International Journal of Innovation and Economic Development
Volume 6, Issue 5, December 2020, Pages 71-77
Strategic Sourcing as a Tool for Improving Firm’s Performance
1Catherine W. Munyi , 2Gregory S. Namusonge, 3Alice Simiyu
1,3 Department of Procurement and Logistics, Jomo Kenyatta University of Agriculture and Technology, Kenya
2 School of Entrepreneurship, Procurement and Management, Jomo Kenyatta University of Agriculture and Technology, Kenya
Abstract: The purpose of this paper is to investigate the effectiveness of strategic sourcing for improving a firm’s performance.
Design/Methodology/Approach The researchers adopted a cross-sectional approach to collect primary data. The data yielded a response rate of 317 from energy generating firms in Kenya. The data collected were put through rigorous statistical analysis to test content validity as well as reliability. Further, a simple linear regression model was used to test relationships between strategic sourcing and the firm’s performance.
Findings The finding suggests that a successful implementation of strategic sourcing improves a firm’s performance through the adoption of multiple sourcing strategies as well as maintaining a manageable supply base. Further, the paper reveals that the wrong choice of suppliers can negatively compromise the quality of products and services of the firm.
Research limitations/implications Strategic sourcing is a complex and very sensitive issue. While the findings shows that strategic sourcing strategies improves a firm’s performance, this study has not covered all the strategic sourcing strategies. A research can be carried out in another sector to refine the study findings.
Originality/Value The study provides an empirical analysis of the strategic sourcing strategies and their effect on a firm’s performance. The study also seeks to provide a solution that meet the needs of today’s business sourcing requirements.
Keywords: Strategic sourcing, Performance of energy generating firms in Kenya, Simple regression, Reliability
Today markets have become very dynamic, and customers are demanding more variety, better quality, low prices, higher reliability, highly responsiveness and faster delivery of goods and services. Thus, for firms to remain relevant and compete more favourably in the markets, they should compete as webs of partners rather than as a single independent entity (Chopra & Meindl, 2003). Equally, Petronic (2007) established that firms that practice supply chain management, are able to connect their activities with various suppliers, distributors, retailers and customers. Supply chains are perceived to join businesses global undertakings such as upstream (procurement of raw materials and components) to downstream through distributors, wholesalers, retailers and eventually consumers (Wenfency, 2011).
Hong (2006) noted that for the formation of successful supply chains, firms select the most competent partners to match their requirements. Therefore, to lower expenses, increase efficiency, and boost the firm’s performance, the firms should embrace strategic sourcing strategies globally (Zhengjia, 2008). Strategic sourcing is defined as a long term way of searching markets, for potential input sources, securing the continuity of these sources, searching for alternative sources and keeping the relevant knowledge updated (Vollman, Berry, Whybark, 2004). The sourcing strategy is characterised by establishing supplier base, selecting suppliers and the number of goods to be ordered from each supplier selected (Burke, 2005).
Despite the significant advancement of research in strategic sourcing, to date, there is limited research conducted in strategic sourcing in developing countries such as Kenya. The economy of Kenya is the largest in East African countries and the largest in purchasing power, thus Kenya has to catch up with middle and developed countries, and one of the keys is energy sector. This sector can propel the other areas in the economy if well managed. To date energy sector in Kenya has been performing poorly leading to frequent high-power outages and power disruptions risks, high cost of power generation, and consumption per customer is decreasing. Hence energy generating firms must not only advance in their manufacturing processes, but also adopt world-class strategic sourcing strategies. Existing literature points out that strategic sourcing would enable firms to realise their goals in terms of supply, cost reduction, high competitiveness and increase the quality of the product and services (Rendon, 2005) which is becoming an essential pre-requisite to stay afloat in the market and grow profitably. Despite the crucial role of strategic sourcing, few investigations have been conducted by the scholars’ in Kenya (Chepngetich, Waiganjo and Karai 2016; Kihanya, Wafula, Onditi, and Munene, 2015; Nyabuto, 2016) whose central focus was a case study of Kenya Power and Lighting Company. Thus, it is necessary to identify the strategic sourcing requirements and strategies applicable in energy generating firms in Kenya. The findings would enable the firms to identify and direct their focus on areas that require to be improved.
