EFFECTS OF PROCUREMENT COSTS ON OVERALL PROFITABILITY OF RETAIL OUTLETS (A CASE STUDY OF UCHUMI SUPERMARKETS KARATINA BRANCH)

BY PAUL MWAURA KAMAU

A RESEARCH PROJECT SUBMITTED TO KENYA INSTITUTE OF MANAGEMENT IN PARTIAL FULFILL MENT FOR THE REQUIREMENTS OF THE REQUIREMENTS OF THE AWARD OF DIPLOMA IN PURCHAS ING AND SUPPLIES MANAGEMENT

OCTOBER 2012 DECLARATION Declaration by the Student I declare that this research project is my original work and has not been presen ted for examination in any institution for the award of any Diploma certificate whatsoever. Name: PAUL MWAURA KAMAU Signature: Date NRB/DPSM/39554

Declaration by the Supervisor This research project has been presented for examination with my approval as the Supervisor.

Name: MR. MBURU Signature: Date: Lecturer supervising

This research project has been approved and accepted on behalf of Kenya Institut e of Management by Nyeri Branch Executive.

Name: Eunice Muriithi SignatureDate

DEDICATION This research project is dedicated to my parents, wife, and friends for their mo ral support that they have given me without which it would not have been possibl e for me to complete it.

ACKNOWLEDGEMENTS I would sincerely wish to acknowledge the support of my supervisor Mr. Mburu fo r being there and offering advice from time to time on how best to improve my re search project. I say thank you very much. I wish to thank the Kenya Institute of Management for offering me the opportunity to pursue the Diploma Course. I also acknowledge the Central Provincial Library for their very resourceful boo ks on the topic under study. I wish to acknowledge the Team Leader of Uchumi Sup ermarkets Karatina branch who supported me as well for his wide experience in re tail business. To all of you thank you very much.

TABLE OF CONTENTS DECLARATION II DEDICATION III ACKNOWLEDGEMENT ..IV TABLE OF CONTENTV LIST OF TABLES .VII LIST OF FIGURES...VIII LIST OF ABBREVIATIONS AND ACRONYMS.....................IX ABSTRACT .....X CHAPTER ONE INTRODUCTION OF THE STUDY 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Background to the Study .. 1 Statement of the Problem ..2 Objectives of the Study 3 Research Questions .. 4 Significance of the Study ..... 4 Limitations of the Study ... 5 Scope of the Study......5

CHAPTER TWO LITERATURE REVIEW 2.0 Introduction .. 5 2.1 Past studies... .5 2.2 Ordering Cost ... 5 2.3 Holding Costs ... 5 2.4 Disposal Costs .... 9 2.5. Conclusion ...... 10 2.6 Conceptual Framework .. 10

CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY 3.0 Introduction .... 12 3.1 Research Design ..... 12 3.2 Target Population ... 12 3.3 Sample Size and Sampling Procedure .....12 3.4 Data Collection Procedure ...........12 3.5 Data Collection Instruments and Procedure.....................13

3.6.

Data Analysis ..........13

CHAPTER FOUR DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF FINDINGS 4.0 Introduction ... 14 4.1 Data Analysis ..... 14 CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 5.1 Summary of Major Findings .. 25 5.2 Conclusion .. 25 5.3 Recommendations .. 26 5.4 Areas for Further Research ..... 26 REFERENCES.... . 27 APPENDICES Appendix I: TIME FRAME Appendix II: RESEARCH BUDGET Appendix III: LETTER OF INTRODUCTION Appendix IV: QUESTIONNAIRE TO ADMINISTRATION STAFF Appendix V: QUESTIONNAIRE TO PROCUREMENT AND ITS STAFF

LIST OF TABLES Table 3.1 Table 3.2 Table 4.2 Table 4.3 Table 4.4 Table 4.5

Target Population .. ..12 Sample Size ... ..13 Response Rate ... ..14 Age of Respondents .. ..15 Distribution of Education of the Respondents.15 Procurement Costs 16

LIST OF FIGURES Figure 2.1 Conceptual Framework10

Figure Figure .24 Figure Figure Figure Figure Figure

4.11 4.12 4.10 4.9 4.8 4.7 4.6

Effects of Purchase Price on organization profitability..22 Extent of Effects of handling costs on Organization profitability. Extent of Stockouts on Organization profitability21 Extent of Effects Stock costs on Organization profitability..21 Effects of Storage costs on Organization profitability20 Extent of effects of re-ordering costs19 Effects of holding costs on organization profitability18

LIST OF ABBREVIATIONS AND ACRONYMS EOQ Economic Order Quantity JIT Just In Time MRP Material Resource Planning

