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DETERMINANTS OF SUPPLIER SELECTION IN PROCUREMENT PROCESS AMONG INTERNATIONAL NGOs: CASE OF UN AGENCIES IN KENYA
BY (Your Name)
A RESEARCH PROJECT SUBMITTED TO THE SCHOOL OF BUSINESS IN PARTIAL FULFILMENT OF THE DEGREE OF BACHELOR OF SUPPLIES MANAGEMENT
JUNE 2012
INTRODUCTION
1.1 Background to the study
Supply chain management and supplier selection have become the fastest growing areas of management especially in the last few years. Although study in the area started in 1960s, it is in the 90s that scholars gained much interest in the area of supplier selection. The reason is that with heightened global competition that has reduced the profit margins of most companies, hence cost cutting has become the option and is being focused in logistics which has become the single largest and most important activity of most firms, both in the for profit and not-for-profit sectors. As such, quite a significant portion of organizations’ budgets is spent in these activities. Supplier selection in particular is crucial in management of a supply chain. The decision is one of the most fundamental and important decisions made by buyers and organizations. This is because supplier selection and management can be applied to a variety of suppliers throughout a products’ life cycle from initial raw materials acquisition to end-of-life service providers (Bai and Sarkis, 2009).
Internationally, purchasing is a major exercise. In USA, the total dollar magnitude of all purchases by businesses exceeded the gross national product in 1995.Purchasing transactions take 55% of the organization’s revenue. Supplier selection becomes important thus because it involves large cash flows (Cheraghi, Dadashzadeh & Subramanian, n.d).
The United Nations, including its many affiliated agencies, represents a vast global market for suppliers of virtually all types of goods and services. In line with General Assembly resolutions, and decisions by other UN Agency Executive Boards, all organizations of the UN system are making great efforts to identify new sources of supply, particularly from developing and under-utilized donor countries, in order to create an expanded and more equitable geographical distribution of procurement.globally, the total volume of goods and services procured by the UN system is quite staggering. In 2003, for instance, was over US $5billion (UN, 2006), and during the 2004-2008 period, UN procurement globally more than doubled in volume from US $ 6.5 billion to US$ 13.6 billion.
Before a vendor is selected by UN agencies prior performance is one of the key issues considered. Another criterion used is also in accordance with the UN Financial rules and regulations, particularly FR No.110.21, “Contracts shall be awarded to the lowest acceptable bidder…”Other criteria include “compliance with specifications, technical acceptability, compliance with delivery schedules, and local servicing and availability of spare parts.” Quality and reliability are also supplier selection determinant for most UN agencies (ibid).
Globally, supplier selection decisions are intricate due to the fact that multiple criteria must be considered in the decision making process.Multi-criteria approach is used in selecting suppliers, however(Weber & Current,1991).although there are numerous criteria used in selecting suppliers depending on organizations, literature suggests that the most important are price,delivery,and quality.
Locally, the procurement procedures pretty much follow the international standards to a large extent. This means that even supplier selection determinants are more or less similar to those considered by purchasers everywhere else.
1.1.1 The concept of supplier selection and procurement
Supplier selection and evaluation have become one of the major topics in production and operations management literature (Motwani et al., 1999).It is the process by which firms identify, evaluate and contract with suppliers. The supplier selection is one part of the value chain that is now considered to deploy tremendous amount of an organization’s resources and for this reason, much is expected in terms of high value from suppliers (Beil, 2009).These are part of what is today called supply management in the supply chain management function in an organization. Supply management refers to “the process of identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives” (Institute of Supply Management).
Weber et al. (1991) define supplier selection as the search for potential providers where the providers are sorted (evaluated) into potential ad non potential providers. Typical criteria for supplier selection could be price structure, delivery which entails timeliness and cost, product and services quality. It is the ongoing process of searching and evaluating process to find a supplier of essential goods and services required in an organization for normal operations.
The term procurement is used in the place of purchasing however, and encompasses activities of specifications and development, expediting, supplier quality control and some logistic activities (Wisner,Tan,and Leong,2008).Some scholars have postulated that supply management is today a mainstream value adding process that is viewed as most strategic(Cousins,2005).
