ISSN: 2041-8752
© M axwell Scientific Organization, 2010
Submitted date: October 01, 2010 Accepted date: November 01, 2010 Published date: December 10, 2010
Corresponding Author:Sarah Eyaa, Department of Procurement and Logistics Management, Makerere University Business
Procurement Practices and Supply Chain Performance of SMEs in Kampala
1
Sarah Eyaa and 2
Joseph M. Ntayi 1
Departm ent of Procurement and Logistics M anagem ent, 2
Faculty of Com putin g and M anagem ent S cience, M akerere U nive rsity B usiness Scho ol, P.O. Box 1337, Kam pala, Uganda
Abs tract: The study sought to examine the relationship between the components of procurement practices which are pu rchas ing risk taking , purch asing knowledge and s kills and strategic purch asing and s upp ly cha in performance of SMEs in Kampala District in Uganda. The motivation for the study was the fact that SMEs suffer poor supply chain performance and there was need to identify the extent to which unprofessional practices like pro curem ent pra ctices, e xplain supp ly chain performance. Findings re veale d that the com pon ents explained 19.4% of the variance in supply chain performance, purchasing risk taking was a significant predictor of supp ly chain performance while purchasing knowledge and skills and strategic purchasing were not. These findings raise implications for SME managers, owners and policy makers which have to be addressed if the competitiveness of SMEs in Uganda is to be enhanced in light of increased global competition.
Key w ords: Procurement practices, SMEs, supply chain performance, Uganda
INTRODUCTION
In today ’s high ly com petitive e nvironme nt, sup ply chain performance is very vital for the survival of firms because customers judge the performance of firms basing on their sup ply ch ain performance . Com petition is no longer between firms but between entire supply chains (Veludo et al., 2004). Worldwide, national econ omies are faced with the challenge of improving their supply chains. Given that majority of the firms in eco nomies today are Sm all and M edium E nterprises (SM Es), they are the ones that are m ost affected by the daunting task of improving the performance of their supply chains. Small and Medium Enterprises (SME s) play very fundamental function in the economies of many developing countries through the creation of employment and provision of support services to larger firms (UNC TAD , 1993) implying the efforts should be made to imp rove their performance and that of their chains in order to foster nation al developm ent.
In Uga nda, SM Es acco unt for 90% of the private sector with 80% of these SMEs in urban areas (Hatega, 200 7). Th ey pro vide e mplo yme nt to approxim ately 2.5 m illion peo ple, contribute 75% of the Gross Domestic Product and are major players in the supp ly chains of large manufacturing firms as buyers, suppliers or intermediaries. SME supply chains in Uganda are chara cterized by late deliveries, poor quality products or no deliveries at all, which are indicators of poo r supp ly chain perform ance . This p oor su pply chain performance
negatively impacts on their performance given that customers today eva luate firms basing o n the perform ance of its chain given that competition has shifted from between firms to between entire supp ly chains (Ntayi et al., 2009). W hen the su pply cha in of a firm fails to perform , it is competed ou t of the m arket a nd is therefo re likely to “die”.
SMEs face a num ber of c hallen ges w hich a re likely to explain the performance of their supply chains and their surviv al. A study on SMEs in Nigeria by Onugu (2005) found out that that less than 5% of the SMEs survive beyond their first year of existence because of the numerous challenges that limit their competitiveness. The same case applie s to U ganda w here m ajority o f them die within the first five y ears w hile on ly 5 to 10% survive and make it to maturity (Private Sector Foundation Uganda, 2006). Constrain ts faced by SM Es in Uganda that negatively impact their performance and that o f their supply chains include limited access to information (Okello-O bura et al., 2008), limited information about financing options, inadequate and expensive supply of power and telecommunication (Hatega, 2007), limited experience, limited access to business networks (Kig ozi, 2006), unprofessional practices, information technology accessibility and collaborative co nstrain ts (UNCCI Report, 2005). This position is supported by Onugu (2005) w ho in his study on SMEs established that some of the problems of SMEs in developing countries include inadequate knowledge and skills in accounting, marketing, information technology, international trade and other a reas o f man agem ent.