ABSTRACT In order for a firm, institution or any business to run profitably, it is import ant for it to procure goods and services using the appropriate methods. As such, a prudent purchasing and maintenance of optimum stock levels will have a bearin g on the profits that the firm realizes. In order for this to happen, firms wil l need to look at the effects of ordering costs, holding costs and disposal cost s of goods to see how they affect their profits. Ones these costs are analyzed the firm will be able to adopt the best suited purchasing method, and the level of stock that will give the firm optimum profits. Chapter one deals with the bac kground of the study and the statement of the problem. It also deals with the o bjectives of the study which was to find out to what extent the ordering costs, holding costs and disposal costs of goods at Uchumi super markets affect its pro fits. In chapter two, detailed literature review was done on theoretical literat ure. It mainly highlighted on the need to keep the optimum stock levels to ensur e that profits are realized as keeping large volume of stock or very little sock s could lead to losses. In chapter three, the research methodology used is detai led. It covers research design, target population, sample size and sampling pro cedure used. It also highlights the methods of data collection which will be th e use of written questionnaires to the relevant respondents. Review of necessar y records held at the supermarkets was also used. Data analysis was done using tables, pie charts and bar graphs. The significance of the study was to look a t the methods of procurement, holding and disposal of goods at Uchumi supermark et so that the Management at the super market can know if it is prudent to ensu re long term profits are realized at the super market. The researcher found t hat Uchumi super market income was amount Kshs. 30m per month. That ordering cos ts per month was about Kshs. 18,000 per month which is 6% of the total income pe r month. The super market placed about 3 orders per month for drugs and other m edical materials and about three orders per week for food items. The researcher further found that the super market had put in place were houses and did not req uire to rent. That holding costs were about Kshs. 1.7m per month which is 14.66 % of the total income at the super market. These costs were attributed to high cost of electricity since some drugs require being stored at low temperatures me aning use of refrigerators throughout. The researcher also found that that disp osal costs at the super market were about 6,000 per month which was 2% of the to tal income. This was attributed some drug shelf life expiring due to lack of us e. CHAPTER ONE INTRODUCTION OF THE STUDY 1.1 Background to the Study Over a period of time organizations have realized the critical role that purchas es department play in realization of their objectives. Keeping inventories cont ribute to effective operation of a firm and helps to make profit. Without any fo rm of stock, no firm can be in business. However, with stock, come various cost s which a firm needs to analyze to ensure that such costs do not impact negative ly on its profits. Ordering costs are costs that are incurred when a firm is or dering for goods. It includes costs such as preparation of bids; selection of a suitable supplier, clerical costs, costs incurred when following up an order an d even the period taken between the times an order is placed and the time such a n order is delivered. It therefore means that if an organization decides to have small but frequent orders, such costs will increase and will impact negatively on its profits.

Holding costs are costs that are incurred by keeping stocks. Such costs includ e tied up capital in stock, rent of warehouses, lighting and refrigeration, pilf erage and theft, deterioration and obsolescence etc. If a firm kept large volum es of inventory then it means more of these costs will occur and will also affec t the profit margins of such a firm. The other cost involved in having stock is the cost of disposal of obsolete and idle stock. Such costs mainly include cos ts of burning, selling, and burling such stocks. All these costs if too high wi ll affect the profitability of a firm. On the other hand, if a firm keeps very small amount of stock, it risks having s tock outs. Stock out occurs when a firm finds itself without materials to run i ts activities. This would mean that customers would not get services resulting in loss of customer goodwill, loss of man hour and idle machine time. This situ ation will have a long term effect on the profits of a firm as customers will go to other firms offering similar services. According to Saleemi (2007), the primary objective of an inventory control is to minimize idle time caused by shortage of inventory and non-availability of inve ntories as per requirement and to keep down capital investment in inventories, i nventory carrying cost and obsolescence losses. Achieving of these objectives w ill result in more return on capital which is materially the prime objective of an organization whether commercial or industrial. Therefore striking a balance is important hence the study focused on the three costs stated above and how the y affect the profits of Uchumi supermarkets. Company Profile Uchumi supermarkets ltd was established in 1975 and commenced business in 1976 w ith the shareholders entering a management contract with Standa S. P.A of Italy. City square, Westland branches were among the first to be opened. Main objectiv e was to create retail outlets for locally manufactured goods and the sale of es sential retail products at competitive prices. It was then the largest retailer in the industry. In 1992 Uchumi went public with 60 million shares floated at th e Nairobi Stock Exchange. First branch outside Nairobi was Nakuru East. In 1997, Uchumi ventured into hyper market, first one on Ngong road, then Mombas a road and finally langata road. In 2002, Uchumi crossed the Kenya border and se t up a store in Kampala, Uganda. The store is located in Kampalas Nakasero suburb and has been an instant hit amongst the residents of Uganda. In 2006, Uchumis Board of Directors declares the company insolvent. The company i s put in receivership by the secured lenders, to be later revived on July 2006. 2008 the company returns to profitability and its still proving to be one of the largest commercial retailing companies in the country employing over 2500 peopl e operating 15 branches. 1.2 Statement of the Problem It is evident that the methods that organizations use all over the world in proc urement of goods and services have a direct impact on their profitability. Orga nizations need to critically look at their methods of procurement so that they c an come up with the most effective procurement methods that will help them achie ve optimum stock levels. Such methods will have an effect on how frequent an or ganization make purchases, and the level of stock that it keeps. Obviously, so many small orders will result in increased ordering costs, risk of stock out and increased lead time while bulk buying will result in increased holding costs an d tied up capital that can be utilized elsewhere. Disposal of obsolete and damag ed stock will also come with costs. On the other hand, frequent small orders av oid the risk of pilferage, obsolescence and frees tied up capital in stock. Bul k buying will ensure that stock out does not occur besides enjoying discounts as sociated will bulk buying. Therefore this means that if ordering costs are too

