ROLE OF PROCUREMENT BEST PRACTICES IN MITIGATING STOCK OUTS IN

STATE OWNED INSTITUTIONS : A CASE STUDY OF JOMO KENYATTA

UNIVERSITY OF AGRICULTURE AND TECHNOLOGY.

MOKAMA JOSHUA MAINA

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

PROCUREMENT AND LOGISTICS SCHOOL OF ENTREPRENEURSHIP AND

MANAGEMENT IN THE COLLEDGE OF HUMAN RESOURCE DEVELOPMENT IN

PARTIAL FULFILLMENT FOR THE REQUIREMENTS FOR THE AWARD OF

DIPLOMA IN PURCHASING AND SUPPLIES MANAGEMENT OF JOMO

KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY.

March, 2016

DECLARATION

This research proposal is my original work and has not been presented for a diploma in any other

University.

Signature………………………. Date…………………………

Mokama Joshua Maina

HD111-6162/2013

This research proposal has been submitted for examination with my approval as University

Supervisor.

Signature………………………… Date……………………….

Miss. KepherBether

i

DEDICATION

I dedicate this proposal to my family for their moral and financial support throughout my

proposal. Special thanks to my Creator for this far He has lead me and beyond.

ii

ACKNOWLEDGEMENT

My special thanks goes to my parents for the support both financially and advise wise and

continually believing in me during the entire process. Also to my supervisor, Miss. Kepher

Bether for her guidance throughout the research process, Above all to God for granting me life,

patience and success in every endeavor and also for the good health throughout the proposal.

iii

ABSTRACT

Effective procurement best practices has a role in ensuring continuous mitigation of stock outs

and having good relations with suppliers who have a good reputation and experience in terms of

their capacity in information technology as well as legal suitability to provide the product/service

needed to be procured. Stock-taking may be performed as an intensive annual end of fiscal year

procedure or may be done continuously by means of a cycle count to ensure customer

satisfaction and also increase internal productivity after mitigating stock outs. The main

objective of the study will be to assess the role of procurement best practices in mitigating stock

outs in state owned institutions with specific reference to Jomo Kenyatta University of

Agriculture and Technology. Its specific objectives are to find out the role of supplier buyer

relationship management, vendor managed inventory and information technology on stock outs

mitigation in state owned institutions. The target population of respondents will be of (40)

employees from which the researcher will use sampling frame to select three departments that

will be used to select a sample size of the respondents that will represent the entire population.

The researcher will use stratified random sampling and questionnaires as instruments for data

collection because it will be easier for the researcher to congregate large information which will

be required for analysis. The study will use descriptive research design where the population

census of 40 employees was selected. Questionnaires containing both closed-ended and open-

ended questions will administered to the respondents by the researcher. Data collected will be

analyzed quantitatively by use of SPSS Version 22.0 and qualitativelyby performing a content

analysis where it will provide an appropriate analysis.All the units of analysis will be

comprehensively studied and whole population taken into account.

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Table of Contents

DECLARATION..............................................................................................................................i

DEDICATION................................................................................................................................ii

ACKNOWLEDGEMENT..............................................................................................................iii

ABSTRACT...................................................................................................................................iv

LIST OF FIGURES......................................................................................................................viii

LIST OF ABBREVIATIONS/ACRONYMS.................................................................................ix

OPERATIONAL DEFINITION OF TERMS.................................................................................x

CHAPTER ONE..............................................................................................................................1

INTRODUCTION...........................................................................................................................1

1.1 Background of the Study...........................................................................................................1

1.1.1 Global Perspective..................................................................................................................2

1.1.2 Local Perspective....................................................................................................................3

1.1.3 Jkuat........................................................................................................................................5

1.2 Statement of the Problem...........................................................................................................6

1.3 General Objective......................................................................................................................7

1.3.1 Specific Objective...................................................................................................................7

1.4 Research Questions....................................................................................................................7

1.5 Justification of the Study...........................................................................................................8

1.1.5 Universities.............................................................................................................................8

1.5.2 Suppliers.................................................................................................................................8

1.5.3 Government............................................................................................................................8

1.6 Scope of the Study.....................................................................................................................8

1.7 Limitation on of the Study.........................................................................................................9

1.7.1 Confidentiality........................................................................................................................9

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1.7.2 Accessibility...........................................................................................................................9

CHAPTER TWO...........................................................................................................................10

LITERATURE REVIEW..............................................................................................................10

2.1 Introduction..............................................................................................................................10

2.2 Theoretical Review..................................................................................................................10

2.3 Conceptual Framework............................................................................................................14

Fig. 2.1 Conceptual framework.....................................................................................................15

2.4 Empirical Review....................................................................................................................25

2.4.1 Supplier Relationship Management......................................................................................25

2.4.2 Vendor Managed Inventory..................................................................................................26

2.4.3 Information Technology.......................................................................................................27

2.5 Critique of Existing Literature.................................................................................................27

2.6 Summary..................................................................................................................................29

2.7 Research Gaps.........................................................................................................................29

CHAPTER THREE.......................................................................................................................30

RESEARCH METHODOLOGY..................................................................................................30

3.1 Introduction..............................................................................................................................30

3.2 Research Design......................................................................................................................30

3.3 Population................................................................................................................................31

3.4 Census......................................................................................................................................31

3.5Pilot Testing..............................................................................................................................31

3.5.1 Reliability.............................................................................................................................32

3.5.2 Validity.................................................................................................................................32

3.6 Research Instruments...............................................................................................................32

3.7 Data Analysis...........................................................................................................................33

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REFERENCE................................................................................................................................34

APPENDICIES..............................................................................................................................38

APPENDIX I.................................................................................................................................38

LETTRE OF INTRODUCTION...................................................................................................38

APPENDIX II................................................................................................................................39

QUESTIONNAIRE.......................................................................................................................39

APPENDIX III...............................................................................................................................44

WORK PLAN................................................................................................................................44

APPENDIX IV..............................................................................................................................45

RESEARCH BUDGET.................................................................................................................45

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LIST OF FIGURES

Fig. 2.1 Conceptual framework

viii

LIST OF ABBREVIATIONS/ACRONYMS

AL Artemether- Lumefantrine

ECR Efficient Consumer Response

EDI Electronic Data Interchange

ERP Enterprise Resource Planning

IT Information Technology

JIT Just In Time

JKUAT Jomo Kenyatta University of Agriculture and Technology

PPDA Public Procurement and Disposal Act

PPOA Public Procurement Oversight Authority

RFID Radio-Frequency Identification

SCM Supply Chain Management

UNECE United Nations Economic for Europe

US United States

VMI Vendor Managed Inventory

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OPERATIONAL DEFINITION OF TERMS

Information Technology: It is the development, installation, and implementation of computer

systems and applications (American Heritage Dictionary, 2000). Some university campuses have

centralized IT while others have implemented a decentralized approach.

Supplier–Buyer Relationships: is the area which is gradually getting more importance in the

business and the academic field. For having competitive advantage and improved market

positioning companies strongly focusing on the development of closer ties with some other

organizations. Thus far, too little is known about the mechanisms which can help to evolve long

term and collaborative relationships, nor about the interaction and existence of buyer-supplier

relationships at different levels in a business relationship (Akkermans, 2009).

Vendor Managed Inventory: It is a continuous replenishment program where the supplier is

given the responsibility for all decisions regarding the replenishment of the customer’s

inventory. As an alternative for the traditional order-based replenishment practice, VMI changes

the approach for solving the problem of supply chain coordination. Instead of putting more

pressure on the suppliers’ performance by requiring faster and accurate deliveries, VMI gives the

supplier both responsibility and authority to manage the entire process of replenish the

customer’s inventory Chopra and Meindl (2004).

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

There are several procurement best practices that can be undertaken to mitigate stock outs.

Stock-out is a period when an institution is running without stock. Stock is very essential in any

institution to ensure that both internal and external customers are provided with the required

service levels and also in ascertaining present and future requirements for all types of inventories

to avoid overstocking and under stocking in production (Lysons&Gillingham, 2003).

Purchasing function is important part of doing business in today’s competitive environment. As a

result of this development purchasing function has now moved from product-centered to a

performance-centered. This trend has called for the process to be evaluated in order to achieve

the performance-centeredness in the public sector (Wan Lu, 2007). With this realization, many

public sector institutions and for that matter governments in many countries have invested

substantial funds to restructure public sector purchasing or procurement processes to improve

performance in terms of quality services and savings.

Weele (2010) argues in support of this current development by saying that many organizations

have now turned to improve purchasing processes as mechanism for cost cutting and savings to

remain in business. Klemencic (2006) also support the above assertion by stating that, a large

number of public sector institutions have made large investment to streamline their purchasing

activities and processes in terms of training and infrastructure in improving customer satisfaction

and also increase their internal productivity.