The main objective of supplier selection process is to reduce purchase risk, maximize overall value to the purchaser, and develop closeness and long-term relationships between buyers and suppliers (Li et al., 1997 as cited in Tahriri, Osman, Ali and Yusuff, 2008).
According to Benyoucef et al (2003), supplier selection process is continuous in order to upgrade the existing variety and typology of their product range. It is necessitated by the fact that most products generally have short lifecycle of 3 to 4 years.
1.1.2 The UN and her agencies
The UN formally came into existence on 24th October, 1945 when 50 countries met in San Francisco at the United Nations Conference on International Organization to draw up the United Nations Charter.China, France, the Soviet Union, the USA, the United Kingdom and a host of other nations ratified the charter. Tasked with maintenance of world peace and security, developing friendly relations among nations and to be a centre for harmonizing different nations’ action in attaining solutions to economic, social, cultural and humanitarian problems; and in promoting respect for human rights and fundamental freedoms, the larger UN family has 15 agencies and several programmes and bodies (UN).
The various UN agencies are located in disparate countries of the world where their operations engender a lot of procurement for both goods and services. This procurement is done mostly locally within the countries the agencies might be located bringing substantial opportunities and lifeline to local suppliers. According to 2010 Annual Statistical Report on United Nations Procurement (2011), the overall procurement volume of United Nations organizations during 2010 increased to US$ 14.5 billion from $ 13.8 billion in 2009 representing a 5.4% increase. In Kenya alone, like in other developing and countries in transition, the share of UN trade value in Shillings rose to 7.4 billion($ 91.2 million).The range of procures include goods and services such as audio visual equipment, beverages, telecommunication equipments,foods,stationery,construction materials,chemicals,furniture,machinery,freight services among many others(ibid).
1.2 Problem statement
Determinants of supplier or vendor selection by UN Agencies have been quite a mystery among local suppliers. Few know the attributes the UN look out for in suppliers and consequently fail to bid for contracts from UN,yet only speculate that the UN agencies consider foreign suppliers once the latter hog all supply contracts. All through, the procurement process, supplier selection is perceived to be riddled with secrecy and favouritism.Certainly; this not only complicates the realization of the UN’s stated objective of seeing increased participation of local suppliers and vendors in doing business with the UN hence spurring growth in employment opportunities across the country, but also raises concern over the social justice in the spending of commonwealth funds given the massive amounts of money involved. The UN agencies in Kenya for instance spent $ 132 million (Sh 11.35 billion) on procurement within Eastern Africa region in the year 2010/11, the bulk of which was spent in Kenya-$91.2 million (Sh 7.84 billion). In 2012, the UN expects to spend $233 billion (Sh 20 billion) on procurement within the region with local suppliers set to get yet the largest share (UN, 2012.
Doing business with the International agencies is one way of ensuring market for small and medium sized business enterprises hence job creation and fulfilling one of the UN’s broad objective of poverty alleviation. Despite these obvious benefits of doing business with the UN, most Kenyan small and medium sized enterprises do not fully benefit from the contracts because they do no know the requirements for supplier selection. A July 2008 study report commissioned by KISM titled, ‘Procurement and Supply in Kenya: The market for Small and Medium Enterprises’ notes that “donor and NGO procurement systems work well though they tend to be over- bureaucratized which is itself a constraint to most SMEs with potential to supply their procurement needs.” Therefore, determination of determinants in supplier selection by the UN agencies is crucial. This study therefore focuses on the determinants of supplier selection in procurement process in the international non governmental organizations, with special focus on the UN agencies in Kenya. Although there are studies on supplier selection determinants in procurement, most of this focuses on government agencies. There are hardly any studies focusing only on supplier selection determinants in International non Governmental Organizations and particularly, the UN agencies in Kenya, hence the need for this study.
1.3.0. Objectives of the study
1.3.1. General objectives
The general objective of this study is to investigate the determinants of supplier selection in the procurement process among international non governmental organizations with special reference to UN agencies in Kenya.