This paper is structured as follows. In section 2, we present how strategic sourcing interacts with the firm’s performance from the literature reviewed. Part 3 discusses research methodology. Section 4 statistical analysis of data collected and part 5 presents the conclusions both discussion and implications.
2. Literature Review
2.1 Strategic Sourcing
Strategic sourcing deals with the searching of markets for potential input sources, searching for alternative sources and keeping the relevant knowledge up to date (Vollman, Berry, & Whybark, 2004). Equally, Burke (2005) established that a successful firm sourcing strategy should be characterised by three basic interrelated decisions which include, criteria for establishing a supplier base; criteria for selecting suppliers who will receive an order from the firm; and the number of goods to order from each supplier sourced. Sourcing is regarded as difficult exercise especially when dealing with unique raw materials, ingredients, parts, components, connectors, apparatus, products, equipment, supplies, and as services increase, and the numbers of buyers involved in the decisions expand (Duffie & Koester 2005). According to Duffie and Koester (2005), in a global enterprise, one purchasing decision may impact numerous business processes or departments including manufacturing, receiving, distribution, marketing, sales or customer support. Many companies have realised the need for elevating traditional procurement function to modern strategic sourcing for value addition across the supply chain since the risks of buying the wrong items, services or buying from the wrong supplier can have vital impacts and ripple effect throughout a business (Duffie & Koester 2005). Consequences can range from late delivery to total service failure liability and can even affect market competitiveness.
Strategic sourcing is a systematic and fact-based approach for optimising an organisation’s supply base and improving the overall value proposition (Lewicki, Barry, Saunders, & Minton, 2002). It stretches beyond supplier price negotiation and focuses on the total cost of ownership (TCO) incorporating customer needs, organisational goals, market conditions and getting the best product/service at the best value-driven by a rigorous and collaborative approach (Amajor, Smith, & Moreland, 2015). It also addresses all levers for savings, make decisions based on factual analysis and market intelligence, and it’s a continuous process. The primary objectives of strategic sourcing are to reduce costs while maintaining or improving the quality of a product or service, examine supplier relationship across the entire organisation and leverage entire organisations spend (Su, Dyer & Gargeya, 2009). When the activities of sourcing are directly related to sourcing strategy, strategic sourcing expressions are used.
Sourcing strategy does not concern with only selecting the best suppliers based on some standards, but it is also about the relationships with the suppliers (Pulles et al., 2014). Sourcing strategies are part of the overall purchasing strategy that is related to defining the number of suppliers a firm will engage for one specific item, provided the given significance of the thing and the structure of the supply market, and how the suppliers are related to each other (Van Weele, 2001; Cousins et al., 2008). The strategic decisions made about sourcing have different types of economic consequences for the buying firm, the involved suppliers as well as other parties in the business network (Gadde et al., 2010; Håkansson et al., 2009). Different types of sourcing strategies are developed and include single-sourcing, multiple sourcing, dual sourcing, delegated sourcing, parallel sourcing, network sourcing and triadic sourcing (Bildsten, 2015). According to Lewicki, et al. (2002), sourcing and strategic sourcing are critical steps in buying goods and services and firms should analyse, assess, and select vendors and their goods and services based on set specifications and requirements.
Strategic sourcing affects the organisation’s performance as Kihanya, Wafula, Onditi, and Munene (2015), asserted in their study on the role of strategic sourcing on organisation’s Performance. The study found out that strategic sourcing enables the organisation to concentrate on its core functions which assist the company achieve strategic advantage and at the same time act as a means in which business conditions or problems are alleviated in a manner that is more efficient or effective (Kihanya et al. 2015). Another study by Nyabuto (2016) on the influence of strategic procurement on the performance of public enterprises in Kenya: A case of Kenya power limited revealed that strategic procurement has positive impacts such as reduced costs and improvements in quality of goods and services in an organisation.