One of the unprofessional constraints that Ugandan SM Es face is unprofessional procurement practices which can be explained by the fact that focus on procu reme nt is in the in public sector in Uganda, where it is regulated by the Public Proc urement and D isposal of Pu blic A ssets Au thority (PPDAA ). Procurement in the private sector on the other hand, is unregulated. Given that procurement is a vital asp ect of su pply chains, it is possible that the poor performance of the SMEs is explained by the procurement practices in the SMEs. According to Carr (1996), the com pon ents of procurement practices are purchasing risk taking and purchasing kn owled ge and s kills (Carr, 1996). A number of studies have been undertaken in Uganda on SMEs but none specifically addresses the impact of the com pon ents of procurement practices on SM E supply chain performance. Okello et al. (2008) studied the impact of information access on the performance of the SMEs in Northern Ug anda. Nta yi et al. (2009) examined the impact of procurement practices, information technology flexibility and collaborative relationships on supp ly chain swiftness. Ntayi and Eyaa (2010) studied the relationship between procurement practices, collaborative relationships and supply chain performance. Little is known about the procurement practices of SMEs in developing countries (Giunipero and Flint, 2001), spec ifically Uganda. Studies have been carried out to assess procurement practices in Saudi Ara bia (Giunipero and Flint, 2001), Botswana (Msimangira, 2003), Taiwan (Carr et al., 2000) and United Kindgom (Pittaway and Morrissey (2004). The Taiwan and United Kingdom studie s focused on SMEs. This study however focuses specifically on explaining supply chain performance using the com pon ents o f procu reme nt practices in o rder to provide a new view point from which we can explain S M E supply chain performance. The performance of SME supp ly chains is an area of concern in any economy because they play a very key role to the economies of most emerging nations from the viewpoint of generating employment and economic growth as well as providing supp ort serv ices to la rge firm s.
LITE RA TU RE REV IEW AN D H YPO TH ESIS
According to Carr (1996), the constructs of procurement practices are strategic purchasing, purchasing risk taking and purchasing knowledge and skills.
Strateg ic purch asing involv es plan ning, evaluating, implementing, and controlling the operational activities of the purch asing functio n in an effort to meet the objectives of the firm (C arr and Smeltzer, 19 97). S trategic purchasing ensu res that a firm ha s a strateg ic procurement plan, strategie s are develo ped to realise the plan and a re often review ed in order to take into acc oun t chan ges in the strategic plan of the company. The construct of
purchasing knowledge and s kills look s at the e xtent to which persons handling the procurement functio n exh ibit high purchasing knowledge and skills. This includes ensuring that persons handling the procurement function are qualified, have the skills to monitor and interpret supp ly mark et cha nges as w ell as handle aspects of relationships with suppliers. Purchasin g risk tak ing is about the long term focus of the purchasing function on issues that involve risk and uncertainty, eagerness of the purchasing function to take on risks when approp riate opportunities present themselves and relentless pursuit of company objec tives by purch asing profes siona ls. Sup ply chain performance is assessed in terms of cost, quality, timeliness and cus tomer respo nsivenes s (Beam on, 1999 ). There are a number of purchasing strategies that can be adop ted by a firm. These may include but are not limited to negotiation, sourcing, developing and maintaining good relation ships with suppliers, developing suppliers, protecting the cost structure of the company and minimising costs (Kiser, 1976). These strategies when we ll imple men ted have the ability on the performance of a supply chain by reducing costs, improving quality, ensuring timely deliveries and customer responsiveness. H1: Strategic purchasing in SMEs im pro ve s S M E supp ly chain performance