According to Saleemi, (2006), stock-out simply refers to the situation in which the demand or

requirement for an item cannot be fulfilled from the current inventory which may result in a

breakdown of production operation or delaying the operation. This loss may be multi-sided, that

is, the loss of machine and man-hour, the loss of service to customers, the loss of goodwill, the

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loss of lagging behind in competition, the loss through losing profit and incurring losses. On the

other hand, the stock-out will increase the inventory carrying cost as well.

Jessop &Jones (2005), states that, stock-out occurs whenever an item is demanded from a

supplier but cannot be delivered because it is temporarily not in stock. In the short run, stock-

outs may incur backorder and/or lost sales costs. Backorder costs typically include extra costs for

administration, price discounts or contractual penalties for late deliveries, expediting material

handling and transportation, the potential interest on the profit tied up in the backorder, etc. Lost

sales costs include the potential profit loss of the sale if all or part of the sale is lost, contractual

penalties for failure to deliver, etc. Besides backorder and lost sales costs, which can be directly

measured, a stock-out may also incur a less tangible cost in the long run.

Anderson, Fitzsimons &Simester (2006) agrees that this cost is related to the loss of customer

goodwill. Intuition suggests that a customer who experiences a stock-out from a supplier may

think twice before placing another order in the future to the same supplier or, even worse, may

inform other customers about the disservice he received and influence them into defecting in the

future too. In other words, the service level provided by a supplier may influence his future

demand and therefore sales. In the short run, sales may fall short of demand when customers

experience stock-outs and choose not to backorder. In the long run, demand itself may decline as

customers who experience excessive stock-outs shift temporarily or even permanently to more

reliable sources. In general, stock-out costs are different for wholesalers/distributors than they

are for manufacturers, and depend on whether the final customer switches brands or switches

sizes or varieties of a brand in response to a stock-out.

An organization should be able to control the stock-outs by ensuring that it has the right quantity

of goods at the right time. The stock level must neither be too high nor too low to prevent

obsolescence and stock-out respectively (Lysons& Farrington, 2006).

1.1.1 Global Perspective

Stock outs are a persistent problem in retailing (Grewal and Levy, 2007). On a global average,

8.3 percent of retail items are not available on the shelves (Gruen and Corsten, 2008). Despite

the initiatives designed to improve the collaboration of retailers and their suppliers, such as

2

efficient consumer response (ECR) and despite the increasing use of new technologies such as

radio-frequency identification (RFID) and point-of-sales data analytics, this situation has

improved little over the past decades (Aastrup and Kotzab, 2010). Stockouts have a direct impact

on retailer financial performance, because they lead to lost sales when shoppers decide to

purchase some items elsewhere or to cancel their shopping trip altogether. Immediate sales losses

due to stock outs are estimated at 4 percent of sales (Gruen et al., 2002), which is about the same

as the average 5 percent of sales retailers spend on logistics (Sivakumar, 2010). Over time,

frequent stock outs are known to diminish the store and brand loyalty of shoppers, and

consequentially jeopardize future sales (Zinn and Liu, 2008). Further, stock outs reduce profits

through a wide array of operational issues which are difficult to measure in terms of costs, and

seldom reported (Zipkin, 2000).

A share in a corporation gives the owner of the stock a stake in the company and its profits.

(Mishkin& Eakins 2009). In the US, (Narasimhan, 2000) studied the effect of excess inventory

on long term stock price performance. Stores management is ever the means of conducting

public sector around the world and it facilitate continued flow of production (Quayle, 2013).

Globalization of institutions requires efficient Supply Chain Management. The science of supply

chain further connects with management to efficiently deliver the goods in a regular base.

Stock outs reduce profits through a wide array of operational issues which are difficult to

measure in terms of costs (Zipkin, 2000). Reducing stock outs, therefore, represents retailers

with the opportunity of increasing sales and reducing cost. However, this also requires a detailed

understanding of the causes for stock outs. Several studies have highlighted the potential of

improving store operations for the purpose of decreasing retail stock outs. The studies report up

to 98 percent of stock outs to be caused by defective shelf replenishment practices, and far less

being caused in the upstream supply chain, such as a shortage of supply from a brand

manufacturer (Aastrup and Kotzab, 2009; Gruen et al., 2002).

1.1.2 Local Perspective

Stock outs have a direct impact on retailer financial performance, because they lead to lost sales

when shoppers decide to purchase some items elsewhere or to cancel their shopping trip

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altogether. Immediate sales losses due to stock outs are estimated at 4 percent of sales (Gruen et

al., 2002), which is about the same as the average 5 percent of sales retailers spend on logistics

(Siva Kumar, 2010). Over time, frequent stock outs are known to diminish the store and brand

loyalty of shoppers, and consequentially jeopardize future sales (Zinn and Liu, 2008).

This study defines a stock out as a situation where an item that is regularly commercialized at a

point of sale and occupies a specific place on the shelves is not available to the consumer in the

store at the moment of purchase. A stock out is characterized by an inefficient process of

refilling shelves. A stock out rate is precisely the percentage of all the items commercialized that

should be for sale, but are not found on the shelves. A 10 % rate of stock out means, for example,

that out of a total of 5,000 items catalogued and commercialized by a supermarket, 500 would

not be available on the shelves for immediate purchase by the final consumer.

Governments act to ensure that a balance is struck between stimulating retail business yet

protecting the consumer from anti-competitive practices and adverse environmental impacts of

new developments (Suzanne et al, 2003). Lysons (2006) observes that in most organizations,

purchasing is a support rather than primary activity such as supply management, logistics or

materials management. In retail organizations however, buying is a critical factor and satisfies

the criteria for a core competence.

Health facility stock-outs of artemether-lumefantrine (AL), the common first-line therapy for

uncomplicated malaria across Africa, adversely affect effective malaria case-management. They

have been previously reported on various scales in time and space, however the magnitude of the

problem and trends over time are less clear. Here, 2010-2011 data are reported from public

facilities in Kenya where alarming stock-outs were revealed in 2008(Raymond K Sudoi, 2008).

Although stores management is not highly pronounced in the Kenya government, ministries,

public sector and manufacturing public sector, the use on stores management can be felt through

reduced costs, maintaining production, continuous supply and reduced loss. If you walk into their

stores, chances are that the managed institution has a clean, well-organized building while the

struggling institution operates out of a messy, disorganized space. This is because the effect of

inventory systems can be felt throughout an institution, (Goldsby&Martichenko, 2005).

4

1.1.3 Jkuat

Stores play a vital role in the operations of an organization. It is in direct touch with the user

departments in its day-to-day activities. The most important purpose served by the stores is to

provide uninterrupted service to the manufacturing divisions. Further, stores are often equated

directly with money, as money is locked up in the stores (Frazelle, 2012). Peter Bailey, (2008)

agrees that, obsolete items that exist in the stores due to new inventions, discoveries, changes in

product line and further use of such items may entail a loss to the organization.

Some of the functions attributed to stores include: to receive raw materials, components, tools,

equipment’s and other items and account for them; to provide adequate and proper storage and

preservation to the various items to meet the demands of the consuming departments by proper

issues and account for the consumption; to minimize obsolescence, surplus and scrap through

proper codification, preservation and handling; to highlight stock accumulation, discrepancies

and abnormal consumption and effect control measures; to ensure good housekeeping so that

material handling, material preservation, stocking, receipt and issue can be done adequately and

to assist in verification and provide supporting information for effective purchase action

(Toomey, 2010).

(Aastrup and Kotzab (2010, p. 158), the problem of causes originating at the store-level is well

known but no changes can be observed in that matter. The supply chain up to the store has been

the focus during the last decades and has been significantly optimized, a logical next step would

be to include and emphasize them in-store logistics or store operations in the analysis of retail

supply chains.

Stock outs occur along the entire supply chain, which typically consists of procurement,

warehousing, distribution and sales (Levy and Grewal, 2000). The studies on stock outs

commonly observe that product availability deteriorates downstream towards the retail shelves.

A stock out is characterized by an inefficient process of refilling shelves. “If the supplier is a

distributor, the emphasis will be on how well his inventory is set up to avoid stock outs. With a

manufacturer, emphasis has to be on inventory accessibility (Wagner, 2006a).

5

1.2 Statement of the Problem

Stock-out is a period when an institution is running without stock. Stock is very essential in any

institution to ensure that both internal and external customers are provided with the required

service levels and also in ascertaining present and future requirements for all types of inventories

to avoid overstocking and under stocking in production (Lysons and Gillingham, 2003).

