NAMIBIA UNIVERSITY OFSCIENCE AND TECHNOLOGY PROGRAMME MASTER of LOGISTICS AND SUPPLY CHAIN MANAGEMENT COURSE RESEARCH METHODOLOGY

COURSE CODE Rmd922m

STUDENT ISCACLE NYANHETE

Student number 213090899 LECRURER DR K ODERO

Investigating the level of strategic recognition of procurement management in Namibia. A case study of Fast moving consumer goods retailers in Windhoek

Table of contentsChapter 2..................................................................................................................................................1

Literature review.....................................................................................................................................1

2.1 Introduction...................................................................................................................................1

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2.1.1 Small retailer..........................................................................................................................1

2.1.2 Larger retailers......................................................................................................................2

2.1.3 Strategic management.........................................................................................................2

2.1.4 Strategic procurement.........................................................................................................3

2.2 Theoretical framework................................................................................................................4

2.2.1 Porter’s five forces model...................................................................................................4

2.2.2 Stakeholder’s theory............................................................................................................4

2.2.3 Resource based theory.......................................................................................................4

2.2.4 Relational view theory.........................................................................................................5

2.2.5 The wheel of retailing...........................................................................................................5

2.3 Procurement as a driver of corporate strategy.....................................................................6

2.3.1 Value creation........................................................................................................................6

2.3.2 Bottom-line.............................................................................................................................7

2.3.3 Topline.....................................................................................................................................7

2.3.4 Procurement risks................................................................................................................8

2.3.5 Sharing information.............................................................................................................8

2.4 Africa’s procurement dilemma.................................................................................................9

2.5 Sustainability..............................................................................................................................10

2.6 Conclusion...................................................................................................................................10

References.........................................................................................................................................11

Chapter 2

Literature review 2.1 IntroductionWhilst senior managers in retail organisations might understand the importance of

strategic procurement they often do not pay adequate attention to it, as they try juggle

finance management, operations management, marketing and many other duties and

responsibilities, which tend to overwhelm these managers (Baby & Joseph, 2016).

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A number studies have been conducted on the importance of strategic procurement in

retail organisations around the world however very little literature available on strategic

importance of procurement management in the retail industry in Namibia. This research

tries to provide literature review sources that were consulted in the investigation the

importance and recognition of procurement management as a strategic function of a

retail organization in Namibia and only focusing on the retailers in Windhoek.

The retail industry in Namibia is relatively oligopolistic, however there are a number of

smaller retail shops that are based in the townships. These small residential area based

retailer’s stock products with local demand and offer locational convenience,

personalized attention, a friendly attitude and are flexible on their product mix in

accordance with local needs (Arpita, 2104).

2.1.1 Small retailerSmall retailers serve the daily purchase needs of the customer stocking fractioned

products, smallest available size of milk, sugar, powdered detergent, toothpaste, soap

and other daily needs (D’Andrea, Lopez-Aleman & Stengel, 2006).

The small retailers know the consumer personally and have good knowledge of the

local community and their consumption habits which enables the retailer to make

products available and adds to diversity of product assortment. Arpita (2014) argues

that retail product assortment include availability, variety and quality.

These small retailers have limited space and therefore cannot stock a large variety of

goods. They rely on procuring the right assortment that meets the local demand, this

therefore places procurement as a major contributor to the bottom line and topline of the

small retailer (Arpita, 2104).

Ackah and Vuvor (2011) also argue that some small retail businesses are born on

impulse on the part of the owner and they run their businesses without proper

procurement strategies which sometimes lead to disillusion and ambiguity in setting

procurement goals and objectives. The owners may fail to give strategic procurement

direction, they fail to set clear procurement goals and objectives for their employees.

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Therefore their procurement function employees fail align their minds to create a

coalition of understand and common procurement goals (Kotter, 1990)

However small retail organisations face challenges of procurement cost and

procurement management capabilities. On the other hand larger organized retailer like

Pick ‘n’ Pay, Shoprite, OK Foods, Spar and Woernmann Broock exploit economies of

scale and enjoy procurement operational efficiencies (Arpita, 2014).

2.1.2 Larger retailersSouthern Africa witnessed the arrival one of global large retailer Walmart when it

acquired fifty one per cent stake in Massmart which operated in twelve other countries

(Nandonde & Kuada, 2016). There are also multinational retailer organization in

Namibia and most of them originate from South Africa with their strategic procurement

offices based in South Africa. However there some Namibian owned retail organisations

operating franchises like Spar and OK Foods.

Procurement takes a huge part of a retail organisation’s working capital requirements,

and huge chunk of working capital is held up in inventory (Pienaar, & Vogts, 2014).