1.3.2. Specific objectives
The specific objectives are:
To establish the determinants of supplier selection in the procurement process among UN agencies in Kenya. To determine if supplier size is a determinant in supplier selection decision in the procurement process within UN agencies in Kenya. To investigate if quality of supplies is a factor in supplier selection within the UN agencies in Kenya. To establish if supplier cost is a factor in supplier selection in the ministries within the government of Kenya in the procurement process. To investigate if bribery and connections are factors in supplier selection decisions in the UN agencies in Kenya.1.4. Research questions
The research questions for the study shall be:
What are some of the factors that determine supplier selection in the procurement process among the UN agencies in Kenya? Is the supplier size a criterion for selection as a supplier in the procurement process by the UN agencies in Kenya? To what extent does quality of supplies determine the supplier selection in the procurement process in the UN agencies in Kenya? Is cost a factor in the selection of suppliers by the UN agencies in Kenya? What is the overall effect of bribery and connections in the supplier selection decision among the UN agencies in Kenya government?1.5. Significance of the study
This study is significant in the sense that it will put into perspective the exact determinants for supplier selection by the UN agencies in Kenya. The study will be of significance to suppliers especially in the small and medium size categories as it will shed light on what the UN agencies consider in a supplier before awarding a contract. The study will also be valuable to business consultants and entrepreneurship trainers as they will help businesses develop capacities in the key aspects that the UN agencies consider before selecting suppliers. The study will enable more firms do business with UN agencies. The study will also provide direction to researchers in developing a theory of buyer behaviour.
1.6.Scope of the study
The study will confine itself only to the UN agencies in Kenya. The focus of the study will be on establishing the supplier selection determinants in the procurement process within these agencies.
1.7.Limitations of the study
The researcher envisages a number of limitations such as the inability of the respondents to adequately fill the questionnaires as required, the inadequacy of the research instrument to capture all the required information, and failure of some respondents to fill the questionnaire, and the inherent weakness in the research design.Also,the study is limited in that it only focuses on UN agencies in Kenya supplier selection determinants, yet there are many other international non governmental organizations that also rely on local suppliers. The findings in this study might not be adequate representation of the supplier selection determinants among all the international non governmental organizations in Kenya; hence the results cannot be generalized to all.
1.8.Assumptions of the study
The researcher will basically proceed with a few assumptions mainly: the respondents will give correct information, the information given will be correct at the time of the study.
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter covers the following: theoretical review, empirical review and conceptual framework.
2.2 Theoretical Review
Consumers buy products based on a combination of cost, quality, availability, maintainability, and reputation factors. The companies along with their supply chains, which can provide these desired things, will ultimately be successful (Wisner, J.et al, 2008).But when confronted with risky purchase decisions, most firms consider first and foremost, sellers or suppliers with proven track record with the firm are favoured as familiar suppliers help reduce perceived risks (Hutt and Speh, 2009).
Quantitative approaches used in supplier selection range from simple linear weighting models to complex mathematical programming models. Linear weighting models are essentially scoring models which place a weight on subjectively a determined criterion and provide a total score for each supplier. Mathematical programming models use linear programming, mixed-integer programming and goal programming to determine supplier selection (Chaundry et al. as cited in Wissenschaftsverlag, 2007).
UN,s contracts for purchase and rental equipment are awarded in accordance with United Nation’s Financial Regulations where competitive tendering is done and the selection determinants include the lowest offer, meeting technical requirements,quality,delvery and standardization(UN,2006).
According to Beil (2009) supplier selection assists organizations in identifying, evaluating and contract with suppliers for strategic partnership. Organizations will only achieve their sourcing objectives once they get the right suppliers who will deliver goods and services on time. Weber et al (1993) considered supplier selection to be long term process and suggests that suppliers should be evaluated based on core competences and strategic needs.