However stock outs in organizations is caused by the following; Under estimating the demand

for a product, Late delivery by a supplier, Using the wrong lead time, a Safety stock level that is

too low, Under ordering, Product quality issues, the supplier refusing to deliver, a shortage of

working capital as per the report from the nets tock monitor(2014).

when an organization is faced with stock-outs, Dobler& Burt (2006) says that, it’s usually

forced to place small rush orders and blanket orders which in turn might reduce the profitability

of the organization due to higher prices and since there might be no discounts on small

quantities. This results to poor supplier-buyer relations whereby organizations do not establish

long-term relationships with capable suppliers and not working closely with them over time

hence, do not achieve high levels of quality and productivity which involves not communicating

intentions and expectations clearly, not defining measures of success, not obtaining regular

feedback, and not implementing corrective action plans to improve performance.

Stock out problems have been studied from two major perspectives: measurement of stock out

rates in stores and consumer response to stock outs (Roland Berger, 2003; Zinn & Liu, 2001).

Regardless of the perspective guiding the research, most studies suggest that managers deal with

stock outs by taking action to reduce the number of stock outs as much as possible (Corsten and

Gruen, 2003; Roland Berger, 2003).

Additionally, a review by Jkuat strategic plan 2009-2012 carried out recently concluded that in

the financial year, 2009/2010, the university’s allocation increased to Ksh.1, 165,000,000

thereby reflecting a 32.2% increase. However this too did not match the submission of Ksh.5,

720,000,000 that the university had made. The university has increased to receive low budgetary

allocations despite the role it plays in economic development of this country (Adan A.

Mohammed, 2009). This allocation is 20% level way below the submission made by the

university. According to the executive summary of procurement review for Jkuat undertaken by

(Wachira Irungu & Associates, April 2012 to May 2012) on behalf of the Public Procurement

6

Oversight Authority (PPOA) under Third Party Providers on areas of non-compliance, Some

weaknesses were identified in JKUAT’s contract and inventory management systems alsothe

Review Team noted that JKUAT consistently procured food stuffs and dry food rations without

sufficient funding and budgetary allocation, contrary Section 26 (6) of the Public Procurement

and Disposal Act(PPDA).

This has therefore opened a research opportunity for the researcher to look the role of

procurement best practices in mitigating stock-outs in state owned institutions. To fulfill this

purpose, a study will be undertaken at Jomo Kenyatta University of Agriculture and Technology

(JKUAT) for which procurement staff will be involved.

1.3 General Objective

The general objective of this study is to establish the role of procurement best practices in

mitigation of stock outs in state owned institutions.

1.3.1 Specific Objective

I. To determine whether supplier-buyer relationship management mitigates stock outs at

Jomo Kenyatta University of Agriculture and Technology.

II. To establish whether the use of vendor managed inventory mitigates stock outs at Jomo

Kenyatta University of Agriculture and Technology.

III. To determine the effect of Information Technology in mitigating stock outs at Jomo

Kenyatta University of Agriculture and Technology.

1.4 Research Questions

I. To what extent does supplier-buyer relationship management mitigate stock outs at Jomo

Kenyatta University of Agriculture and Technology?

II. To what extent does vendor managed inventory mitigate stock outs at Jomo Kenyatta

University of Agriculture and Technology?

III. To what extent does Information Technology mitigate stock outs at Jomo Kenyatta

University of Agriculture and Technology?

7

1.5 Justification of the Study

1.1.5 Universities

This research will be particularly useful to the Universities in that they will understand the role

of procurement best practices in mitigating stock-outs and thus may adopt the recommendations

to strengthen its procurement system. The findings will be of much benefit to the user

departments in the university as materials procured will be of the right quality, quantity and

sourced from the right source and delivered at the right time to satisfy customer needs. This will

also ensure that university activities are not regularly interrupted by stock outs.

1.5.2 Suppliers

The suppliers will benefit much from this research as they will understand why they need to have

good relations with their buyers thus, being paid on time to allow them supply goods and

services of the right quality, right quantity, the right time and place to avoid stock outs. Through

the research findings, the business community may be able to ascertain the viability of doing

business with state owned universities.

1.5.3 Government

This research will be of much importance to the government as it may give better understanding

on how to maintain the required operational and maintenance of supplies that are available in the

right quantities and the right time so as to reduce waste of the state funds and restore the states

confidence in state owned institutions. These study findings may also be useful to researchers

and research institutions as they will understand the role procurement best practices that mitigate

stock outs.

1.6 Scope of the Study

The research will be conducted in the procurement department at main campus of Jomo Kenyatta

University of Agriculture and Technology (JKUAT) is a public university near Nairobi, Kenya.

8

It is situated in Juja, 36 kilometers northeast of Nairobi. The variables will cover; the supplier-

buyer relationship management, use of vendor managed inventory, the state of technology and

how they will help in mitigating stock outs in Jomo Kenyatta University of Agriculture and

Technology.

1.7 Limitation on of the Study

1.7.1 Confidentiality

Confidentiality issue is anticipated to hinder the study but the research will overcome this

through informing the relevant authority about the research and ensuring that they understand

that the study will be for academic purposes only and therefore enhance their effective

participation.

1.7.2 Accessibility

Accessibility to information and premises is anticipated to be a challenge but the researcher will

write a formal letter requesting the relevant authority to enable effective facilitation of the process in

the collection of the data needed for the study.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents a review of related literature and various concepts on the subject under

study presented by various researchers, scholars, analysts, theorists and authors. It would enable

the researcher to gain knowledge from previous research and come up with other useful

information to strengthen the study.

2.2 Theoretical Review

A theory is an explanation of some aspect of phenomenon. Theories have practical value because

they are used to better understand, predict and control various phenomena. The main aspect of

theory is to inform practice. It has been said that there is nothing as practical as a good theory.

Theoretical review compares how different theories address an issue. A review is anywhere

from a couple of sentences to paragraphs explaining a person’s view on a product or service

(Creswell, J.W.2005).

Agency Theory

Meckling and Jensen developed the agency theory in 1976 to explain the relationship between

principals (shareholders) and agents (managers) (Mwaniki, 2013). In this context, the principal

delegates an agent to perform work in the best interest of the principal (Oluoch, 2014). However,

this delegation of the decision-making authority can lead to a loss of efficiency and consequently

increased costs (Mwaniki, 2013).According to Ross (2004) the agent theory or agency dilemma

occurs when one person or the agent is able to make decisions on behalf of, or that impact,

another person or entity the principal. The dilemma exists because sometimes the agent is

motivated to act in his own best interests rather than those of the principal. The agent-principal

relationship is a useful analytic tool in political science and economics, but may also apply to

10

other areas he further states common examples of this relationship include corporate

management and shareholders, or politicians and voters. For another example, consider a dental

patient wondering whether his dentist is recommending expensive treatment because it is truly

necessary for the patient's dental health, or because it will generate income for the dentist. In fact

the problem potentially arises in almost any context where one party is being paid by another to

do something, whether in formal employment or a negotiated deal such as paying for household

jobs or car repairs.

The problem arises where the two parties have different interests and asymmetric information,

such that the principal cannot directly ensure that the agent is always acting in its best interests,

particularly when activities that are useful to the principal are costly to the agent, and where

elements of what the agent does are costly for the principal to observe. Moral hazard and conflict

of interest may arise. Indeed, the principal may be sufficiently concerned at the possibility of

being exploited by the agent that he chooses not to enter into a transaction at all, when that deal

would have actually been in both parties' best interests: a suboptimal outcome that lowers

welfare overall. The deviation from the principal's interest by the agent is called agency costs

(Davis, 2003).

Various mechanisms may be used to align the interests of the agent with those of the principal. In

employment, employers may use piece rates/commissions, profit sharing, efficiency wages,

performance measurement, the agent posting a bond, or the threat of termination of employment.

In terms of game theory, it involves changing the rules of the game so that the self-interested

rational choices of the agent coincide with what the principal desires. Even in the limited arena

of employment contracts, the difficulty of doing this in practice is reflected in a multitude of

compensation mechanisms and supervisory schemes, as well as in critique of such mechanisms

(Deming, 2006).

According to Doeringer &Piore (2009) the employment contract, individual contracts form a

major method of restructuring incentives, by connecting as closely as is optimal the information

available about employee performance, and the compensation for that performance. Because of

differences in the quantity and quality of information available about the performance of

individual employees, the ability of employees to bear risk, and the ability of employees to

11

manipulate evaluation methods, the structural details of individual contracts vary widely,

including such mechanisms as piece rates, share options, discretionary bonuses, promotions,

profit sharing, efficiency wages, deferred compensation, and so on. Typically, these mechanisms

are used in the context of different types of employment: salesmen often receive some or all of

their remuneration as commission; production workers are usually paid an hourly wage, while

office workers are typically paid monthly or semi-monthly and if paid overtime, typically at a

higher rate than the hourly rate implied by the salary.