high, if holding costs are too high and if the disposal costs are also too high, and then all these costs put together will affect the profits of any organizati on. From observation, it was observed that Uchumi supermarkets were incurring h igh costs in ordering of goods, storage of goods and disposal of goods. This st udy therefore looked at the effect of these costs on the profitability of Uchumi supermarkets. 1.3 Objectives of the Study The objectives of the study were: i. To find out to what extent ordering costs of stocks affect the profits o f Uchumi supermarkets. ii. To establish how holding costs affect the profits of Uchumi Supermarke t iii. To find out the costs associated with disposing of obsolete material aff ect the profit Uchumi Supermarkets. 1.4 Research Questions The study was guided by the following research questions:i. To what extent do the ordering costs of stocks affect profits at Uchumi Supermarkets? ii. To what extent does holding costs of inventory affect profits at Uchumi Supermarkets? iii. To what extent does disposal cost of obsolete stocks affect profits at U chumi supermarkets? 1.5 Significance of the Study The study may assist the management of the Uchumi supermarkets to understand the se costs better so that they are kept at optimum level. This could help the man agement of the super market to keep the procurement costs at a level that will e nsure profits are realized both in short and long run. It may also help the mana gement of Uchumi supermarket to keep the optimum stocks levels that will ensure maximum profits hence its smooth running. This could help the management of the super market to make deliberate measures t o order and keep stocks at a level that will ensure that the overall costs assoc iated with acquisition of goods is minimum. The findings of the study may aid t he management of Uchumi super market to opt for the suitable method of procureme nt. 1.6 Limitations of the Study The researcher dealt with a small sample compared to the whole population. There was lack of interest in some of the respondents who bent the questions without putting weight on the questions asked. Accessibility of information was also a c hallenge since some of the staff felt threatened in giving the information which to them seemed confidential. I however assured them that the study was purely f or academic purpose. 1.7 Scope of the Study The study was carried out in Uchumi Supermarket Karatina branch.A saturated popu lation of 50 respondents was contacted to obtain data for analysis. These were t he Administration staff, Accounts, Procurement and Store staff. The study took s ix months from March 2012 to August 2012.

CHAPTER TWO LITERATURE REVIEW 2.0 Introduction This chapter represents the review of literature on various methods of procureme nt of goods and their resultant costs with references from different authors who have evaluated the same. 2.1 Past Studies 2.2 Ordering Costs According to Saleemi (2007), ordering costs also known as the procurement cost o r costs of acquisition are costs of obtaining quotations, preparation of orders and its placement, follow-up action, receiving and inspection, payment of bills etc. Dobbler (1997) contends that ordering costs are costs that occur when placing or ders; clerical costs which occur when preparing bids, costs involved in expediti ng orders, inspection of goods delivered and lead time uncertainty. According to Baily (2005), ordering costs entails costs of incurred preparing or ders and evaluating suppliers, stationery involved and also labour. These costs therefore will increase the overall cost of goods received if a firm places fre quent orders. 2.3 Holding Costs According to Lysons and Farrington (2006), the reasons for keeping inventory not withstanding such developments as Just in Time (JIT), Computer based Production Methods and the aims of lean production, a number of reasons may be deduced for all organizations keeping some inventory. These include wanting to reduce the r isk of risk of supplier failure or uncertainty safety and buffer stocks are held to provide some protection against such contingencies as strikes, transport bre akdowns due to floods or snow, crop failure, wars and similar factors, protect a gainst lead-time uncertainties, such as suppliers replenishment and lead time are not known with certainty. In such cases, an investment in safety stocks is nec essary if customer service is to be maintained at acceptable levels. Meet unexpected demand or demands for customization of products as with agile pr oduction, and smooth, seasonal or cyclical demand. Take advantage of lots or pu rchase quantities in excess of what is required for immediate consumption to tak e advantage of price and quantity discounts. Hedge against anticipated shortage and price increases, especially in times of high inflation or as a deliberate po licy of speculation, ensure rapid replenishment of items in constant demand, suc h as maintenance of supplies and office stationery. These factors explain why t here is need to hold inventory at Uchumi super market despite the costs associat ed with it. Lysons (2006) further says that the aims of inventory management are to provide both internal and external customers with the required service levels in terms o f quantity and order rate fill., to ascertain present and future requirements fo r all types of inventory to avoid overstocking while avoiding bottlenecks in produ ction to keep costs to a minimum by variety reduction, economical lot sizes and analysis of costs incurred in obtaining and carrying inventories and provide ups tream and downstream inventory visibility in the supply chain. Economic Order Quantity (EOQ) is the Optional Ordering Quantity for an item of s