However the working capital requirements can be reduced through lead time

compression which improves the cash-to-cash cycles. The use of vendor managed

inventory also reduces the need for working capital, the working capital can then be

used in other activities that generate income for the organization.

2.1.3 Strategic managementBao (2015) argues that a firm’s strategic management focus should be on issues that

would alter the entire business focus and procurement decision can alter a retail

organisation’s business focus that makes it strategic. David and David (2015) argue that

strategic management focuses on integrating marketing, finance and accounting,

productions and operations, research and development and information systems to

achieve competitive advantage. Fitzroy, Hulbert and Ghobadian (2012) define strategic

management as the creation of an organization that generate value in a turbulent world

over an extended period of time. In all these definition procurement management is not

mentioned as a strategic function, however procurement decisions have an impact on

the strategic decisions of a retail organization. However procurement can create value

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for a retail organization during turbulent time as procurement personnel negotiates good

deals that can keep the organization going in turbulent times.

2.1.3.1 Cost leadership strategyIreland et al (2013) argue that firms pursuing the cost leadership strategy concentrate

on finding ways to lower cost in comparison to their competitors by reducing cost in their

activities while maintaining competitive levels.

2.1.3.2 Differentiation strategyIreland et al, (2013) define differentiation as an integrated set off actions taken to

produce goods and services that customers perceive to being different in ways that are

important to them. However in order to maintain differentiation a firm needs to

constantly upgrade differentiated features that create value to the customer.

Badenhorst-Weiss, Biljon and Ambe (2017) also maintain that the differentiation

strategy aims at offerings product or service that is unique and more valuable to the

customer and it also aims at creating customer loyalty and brand preference which

makes the customer willing to pay a premium price for such a product.

The procurement function plays a major role in differentiation in a retail organization

since there do not produce but rely on their suppliers to give them differentiated features

in products they sell.

2.1.4 Strategic procurementIn the last two decades many retailers have shifted their focus to core activities and

outsourced the rest, creating a complex web of intercompany relations relationships.

However some retailers fail to recognize the strategic importance of these relationships

and they struggle to exploit to full potential and they end up losing control of many

aspects of customer value proposition (Booth, 2010).

Hamister (2012) argue that suppliers have knowledge in different domain and a

combination of the two can create unique knowledge. Retailers act as a link between

manufacturers and the consumers of the final products by facilitating the flow of

products and information in both directions (Kimani, 2011). Many retailer have built

lasting competitive advantages through their procurement management, which is

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integrated into coherent and well‐executed business models. An excellent retail

procurement management is critical to retailers’ efficient and profitable performance.

According to Cousins, Lamming, Lawson and Squire (2008) procurement strategy is

one of the drivers of corporate strategy, good supplier relationships and lean supply

practices can give a retail chain competitive advantage, contributing to bottom line, top

line, customer service and meeting the retailer’s corporate objectives.

Business relationships are important sources of competitive advantage and good and

close relationships with suppliers can help a retailer to reduce procurement cost (Yu &

Ramanathan, 2012)

Procurement provide a huge upstream potential for economic value creation for

retailers, if it is synchronized, variability is eliminated and inventory reduced (Randall,

Gibson, Defee & Williams, 2011)

2.2 Theoretical framework2.2.1 Porter’s five forces modelThe bargaining power of suggest suppliers suggest that the retailer should be able to

force its suppliers to hold down their prices thereby reducing their margin (Ireland,

Hoskisson and Hitt, 2013). It treats suppliers as commodities that can be changed at

any time and they have no influence to the firms, it rules out collaboration with suppliers

2.2.2 Stakeholder’s theory The stakeholders’ theory proposes that a firm should take into consideration its

relationships with specific stakeholder groups when setting its corporate direction and

when formulating its strategy (Yu & Ramanathan, 2012). Suppliers are the retail

organisation’s major stakeholders therefore the strategic direction of a retail

organization should consider suppliers and the interface of an organization and its

suppliers is the procurement function. Therefore the procurement function should be

considered as a strategy function according to the stakeholder’s theory.

2.2.3 Resource based theoryThoo, Tan, Sulaiman, and Zakuan (2017) argue that external acquired resources are

critical in achieving outstanding performance than the firm’s own constrained resources.

However externally acquired resource must be effectively managed and integrated with

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internal resources. The resourced based theory advocates for the allocation of chief

resources and capabilities to where the organization can has competitive advantage

(Lynch, 2012). Inventory is one of the retail organization’s main resources because

inventory availability and assortment can lead to customer satisfaction and create store

loyalty which lead to create competitive advantage.