In conclusion the above theory shows clearly how the Vendor managed inventory system is

useful for buyer and supplier, where the buyer suffers no stock outs while the supplier is able to

perform the business having a secured market for his products and not having to work under

pressure that is on lead time as products will be always ready. In addition both parties’ interests

are looked into and depend on each other in order to ensure effective performance in supply

chain management unit in each organization.

Stakeholder Theory

The stakeholder’s theory is based on the notion that the organization’s effectiveness is measured

by its ability to satisfy both the agents and shareholders who have a stake on the organization

(Matundura, 2014). However, the agents in a firm who are the managers of the firms are

expected to serve and meet the demands of the shareholders who are the owners of the firms

(Oluoch, 2014). The shareholder’s theory thus seeks to explain the structure and operations of

established corporations in relationship management to meet the needs of the shareholders

(Abdulrazak, 2013). The shareholders thus seeks to explain the corporate disclosures, explore

more on the pattern of information disclosure, qualitative characteristics of the information

disclosed, and the behaviour of the top executives in the provision of the timely

information(Kamwenji, 2014).

The general idea of the Stakeholder concept is a redefinition of the organization. In general the

concept is about what the organization should be and how it should be conceptualized. Friedman

(2006) states that the organization itself should be thought of as grouping of stakeholders and the

purpose of the organization should be to manage their interests, needs and viewpoints. This

12

stakeholder management is thought to be fulfilled by the managers of a firm. The managers

should on the one hand manage the corporation for the benefit of its stakeholders in order to

ensure their rights and the participation in decision making and on the other hand the

management must act as the stockholder’s agent to ensure the survival of the firm to safeguard

the long term stakes of each group.

In one of his latest definitions Freeman (2004) defines stakeholders as “those groups who are

vital to the survival and success of the corporation”. In one of his latest publications Freeman

(2004) adds a new principle, which reflects a new trend in stakeholder theory. In this principle in

his opinion the consideration of the perspective of the stakeholders themselves and their

activities is also very important to be taken into the management of companies. He states “The

principle of stakeholder recourse. Stakeholders may bring an action against the directors for

failure to perform the required duty of care” (Freeman 2004).

All the mentioned thoughts and principles of the stakeholder concept are known as normative

stakeholder theory in literature. Normative Stakeholder theory contains theories of how

managers or stakeholders should act and should view the purpose of organization, based on some

ethical principle (Friedman 2006). Another approach to the stakeholder concept is the so called

descriptive stakeholder theory. This theory is concerned with how managers and stakeholders

actually behave and how they view their actions and roles. The instrumental stakeholder theory

deals with how managers should act if they want to flavour and work for their own interests. In

some literature the own interest is conceived as the interests of the organization, which is usually

to maximize profit or to maximize shareholder value. This means if managers treat stakeholders

in line with the stakeholder concept the organization will be more successful in the long run.

A very common way of differentiating the different kinds of stakeholders is to consider groups

of people who have classifiable relationships with the organization. Friedman (2006) means that

there is a clear relationship between definitions of what stakeholders and identification of who

are the stakeholders.

The Stakeholder Theory is very popular in our times because people, and so on stakeholders, are

worried about the sustainability of the actual economic system. With globalization, companies

13

take more and more importance on Stakeholder Theory. With deregulation, and less power of

state in favour of economy, companies should not only enjoy the rights of this deregulation but

also duties. This theory will help in reduction and mitigation of stock outs and ensure customer

satisfaction as a result of the collaboration/relationship management between the two parties. It

can also help in establishing vendor managed inventory process.

2.3 Conceptual Framework

A conceptual framework is an analytical tool with several variations and contexts that can be

used to make conceptual distinctions and organize ideas. Strong conceptual frameworks capture

something real and do this in way that is easy to recall and apply (Robinson, 2009). However if

one variable depends upon or is a consequence of the other variable, it is termed as a dependent

variable, and the variable that is antecedent to the dependent variable is termed as an independent

variable (Kothari, 2004). In this study stock outs mitigation will depend upon procurement best

practices, therefore stock outs mitigation will be a dependent variable and independent variable

will be procurement best practices which includes supplier buyer relationship management,

vendor managed inventory and information technology. Following is an illustration of the

relationship between the dependent and the independent variables of this study

14

Independent Variables Dependent Variable

Fig. 2.1 Conceptual framework

Supplier Buyer Relationship

Building relationship with suppliers is becoming an explicit part of the procurement strategy for

both small and big companies. Challenges like globalization, rapid product development,

advances in production technologies, cost reduction, bubbling issues like trimming supply base,

just-in-time, mass customization, lean manufacturing, core competence-based on make or buy

procurement strategies have led procurement managers to think radically in a different way to

deal with future procurement strategies. The result has been to improve the role of buyer-supplier

relationship in competitive equation. Establishing long-term relationships with capable suppliers

and working closely with them over time to achieve high levels of quality and productivity

involves communicating intentions and expectations clearly, defining measures of success,

obtaining regular feedback, and implementing corrective action plans to improve performance

(Fitzsimons 2000).

15

Supplier-buyer relationship management

Communication

Feedback

Vendor managed inventory

Delivery

Accessibility

Stock outs mitigation

Reduced costs

Optimal Inventory Levels

Information Technology

Inventory control Systems

EPR Systems

The purchase department has a responsibility to establish correct and cordial relations with the

suppliers. If suppliers are good, their performance in supplying the right quantity and at the right

time is outstanding and there are business-like relations between them, then, the relations are

seldom spoiled. In maintaining cordial relations the responsibility of the purchase department is

to place an order with the supplier with correct specifications and in unambiguous terms, set out

the purchase terms clearly, give instructions in clear terms, specify the terms of payment in the

order itself if the department wishes to depart from the terms quoted by the supplier; and to leave

nothing ( particularly important points such as quality, quantity, time, place of delivery and other

delivery conditions, price, transportation, packing and careful shipment) to interpretations (CIPS

2003).

Supplier-buyer co-operation is here an important aspect. This helps in evolving the stocking

policy which usually helps reducing the extreme fluctuations in material prices over a particular

period. Other policies with regard to improvement in suppliers, reduction in cash and

maintaining the supply in the pipeline are equally important which should be looked into in

greater detail before setting out the procedure for implementation of the plans chalked out

(Lysons& Farrington (2006).

The buyer knows the importance of a strong and healthy producer who is a regular supplier and

is capable of innovation and improvement. Similarly, the seller also knows that his profit and

progress are conditioned by the profit and progress of his consumers. Buyers and sellers in the

modern society do not represent adverse forces. The fact is that they cannot afford to be hostile

or suspicious. Instead they are bound by mutual objectives and have to maintain, though

business like, a close, co-operative and cordial relations in order to satisfy the condition of their

survival. (Saleemi, 2006). It has also been found that increased communication leads directly to

increased performance and satisfaction (Sriram and Stump, 2004). Resource dependency

influences commitment, trust and satisfaction (Zineldin, 2003), and the exercise of and

perception of power are related to commitment, trust and relationship success (Zhang   et al. ,

2009).

CIPS &NIGP (2012) advocates that Supplier Relationship Management (also called Vendor

Relationship Management) is a set of principles, processes, and tools that can assist

16

organizations to maximize relationship value with suppliers and minimize risk and management

of overhead through the entire supplier relationship life cycle. Supplier Relationship

Management has two aspects, which are: Clear commitment between the supplier and the buyer,

and the objective of understanding, agreeing, and whenever possible, codifying the interactions

between them. As a Best Practice: Good Supplier Relationship Management (SRM) is an

effective practice that will allow an organization to: Identify strategic suppliers based on relative

importance (supplier stratification);Define operational expectations and establish a governance

structure and process for internal and supplier interactions across the life cycle of the supplier

relationship; Define formal processes for management involvement in the relationship; Clarify

internal roles and responsibilities; Establish processes to effectively manage performance; and

Develop supplier capabilities to continuously improve the value of the organization.

(Ring & Van de Ven, 1994) Says that, Relationship interaction process is the place where

relationship value is generated. Six respects Characterize this process: relationship investment,

transaction history, communication, relationship adaptation flexibility, improvement potential

and volatility. (Anderson, Fitzsimons and Simester 2006), argues that an organization faced with

stock out may lead to loss of production with workers still having to be paid but no products

being produced, this can harm the reputation of the business. It is therefore important for any

organization to ensure that stock is kept at a good level to avoid all this losses.