tock that minimizes costs. JIT is a philosophy of manufacturing based on planned elimination of all waste and continuous improvement of productivity. It encomp asses the successful execution of all manufacturing activities required to produ ce a final product from design engineering to delivery and including all stages of conversion from raw materials onward. The primary elements include having on ly the required inventory when needed; to reduce quality to zero defects; to red uce lead time by reducing setup times, queue lengths and lot sizes to incrementa ry revise the operations themselves; and to accomplish these things at minimum c ost. In short, JIT production is making what the customers need when it is need ed and in the quantity needed using the minimum resources of people, materials a nd machinery. Therefore, this method can be used in an organization to signific antly reduce costs associated with holding inventory. According to Dobler (1997) inventories help balance the firms supply with the ma rket forces of demand and supply thus well planned and effectively controlled in ventories can contribute to effective operation of a firm and to a firms profits. The basic challenge is to determine the inventory level that works most effect ively with the operating system or systems existing within the organization and that realistically is the most feasible in dealing with given suppliers and mate rial markets. If the inventory issue is viewed through the eyes of various oper ating departmental managers, an interesting situation occurs. The marketing man ager tends to favour larger inventory stocks to assure rapid assembly and delive ry of a wide range of finished product model. This capacity obviously can be us ed as an effective sales tool. The production manager is inclined to go along w ith the marketing manager, but for quite a different reason. He or she argues f or higher inventory levels because they allow more flexibility in daily planning ; unforeseen problems in producing a given component, can be mitigated if produc tive efforts can easily be transferred to another component for which the requir ed raw materials are on hand. Likewise, a reasonable inventory of the required items ensures against production shutdowns due to delivery problems, suppliers p roblems and stock outs thus avoiding the incurrence of high production downtime costs. These arguments reveal the flip side of the arguments favoring a JIT sys tem. The financial officers of the firm, on the other hand argue convincingly in favo ur of very law inventory levels. They point out that the companys need for funds usually exceeds availability and that reduced inventories free sorely needed wo rking capital for other uses. They note also that total indirect inventory carr ying costs drop proportionately with the inventory level. The purchasing and su pply manager is the final participant; he/she is concerned with the size and fre quency of individual orders. Purchasing often favour a policy of placing fewer and larger orders. Unless contractual arrangement with routine delivery-release systems can be worked out with suppliers, fewer and larger orders usually increa se the total inventory level. At the same time however, they tend to minimize o perating problems with supplies, and in some cases, they may reduce unit materia l prices. Large volume buying also permits more efficient utilization of buying personnel and more effective advance planning for major activities such as market studies, supplier investigations and so on. Thus, it is clear that each departmental ex ecutive supports his or her position with legitimate justification. He cites the costs associated with inventory as; carrying costs, opportunity costs of invest ed funds, insurance, property taxes, storage costs, obsolescence and deteriorati on. The study hence will aim at looking at how ordering costs of inventory, hol ding costs of materials and disposal of obsolete stores affect profits at Uchumi super market. According to Baily (2005) every organization holds some things in stock. Stock c an be a nuisance, a necessity or a convenience. Retailers and whole sellers see stock as the central feature of their businesses. What they sell is what they

buy, and they aim to sell from ve yet to arrive. Stock is an d often appears on the balance p a lot of money. He contends ns:

stock rather than from future deliveries which ha important element in operational effectiveness an sheet as the biggest of current assets, locking u that inventories are held for the following reaso

The convenience of having things available as and when required without making s pecial arrangements. Cost reduction through purchase or production of optimum qu antities; protection against the effects of forecast errors, inaccurate records, Mistakes in planning ,Provision for fluctuation in sales or production ,Carryin g stock is expensive and it is accepted that many organizations carry too much s tock. A continuing drive to reduce stock without reducing services is needed to combat the natural tendency of stock to increase. Constructive approaches to stock reduction include: Arranging for things to be made and delivered just in time instead of stock pili ng in case a need arises. Devising ways to reduce ordering costs, set up costs, and lead times so that optimum quantities are achieved. Making forecasts more ac curate, ensuring that records are right and better planning .Essentially, the ro le of stock controller is to achieve a balance. Too little stock and the organi zation will suffer from delayed production, poor customer service or lack of abi lity to respond to new requirements; too much stock and the funds of the organiz ation will be tied up, thus impairing opportunities to invest or spend elsewhere . A well known rule of thumb is that the cost of carrying stocks is 25 per cent p er annum. While this is merely a guide, and the cost for a particular organizat ion may well be somewhat higher or indeed lower, it is clearly important to be e xtremely cautious about making an investment with this very high negative return . Influential thinkers in supply chain management have suggested that inventory is waste and should be avoided wherever possible. The reasons behind this view are that stocks of materials can adversely impact any organization because they ; tie up capital, impair cash flow, impair flexibility, need to be stored at a c ost, need to be handled at a cost, need to be managed at a cost, are at risk of loss through fire, theft and many other possible misfortunes and usually depreci ate in value. There are many systems employed for the purpose of determining when and in what quantities to replenish stocks. These systems are either based on some form of a ction level approach or periodic review system. According to Harms et al (1992), after items have been accepted by the procureme nt officer, they will either be sent to the warehouse for storage, to the constr uction site, or to the production floor for temporally storage or immediate use. Proper storage of materials requires planning and coordination. The procureme nt officer must keep a constant inventory in the warehouse or on-site. This wil l ensure that there will be enough materials to keep production going even if th ere is an interruption of the supply. This method of warehousing materials requ ires a separate storage space where items will be safe from damage yet easily re moved. Proper records of inventory are required at Uchumi super market to ensure that s tocks are ordered when it is required and that operations are not interrupted an d this study will aim at establishing the effects of ordering costs of inventory , holding costs of materials and disposal costs of obsolete goods on profits at Uchumi super market. One problem with warehousing materials is that they can deteriorate while being stored e.g. corroding of metals, breakages and employees theft. The cost of rep lacing damaged, lost or stolen parts is reflected in the price of the final prod uct. Storage area costs must also be included. Therefore, warehousing material s on a temporally or long term basis usually increases the cost of a product. H ence they need to keep only the necessary items of stock to avoid such losses.

