unique way that creates greater buyer value by effectively integrating (Christopher, 1992).

According to Saunders (1997) the supply chain is the linking of all the value chains of the organisations that make-up the supply chain. The final customer becomes the recipient of the value of the end product or service. The final customer can be seen as receiving a bundle of values from the different organisations within the supply chain.

Role and importance of procurement

Changes in the economic and competitive environments over the last twenty years have resulted in new ways of thinking within companies, in their search for competitive advantage. Many changes have occurred in the way that firms view the function of Purchasing. The movement away from the philosophies of mass production has led to new approaches to the traditionally operational task of purchasing; this has resulted in the concept of purchasing as a part of the strategic function of ‘supply chain management’, which is aligned to the overall corporate strategy. (Finch, 2004)

According to (Knudsen, 2003), increased global scope of operations, increased usage of outsourcing, and the buyers’ increased dependence on suppliers’ capabilities, make procurement work a vital undertaking for corporations to master. Within the last ten years, the lowly, back-end procurement process has been transformed into a strategic resource. Procurement is now seen not only as a strategic player in the value chain, but as a major driver in the extended supply chain. There are many reasons for its popularity. Specific drivers may be traced to such areas as trends in global sourcing, emphasis on time to market, product quality based competition, customer uncertainty and the need to improve bottom-line costs. (Kalakota & Robinson, 2001)

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Details

Pages
20
Year
2014
ISBN (eBook)
9783656842392
ISBN (Book)
9783656842408
File size
662 KB
Language
English
Catalog Number
v283898
Grade
Tags
procurement ghana limited

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Title: Procurement & the value chain. A tool for acheiving effective organizational goal