(Basheka, 2008)agrees that possible ways of limiting high rate of stock out in an institution

should be determined by suggesting a way forward of improving stock management.

(Johanson&Mattsson, 1987; Hakansson&Snehota, 1995) Say that a supplier relationship is

developed in a cumulatively evolving process. Not only transaction occur in a relationship

evolution process but also fostering trust, communication, adaptation and collaboration requires

time and investment. The content, strength and nature of relationship are constantly changing

rather than stable .In parallel to exchange interaction, mutual adaptation of some kind occurs to

enable coordination and creates additional joint value.

17

Vendor Managed Inventory

Vendor Managed Inventory is an inventory management process that falls under the ‘push’ stock

management processes. These are processes that are triggered by interpretation of an expected

demand in inventory and supply is scheduled to meet this demand. Vendor Managed

Inventory/Consignment Stock is inventory that is in the possession of the buyer (shop,

warehouse or store), but is still owned by the supplier. Payment of the inventory is made once it

is sold. Accordingly, the capital investment on the stock comes from the supplier and the buyer

provides space for it (Kumar & Kumar, 2003). It is also referred to as a program of supplier

managed inventory or direct replenishment inventory which emerged in the late 1980’s as a

partnership to coordinate replenishment decisions in a supply Chain while maintaining the

independence of Chain member, (Mehmet, 2006).

VMI, also known as continuous replenishment or supplier-managed inventory, is now widely

used in the retail industry. In the VMI process, the supplier assumes the responsibility of

managing the customer's inventory, making decisions, such as when and how much inventory to

ship to the customer. The supplier usually uses advanced information technology such as Internet

technology to monitor the customer's demand information and stock level. As these technologies

continue to become less expensive, and, therefore, more common in industry, it is expected that

programs such as VMI will also become more and more popular. (Watson, 2005).

(Cao and Li, 2009) In recent years, there has emerged a new supply chain inventory

management method, Vendor Managed Inventory (VMI). This inventory management method

has broken the traditional fragmentation of the inventory management model, it reflects the

thinking of integrated supply chain management and adapts to changing market demands, and it

is a representative of new inventory management thinking.

Harrison and van Hoek (2008) say this regarding vendor-managed inventory (VMI), it is defined

as an approach to inventory and order whereby the supplier, not the customer, is responsible for

managing and replenishing inventory. Lysons and Farrington (2006) defined VMI as a (JIT) just

in time technique in which inventory replacement decisions are centralized with upstream

manufacturers or distributors.

18

VMI is a strategy to conduct Supply Chain Management (SCM) and implies that the supplier is

given full responsibility for managing the customer's inventory levels (Disney and Towill,

2003a). Angulo et al (2004) also think it is one of the most widely discussed partnering

initiatives for encouraging collaboration and information sharing among trading partners; it is an

operation mode of inventory in the supply chain environment.

(Simchi-Levi et al., 2003), With VMI, it is the supplier who decides on the appropriate inventory

level and the reasonable policies to maintain those levels. The customer allows supplier to

manage their inventory. In this relationship, both sides expect the lowest costs. The customer can

propose the requirements of service level and inventory level to the supplier. That is, under the

VMI, the supplier's role shifts from passive implementer to policy maker (Mishra and Raghu

Nathan, 2004).

VMI service for key customers is perhaps one of the more value-enhancing activities performed

by suppliers (Trim and Lee, 2006), when their past performance allows customers to develop

trust in the supplier's capability to manage their inventories. The inventory carrying costs are

then minimized and stock out are avoided. From the customer's perspective, allowing a supplier

to track inventories, determine ship schedules and order quantities saves time, which could be

better spent on more strategic sourcing activities. In addition, the customer can delay taking

ownership of a product until it reaches the stocking location, reducing inventory carrying costs.

From the suppliers' perspective, this means they can avoid ill-advised orders from the customer,

as they decide how the inventory is set up, when to ship it, how to ship it, where it goes, and they

have the opportunity to educate their customers about their other products.

Without these programs, the supplier can only receive the replenishment orders from the

distributors. These orders are usually quite different with the distributor's actual demand.

Besides, a distributor's order may include adjustments to inventory as the retailer's forecasts for

demands may change in the future. The orders may also be artificially inflated if the retailer

suspects that the supplier has limited capacity and would not be able to meet its full orders.

Finally, the retailer might grant a number of demands over different periods into a single order,

thus creating a lumpier demand flow for the supplier. Under VMI and its related programs, the

supplier typically gets a daily feed of actual retailer demand and stock level through electronic

19

data interchange (EDI) or over the Internet (Potter et al, 2007). Moreover, the retailer may share

information on upcoming promotions or big customer deals as part of a formal collaboration

process. All of these combine to reduce the uncertainty of supplier's demand. With more

predictable demand, the supplier will be able to reduce their inventory levels and improve their

services to customer at the same time. As a result, distributors would be able to reduce their

inventories and increase its own services, resulting in increased sales for the entire supply chain

(Mentzer, 2004).

In the process VMI, the supplier monitors the inventory levels of retailers and regularly

replenishment decisions regarding the number of orders, delivery methods, and the supply time.

With VMI, a supplier can reduce demand uncertainty, so that allowing a specified service level

to be maintained at minimal inventory and production cost. The customer's benefit from

implementing VMI is a better balance between the conflicting performance measures of

inventory holding cost and customer service (Waller et al. (1999).

According to Waller et al. (1999), VMI leads to a great decrease in inventory level. Argued that

VMI can reduce the misunderstandings between the customer and the supplier, hence reduce the

error orders. Suppliers will have a more accurate understanding of demand, which can help them

to better develop their production plans in order to meet the customer's demand. Christopher

(2004) proposes that, due to suppliers having direct access to information about customer

demand, their safety stock will be reduced. Further, he argued that the customer will benefit from

the relationship. This is due to a significant decline in inventory level, as well as a decrease in

stock out risk. According to Lapide (2001), the inventory level decrease is due to the customer

and their supplier not needing to stock more inventory than demand. (Pohlen and Goldsby

(2003) stated that in VMI, sales are no longer the standard to measure service level, instead,

focus is on the performance of the entire supply chain.

Mishra and Raghu Nathan (2004), Yao, Dong, and Dresner (2007a), Pasandideh, Niaki, and

RoozbehNia (2009), and Zavanella and Zanoni (2009), all identified that a supplier’s costs

increase while a retailer enjoys the benefits in a VMI relationship. Lee and Chu (2005) observed

that a supplier will have a benefit from a VMI partnership only in the case when the inventory

kept by the retailer is lower than the inventory held under a VMI. Mishra and Raghu Nathan

20

(2004) discussed the competition between suppliers with similar products and demonstrate how

this situation benefits a retailer under a VMI system, for a single retailer and two suppliers with

substituting products. According to (Trim and Lee, 2006), before the customer allows the

supplier via VMI service to take control of the stock levels, the buyer must check the supplier

past performance. The past performance of the supplier allows customers to develop trust in the

supplier's capability to manage their inventories. The inventory carrying costs are then

minimized and stock out are avoided.

In the VMI process, the customer is free to forecast and create the orders as the vendor generates

the orders. The supplier is responsible for monitoring the sale and inventory, and uses the

information to replenish orders; in fact, the supplier takes over the tasks of inventory

replenishment. Mangan et al. (2008) believe that by enabling a vendor to manage stock

replenishment at their facilities, a customer is effectively eliminating an echelon in the supply

chain. In doing so, upstream demand visibility is improved to reduce the impact of demand

fluctuations. Hence, VMI can enable supply to meet demand more accurately and more

precisely.

The benefits of VMI can be significant. Many benefits derive from the fact that the supplier

services represent a timely and undistorted demand signal. Without these programs, the supplier

can only receive the replenishment orders from the distributors. These orders are usually quite

different with the distributor's actual demand. Besides, a distributor's order may include

adjustments to inventory as the retailer's forecasts for demands may change in the future. The

orders may also be artificially inflated if the retailer suspects that the supplier has limited

capacity and would not be able to meet its full orders. Finally, the retailer might grant a number

of demands over different periods into a single order, thus creating a lumpier demand flow for

the supplier. Under VMI and its related programs, the supplier typically gets a daily feed of

actual retailer demand and stock level through electronic data interchange electrical data

interchange (EDI) or over the Internet (Potter et al, 2007). Moreover, the retailer may share

information on upcoming promotions or big customer deals as part of a formal collaboration

process. All of these combine to reduce the uncertainty of supplier's demand. With more

predictable demand, the supplier will be able to reduce their inventory levels and improve their

services to customer at the same time.