2.4. Disposal Costs According to Lyson (2006), Disposal costs are cost incurred when disposing off s urplus and obsolete stores. These costs involve placing tenders to dispose of s uch items, manpower and personnel involved in such activities and the costs of s uch goods. Saleemi (2007) argues that disposal costs are cost incurred when dispensing off obsolete items which are items which have gone out of date because of new invent ions, discoveries, changes in product line, process, materials etc. They may al so involve surplus stores which denotes the excess of materials and equipment in the stock either not required by units concerned or likely to last longer than reasonable period without being put to use. 2.5 Conclusion and Gaps to be filled The procurement method which an organization uses has a bearing on the overall p rofitability due to their resultants costs. From the quoted authors, it is true that costs associated with the ordering of g oods will affect negatively profits of a firm. The costs associated with holdin g costs as well as the cost associated with disposal of damaged and obsolete mat erials affect negatively the profits of a firm. These costs also have a bearing on the final price of services. Figure 2.1 Conceptual Framework 2.6 Conceptual Framework Independent t

Dependen

Source (Author 2012) The dependent variable is the overall cost involved in procurement and how it af fects the profits and is affected by independent variables which are, the orderi ng costs, holding costs and disposal costs. Independent variables are the ordering costs, which are the costs that are incur red when placing orders. These costs affect the profits which is the dependent variable. Holding costs are also an independent variable and are costs that are incurred when keeping inventory once orders are received. They include warehou sing costs, heating and lighting costs, tied up capital and breakage, spoilage a nd theft. These costs also affect the profits which is the dependent variable. Disposal costs are an independent variable which is incurred when disposing off surplus, obsolete and damaged stocks. They also affect profits negatively.

CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY 3.1 Introduction This chapter presents the design that was used to meet the objectives of the stu dy and include research design, target population, sample and sampling procedure s, data collection procedure and data analysis techniques. 3.2 Research Design The research design that was used in this study is case study. The the study was to look at costs associated with procurement of good affect profits of Uchumi super market. The researcher chose this udy because it is ideal when one is dealing with only one case. In e researcher dealt with Uchumi super market only. 3.3 Target Population The target population consisted of the following: Table 3.1 Target Population Section Number of Staff Administration 8 Accounts and IT 6 Procurement 4 stores 12 Shop attendants 20 Total 50 3.4 Sample Size and Sampling Techniques The researcher used random sampling method. A sample of sixteen employees was se lected. The researcher looked out for the respondents who had the required info rmation. The researcher targeted the Administration Staff, the Accounts Staff, Stores and the Procurement Staff at the Super market. The researcher also used random sampling in order to target any other staff that had valuable informatio n. Table 3.2 Sample Size Section Number of Staff Administration 5 Accounts and IT 4 Procurement 3 Stores 4 Total 16 3.5 Data Collection Instruments and Procedures Secondary data was collected through review of relevant records held at the sup er market administration offices. Primary data was collected through interviews . The researcher also used questionnaire with an open and closed ended structure intention of and how they method of st this case th

to collect data. These methods are suitable when carrying out a case study. Q uestionnaires are suitable because they contain questions that the researcher wa nted answered, while interviews served to clarify answers that were not clear. 3.5.1 Validity and Reliability Validity of data collection instruments is the degree to which results obtained from analysis of the data actually represents the phenomenon under study. Relia bility of data collection tools is the consistency or dependability of such tool s to give similar results over a certain period of time. The researcher ensured validity and reliability of the data collection tools by discussing them with h is supervisor, conducting a pilot study in a nearby dispensary and by discussing them with his peers. 3.6 Data Analysis The data was analyzed using descriptive statistics. The feedback obtained from the respondents was summarized, tabulated and presented using tables, pie charts and bars charts. Finally analysis was done using both quantitative and qualita tive techniques.

CHAPTER FOUR DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF FINDINGS 4.0 Introduction This chapter outlines a summary of the data captured by the researcher and uses statistical techniques to present the findings. The data was analyzed quantitat ively using tables, bar graphs and pie charts. Also other findings are presente d qualitatively using paragraphs 4.1 Data Analysis Data analysis was done for the three objectives of the study. Table 4.2 Response Rate Category Sample Size Response Rate Percentage Administration Staff 5/16 5 100% Accounts and IT Staff 4/16 3 75% Procurement Staff 3/16 3 100% Store 4/16 4 100% Total 16 15 100% From the above table 4.2, all members of Administration Staff responded to the q uestionnaires. In the accounts and IT staff section, three out of the four staf f members sampled responded to the questionnaire and finally, all the three proc urement staff responded to the questionnaire. This was a 92 % response. Table 4.3 Age of Respondents Category 18-30 31-40 Administration Staff 4 Accounts and IT Staff 2 Procurement staff 0 Store staff 2 1 Total 4 7 4 Percentage 26.6% 46.6% 41 and above 2 3 1 0 3 0 1 26.6%

From the above table 4.3, respondents aged between 18 30 years were 26.6% and th ose aged between 31-40 years were 46.6%. The respondents aged 41 years and above were 26.6% and comprised mainly the Administration Staff at the Super market.