2.3 Empirical Review
Literature review shows that from empirical front, comprehensive efforts have been made to develop decision methods and techniques for supplier selection. Weber et al(1991) reviewed and classified 74 articles that appeared since 1966 with regard to particular criteria used in supplier selection ( as cited in Mendoza, 2007).In these papers, what comes out as the major supplier selection determinants include price,delivery,quality,and production capacity and location.Holt presented a review of contractor evaluation and supplier section methodologies such as multi-attribute analysis, multi-attribute utility theory, and cluster analysis where he discusses applications of each of these techniques.Degraeve et al uses the Total Cost of Ownership (TCO) as the framework for comparing supplier selection models.
But it is De Boer et al study that is comprehensive enough as it looks at supplier selection literature by even classifying the existing literature in a framework. The framework enumerates steps preceding supplier selection decision. These steps are, problem definition, formulation of selection criteria, pre-qualification, and final selection. The other unique thing about their analysis is the classification of supplier selection literature according to different purchasing situations namely first time buys, modified re-buys, and straight rebuys(Mendoza,2007).Yet, this analysis though comprehensive leaves crucial gaps as it does not clearly state the supplier selection determinants, but instead dwells on the selection procedures.
Dickinson (1966) in his pioneering work on supplier selection identified and ranked 23 supplier selection criteria as collected from a questionnaire given to purchasing agents. Quality, delivery, and performance history rank top with net price ranking a distant sixth. This seems to concur with previous studies, but one notable discrepancy is that price curiously ranks lower than quality.Again, net price is deceptive as other related costs such as packaging and freight cost could raise the total cost. Total cost covers everything hence should be the one listed and not net cost.
Ellram (1990) proposed three criteria for supplier selection. These are: the financial statement of the supplier, organizational culture and strategy of supplier, and the technological state of supplier.
Omar & Sim (2010) in a study on supplier selection criteria conducted on Malysian Manufacturing firms found that cost followed by quality ranked higher than any other determinants. Delivery ranks third based on their analysis.
2.5 The Conceptual Framework
Independent Variable Dependent variable
Source: Author (2012).
One of the highly ranked supplier selection determinants from the available literature is the quality of supplies. Pioneering works of Dickinson (1966) which surveyed 300 commercial organizations ranked quality as the highest determinant for supplier selection. Quality refers to conformance to requirements or fit to use. Conformance quality is also viewed as absence of defects (APICs, 1999).Since the early studies of 60s on supplier selection all through to 90s, quality has consistently ranked top among the various supplier selection determinants. Purchasers would like to buy only those goods and services that are of high quality.
The other critical factor for supplier selection beside quality is delivery. Meeting delivery deadlines is critical so as to avoid operations disruptions for lack of supplies. hoi(19960 as cited in Cheraghi et al.(n.d),delivery together with quality constitute what might be considered the threshold criteria for supplier selection.
Performance history of a supplier is also a critical determinant in supplier selection as literature adduces. In particular, for those goods and services that are of great value or involving huge cost outlay, then the purchaser tends to go for that supplier whom they are sure about their past performance. This is basically to reduce risks associated with failure of unknown suppliers to deliver goods or execute their part of contract.
According to Weber et al. (1991) cost is one of the key determinants for supplier selection. Cost of supplies like delivery and quality constitutes the traditional determinants of supplier selection, also known as order qualifiers. Most organizations both in business and Non-governmental organization world consider the lowest cost offer since the purchaser aims to minimize on cost of procurement while trying to maximize on the quality and quantity of purchases.UN’s procurement guidelines generally require that cost of goods or services be the primary determinant of supplier selection.
Service factors such as after sales service, repairs capacities, change and supply of parts, easy assessable, customer service, technical capacity, and warranty of the product (Omar & Sim, 2010).For this reason, most purchasers tend to consider these service factors capacity in a potential supplier. Any supplier with the capacities to provide these services ultimately gets selected as a supplier to most organizations.
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter covers the following sub sections: the research design, the target population, sample design which contains sampling techniques, data collection instruments and pilot test, and data analysis and presentation.
3.2 Research Design
A research design is the plan and structure of investigating so conceived as to obtain answers to research questions (Kothari, 2004).A research design functions as the research blue print for measurement and analysis of data (Creswell, 2003).As such, it is used to show how the major parts of the research project i.e. the samples, measurement of variables, treatments or controls, and methods of assignment work together to try to address the core research questions.
