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

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.

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.

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.

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

LIST OF FIGURES

Fig. 2.1 Conceptual framework

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

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.
SupplierBuyer 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 customers 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 customers
inventory Chopra and Meindl (2004).

10

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 todays 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
1

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, stockouts 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
2

the initiatives designed to improve the collaboration of retailers and their suppliers, such as
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 prots through a wide array of operational issues which are difcult 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 nancial 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
(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
4

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).

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,
equipments 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 signicantly 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
5

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).

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, its 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 universitys 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
6

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
Oversight Authority (PPOA) under Third Party Providers on areas of non-compliance, Some
weaknesses were identified in JKUATs 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

II.

Jomo Kenyatta University of Agriculture and Technology.

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

III.

Kenyatta University of Agriculture and Technology.

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?
7

II.

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

III.

University of Agriculture and Technology?

To what extent does Information Technology mitigate stock outs at Jomo Kenyatta
University of Agriculture and Technology?

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.
8

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

10

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 persons 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,
11

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
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).

12

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
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 stakeholders theory is based on the notion that the organizations 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 shareholders 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
13

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
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 stockholders 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

14

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
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

15

Independent Variables

Dependent Variable

Supplier-buyer
relationship management
Communication
Feedback

Vendor
inventory

Stock outs mitigation

managed

Reduced costs

Delivery

Optimal
Levels

Accessibility

Inventory

Information Technology
Inventory control Systems
EPR Systems

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
16

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

obtaining regular feedback, and implementing corrective action plans to improve performance
(Fitzsimons 2000).
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

17

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 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

18

rather than stable .In parallel to exchange interaction, mutual adaptation of some kind occurs to
enable coordination and creates additional joint value.

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 1980s 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.
19

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.
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.
20

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 (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.
21

Mishra and Raghu Nathan (2004), Yao, Dong, and Dresner (2007a), Pasandideh, Niaki, and
RoozbehNia (2009), and Zavanella and Zanoni (2009), all identified that a suppliers 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
(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
22

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.

Information Technology
The practical application of knowledge especially in a particular area or a capability given by the
practical application of knowledge (Thomas Hughess 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).

23

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 Hughess 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
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).

24

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
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, exibility, 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).
25

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.

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 buyers 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 companys 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
26

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
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).

27

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.
(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 suppliers 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.
28

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,
exibility, integration and accessibility are examples of qualities valued by users.
(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 dont mention the ways possible to limite stock outs.

29

As a response to Mishra and Raghu Nathans (2004) work, Kim (2008) neglected that a retailer
takes advantage of brand competition under a VMI system by increasing its profits. Kims (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 suppliers 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.
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
30

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
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

31

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.

32

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
population.

These

are

demographics

like

(Mugenda&Mugenda, 2003).
33

age,

gender,

work

experience

etc.

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 incharge 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
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
34

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
decision making hence preparing crude data into interpretable designs. The study will adopt both
35

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.

36

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40

41

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,

42

Mokama Joshua Maina.

TEL:0706701969

Thank you for your assistance!

43

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

( )

Bachelors Degree

( )

Masters Degree

( )

44

3. Kindly describe the nature of your job

Chief Procurement Officer
Principle Procurement Officer
Assistant Procurement Officer
Senior Procurement Clerk
Procurement/Stores Clerk

(
(
(
(
(

)
)
)
)
)

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 stockouts in the University. (Tick where applicable).
SA
1

There is adequate communications with the suppliers which

help reduce cost.

Proper communication enhances optimal inventory levels.

Feedback is given thus ensures mitigation of cost.

Feedback enhances optimal inventory levels.

SD

6. What else contributes to stock outs in the university apart from buyer supplier relationship?

45

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
_________________________________________

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
1

Proper delivery enhances reduced cost.

Timely delivery ensures optimal inventory levels.

Accessibility of stock reduces cost.

Accessibility ensures optimal inventory levels.

SD

8. What else contributes to stock outs in the university apart from vendor managed inventory?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
46

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
_____________________________
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
1

There is adequate inventory control systems which help

reduce cost.
Proper inventory control systems ensure optimal inventory

levels.
Enterprise resource planning systems are used hence reduce

cost.
Enterprise resource planning systems enhance optimal

SD

inventory levels.

10. What else contributes to stock outs in the university apart from information technology?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

47

___________________________________________________________________________
__________________________________
11. How do you rate the implementation of e-procurement in your function? (Tick appropriately)
Satisfactory

Needs minor

Needs

Needs

Unsatisfactory

Unknown/

improvement

moderate

significant

cannot be

improvement

improvement

measured

SECTION E: STOCK OUT MITIGATION

12. The role of role of procurement best practices in mitigating stock outs in state owned
institutions. (Tick where applicable).
SA
1

Supplier buyer relationship management has a role in the

reduction of cost.
Vendor managed inventory has a role in cost reduction and

optimizing inventory levels

Information technology enhances optimal inventory level.

SD

13. What else contributes to stock outs mitigation in the university apart from Supplier buyer
relationship, Vendor managed inventory and information technology?

48

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________

*THANK YOU FOR YOUR TIME*

APPENDIX III

WORK PLAN

Activity

18th January-2nd

3rdFebruary-

12thFebruary -3rd

4th March-22nd

February 2016

11thFebruary 2016

March 2016

March 2016

Formulating The Title,

Background The Study
And Statement Of The
Problem
Objectives And
Research Question
Limitation Scope

49

Chapter Two

Chapter Three

APPENDIX IV

RESEARCH BUDGET

ACTIVITY

QUANTITY

UNIT COST

TOTAL COST

(KSHS)

(KSHS)

STATIONERY
Flash Disk

3 Pcs

2,000

6,000

Typesetting/Printing

58Pages

174

Pens
Photocopying

5 Pcs
4Copies

10
5

50
1,160

Literature review

5 Times

130

650

Spring file

3 Pcs

100

300

Proposal

SUBTOTAL

8,334

DATA COLLECTION
Questionnaires

6 Pages

40
50

240

printing
Photocopying

58 Pages

290

Travel cost

3 Times

400

1,200

Data analysis

1,500

Miscellaneous

5,000

Grand Total

16,564

51