Table 4.4 Distribution of Education of the Respondents Education Level Frequency Percentage Certificate 2 18.18% Diploma 5 45.45% Bachelors Degree 4 36.36% Total 11 100%

From the above table 4.4, above five out of 11 respondents had diploma level of education which is 45.45 % of the respondents. The number of respondents with C ertificate level of education was two, which is 18.18 % and finally the number o f respondents with a Bachelors degree was four at 36.36 %. The first objective of the study was to find out to what extent ordering costs o f stock (fuel, alcoholic drinks, boarding materials, medical materials and food stuffs) affect profits at Uchumi super market. The second objective was to establish how holding costs of these materials affec t the profits of Uchumi super market and finally the third objective was to find out the costs associated with disposing off obsolete medical materials and food stuffs and how they affect profits of Uchumi super market. Table 4.5 Procurement Costs Types of Costs Amount in Kshs t Costs Ordering Costs 18,000 300,000 Holding Costs 44,000 300,000 Disposal Costs 6,000 300,000 Total 68,000 22.66% Income per Month 6% 14.66% 2% Percentage of Procuremen

According to responses received from the respondents, there was a general agreem ent among the administration staff, Accounts and IT Staff and Procurement staff that the Monthly income at the super market is about Kshs.300,000 per month. Th e respondents put ordering costs at the super market at about Kshs. 18,000 per m onth which comprise 6% of the total income at the super market. The respondents put holding costs at the super market at about Kshs. 44,000 per month which comprise 6% of the total income at the super market and finally disp osal costs were put at 6,000 per month. The total of procurement costs at Uchumi super market was Kshs. 68,000 comprisin g of 22.66% of the total income at the super market per month. No costs were in curred during inspection of goods received from suppliers; however a lot of time is spent to inspect goods. The time taken from the time an order is placed and the time it is delivered (le ad time) ranged between four days to six days. 4.2.3 Effects of holding costs on organization profitability The table 4.6 below indicates that 50% of the respondents asserted that holding costs highly affects, 38% felt that it only affects moderately while 12% felt th at holding costs does not affect the profitability of the organization.

Table 4.6 Effects of holding costs on organization profitability RATING FREQUENCY Highly Affecting Moderately Affecting Not Affecting 3 TOTAL 24 100% PERCENTAGE 12 50% 9 38% 12%

Fig 4.6 Effects of holding costs on organization profitability 4.2.4 Extent of effects of holding cost on organization profitability The research sought to relate the extent of effect of holding cost in relation t o organization profitability. The table 4.7 below indicates that 46% of the resp ondents asserted that holding costs affects organization profitability on to a great extent, 44% felt that it only affects moderately while 10% felt that hold ing costs affects organization profitability to a small extent.

Table 4.7 Extent of re- ordering cost on organization profitability RATING FREQUENCY Great extent 10 Moderately 12 Small extent 2 TOTAL 24 100% PERCENTAGE 46% 44% 10%

Fig 4.7 Extent of effects of re- ordering costs 4.2.5 Effects of re- ordering cost on organization profitability From the research findings, it was established that 69% respondents asserted tha t re- ordering costs affect the organization profitability very greatly, 27% fel t that it greatly only affects moderately while 4% felt that re- ordering cost h as no effect on organization profitability. These findings are shown in the tabl e 4.8 below. Table 4.8 Effects of storage costs on organization profitability RATING FREQUENCY PERCENTAGE Highly Affecting 17 69% Moderately Affecting 6 27% Not Affecting 1 4% TOTAL 24 100% This information is as presented in the figure below

Fig 4.8 Effects of storage costs on organization profitability 4.2.6 Extent of effects storage costs on organization profitability The research sought to relate the extent of effect of storage cost in relation t o organization profitability. The table 4.9 below indicates that 60% of the resp ondents asserted that storage cost affects organization profitability to a great extent, 30% felt that it only affects moderately while 10% felt that storage co sts affects organization profitability to a small extent. Table 4.9 Extent of effects of stock out costs on organization profitability RATING FREQUENCY Great extent 14 Moderately 7 PERCENTAGE 60% 30%

Small extent TOTAL 24

3 100%

10%

Fig 4.9 Extent of Effects of stock costs on organization profitability 4.2.7 Effects of stock out costs on organization profitability The table4.10 below indicates that 65% of the respondents asserted that stock ou t costs highly affects organization profitability, 31% felt that it only affects moderately while 4% felt that stock out costs does not affect organization prof itability. Table 4.10 Effects stock out costs on organization profitability RATING FREQUENCY PERCENTAGE Highly Affecting 16 65% Moderately Affecting 7 31% Not Affecting 1 4% TOTAL 24 100%

Fig. 4.10 Effects of stock out costs on organization profitability The research sought to relate the extent of effect of stock out cost in relation to organization profitability. The table 4.11 below indicates that 54% of the r espondents asserted that stock out costs affects organization profitability to a great extent, 36% felt that it only affects moderately while 10% felt that stoc k out costs affects organization profitability to a small extent. Table 4.11 Extent of effects of handling costs on organization profitability RATING FREQUENCY Great extent 13 Moderately 8 Small extent 3 TOTAL 24 100% PERCENTAGE 54% 36% 10%

Fig 4.11 Extent of effects of handling costs on organization profitability The table 4.12 below indicates that 69% of the respondents asserted that handlin g costs highly affect the organization profitability, 27% felt that it only affe cts moderately while 4% felt that handling costs does not affect organization pr ofitability.