The supply chain for energy generating Sector has five main key functional stages which include the supply of primary fuel sources, generation, transmission, distribution and supply to the final user (Seth & Scott, 2013). For the power utility firms, it is crucial to establish the right sources of raw material, distribution and storage services. The rationale for Kenyan government unbundling power was to enhance overall power efficiency and encourage healthy competition among the energy generating supply chain actors (Karekezi & Kimani 2004). Unbundling has led the primary fuel stage to have several different supply markets operating. Though at the generation stage there is competition, there is no choice of the supply market. However, there are a diversity of requirements that energy generating companies at each level of operation would need to strategically source from other organisations and stakeholders, to get the opportunities to reduce the cost to serve power, improve and upgrade product and service offerings.
2.2 Performance of Firms Measurement
Performance measure entails both quantitative and qualitative assessment of the degree to which a firm achieves the general or specific objectives (Lysons & Gillingham, 2003). Traditional performance measures of firms is based on financial indicators such as profit, market share and cost. Performance measures in supply chain range from cost and non-cost measures (Lunga & Mbanje, 2015), financial and business process perspectives (Chopra & Meindl, 2010), to customer satisfaction, revenues, as well as learning and growth (Taghipour, Bagheri, Khodarezaei & Farid, 2015), as well as operational measures such as quality performance or cycle time (Sherman, 2001). Performance measure within the firm is used in several ways including forming a basis for; evaluation and reward of individuals, allocation of scarce resources among strategic business units, and making decisions that increase future profitability (Chan & Qi, 2006). It is therefore essential for firms to consider the nature of SCM practices that influence the supply chain performance. A well-designed performance measurement system is central in understanding and improving the performance of all the actors in the supply chain operations (Chan & Qi, 2006). However nowadays, both financial and non-financial indicators such as quality, delivery time, lead times, customer satisfaction among others, form the basis for performance measurement. In this study, both financial and non-financial indicators are used to measure the firms’ performance, such as revenue generation and customer satisfaction. This led to the following research hypothesis;
H01: Strategic sourcing has no significant influence on the performance of energy generating firms in Kenya
3.1 Instrument Development
Content validity is ensured by adapting all the instruments from the existing previous researches in strategic sourcing, which are deemed to have reliable and valid scales. A five-point Likert scale anchored by 1 (Strongly Disagree) 5 (Strongly agree) is used to assess the degree of strategic sourcing in the opinion statements provided “kindly assess to what extent you agree or disagree with the following opinion statement’. Firms performance was also measured using a five-point Likert scale of 1(Strongly Disagree) 5(Strongly Agree) and by ticking in the box of the revenue indicators provided for the last five years.
3.2 Data Collection
The study focused on energy generating firms in Kenya because few studies are featured in this sector. The study targeted logistics/supply chain/procurement managers in senior positions to answer the dropped questionnaires since they possessed sufficient knowledge regarding the overall process of strategic sourcing and firms’ performance. After randomly selecting 375 samples of respondents, the researchers dropped the questionnaires which generated a response rate of 317.
The following section contains the findings of strategic sourcing and firms’ performance in the descriptive and inferential statistics form. The researcher asked the respondents to indicate the sourcing strategies their firms’ have been using in the past five years up to 2017 to acquire goods and services. The findings in Table 4.1 indicated that majority of energy generating firms (56%) have been adopting multiple strategies for sourcing materials, 29 per cent of the respondents indicated that their energy generating firms have been using single-sourcing strategies and 15 per cent of the respondents pointed out that they have been using dual sourcing strategies in sourcing materials for their firms.
Table 1: Strategic sourcing strategies
Further on descriptive statistics, the study sought respondents’ opinion on the influence of strategic sourcing on the performance of energy generating firms in Kenya based on the following scale: 5 SA=strongly agree, 4 A=agree, 3 UN=undecided, 2 D=disagree, 1 SD=strongly disagree. A standard deviation of more than one implies a significant difference in respondents. The results are as shown in Table 4.2. From the findings, the majority of the respondents agreed that strategic sourcing optimises the organisations’ supply base and improves on organisations’ relationships with a mean of 4.347 and standard deviation of 1.102. Likewise, the study found out that majority of the respondents agreed that sourcing decisions of one organisation along with the firms supply chain affect other organisation’s processes and spending with a mean rate of 3.968 and an SD of 1.090, quite a number of the respondents were undecided. The findings also revealed that energy generating firms incorporate the customers’ needs, such as on-time delivery and quality products when sourcing with a mean rate of 4.31. Equally, the study established that buying a wrong item or service or buying from a wrong supplier can have a prime impact on product and service offerings by energy generating firms with a mean rate of 4.2. Likewise, the findings established that the sourcing decisions of one organisation along the energy generating firms supply chain influence other organisation’s processes and spend with a mean rate of 3.9.