21

Information Technology

The practical application of knowledge especially in a particular area or a capability given by the

practical application of knowledge (Thomas Hughes’s 2004). Technology involves training

employees to increase knowledge and skills of an employee for doing particular jobs through

gaining computer knowledge. It is an organized activity designed to create a change in the

thinking and behavior of people and to enable them to carry out their jobs in a more efficient

manner. By doing this it enhances the knowledge and skills for efficient performance of a

particular task. Use of technology is an important component in an organization, and is done due

to job satisfaction, higher quality of goods fewer accidents and saves time in the business. It is

important for the organization to be equipped with computer technology so as to ease

communication. Stock outs are mitigated through this.

Information technologies are a vital component of successful institution and organizations.

Information technologies, including Internet based, are playing a vital and expanding role in

store management (Lyson (2006).Technology is a tool that can facilitate this process in a more

efficient and effective way. The use of technologies is not a substitute for the development of

comprehensive and robust strategies. Technology only facilitates the development of a good

strategy. Procurement professionals should identify and implement technology that aides the

procurement process and supports the overall strategy of the organization. The technology

should create measureable results (linked to Return on Investment) including, reduced

transaction costs, improved process efficiency, a reduction or elimination in “maverick

spending”, increased contract compliance, improved transparency, reduced cycle times and

improved inventory costs. Technology can also increase supplier access to bid opportunities

which can result in increased competition, diversity and inclusion of suppliers (Arjan Van

Weele , 2009). 

Training on technological matters can open debate on potential ethical dilemmas that may arise

in public procurement and logistics in organizations, explaining real life situations and instill

self-discipline when making distribution and delivery decisions in difficult circumstances

(Armstrong, 2004). According to (Thomas Hughes’s 2004), Technology is defined as the

application of science, especially to industrial or commercial objectives. It is also the science of

the application of knowledge to practical purpose. This is precisely what new technology has

22

allowed the developed world to do. Technologycan be knowledge of techniques, processes, or

can be embedded in machines, computers, devices and factories, which can be operated by

individuals without detailed knowledge of the workings of such things. Efficiency in

computerized firms leads to effective and faster communication channels which enhance good

relationships between top management and subordinated. This fasten the decision making

process. It is however not clear if these intended effects have been achieved or realized.

(Roger Golden, 2014) says that Communication is essential to successful business operations,

and the technology of the twenty-first century has become completely integrated in business

interaction. Company networks are faster, the Internet has become a powerful force, and wireless

communications have transformed the way business is performed. Software is loaded onto a

computer to provide specific types of functionality. Productivity tools, such as Microsoft Word, a

word processing package, and Microsoft Excel, a financial spreadsheet system, can perform

many of the most common tasks a small business requires. Microsoft PowerPoint or Apple

Keynote allow users to prepare professional-looking sales presentations quickly and easily.

Although technically software, accounting systems deserve their own mention because of their

mission-critical role in any business. Accounting systems keep track of every dollar a company

spends along with every dollar of revenue. One popular choice for smaller companies is

QuickBooks by Intuit, which is simple to set up and maintain. Larger companies may want to

consider SAP Business One or Sage AccpacERP, both of which allow for more customization

and more integration with other systems. When trying to decide which software is right for you,

ask your accountant for their recommendation (Armstrong, 2004).

If your business sells goods, you may want to explore an inventory control system. These

systems keep track of every item in your inventory, ensuring you do not run out of stock, nor you

order too much. When new inventory arrives, the system is updated to reflect the additions and

when it is sold, it is deducted from the totals. A Customer Relationship Management (CRM)

System tracks a customer throughout his experience with your company. From the moment you

obtain information about the customer, the CRM system will track their interactions with you. If

a customer calls to order a product or service, or calls for help or a technical question, the CRM

system will tell the service representative when the items were shipped, what is back-ordered and

23

any other conversations the customer may have had with your company. CRM systems help

build relationships with a customer by assembling all the information your company collects

from the customer in one place for use, review and proactive response (Hearst, 2016).

Enterprise resource planning (ERP) systems are evolving into a strategically important area for

most organizations. Watson and Schneider (1999) defined an ERP system as an integrated,

customized and packaged software-based system that handles the majority of system

requirements in all functional areas such as finance, human resources, manufacturing, sales and

marketing. The ERP system is adopted for various reasons, including as a replacement for legacy

information technology (IT) systems and to improve operating efficiency (Chand et al., 2005;

Hong & Kim, 2002). Broadly, the ERP system has been identified as one of the most effective

ways of achieving competitive advantage, since it helps companies generate synergies by

integrating business processes and sharing resources across an organization (Zheng et al., 2000).

System quality in an ERP system measures a functional feature of the system. System reliability,

response time, flexibility, integration and accessibility are examples of qualities valued by users

(DeLone& McLean, 2003; Nelson et al., 2005). In situations involving high ERP quality

(including information and system quality), employees are more likely to perceive ERP

initiatives as contributing to enhancing their job performance.

IT is an important tool in stores management since it is used to store, retrieve, transmit and

manipulate data, often in the context of a public sector or other institutions (Subramani, 2004).

The implementation of ERP is important since it helps in minimizing error, increasing accuracy

and efficiency. Procurement training is generally important since it provide workers with

information, new skills, or professional development opportunities on how to operate in their

place of work (Phillips, 2003).

Koh& Simpson (2007) describe ERP as following: “The term ERP can be defined as an

accounting-oriented information system for identifying and planning the enterprise-wide

resources needed to take, make, ship and account for customer orders.“ ERP programs are used

as production planning and control tools. The supply chain competitiveness relies on how

efficiently the information is shared between the members of the supply chain and this

information can be shared by utilizing ERPs.

24

When ERP systems are fully realized in a business organization, they can yield significant

tangible and intangible benefits (Shang & Seddon, 2002; Umble et al., 2003). Tangible benefits

include cost reduction, cycle time reduction, productivity improvement and customer services

improvement, while intangible benefits include sustaining competitive advantage and supporting

business growth. ERP systems, once implanted in an organization, remain operational for a long

time because they often serve as a basis for enhancing IT infrastructure and operations

manageability, as well as for allowing future expansion (Nicolaou, 2004).

2.4 Empirical Review

Today one of the buyer’s main strategic goals is to try to reduce the number of supplier that the

buyer is dealing directly with. This can be achieved by forming systems of suppliers, with

suppliers in different tiers. Another strategic goal is to reduce the costs for purchasing which

accounts for a large amount of a company’s total costs.

2.4.1 Supplier Relationship Management

(Fitzsimons 2000), says that building relationship with suppliers is becoming an explicit part of

the procurement strategy for both small and big companies and the result has been to improve the

role of buyer-supplier relationship in competitive equation. Establishing long-term relationships

with capable suppliers and working closely with them over time to achieve high levels of quality

and productivity involves communicating intentions and expectations clearly, defining measures

of success, obtaining regular feedback, and implementing corrective action plans to improve

performance.

(Lysons& Farrington (2006), says that Supplier-buyer co-operation is here an important aspect as

it helps in evolving the stocking policy which usually helps reducing the extreme fluctuations in

material prices over a particular period. On the same note (Saleemi, 2006), adds that buyers and

sellers in the modern society do not represent adverse forces. The fact is that they cannot afford

to be hostile or suspicious. Instead they are bound by mutual objectives and have to maintain,

though business like, a close, co-operative and cordial relations in order to satisfy the condition

of their survival. In addition research shows (Sriram and Stump, 2004), increased

25

communication leads directly to increased performance and satisfaction, resource dependency

influences commitment, trust and satisfaction (Zineldin, 2003), and the exercise of and

perception of power are related to commitment, trust and relationship success (Zhang   et al. ,

2009).

It is therefore important for any organization to ensure that stock is kept at a good level to avoid

all this losses (Anderson, Fitzsimons and Simester, 2006) argue and (Basheka, 2008) agrees that

possible ways of limiting high rate of stock out in an institution should be determined by

suggesting a way forward of improving stock management.

Supplier buyer relationship is developed in a cumulatively evolving process. Not only

transaction occur in a relationship evolution process but also fostering trust, communication,

adaptation and collaboration requires time and investment. The content, strength and nature of

relationship are constantly changing rather than stable (Johanson&Mattsson, 1987;

Hakansson&Snehota, 1995).

2.4.2 Vendor Managed Inventory

(Watson, 2005), says that Vendor Managed Inventory is also known as continuous replenishment

or supplier-managed inventory, is now widely used in the retail industry. In the VMI process, the

supplier assumes the responsibility of managing the customer's inventory, making decisions,

such as when and how much inventory to ship to the customer. The supplier usually uses

advanced information technology such as Internet technology to monitor the customer's demand

information and stock level. (Cao and Li, 2009), in addition says that VMI reflects the thinking

of integrated supply chain management and adapts to changing market demands, and it is a

representative of new inventory management thinking.