Table 4.12 Effects of purchase price on organization profitability RATING FREQUENCY PERCENTAGE Highly Affecting 17 69% Moderately Affecting 6 27% Not Affecting 1 4% TOTAL 24 100% The figure 4.12 below presents this information;

Fig. 4.12 Effects of purchase price on organization profitability The research sought to relate the extent of effect of purchase price in relation to organization profitability. The table 4.13 below indicates that 50% of the r espondents asserted that purchase price affects organization profitability to a great extent, 45% felt that it only affects moderately while 5% felt that purcha se price affects organization profitability to a small extent. Table 4.13 Extent of effects of insurance cost on organization profitability RATING FREQUENCY PERCENTAGE Great extent 13 50% Moderately 10 45% Small extent 1 5% TOTAL 24 100% Table 4.13 Extent of effects of insurance cost on organization profitability

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 5.1 Summary of Major Findings The above data analysis shows the various costs incurred in the procurement of g oods at Uchumi supermarkets. The ordering costs at 6% and these costs were cite d at clerical work involved in preparation of items to be purchased. This mostl y consisted of paper work, computer printouts. Much of these costs were as a res ult of calling the suppliers. It was also noted that the super market preferred frequent small orders. There were approximately three orders per month for medi cal materials and three orders per week for food items. These costs relate to t he first objective, which was to find out the effect of ordering costs on profit s at Uchumi super market Karatina. Holding costs comprised of 14.66 % and was the biggest cost of the procurement c osts. This was attributed to mostly storage of drinks and other medical materia ls which require low temperatures which means use of fridges which consumes elec tricity throughout the day. It was noted that electricity bills were at an all time high during the period of study. To mitigate against frequent power black outs usually experienced in the area, t he supermarket invested in a standby generator which also consumed diesel fuel. The super market has invested in construction of its own stores and therefore th

ere were not rental costs. These costs relate to the second objective which was to find out the effects of holding costs on profits at Uchumi supermarket. Finally, the disposal costs were little at only 2%. This was attributed to the fact that the super market preferred frequent small orders hence few items of st ock experienced damages and obsolesce. These costs were as a result of drugs th at become expired due to prolonged stay at the store. These costs relate to the third objective which was to find out the effects of ordering costs on profits a t Uchumi super market Karatina. 5.2 Conclusion From the above findings, it is clear that ordering costs were high at the superm arket and were affecting its profits negatively. Holding costs at the super market though high and were affecting profits negativ ely were reasonable given the high cost of electricity during the period of stud y. The costs associated with disposal of damaged and obsolete stores were negligibl e and cannot be said to affect negatively the profits at the super market. 5.3. Recommendations The researcher recommends that Uchumi super market Management adapts Economic Or der Quantity method of procurement which is the quantity that minimizes costs of procurement. This is possible since the supermarket has implemented the Enterpr ise Resource Planning System. The super market should also take advantage of available warehouses to make big orders which will reduce ordering costs and utilize the storage space. The super market should also avoid keeping in large volumes of drugs that are not commonl y used such of those used to cure rabbis and food stuffs only used by specific t ourists. 5.4. Suggestion for Further Research There is need for further research on Economic Order quantity method of procurem ent to be carried out at the super market.

REFERENCES Burton M (1998) Effective Warehousing 4th edition Pitman Publishing Limited, Lon don. Donald W. Bobler (1997), Purchasing and Supply Management. MacGrow Hill Companie s. Newyork Kenneth Lysion (2006), Purchasing and Supply Chain Management. Pearson Education Ltd. Newyork Peter Baily and David F Purchasing Principles and Management. ,(2005) Pearson Ed ucation Ltd. London

Henry R.Harms (1992), Production Systems Technology MacMillan/McGrow. Hill Newyo rk N.A. Saleemi (2007), Purchasing and Supplies Management Simplified. Printwell In dustries Ltd Nairobi Saleemi S. Principles of Effective Store Keeping (1994), Saleemi Publishers.

APPENDICES APPENDIX I TIME FRAME STAGE IN RESEARCH PROCESS ESTIMATED TIME IN WEEKS 1 Identification of Topic 2 March 2012 2 Writing the Research proposal 3 March/April 2012 3 Data Collection 2 May 2012 4 Presentation & analysis of Data 2 May 2012 5 Report Writing 2 June/July 2012 6 Typing & binding of final report 2 August 2012 7 Submission to the Supervisor 1 August 2012 APPENDIX II PROJECT BUDGET Serial No. Item Quantity 1 Flash disk 1 500.00 2 Stationery 3 Typing 54 15 810 4 Photocopying 300 2 5 Travelling 6 Binding Cover 5 50 7 Binding in hardcover 2 8 Contingency TOTAL AMOUNT APPENDIX III LETTER OF INTRODUCTION PAUL MWAURA KAMAU P.O. Box 73167 00200 KARATINA Date 25th May 2012 Dear Respondents

DATE

Rate in Ksh 500 1,500 600 1,000 250 500 500 6,160

Amount

1,000

RE: RESEARCH ON COSTS ASSOCIATED WITH PROCUREMENT OF GOODS. I am a student of Kenya institute of management Nyeri. You have been identified as one of the respondents in this survey. The surveys findings will be reported i n general terms so therefore, do not indicate your name in this questionnaire Th e information given will be treated in confidence and is intended for academic p urpose only. Please attempt all the questions in the questionnaire. Thank you. Yours faithfully, Paul Kamau