The purpose of this study being to describe the determinants of supplier selection in the procurement process, it means it seeks to describe the phenomena as it exists. Therefore, descriptive research design will be used as it is deemed to be the most appropriate. Various authors recommend the use of descriptive design (e.g. see Orodho, 2004; Dane, 2000) to produce information that is of interest to policy makers even in business. Even Jackson (1994) contends that all research is partly descriptive in nature, insofar as the descriptive aspect defines and describes the research’s who, what, when, where, why, and how, which are exactly some of the questions raised in the study. The descriptive research design will also help save time and money.
3.3 Target population
A population is the total collection of elements about which inferences are made and refers to all possible cases which are of interest for a study (Sekaran, 2003).
The target population for the study is the 18 UN agencies based in Nairobi. The study will target the chief procurement and logistics officers in these agencies as the unit of analysis. These are selected because they are the ones tasked with the responsibility of sourcing for suppliers of goods and services to their organizations.
The Characteristics of the population is as indicated in the table 3.1 below.
UN Agency Target Population
Total Number % of the Total
(Agencies)
Headquartered agencies 2 11.11
Regional Offices 14 77.78
Others 2 11.11
Total 18 100
Source: UNON.org, 2006
3.4 Sampling design
3.4.1 Sampling Technique
Sampling refers to the systematic selection of a limited number of elements out of a theoretically specified population of elements. The rationale is to draw conclusions about the entire population. According to Kothari (2004), the ultimate test of a sample design is how well it represents the characteristics of the population it purports to. The reason for sampling in this study is to lower cost, accessibility of study population and the greater speed of data collection.
A sample size of 50% of the population will be taken to give a total sample of 9 UN agencies. This is informed by the principle that if the elements of a population are quite similar, only a small sample is necessary to accurately portray the characteristics of interest (Virtual University of Pakistan, n.d). Stratified random sampling will be used where the sample size of 50% shall be taken from each of the three categories (strata) of the population. Stratified random sampling will be used because it ensures a greater statistical efficiency, and reduce sampling error.Kothari(2003) supports random sampling as it satisfies the law of statistical regularity ‘if a sample is chosen at random, on average it has the same characteristics and composition as the population’.
Table 3.2: Sample Size
UN Agency Target Population Sample Percentage Sample Units
Headquartered Agency 2 50 1
Regional Offices 14 50 7
Others 2 50 1
Total 18 9
Source: Author (2012)
3.5 Data Collection Instruments and Pilot Test
The overall aim of the study is to establish the determinants of supplier selection among international organizations, specifically the UN agencies in Kenya. The bulk of data collected will therefore be primary in nature. The questionnaire will be the main instrument, alongside face to face interviews. The use of questionnaires for primary data collection has been supported by many scholars among them;Mugenda(1999),and Peil(1995).A questionnaire is easier to administer, less costly, and ensures greater depth of response, according to Mugenda(1999).A questionnaire also helps capture factual information effectively. For the purpose of this study, the questionnaire will be used for the mainly economical, and appropriateness reasons.
A pilot study shall be conducted using questionnaires to be administered to respondents from four UN organizations. Those questions that will not be clear or are ambiguous will be revised so as to collect the desired information. A senior academic from the school of Business of Jomo Kenyatta University will assess the validity and reliability of the instrument.
3.5.1 Research Procedure
The researcher will first obtain a letter of introduction from Jomo Kenyatta University. The letter will help in identification in the various UN agencies premises while approaching respondents. The questionnaires shall be personally administered through drop and pick method.
3.6 Data Analysis and Presentation
The statistical method used in this study is descriptive and inferential statistics. Data analysis will be done using Statistical Package for Social Sciences computer software (SPSS).Tables, pie charts and graphs will be used to present the results on various variables in the study. Descriptive statistics such as mode, mean and median shall be used to present the various characteristics for data sets after the descriptive analysis. For this kind of study, descriptive analysis is the best and has been supported by such scholars as Schindler (2001), and Crawford (1995).
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