Table 2: Strategic Sourcing Descriptive Statistics analysis
An additional test was conducted on simple regression to determine the influence of strategic sourcing on the performance of energy generating firms in Kenya. The model used was Y= ß0+ ß1x1+ ε. Where: Y= Performance of energy generating sector supply chain β0=constant (Slope) of the Model β1 is the coefficient for X1; X1= Strategic sourcing practice; ε = error term
The null hypothesis was H01: Strategic sourcing has no significant influence on the performance of energy generating firms in Kenya.
The researchers tested the hypothesis by use of linear regression which tested the relationship between strategic sourcing and performance of energy generating firms in Kenya. Path coefficients determined the direction and strength while T statistics provided information on the significance to the relationships. Table 4.3 presents the results.
Table 3: Model Summary of Strategic Sourcing
The R2 for the regression model between strategic sourcing and the performance of energy generating firms in Kenya was 0.122 meaning that strategic sourcing explains 12.2% variation in the performance of energy generating firms in Kenya. In contrast, the error term expresses the remaining variation.The regression model was a good fit, as indicated by a significant F-statistic (F=17.418, p<0.05). See Table 4.4.
Table 4: ANOVA of Strategic Sourcing
The regression model obtained from the output was
Performance =13.113 +0.381 strategic souring + error
The regression coefficient for strategic sourcing was 0.376 indicating that a unit increase in the strategic sourcing would result in a 37.6% increase in the performance of energy generating firms in Kenya. The t-statistic for the regression coefficient for strategic sourcing was significant at 5% level of significance (T=11.646, p<0.05) implying rejection of the null hypothesis. See Table 4.25. Based on these statistics, the study concluded that there was a significant positive relationship between strategic sourcing and performance of energy generating firms in Kenya.
Table 5: Coefficients Strategic Sourcing
5.1 Theoretical Contribution
The study contributes to the understanding of the association between strategic sourcing and firm’s performance. The findings established that energy generating firms’ in Kenya mainly have adopted multiple and single-sourcing strategies. However, there are also some few firms which have adopted dual and other sourcing strategies. Therefore, firms should adopt various sourcing strategies when acquiring goods and service to complement another as noted by Bildsten (2015), because strategic decisions made about sourcing have different types of economic consequences for the buying firm and should be carefully chosen (Håkansson et al., 2009).
The results also revealed that strategic sourcing optimises the organisations’ supply base and improves on organisations’ relationships. Likewise, the researchers found that sourcing decision of one organisation along the energy generating firms supply chain impact other organisation’s processes and spending. Equally, firms should incorporate correct specifications of the customers’ needs, such as on-time delivery and quality products when sourcing. However, the study disclosed that buying a wrong item or service or buying from a wrong supplier can have key impact on product and service offerings by energy generating firms. These findings concurred with the study by Duffie and Koester (2005).
5.2 Managerial Contribution
The study recommends that energy generating firms should adopt sourcing strategies that suit their needs and requirements. However, energy generating firms that have adopted multiple sourcing strategies should be cautious since it might be very costly to manage many suppliers. The study also, recommends to the management of energy generating firms that, they should adopt strategic sourcing as a way of optimising their supply base and improving firms’ relationships. Equally, the study endorses to the administration of energy generating firms to incorporate customer needs in their strategic sourcing such as on-time delivery and quality products. The study also, suggested that management of energy generating firms should prepare correct specification to avoid purchasing wrong items. Moreover, the study recommends to the administration of energy generating firms that they should include sourcing strategy in their policy statement because the findings revealed that strategic sourcing strategies improves the performance of energy generating firms positively.
5.3 Limitations and Future Research
Strategic sourcing is a complicated and very sensitive issue. While the findings shows that strategic sourcing strategies improves a firm’s performance, this study has not covered all the strategic sourcing strategies. A research can be carried out in another sector to refine the study findings.
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