Qu ayle and Quayle (2000) and Wheatley (1998) assert that effective strategic purchasing requires that the people involved in implementing the strategy are knowledgeable, mak ing it po ssible to add v alue. T his is uph eld by the fact that majority of strategy management teamsn are cross - function to ensure that there is a wealth of knowledge and skills. The implication is that when the purchasing strategie s in a firm are operationalised by persons who have the required purchasing knowledge and skills, the de sired o utcom es w ill be realised, thus improving supp ly cha in perfo rman ce. H 2: Purchasing knowledge and skills improve supply chain performance. Taking risks in the purchasing function involves long term focus and being able to take up opportunities when they arise. When risk is taken and opportunities exploited wh ile applying the required purchasing knowledge and skills, it is possib le to gain adv antag es that w ill result in improved supply chain performance. Ammer (1989) supp orts this pos ition by assertin g that a purchasing function will only be able to strategically contribute to a firm when it learns to tak e the n eces sary risk s. Peo ple acquire the knowledge and skills that make them be tter decision makers from previous `experiences where they took calculated risks (Neslin and Greenhalgh, 1983). H3: purchasing risk taking improves supply chain performance
METHODOLOGY
The study was carried out in 2007 and adopted a cross sectional and quantitative study design. Data was
Tab le 1: C ron bac h alp ha c oeff icien ts
Item Cronbach alpha coefficient
Purchasing risk taking 0.70
Purchasing k now ledge and sk ills 0.64
Strategic purchasing 0.66
Supply chain performance 0.81
collected from respondents who were persons in charge or overseeing purchasing mana geme nt or procurement related activities using a self - administered questionnaire. The responses in the questionnaire were hinged on a 4 point Likert Scale with these responses 4 - strongly agree, 3 - agree , 2 - disag ree, 1 - strongly disagree. An even number responses was preferred because an odd number gives room for responses of “neither agree or neither disagree” which can be easily confused for “I do not know” by respon dents (R aaijmakers et al., 2000). The study population was 1,50 0 SM Es tha t are registered in Nakawa Division, Kampala District. The list of the SMEs was obtained from the Uganda Small Scale Industries Associa tion. Basing on the Krejcie and Morgan (1970) sample size de termin ation c riteria, a sam ple of 3 06 is appropriate for a population of 1500. We however took a sample of 300 in ord er to m ake it possible to random ly sam ple the firms. The firms were listed in alphabetical order and after the first SM E w as chose n random ly, every fifth SME was chosen to give the total sample size. 250 usab le ques tionna ires w ere co llected, giving a response rate of 83% . Colle cted d ata w as an alysed using the Statistical Package for Social Scientists (SPSS). The correlation analysis was used to establish the nature and streng th of the re lationsh ip betw een th e varia bles w hile the regression analysis was used to determine the variance in supply chain performance that is explained by th e procurement practices. In this study, we took on the classification of SME s by the Government of Uganda basing on the number of peo ple emp loyed by the firms; 5
-50 peop le (sma ll) and 51- 500 people (medium) (Schiffer and W eder, 2 001; U ganda Bureau of Statistics, 2003). Beyene (2002) an d M utula and B rakel (2006 ) howe ver, dispu te that there is no generally established classification for Small- and Medium-Scale E nterpris es (SM Es) in Africa. Measures for the variables were obtained and adapted from studies undertaken by previous scholars. Sup ply chain performance scales were obtained from the works of Beamon (1999) while scales for procurement practices were obtained from C arr (1996). Sca les were tested for reliability using the Cronbach Alpha Co efficien t. The overa ll co-efficient was 0.7749 which according to Nu nnally (1967) is good. The coefficients of the ind ividua l items a re sho wn in the T able 1 .
RESULTS
In order to determine the strength and direction of the relationships between the dependen t variables and independent variable, correlation analy sis w as carried ou t. To determine the impact of each of the independent variables on the variation in sup ply chain performance, a hierarc hical regress ion an alysis w as carried ou t.
Correlation analysis results: The results of the correla tion an alysis a re pres ented in the T able 2 .
There were positive and significant relationships between the variables; purchasing risk takin g and supp ly chain perform ance (r = 0.444, p-value < 0 .001), purchasing kno wledge and s kills and supp ly cha in performance (r = 0.257, p-value < 0.001) supporting hyp othes is H2 and H3. H2:Purchasing knowledge and skills improve supply chain performance; H3: purchasing risk taking improves supply chain performance. An improvement in purchasing risk taking and purchasing knowledge and skills improves supply chain performance.
