Negotiation as A Cost Reduction Technique In Material Procurement
CHAPTER I: Introduction
Every human being needs water to survive, so also every organization needs materials to survive. In the private and public sector, their total expenditure is mainly spent on acquiring either materials or facilities or services. There is no way business operations can be effectively carried out without them. Negotiation is vital to organizations so as to reduce cost or minimize cost and to maximize profit.
1.1 Background of the study
Negotiation as a cost deduction technique in material procurement is for efficiency of any business, and also contingent upon obtaining the right materials and have it available in the right quantity from the right source, at the right price, delivered at the right place at the right time, whereby failure to any of these adds to costs and decreases the profit level of any organization.
There has been procurement fraud because of the idea of speed money in the mind of some of the procurement managers or officials who buy materials or items for the organization. Lack of transparency has lead to excess spending, increasing cost of production, losing a lot of money through the inflating of prices, over invoicing and overpayment of materials procured.
High cost incurred in material procurement is as a result of procurement manager not doing his home work well that is by planning his objectives and strategy before hand and he enters the session without a positive attitude of success.
Lack of knowledge and not been conversant to some guide when negotiating by the procurement manager in respect to issue such as, when to negotiate, the agenda, negotiation technique and behaviour, some attribute of a good negotiator, the team leader to negotiate term of payment not stipulated and followed add to the cost of production. These could also lead to high cost of finished products and make it not to compete well with its competitors in the market, and calls for extra expenses on promotions and advert, renovation and so forth, just to improve sales in order to make profit or keeps the organization living.
Hence procurement being a process whereby all classes of resources such as materials, facilities, people required to render services are obtained procurement covers a wider range of supply activities than buying alone. Negotiation as cost reduction technique in materials procurement is embarked on to solve some of the problem earlier mentioned. Negotiation is a very vital and essential technique in every organization in both private and public sector to reduce high cost incurred in material procurement, the role in negotiation and all that it takes to negotiate effectively. The impact expected at the end of these is to minimise cost and maximise profit of the organization, and also to ensure that the end products stand in the competitive market, to satisfy the taste of consumers and promote the standard of living economy and the society at large.
1.2 Statement of the Problem
In both the private and public sectors, between 50% and 80% of their total expenditure is spent on acquiring either materials or services, procurement is thus the biggest item of expenditure of an organization. Excessive costs are incurred when enquiring these materials in private sector about 60% to 75% of company’s procurement (purchases) of materials examples raw material is done by the company agent or foreign officials of the company based abroad , who usually charge certain percentages for their work which could lead to additional cost of production, over-invoicing and over payment. What else can be done, and what other means can be used to acquire raw materials.
Further more, when there is a need to render service that is the award of contract we know that every one is interested in buying, although they call it purchasing but it has lead to mismanagement and squandering of funds. What are the procedures, measures technique to ensure that such contract or procurement of materials, goods and services are carried out appropriately and so on.
To reduce cost, negotiation is one of the techniques to use, since negotiation is an art of arriving at a common understanding through bargaining on the essentials of a contract such as delivery, price, terms and condition of service, payment. These communication of inter-changing ideas and information as a result of which procurer and the supplier arrived at a mutually acceptable bargain enhance the procurement manager with a positive attitude of success, planned his objectives and strategy before hand.
The procurement manager would have to collect and study all relevant facts before meeting the supplier, and then develop an agenda for the meeting to negotiate with the supplier. Adequate arrangement or preparation would be made in respect to the negotiation team, the leader with the technique that would be used to negotiate and when to negotiate will be spelled out.
1.3 Objectives of the Study
The objectives of these study is to ensure negotiation technique of communication for bargaining are well understood so that the buying organization and the supplier will arrive at and agreed price, terms and condition of service, payment and so on.
To ensure prudence and judicious utilization of the limited resources available in an organization, all procurement undertaken must comply with the principle of openness between the procurer and the supplier, transparency, accountability, competition among suppliers, cost effectiveness and value for money are monitored to enhance profitability of organization. Between the procurer and supplier there should be an understanding which leads to reducing cost involved in competitive bidding.
To also make room for meetings in order to attain the desire goal of the organization, and to ensures that suppliers perform according to the terms of the negotiation.
This study is specifically designed to:
- Identify the techniques for negotiation
- Identify the strategies for effective negotiation
- Investigate the current trend of materials availability in the organization under study
- Identify criteria for coordination and management of supplier, that can ensure cost reduction in material procurement
- Identify means of constant flow of material negotiated to avoid interruption at the point of production.
1.4 Significance of the Study
This research work would be useful or the beneficiaries of this research work is the management of the organization under study, Nigerian Bottling Company Coca Cola Plc to re-address the way and manner by which materials are procured with regard to cost consciousness
The research work would also be of benefit to private and public procurement entity when negotiating on either organization or government contract. Negotiation is a trick to win supplier’s heart to willingly enter into a business traction and not using authority or power.
The research work would add to the findings of the previous and future researchers who intend to study or have studied similar topic and will also help the other incoming researcher to build up on their findings.
As a procurement manager the knowledge acquired would be used at the field to practice the profession in acquisition of materials to enhance profitability of the organization. To also expose some development suppliers stand to benefit from the organization the supply materials.
1.5 Research Questions
- What are the techniques for negotiation?
- What are the strategies for effective negotiation and how can negotiation enhance purchasing activity to function effectively as purchasing in the organization?
iii. What is the rate or extent of materials availability in the organization under study?
- How can coordination and management of supplier ensure or enhance cost reduction in material procurement, and how does negotiation team help the business in actualizing it cost reduction objectives.
- How can constant flows of material negotiated avoid interruption at the point of production?
1.6 Definition of Terms
Negotiation: this is the process of planning, receiving, and analysing used by the buyer and the seller, to reach an acceptable agreement or compromise is an aspect of business transactions of payment and so on.
Purchasing: This is used as a process of buying in the market, but in a broader sense, it is a professional term used when buying goods and services by organisations, companies, industries, commerce and corporation by a professional buyer.
Procurement: Is where large quantity of goods and services are exchanged for money with the aim of reselling them to industrial or ultimate consumer markets. Examples of these markets are distributors, wholesalers, retailers and associations.
Bargaining: Is an agreement to buy, sell or exchange made after discussions in order to arrived at compromise
Specification: a specification is a details description of item, its dimension, analysis, performance or other relevant characteristics in sufficient details to ensure that it will be suitable in all respect for the purpose it is intended or wanted.
Buyer: a buyer is a person who buys goods at a particular price without the technicalities involved being taken into consideration. He is not regarded as a purchaser in real sense.
Purchaser: is anyone from the professional to the top executive or any departmental member with the tag ‘Purchasing Manager’ that select suppliers and also have the responsibility for implementing the policies of the organization related to the acquisition of material, services, and production equipments or assets.
Competitive Bidding: is calling for bids and evaluating the bids to arrive at the best price.
Tactics: is expedient means of achieving an objective.
Service: it could be after sales services, delivery dates, sellers meeting, and providing information on materials availability.
Confrontation: is a situation where both sides refuse to bulge, which often result to surrender or no deal.
Persuasion: is a situation where one party knows best and will therefore subtly impulse his will on the other.
Dimension: this implies not only quoting the sizes of the various parts of articles, but also indicating the amount of tolerance which may be permitted in the sizes.
Material: Is an element of production that is used to produce a product.