2.2.4 Relational view theoryDyer and Sign (1998) suggest that inter-organisational relationship can result in

sustainable competitive advantage (relational rent). The firms pool their respective

resources to eliminate deficiencies in each other’s individual portfolio of resources and

create a distinctive resources endowment. Procurement function through its well

managed relations can facilitate or create supply chain community that facilitates the

exchange of information between members of the community.

The high level exchange of information can results in supply chain intelligence which

can then create visibility downstream, this visibility then enables the retailer to meet or

exceed customer expectation (Christopher & Peck, 2004). Retail supply chain

intelligence enables the suppliers to access point of sale information which they will use

to improve the product in order to meet their needs. Supply chain intelligence will relay

to NamibMills that consumers in Western suburbs’ of Windhoek prefer fractioned

products especially the informal settlement because of budgetary constraints, this will

enable the milling company to package its maize and mahangu in smaller packages for

the Western suburb’s markets thereby meeting or exceeding the customer’s

expectations

2.2.5 The wheel of retailingThe wheel of retailing theory by McNair states that a retail organisation goes through a

three phased cycle namely entry, trading and vulnerability. It states that a retailer start

his/her business by serving low-income consumers and later enjoys the reputation of

cutting prices and margins. However as the business grows feeding on the reputation of

cutting prices and low margins the retailer will start to acquire upmarket properties,

provide elaborate services and increase their margins (Nandonde & Kuada, 2018).

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In order to survive in the entry phase when cutting prices and earing low margins the

retail organisation has to have tight control of its procurement costs. The retail

organisation needs to negotiate better prices with suppliers and lower procurement

costs in order to improve net income which increases the liquidity reserves of the retail,

therefore procurement place a major role in achieving the retail organisation’s strategic

goals in this phase

Terblanche (2016) maintains that during the trading up phase the retail organisation

changes demographic trends and competition action, offers high quality products,

installs more expensive fixtures and opening up shops in better locations. Procurement

plays a major role in the trading up strategy, it contribute to acquiring high quality goods

at a lower price thereby keeping the margin high, reducing the total cost of ownership of

fixtures and finding affluent shop locations at a reasonable price.

According to the wheel of retailing theory the retail institution will eventually reach

maturity as it turn into a high cost-high profit firms and vulnerable to competition from

low price retailers (Terblanche (2016). Through negotiating better prices and lowering

procurement costs, the net income is improved thereby increasing the liquidity reserves

of the retail. Therefore if the procurement function of retailer in the vulnerability phase

negotiates a better prices of its products a retail organization that is supposed to be in

the vulnerability phase can still compete with low-priced retail organisations.

2.3 Procurement as a driver of corporate strategyIt in top-down approach to strategy formulation senior management determines the

strategy and dictates to functional areas in the modern day globalized challenging,

dynamic and ever-changing retail environment the bottom up approach might a better

option (Badenhorst-Weiss et al, 2017) Competition is no longer between firms or dyad

but between supply chains therefore emphasis has been put on managing supplier

relationships in order to improve performance, improve the bottom line, topline and

customer service (Cousins et al, 2008).

2.3.1 Value creationPhilippart (2016) argues that value creation demands that firms innovate either to

increase consumer satisfaction or to improve effectiveness as compare to rival firms

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and in the retail industry suppliers are the main source of value creation. During

turbulent economic times retailers need to realign themselves to narrow the gap

between their value proposition and the evolving consumer needs. Procurement plays a

major role in closing this gap, through inventory management, supply chain

management and product realignment (Mann, Byun & Li, 2015).

Pienaar and Vogt (2014) maintain that customers in the retail industry value service

quality more than other factor because the products are mainly homogeneous, and

service quality in retail is mainly about reliability and consistency. Reliability in retail can

be measured through consistency of product availability, for example fresh fruits will

always be available in Fruit & Veg shelves, and Fruit & Veg procurement function

ensures the constant availability of the fresh fruit on the shelves.

2.3.2 Bottom-lineProcurement takes a huge part of a retail organisation’s working capital requirements,

and huge chunk of working capital is held up in inventory (Pienaar, & Vogts, 2014).

However the working capital requirements can be reduced through lead time

compression which improves the cash-to-cash cycles. The use of vendor managed

inventory also reduces the need for working capital, the working capital can then be

used in other activities that generate income for the organization.

Negotiating better prices and lowering procurement costs improves net income which

increases the liquidity reserves of the retail. In retail business most products are

homogeneous and price sensitive, any increase or decrease in in price would have an

impact on the sales volume and profitability. Therefore if the procurement function of

Pick ’n’ Pay negotiates a better prices of meat for its butchery it can still make a high

profit margin without increasing the price and the volume of sales.

