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NEGOTIATION
AS A COST REDUCTION TECHNIQUE IN MATERIAL PROCUREMENT
ABSTRACT
Negotiation
as a reduction technique in material procurement is to ensure that high cost
incurred in material procurement is manage hence the negotiation is one of the
tool in spend cost management to optimise profit in every organization. Lack of
knowledge to some guide when negotiating by procurement manages lead to high
cost of finished product and it makes the product not to compete well with its
competitors in the market. The impact expected at the end of negotiation is to
minimize cost and maximise profit of the organisation. In both private and
public sectors between 50% to 80% of the total expenditure is spend on
acquiring either materials or services. The high percentage of charges by
company’s agent could lead to additional cost of production over invoicing and
overpayment. What else can be done, and what other mean can be used to acquire
raw materials without incurring high cost. To reduce high cost, negotiation is
one of the technique of spend cost management to arrive at a mutually
acceptable bargain by planning. Objectives and strategy in order to arrive at
an agreed pace term and condition of service between a procures and supplier.
To ensure prudence and judicious utilization of the limited resources available
in an organization. To expose ideas to procurement manager on how to achieve
the objectives and enhance the profitability of organization as materials
procured when adequately negotiated reduce cost incurred in acquisition of
material for production process. To expose purchasing manager to possible tools
of spend and cost management. The major research question of what re the
techniques for negotiation the strategies for effective negotiation, the rate
of material availability, how coordination and management of suppliers to
ensure cost reduction and constant flow of materials to avoid interruption at
the point of production. The research Design would be descriptive and
analytical in nature. Interview would be conducted on selected staffs of
Production, Stock Control section, Human Resources and Procurement Department.
The Instrument for data collection are Questionnaire, Record, Interview,
Observation. This work also comprise of summary of findings, conclusions and
recommendation.
CHAPTER
I: Introduction
Every human
being needs water to survive, so also every organization needs materials to
survive. In the private and public sector, their total expenditure is mainly
spent on acquiring either materials or facilities or services. There is no way
business operations can be effectively carried out without them. Negotiation is
vital to organizations so as to reduce cost or minimize cost and to maximize
profit.
1.1 Background of the study
Negotiation
as a cost deduction technique in material procurement is for efficiency of any
business, and also contingent upon obtaining the right materials and have it
available in the right quantity from the right source, at the right price,
delivered at the right place at the right time, whereby failure to any of these
adds to costs and decreases the profit level of any organization.
There has
been procurement fraud because of the idea of speed money in the mind of some
of the procurement managers or officials who buy materials or items for the
organization. Lack of transparency has lead to excess spending, increasing cost
of production, losing a lot of money through the inflating of prices, over
invoicing and overpayment of materials procured.
High cost
incurred in material procurement is as a result of procurement manager not
doing his home work well that is by planning his objectives and strategy before
hand and he enters the session without a positive attitude of success.
Lack of
knowledge and not been conversant to some guide when negotiating by the
procurement manager in respect to issue such as, when to negotiate, the agenda,
negotiation technique and behaviour, some attribute of a good negotiator, the
team leader to negotiate term of payment not stipulated and followed add to the
cost of production. These could also lead to high cost of finished products and
make it not to compete well with its competitors in the market, and calls for
extra expenses on promotions and advert, renovation and so forth, just to
improve sales in order to make profit or keeps the organization living.
Hence
procurement being a process whereby all classes of resources such as materials,
facilities, people required to render services are obtained procurement covers
a wider range of supply activities than buying alone. Negotiation as cost
reduction technique in materials procurement is embarked on to solve some of
the problem earlier mentioned. Negotiation is a very vital and essential
technique in every organization in both private and public sector to reduce
high cost incurred in material procurement, the role in negotiation and all
that it takes to negotiate effectively. The impact expected at the end of these
is to minimise cost and maximise profit of the organization, and also to ensure
that the end products stand in the competitive market, to satisfy the taste of
consumers and promote the standard of living economy and the society at large.
1.2 Statement of the Problem
In both the
private and public sectors, between 50% and 80% of their total expenditure is
spent on acquiring either materials or services, procurement is thus the
biggest item of expenditure of an organization. Excessive costs are incurred
when enquiring these materials in private sector about 60% to 75% of company’s
procurement (purchases) of materials examples raw material is done by the
company agent or foreign officials of the company based abroad , who usually
charge certain percentages for their work which could lead to additional cost
of production, over-invoicing and over payment. What else can be done, and what
other means can be used to acquire raw materials.
Further
more, when there is a need to render service that is the award of contract we
know that every one is interested in buying, although they call it purchasing
but it has lead to mismanagement and squandering of funds. What are the
procedures, measures technique to ensure that such contract or procurement of
materials, goods and services are carried out appropriately and so on.