Tab le 2: C orrela tion c oeff icien ts
Mean S .D . (1) (2) (3) (4)
Purch asing risk taking (1 ) 2.45 0.72 1.000
Purch asing k now ledge a nd sk ills (2) 2.28 0.72 0.526** 1.000
Strategic p urcha sing (3) 2.36 0.79 0.503** 0.756** 1.000
Sup ply cha in perfo rman ce (4) 2.79 0.40 0.444** -0.257** 0.229** 1.000
**: Correlation is significant at the 0.01 level (2-tailed)
Tab le 3: H ierarch ical reg ressio n an alysis
M ode l 1 M ode l 2 M ode l 3
--- --- ---Stan dard ized Be ta Sig. Stan dard ized Be ta Sig. Stan dard ized Be ta Sig.
Strategic purchasing 0.229 0.000 0.080 0.202 -0.026 0.663
Purchasing k now ledge and sk ills 0.196 0.002 0.050 0.411
Purchasing risk taking 0.431 0.000
F 30.467 20.386 45.434 Sig. 0.000 0.000 0.000 R 22.9% 26.2% 4 4.5 % R S quare 5.2% 6.9% 1 9.8 % R Square Chan ge 5.2% 1.7% 12.9% Adjusted R Square 5.1% 6.5% 19.8%
The relations hip betw een s trategic p urchasing and s upp ly chain performance was significant and negative (r = -0.257). This re sult does not support hypothesis H1. H1: Strategic purchasing in SMEs improves SM E supply chain perform ance . The implica tion is that an improvement in strateg ic purc hasin g crea tes a de cline in supply chain performance.
Regression analysis: In order to determine the impact of each indep endent va riable on supply chain performance, each variable was entered, one at a time, creating three (3) mod els to explain the variations in supply chain performance. The results of the hierarchical regression a re show n in the Tab le 3.
In model 1, strategic purchasing was entered and results indica te that it (strateg ic purchasing) accounts for 5.2% of the variation in sup ply ch ain performance. Model 1 is statistically significa nt (sig. = 0.000, p<0.01, F = 30.467).
In model 2, purchasing knowledge and skills was added and the R square increased to 6.9%, implying that purchasing knowledge and skills account for a 1.7% increase in the variation in supply chain performance. Model 2 is statistica lly signific ant (sig. = 0.000, p<0.01, F = 2 0.386).
In model 3, purchasing risk taking was added and the R Squ are inc rease d to 19 .8% , imply ing that purchasing risk taking accounts for a 12.9% increase in the variation in supply c hain p erform ance . M odel 3 is statistica lly significa nt (sig. = 0.000 , p<0 .01, F = 45.43 4).
The overall model is significant at the 0.01 level (F = 45.434, sig. = 0.000, p<0.01) and the independent variables (strategic purchasing, purchasing knowledge and skills, purchasing risk taking) explain 19.4% of the variation in supply chain performance. Strategic purchasing (sig. = 0.663, p>0.01) and purchasing knowledge and s kills (sig. = 0.411 , p>0.01) are not significant predictors of supply chain performance at the 0.01 level. Purchasing risk taking is a significant predictor of supply chain performance (sig. = 0.000, p<0.01) at the 0.01 level.
Strateg ic purchasing has a negative impact on su pply chain performance (Beta = -0.026 ) imply ing tha t a unit increase in strategic purchasing reduces supply chain performance by 0.026 units. A unit increase in purchasing knowledge and skills increases supply chain performance by 0.05 (B eta = 0.050). A unit increase in purchasing risk taking increases su pply c hain perform ance by 0.4 31 (B eta = 0.431). Purchasing risk taking and purchasing knowledge and skills both have positive impacts on supp ly chain performance with purchasing risk taking having the strongest impact. Strategic purchasing on the other hand has a nega tive imp act on supp ly cha in performan ce.