APPENDIX IV Instructions These questionnaires are designed to gather information about your organization and yourself on the effects of ordering costs, holding costs and disposal costs of goods on the overall profitability of Uchumi supermarkets. The results will be confidentially treated and will only be reported only in gen eral terms of the entire population hence do not write your name. Please put a tick on the correct option. For questions that require your opinion , answer in the space provided. You are kindly requested to answer all the questions to the questionnaire. Your positive responsive will be highly appreciated. The questionnaire covers questions which you are requested to fill. Questionnaire to the Administration Staff Background Data 1. What is your highest academic qualification? a) KCSE/KCE [ b) KACE [ c) Diploma [ ] d) Degree [ e) Others Specify [ 2. Age: a) 18 30 [ b) 30 40 [ c) 41 and above 3. (a) (b) 4. 5. Gender : Male Female

] ] ] ] ] ] [ [ [

] ] ]

How many orders are placed in month? [ ] Do you prefer frequent, small orders or single bulk order? . 6. Approximately how much money is incurred during the process of placing a n order?

7. Approximately how much money is incurred in following up an order i.e. i n calling suppliers, etc? 8. Approximately how much money is incurred during inspection of goods rece ived from suppliers? 9. How long does it take from the time an order is placed and the time good s are received in stores (lead time)? 10. Does your organization suffer frequent stock outs due to failure of supp liers to deliver orders on agreed time? Yes [ ] No [ ] 11. If yes, does this situation lead to monetary loss, idle man hours and cu stomer dissatisfaction? Yes [ ] No [ ] 12. Approximately how much money is spent on storage of materials, i.e. rent , lighting, heating etc per month? 13. Approximately how much money is spent on warehouse personnel i.e. storek eepers and watchmen per month? .. 14. Do you have cases of stock losses due to mishandling or prolonged storag e? . 15. Does the super market suffer losses due to wastage and obsolescence of goods? Yes [ ] No [ ] 16. How much is spent to dispose off surplus and obsolete stores?

.. Thank you APPENDIX V Questionnaire to the Procurement Staff Background Data 1. What is your highest academic qualification? a) KCSE/KCE b) KACE c) Diploma [ d) Degree e) Others Specify 2. Age: a) 18 30 [ b) 31 40 [ c) 41 and above 3. 4. 5. Gender : (a) (b) Male Female

[ [ ] [ [ ] ] [ [ [

] ] ] ] ] ] ]

How many orders are placed in month? [ ] Do you prefer frequent, small orders or single bulk order? . 6. Approximately how much money is incurred during the process of placing a n order? 7. Approximately how much money is incurred in following up an order i.e. i n calling suppliers, etc? 8. Approximately how much money is incurred during inspection of goods rece ived from suppliers?

9. How long does it take from the time an order is placed and the time good s are received in stores (lead time)?........................................... ........................ 10. Does your organization suffer frequent stock outs due to failure of supp liers to deliver orders on agreed time? Yes [ ] No [ ] 11. If yes, does this situation lead to monetary loss, idle man hours and cu stomer dissatisfaction? Yes [ ] No [ ] 12. Approximately how much money is spent on storage of materials, i.e. rent , lighting, heating etc per month? 13. Approximately how much money is spent on warehouse personnel i.e. storek eepers and watchmen per month? .. 14. Do you have cases of stock losses due to mishandling or prolonged storag e? . 15. Does the supermarket suffer losses due to wastage and obsolescence of go ods? Yes [ ] No [ ] 16. How much is spent to dispose off surplus and obsolete stores? .. Thank you

APPENDIX VI Questionnaire to the Accounts and IT Staff Background Data 1. What is your highest academic qualification? f) KCSE/KCE [ g) KACE [ h) Diploma [ ] i) Degree [ j) Others Specify [ 2. Age: 18 30 [ d) 31 40 [ e) 41 and above 3. 4. 5. Gender : (a) (b) Male Female

] ] ] ] ] ] [ [ [

] ] ]

How many orders are placed in a month? [ ] Do you prefer frequent, small orders or single bulk order?

. 6. Approximately how much money is incurred during the process of placing a n order? 7. Approximately how much money is incurred in following up an order i.e. i n calling suppliers, etc? 8. Approximately how much money is incurred during inspection of goods rece ived from suppliers? 9. How long does it take from the time an order is placed and the time good s are received in stores (lead time)? 10. Does your organization suffer frequent stock outs due to failure of supp liers to deliver orders on agreed time? Yes [ ] No [ ] 11. If yes, does this situation lead to monetary loss, idle man hours and cu stomer dissatisfaction? Yes [ ] No [ ] 12. Approximately how much money is spent on storage of materials, i.e. rent , lighting, heating etc per month? 13. Approximately how much money is spent on warehouse personnel i.e. storek eepers and watchmen per month? .. 14. Do you have cases of stock losses due to mishandling or prolonged storag e? . 15. Does the super market suffer losses due to wastage and obsolescence of g oods? Yes [ ] No [ ] 16. How much is spent to dispose off surplus and obsolete stores? . Thank you