To reduce
cost, negotiation is one of the techniques to use, since negotiation is an art
of arriving at a common understanding through bargaining on the essentials of a
contract such as delivery, price, terms and condition of service, payment.
These communication of inter-changing ideas and information as a result of
which procurer and the supplier arrived at a mutually acceptable bargain
enhance the procurement manager with a positive attitude of success, planned his
objectives and strategy before hand.
The
procurement manager would have to collect and study all relevant facts before
meeting the supplier, and then develop an agenda for the meeting to negotiate
with the supplier. Adequate arrangement or preparation would be made in respect
to the negotiation team, the leader with the technique that would be used to
negotiate and when to negotiate will be spelled out.
1.3 Objectives of the Study
The
objectives of these study is to ensure negotiation technique of communication
for bargaining are well understood so that the buying organization and the
supplier will arrive at and agreed price, terms and condition of service,
payment and so on.
To ensure
prudence and judicious utilization of the limited resources available in an
organization, all procurement undertaken must comply with the principle of
openness between the procurer and the supplier, transparency, accountability,
competition among suppliers, cost effectiveness and value for money are
monitored to enhance profitability of organization. Between the procurer and
supplier there should be an understanding which leads to reducing cost involved
in competitive bidding.
To also make
room for meetings in order to attain the desire goal of the organization, and
to ensures that suppliers perform according to the terms of the negotiation.
This study
is specifically designed to:
i. Identify the techniques for
negotiation
ii. Identify the strategies for
effective negotiation
iii. Investigate the current trend of
materials availability in the organization under study
iv. Identify criteria for coordination
and management of supplier, that can
ensure cost reduction in material procurement
v. Identify means of constant flow of
material negotiated to avoid interruption at the point of production.
1.4 Significance of the Study
This
research work would be useful or the beneficiaries of this research work is the
management of the organization under study, Nigerian Bottling Company Coca Cola
Plc to re-address the way and manner by which materials are procured with
regard to cost consciousness
The research
work would also be of benefit to private and public procurement entity when
negotiating on either organization or government contract. Negotiation is a
trick to win supplier’s heart to willingly enter into a business traction and
not using authority or power.
The research
work would add to the findings of the previous and future researchers who
intend to study or have studied similar topic and will also help the other
incoming researcher to build up on their findings.
As a procurement
manager the knowledge acquired would be used at the field to practice the
profession in acquisition of materials to enhance profitability of the
organization. To also expose some development suppliers stand to benefit from
the organization the supply materials.
1.5
Research Questions
i. What are the techniques for
negotiation?
ii. What are the strategies for effective
negotiation and how can negotiation enhance purchasing activity to function
effectively as purchasing in the organization?
iii. What is the rate or extent of materials
availability in the organization under study?
iv. How can coordination and management of
supplier ensure or enhance cost reduction in material procurement, and how does
negotiation team help the business in actualizing it cost reduction objectives.
v. How can constant flows of material
negotiated avoid interruption at the point of production?
1.6 Definition of Terms
Negotiation:
this is the process of planning, receiving, and analysing used by the buyer and
the seller, to reach an acceptable agreement or compromise is an aspect of
business transactions of payment and so on.
Purchasing:
This is used as a process of buying in the market, but in a broader sense, it
is a professional term used when buying goods and services by organisations,
companies, industries, commerce and corporation by a professional buyer.
Procurement:
Is where large quantity of goods and services are exchanged for money with the
aim of reselling them to industrial or ultimate consumer markets. Examples of
these markets are distributors, wholesalers, retailers and associations.
Bargaining:
Is an agreement to buy, sell or exchange made after discussions in order to
arrived at compromise
Specification:
a specification is a details description of item, its dimension, analysis,
performance or other relevant characteristics in sufficient details to ensure
that it will be suitable in all respect for the purpose it is intended or
wanted.
Buyer: a
buyer is a person who buys goods at a particular price without the
technicalities involved being taken into consideration. He is not regarded as a
purchaser in real sense.
Purchaser:
is anyone from the professional to the top executive or any departmental member
with the tag ‘Purchasing Manager’ that select suppliers and also have the
responsibility for implementing the policies of the organization related to the
acquisition of material, services, and production equipments or assets.
Competitive
Bidding: is calling for bids and evaluating the bids to arrive at the best
price.
Tactics: is
expedient means of achieving an objective.
Service: it
could be after sales services, delivery dates, sellers meeting, and providing
information on materials availability.
Confrontation:
is a situation where both sides refuse to bulge, which often result to
surrender or no deal.
Persuasion:
is a situation where one party knows best and will therefore subtly impulse his
will on the other.
Dimension:
this implies not only quoting the sizes of the various parts of articles, but
also indicating the amount of tolerance which may be permitted in the sizes.
Material: Is
an element of production that is used to produce a product.
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