(Trim and Lee, 2006), says that when their past performance allows customers to develop trust in

the supplier's capability to manage their inventories. The inventory carrying costs are then

minimized and stock out are avoided. Also VMI service saves time for the customer, which

could be better spent on more strategic sourcing activities while the supplier have the opportunity

to educate their customers about their other products.

26

(Pohlen and Goldsby (2003) stated that in VMI, sales are no longer the standard to measure

service level, instead, focus is on the performance of the entire supply chain. Mishra and Raghu

Nathan (2004), Yao, Dong, and Dresner (2007a), Pasandideh, Niaki, and RoozbehNia (2009),

and Zavanella and Zanoni (2009), all identified that a supplier’s costs increase while a retailer

enjoys the benefits in a VMI relationship. Lee and Chu (2005) observed that a supplier will have

a benefit from a VMI partnership only in the case when the inventory kept by the retailer is lower

than the inventory held under a VMI.

According to Waller et al. (1999) use of vendor managed inventory can be very useful in

reducing misunderstandings between the buyer and the supplier, a supplier can reduce demand

uncertainty and inventory level. He continues and argues that that the buy will benefit from the

inventory reduction and also will minimize the risk of stock outs and benefit the relationships

between the two parties. (Potter et al, 2007), say, Under VMI and its related programs, the

supplier typically gets a daily feed of actual retailer demand and stock level through electronic

data interchange electrical data interchange (EDI) or over the Internet.

2.4.3 Information Technology

(Arjan Van Weele , 2009), says the use of technologies is not a substitute for the development of

comprehensive and robust strategies. Procurement professionals should identify and implement

technology that aides the procurement process and supports the overall strategy of the

organization. According to (Armstrong, 2004), accounting systems deserve their own mention

because of their mission-critical role in any business. Accounting systems keep track of every

dollar a company spends along with every dollar of revenue.

According to (Chand et al., 2005; Hong & Kim, 2002), ERP system is adopted for various

reasons, including as a replacement for legacy information technology (IT) systems and to

improve operating efficiency. (DeLone& McLean, 2003; Nelson et al., 2005), say System quality

in an ERP system measures a functional feature of the system. System reliability, response time,

flexibility, integration and accessibility are examples of qualities valued by users.

27

(Shang & Seddon, 2002; Umble et al., 2003), say, when ERP systems are fully realized in a

business organization, they can yield significant tangible benefits such as cost reduction, cycle

time reduction, productivity improvement and customer services improvement and intangible

benefits such as, sustaining competitive advantage and supporting business growth.

2.5 Critique of Existing Literature

Supplier-buyer relationship management is majorly achieved through prompt payment of

suppliers and also by communicating, if payment is delayed obviously this will compromise the

relationship thus leading to stock-outs because of long lead times and unresponsiveness.

(Anderson, Fitzsimons and Simester, 2006) and (Basheka, 2008) say, any organization to ensure

that stock is kept at a good level to avoid all this losses and agrees that possible ways of limiting

high rate of stock out in an institution should be determined by suggesting a way forward of

improving stock management but they don’t mention the ways possible to limite stock outs.

As a response to Mishra and Raghu Nathan’s (2004) work, Kim (2008) neglected that a retailer

takes advantage of brand competition under a VMI system by increasing its profits. Kim’s

(2008) research shows that the retailer might lose instead of increase his profits when adopting a

VMI system, if the retailer deals with high profit margins and low holding costs. An der Vlist,

Kuik, and Verheijen (2007) reviewed the work of Yao, Dong, and Dresner (2007a) and contested

the benefits argued to be achieved after a VMI implementation, because the model did not

consider shipping costs from vendor to buyer and also did not consider the poor management of

goods in and out of the supplier’s space. The authors further developed the model researched by

Yao, Dong, and Dresner (2007a) by integrating the delivering costs from vendor to buyer.

Lee and Chu (2005) analyzed that since the supplier is likely to get minimal benefits in VMI they

can as well consider using new mechanisms in which the vendor overtakes the inventory

replenishment duty of the retailer, and will replenish more units after demand is realized. The

authors concluded that both partners can have an interest into adopting the NM as long as the

inventory level wanted by the vendor is higher than the one at the retailer but they do not

consider if the retailer would want low level inventory.

28

In the last forty years, both private and public sector organizations have been utilizing

information technology system in an attempt to streamline and also automate their purchasing

and other processes; is only recently that e-procurement systems have recorded the needed

attention it deserves as a means of enhancing the purchasing processes (Kishor 2006).

Silver, 2011) argues that information technology and procurement staffs training are important

keys in stores management. Further, they elude that significant change in the information

technology systems in stores management, is rapidly changing and the sector have to keep

upgrading the systems to be able to integrate with the suppliers and other sector. Further, existing

literature faces enormous issues, omitted variable bias, and had difficulties accurately.

2.6 Summary

This chapter reviewed the theoretical literature related to the themes in the study. Theory of

supplier buyer relationship management such as quality management theory is discussed. Vendor

managed inventory theory in this study there is renewal .The interactions of these theory help to

explain issues within the concepts and the benefits to simplify the interrelatedness. The

conceptual framework is also illustrated in this section with procurement best practices in

mitigating stock outs given as, supplier buyer relationship management, Vendor managed

inventory and Information technology are adopted by the study to form the independent

variables. Stock outs mitigation as the dependent variable completed the framework.

Past studies related to the variables were analysed and research gaps identified. The framework

tries to understand the mechanisms with which the institutional leaders may influence their

institutional performance through their subordinates.

A supplier who receives support, inspiration and vibrant relationship from the buyer and vice

versa is likely to experience work as more challenging, involving and satisfying and

consequently become highly engaged with the job tasks. Not only does engaging and good

relationship with the supplier or buyer has the potential to significantly affect the institutions

productivity profitability and loyalty for their institutions but it is also a key link to customer

satisfaction, company reputation and overall stakeholder value. Thus, to mitigate stock outs,

institutions opt to turn their perception in relationship management, technologies and in other

29

systems such as Vendor managed inventory systems if institutional performance is to be

achieved.

2.7 Research Gaps

The literature review has dealt much on past studies carried out on matters stock-outs in both the

state owned and private sectors. In result, this section will analyze the research gaps left

unaddressed by past research. Notably, there are actually major gaps as the studies that have

been done have only focused on the factors that causes stock-outs leading to unnecessary drop in

stock and delay of institutional resources to perform tasks and have not touched on the best

practices in mitigating stock-outs.

According to (Anderson, Fitzsimons and Simester 2006), it appears only to focus on gaps on

perceptions of requirements and advantages held by stock-outs mitigation in the areas of

reduction of losses, inventory management and protecting the reputation of an organization. The

research gap of this study seeks to fill the gaps in coming up with the role of procurement best

practices in mitigating stock-outs in state owned institutions on supplier buyer relationship

management, vendor managed inventory and information technology. From the literature review,

it is evident that the research work that has been carried out before did not wholly deal with these

three issues named above. The researcher intends to bridge these evident research gaps.

30

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter outlines the methodology which will used in carrying out the research. It focused

on; research design, target population, sampling frame, sampling design and sample size. The

researcher also discussed data collection procedure, pilot test and data analysis procedure.

3.2 Research Design

According to Kothari (2004) descriptive research design is the arrangement of conditions for

collection and analysis of data in a manner that aims to combine relevance to the research,

purpose with economy procured. Descriptive design is appropriate because it involves a means

of collecting and analyzing data in order to answer research questions (Mugenda&Mugenda,

2003). The research design that will be appropriate for the study will be descriptive research

design.

3.3 Population

According to Kothari (2004) population refers to a sum total of individual with requisite

information being sought by the researcher. Because there is limited time and money to gather

information from everyone or everything in a population, the goal becomes finding a

representative sample of population which becomes the target population. Target Population

represents all cases of people or organizations which possess certain characteristics; it is the

larger group from which a sample is taken. In other words population is the aggregate of all that

conforms to a given specification. Normally the researchers should get more about the target

31

population. These are demographics like age, gender, work experience etc.

(Mugenda&Mugenda, 2003).

The target population included forty (40) respondents who are entire staff of procurement

department and stores in JKUAT Main Campus. The department has four sections each with a

section head, the overall Chief Procurement Officer, the Principal Procurement Officer and in-

charge central stores including personnel in the three (3) University Stores. Two departmental

heads, four section heads and thirty four staff members.