DISCUSSION
Purchasing risk taking is a significant predictor of supp ly chain performance because SM Es in Uga nda are private firms that are willing to take risks as long as there is a profit ad vantage a ttache d. M ajority o f the priv ate firms in Uganda are set up with very broad business objectives and are therefo re eage r to exploit opportunities that come their way even when their competences in these areas are limited as long as they are assured of gains that can guarantee their survival. This is evidenced by instances where SMEs are willing to bid for contracts that they have no competences in; what they do is contact people that have competences in the area in which they are bidding, mak e them cons ultants in their firms and use their docu men ts to bid. This shows the extent to which SMEs are willing to go in order to take risks in the area of procurement in order to realise gains. C arr et al. (2000) asserts that managers make concerted attempts in taking calculated risks so that their firms can be able to advance. Given that majority of the SMEs do take risks, the effect of purchasing risk taking fe lt across the en tire supp ly chain, hence purchasing risk taking becoming a significant predictor of supply chain performance. Our finding on pu rchas ing risk taking being the the variab le with the strongest impact agrees with Ammer (1989) who asserts that the first stage towards d evelo ping s trategic purchasing is the willingness of the purchasing function to take risk. This exp lains why the SM Es are increa singly taking risks in the area of purchasing so that it can grow into a strategic area so that they are guaranteed of benefiting from procu rements in the p ublic sector. The pressure for SMEs to make procurem ent a stra tegic function and improve purchasing knowledge and skills stems from the fact they (SMEs) are under pres sure to improve their procurement processes and given that majority of sup pliers to th e pub lic entixtties are SM Es. . The finding that purchasing knowledge and skills and strategic purchasing disagrees with the works of Carr and Smeltzer (1997), Be amo n (1999), Q uayle and Qu ayle (2000) and Whe atley (1998) implying that the assertion that these two variab les imp rove supp ly cha in performan ce ca nno t be ge neralise d to SM Es in K amp ala District in Uganda. This study therefore provides a new insight in exp laining SM E supply c hain p erform ance in the Ugandan context. The fact that purchasing knowledge and skills and strategic purchasing are not significant predictors can be explained by a numb er of reasons. First and foremost, 56% of the respondent firms did not have purchasing depa rtmen ts to oversee the purchasing related activities. Purchasing was considered as part of depart men ts like a c c o u n t in g a n d f i n an c e or administration. A p urchasing depa rtmen t in a firm is charged with the responsibility of recruiting qualified
people to undertake purchasing related activities and supervising purch asing related activities, of which strategic purchasing is one of them. Secondly, majo rity of the persons handling purchasing activities in the respondent firms were not qualified in purchasing and supp ly chain management, further explaining the fact that purchasing knowledge and skills is not a significant predictor. When the persons handling the purchasing activities, do not have the required knowledge and skills, then it is not po ssible fo r them to effectively undertake the role of strategic purchasing that involves planning for the purchasing function, designing and implementing strategies to realise the plan. Strategic purchasing requires high level knowle dge and skills in purchasing in which one has to be trained. Thirdly, the limited purchasing knowledge and skills in SM Es wh ich are private is poss ibly due to the fact that focus on developing purchasing knowledge and skills in Uganda has been on the private sector. The Government of Uganda through the Public Procurement and Disposal o f Pub lic As sets Au thority (PPDAA) has expensed a lot of money and effort towards improving purchasing knowledge and skills in the Public and Dispos ing Entities (PD Es). Ho wev er, the PPDAA Compliance Audit Report (2008) revealed that there is still a shortage of purchasing knowledge and skills in the public sector. If the public sector w here effort is being place d is still limited in the kn ow ledge and s kills area, wh at is exp ected in the private sector wh ere the re is very minimal or no effort at all? Fourthly, many SMEs do not cons ider pu rchas ing / pro curem ent to b e of strate gic importance and because of this managers and owners do not see w hy the re sho uld be an en tire departm ent in charge of purchasing management. These depa rtments are also seen as co st centres that w ill require hiring of more employees wh o w ill increase on th e salary budget. In h is study of purc hasin g ma nageme nt prac tices in Botswana, M simang ira (2003) established that staff undertaking purchasing activities were greatly uninspired by the fact that mana gers do not realise and recognise the importance of purchasing professionals. Lastly, purchasing knowledge and skills and strategic purchasing are not significant predictors of supply chain performance because they are not enforc ed ac ross an entire su pply chain. One or two firms along a chain may employ qualified purchasing professionals and undertake strategic purchasing but if this is not done across the en tire chain, the effect is eroded such that the impact of those undertaking these a ctivities on the performance of the supp ly cha in is not s ignifica nt.