2.3.3 ToplineProcurement function can satisfy the customer needs by buying what the customers are

demanding thereby creating customer value, giving the retailer competitive advantage

which can then be exploited thereby contributing the topline of the retail organiasation

(Pienaar & Vogt, 2014).

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Excellent procurement management facilitates customer satisfaction through a range of

quality goods and eliminates stock outs, retailers with the highest customer retention

rates earn the highest sales volumes or values (in monetary terms). In other words,

customer loyalty is also an important factor that affects the performance of a retail

organisation; however customer loyalty is retained through high levels of customer

service and customer service is enhanced through stock availability and stock is made

available through procurement.

Pienaar and Vogt (2014) argue that there is a positive correlation between stock

availability and sales volume. Stock availability and responsiveness to the customer’s

ever-changing preferences can lead to customer retention and retention will be lead to

loyalty and a loyal customer is likely to increase the volume and value of purchases a

single customer makes. If Pick ‘n’ Pay ensures that they always have fresh milk in their

shelves and its procurement function is responsive to the customer’s demand of low fat

milk. Customers will always buy milk from Pick ‘n’ Pay and even add bread and sugar to

the purchases of milk. The customer can also add some other grocery items (besides

milk, bread and sugar) to his list where he intended to buy only milk, he/she might end

up buying meat and vegetables from the same shop or even buying the whole month’s

grocery provisions from Pick ‘n’ Pay.

2.3.4 Procurement risksAccording to Lee, Lin and Pasari (2014) procurement risks falls into the category of high

probability of occurrence and severe impact. Most widely advocated procurement

processes make an organization vulnerable to risks. Low-cost sourcing, lean supply and

agile supply chain, vendor managed inventory (VMI), Just-In-Time (JIT), integration,

outsourcing, make organisations prone to disruptions (Murray, 2013)

A culture of procurement risk management must be developed throughout the retail

organisation and the organisation should build procurement risk resilience and

procurement risk management should be one of the corporate objectives (Christopher&

Peck, 2004).

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2.3.5 Sharing informationSharing promotional between a retailer and a suppliers is a very beneficial because

promotion can create disruptions. Promotions increase demand and at times catching

the supplier by surprise resulting in shortage as the supplier fails to cope with the

temporary demand increase. The supplier might respond to this demand by trying to

match it leaving the supplier with excess inventory at the end of the promotion

(Hamister, 2014).

Risks can be identified through information sharing, studying the procurement

environment, processes and activities after identifying the risks the impact must be

established and mitigation comes from alternative scenarios, early warnings and

contingency planning

2.4 Africa’s procurement dilemmaSome parts of Africa has a shortage of food supplies because of poor investment in

agriculture and low production which leads to food being consumed far away from its

source of production (Nandonde & Kuada, 2016). This presents a dilemma to the retail

organisation’s procurement function which has to move tons of perishable products over

thousands of kilometers without compromising quality, keep costs low and adhering to

hygiene standards despite multiple handling.

Retail firms operate with complex linkages and these relationships gives them access to

other resources of other from and through these relationships the retailers acquire the

supplies it needs (Yu & Ramanathan, 2012).

2.5 SustainabilityThe increasing concern and awareness among consumers of environmentally friendly

business processes and the growing cost of natural resources has forced many

organisations to use sustainable business processes (Wisner, Tan & Leong, 2011).

Sustainability is meeting the business needs for materials, goods and services in an

environmentally friendly and ethical way, taking into consideration the (triple P) people,

planet and profit.

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2.6 ConclusionThe procurement function ensures that retailer’s facilities are running optimally and at

the fullest capacity as possible by facilitating a continuous flow of goods and services a

supplying. It ensure a consistent and reliable supply of high quality goods and services

through its long term mutually beneficial relationships with suppliers. According to

Kearney (2014) leading companies get the double as much measurable cost reduction

as compared to ordinary companies from capitalizing on procurement to get competitive

advantage through supplier driven innovation.

Fast moving consumer goods retailers unlike other businesses have many small value

transaction (many under N$50. 00) the profitability ratio (net profit after tax as a

percentage of turnover) is between 1.5 and 3.0 per cent (Terlanche, 2016). These small

value transactions require the same time, resource and effort to execute as other

business which have an average of N$200 per transaction. It take almost the same

amount of time, effort and resource to sell a trousers worth N$1 000. 00 as to sell a loaf

of bread that sells for N$10.00. Therefore there is need to have tight control on costs

and reducing procurement costs is one way a retailer can improve the margins

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