3.4 Census

The UNECE (2006, p. 6 and 7) defines a population census as the operation that produces at

regular intervals the official counting (or benchmark) of the population in the territory of a

country and in its smallest geographical sub-territories together with information on a selected

number of demographic and social characteristics of the total population.The population for

census will be forty (40) employees which includes two departmental heads, four section heads

and thirty four staff members.

3.5Pilot Testing

The researcher will use piloting to check the reliability and validity of the research instruments

and the effectiveness of the research design. According to Kaimenyi (2012) it is difficult to give

the exact number for the pilot group but as a rule of thumb, it is recommended that the researcher

pilots 5-10% of the final sample. Pilot tests is used in two different ways in social science

research. It can refer to so-called feasibility studies which are "small scale version[s], or trial

run[s], done in preparation for the major study" (Polit et al., 2001: 467). A final pilot could be

conducted to test the research process, e.g. the different ways of distributing and collecting the

questionnaires.

3.5.1 Reliability

Reliability is the degree to which an assessment tool produces stable and consistent results

Cozby, P.C. (2001). Reliability of each instrument will be ascertained through discussing the

32

drafts with the supervisor and make necessary adjustments to the research instrument before

conducting a pilot study that will be undertaken at Jomo Kenyatta University of Agriculture And

Technology located in Juja town in order to identify elements of study population and unit of

analysis.

3.5.2 Validity

Validity refers to how well a test measures what it is purported to measure Moskal, B.M., &

Leydens, J.A. (2000).During the pilot study, draft questions will be pre-tested. On the other

hand, questions which will not yield good results will require review. All the units of analysis

will be comprehensively studied and whole population taken into account.

3.6 Research Instruments

According to Orodho (2009) data collection method is a tool that is used for data collection in a

manner that is both objective and systematic. The researcher will use questionnaire to collect

primary data. A questionnaire is research instrument consisting of a series of questions and other

prompts for purpose of gathering information from respondents (Kothari, 2004). The researcher

will issue the questionnaires to staff in the sampled departments. This instrument will be used

due to its suitability of having an ample time for the staff concerned to adequately fill the

questionnaire form. The questionnaires will be distributed to the respondents directly and then

later collected using the drop and pick method. The researcher will first seek permission from the

management through an official written letter. Thereafter data will be collected using

questionnaire which is expected to give accurate information. Questionnaires will be hand

delivered and due to time constrains they will be collected as agreed. Open ended questions will

be used because it is economical in terms of time and money and the respondents will be able to

give insight into their feelings, background, hidden motivation, interest and decisions.

3.7 Data Analysis

According to Kothari (2004) data analysis is a process of gathering, modeling and transformation

data with the goal of highlighting useful information, suggesting conclusions and supporting

33

decision making hence preparing crude data into interpretable designs. The study will adopt

both qualitative and quantitative analysis. These is because the data will be analyzed in both

numerical and textual. This way of data analysis will checked for accuracy, completeness of

recording, errors and omission. The data that will be obtained from the research will be

presented, tabulated and analyzed using descriptive statistic which are the frequency distribution

tables and percentages on the basis of various objectives and variables that will measure them

after obtaining percentages and tables. Statistical package for social sciences (SPSS version 22.0)

will be used to analyze quantitative data and allowed easy interpretation, conclusions and

recommendations while the researcher will also use content analysis method to analyze

qualitative data to summarize any form of content by counting various aspects of the content.

34

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38

APPENDICIES

APPENDIX I

LETTER OF INTRODUCTION

Dear participant,

I am Mokama Joshua Maina, an undergraduate student pursuing a Diploma in Purchasing and

Supplies Management in the department of procurement and logistics, school of entrepreneurship

and management in the college of human resource development at Jomo Kenyatta University of

Agriculture and Technology.

I am currently conducting research in the area of procurement. The topic is Role of

Procurement Best Practices in Mitigating Stock Outs in State Owned Institutions a Case

Study of Jomo Kenyatta University of Agriculture And Technology.

The purpose of this letter, therefore, is to kindly request you to respond to the attached

questionnaire. The information you give will be treated confidentially and at no time your name

be referred to directly. The information given will only be used for academic purpose.

Thank you in advance for your time and cooperation

Sincerely,

Mokama Joshua Maina.

TEL:0706701969

Thank you for your assistance!

39

APPENDIX II

QUESTIONNAIRE

(Please fill in the questionnaire as diligently as you can. Tick in the appropriate box where

the question requires you to do so, where the space is provided. Please fill in your answer)

SECTION A: GENERAL INFORMATION

1. Period of service for the institution

1-5 years ( )

6-10 years ( )

11-15 years ( )

16-20 years ( )

20 and above ( )

2. Educational Background.

Diploma ( )

Bachelor’s Degree ( )

Master’s Degree ( )

3. Kindly describe the nature of your job

Chief Procurement Officer ( )

Principle Procurement Officer ( )

Assistant Procurement Officer ( )

Senior Procurement Clerk ( )

Procurement/Stores Clerk ( )

40

Other (Please specify) ------------------------------------------------------------------

4. Kindly indicate whether you agree or disagree with the following statements on the role of

procurement best practices in mitigating stock-outs in the University. (Tick appropriately)

SA – Strongly Agree A – Agree N – Neutral D – Disagree SD – Strongly Disagree

SECTION B: SUPPLIER-BUYER RELATIONSHIP MANAGEMENT

5. To find out the role of supplier-buyer relationship management practice on mitigating stock-

outs in the University. (Tick where applicable).

SA A N D SD

1 There is adequate communications with the suppliers which

help reduce cost.

2 Proper communication enhances optimal inventory levels.

3 Feedback is given thus ensures mitigation of cost.

4 Feedback enhances optimal inventory levels.

6. What else contributes to stock outs in the university apart from buyer supplier relationship?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

_________________________________________

41

SECTION C: VENDOR MANAGED INVENTORY

7. To find out the role of vendor managed inventory practice on mitigating stock-outs in the

University. (Tick where applicable).

SA A N D SD

1 Proper delivery enhances reduced cost.

2 Timely delivery ensures optimal inventory levels.

3 Accessibility of stock reduces cost.

4 Accessibility ensures optimal inventory levels.

8. What else contributes to stock outs in the university apart from vendor managed inventory?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

_____________________________

SECTION D: INFORMATION TECHNOLOGY

9. To find out the role of information technology practice on mitigating stock-outs in the

University. (Tick where applicable).

SA A N D SD

42

1 There is adequate inventory control systems which help

reduce cost.

2 Proper inventory control systems ensure optimal inventory

levels.

3 Enterprise resource planning systems are used hence reduce

cost.

4 Enterprise resource planning systems enhance optimal

inventory levels.

10. What else contributes to stock outs in the university apart from information technology?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

__________________________________

11. How do you rate the implementation of e-procurement in your function? (Tick appropriately)

Satisfactory Needs minor

improvement

Needs

moderate

improvement

Needs

significant

improvement

Unsatisfactory Unknown/

cannot be

measured

SECTION E: STOCK OUT MITIGATION

43

12. The role of role of procurement best practices in mitigating stock outs in state owned

institutions. (Tick where applicable).

SA A N D SD

1 Supplier buyer relationship management has a role in the

reduction of cost.

2 Vendor managed inventory has a role in cost reduction and

optimizing inventory levels

3 Information technology enhances optimal inventory level.

13. What else contributes to stock outs mitigation in the university apart from Supplier buyer

relationship, Vendor managed inventory and information technology?

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________________________________________________

___________________________________

*THANK YOU FOR YOUR TIME*

44

APPENDIX III

WORK PLAN

Activity 18th January-2nd

February 2016

3rdFebruary-

11thFebruary 2016

12thFebruary -3rd

March 2016

4th March-22nd

March 2016

Formulating The Title,

Background The Study

And Statement Of The

Problem

Objectives And

Research Question

Limitation Scope

Chapter Two

Chapter Three

45

APPENDIX IV

RESEARCH BUDGET

ACTIVITY QUANTITY UNIT COST

(KSHS)

TOTAL COST

(KSHS)

STATIONERY

Flash Disk 3 Pcs 2,000 6,000

Typesetting/Printing

Proposal

58Pages 3 174

Pens 5 Pcs 10 50

Photocopying 4Copies 5 1,160

Literature review 5 Times 130 650

Spring file 3 Pcs 100 300

SUBTOTAL 8,334

DATA COLLECTION

Questionnaires

printing

6 Pages 40 240

Photocopying 58 Pages 5 290

Travel cost 3 Times 400 1,200

Data analysis 1,500

Miscellaneous 5,000

Grand Total 16,564

46