CONCLUSION
Our study provides a unique finding on the relation ship between the components of procurement
practices and SM E supply chain performance, which has not been widely stud ied in U ganda. W hile strategic purchasing had been found to be a significant and positive predictor of SM E supply c hain performance, our finding disagrees with this position because it was found that an increase / impro vem ent in strategic purchasing activities instead creates a declin e in SM E supply c hain performance. We also contribute to an understanding of the extent to which factors like procurement practices explain the variation in the supply chain performance. Many factors that affect SM E perform ance in Uganda have been analysed but the area of procurement has not received adequate focus in examining the impa ct of its com pon ents o n S M E performance. Given that purchasing risk taking and know ledge and skills are significant predictors of SM E supp ly chain perform ance, effort shou ld be made tow ards im prov ing the m in o rder to impro ve the perform ance of the S M Es.
IMPLICATIONS OF THE FINDINGS
Man agement of SMEs should focus on developing purchasing risk taking abilities before focusing on purchasing knowledge and skills and strategic purchasing. Ammer (1989) asse rts that before the strategic function of procurement can develop, it has to first learn to take risks. W hen the risk taking abilities have been developed, then staff handling procu reme nt related activities w ill be able to handle strategic purch asing activities. C apac ity in purchasing risk taking can be developed by collaboration amongst entities like Public Procurement and Disposal of Pub lic Ass ets A uthority (PPDA A), U ganda Small S cale Industries Association (USSIA), Ministry of Trade, Industry and Tourism and Private Sector Foundation of Uganda (PSFU). There is need to study further the other factors explain the performance of SME supply chains given that the comp onents of p rocurement practices e xp la in on ly 19 .4 % .
LIMITATIONS OF THE STUDY AND AREAS FOR FUTURE RESEARCH
Our study is limited by a number of factors and we discuss the factors in this section and also recommend directio ns for studies in future .
Our sample was com pose d of S M Es found in Ka mpa la District and le aving out SM Es in o ther distric ts in Uganda. O ur findings cannot therefore be generalised across the en tire cou ntry. Stu dies in fu ture ca n exte nd to other parts of the co untry, because the results may vary. The classification of SMEs that was obtained from the Uganda Bureau of Statistics for this study classified the SMEs into only 5 sectors, namely construction, manufacturing, education, hotels and restaurants, retail. It
is from th is list that we selected the SMEs. The classification ignore s SM Es in o ther sec tors, ma king it hard to extend ou r findings to these s ectors . It is recommended that stud ies in futu re exte nd to some of these sectors like agro - processing, garment, etc.
Respondents were persons in charge of handling purchasing activities and yet there are other people in the firms whose decisions affect procurement practices and supp ly chain performance. These pe rsons w ho w ere excluded include purchasing committee members and user departments. This study therefore missed out on the vital information that these other groups of peop le wo uld have provided. In future, stu dies sh ould take into account all categories of people that should provide the information needed to realise the objectives of the study. Practices are gained over time, so in order to examine the true na ture of p ractices as w ell as supp ly cha in performance, a long itudina l study is nece ssary . W e recommend that a longitudinal study to examine procurement practices in Ugandan SMEs be undertaken in future.
Our model explained on 19.4% of the v ariation in supp ly chain performance. This is a low percentage implying that we left out a number of other variables that explain the va riation in th e sup ply ch ain performance of SM Es. We recommend that other factors like macro – environmental factors like regulations that govern business operations, political factors, etc., be stu died to determ ine ho w the imp act sup ply ch ain pe rformance .
ACKNOWLEDGMENT
W e would like to extend our appreciation to the Dutch Go vernmen t that funded this study through the “NPT PROJEC T NPT/UG A/040 - Support for Institutional Cap acity Develop men t in Pub lic and P rivate Procurement M anag eme nt in Uganda”. The NPT Project M anager, Ms . Astrid Ter - W iel and other projec t staff, Proffessor Jan Telgen and Professor Gerrit Rooks for the guidance given during this study. W e further acknowledge the Managem ent of M akere re U nivers ity Bu siness School for th e sup porting acad emic research.
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