CHAPTER ONE

1.0 INTRODUCTION
Chapter one of this project provide information on back ground of the study, it also
provides a statement of the problem, objectives of the study, questions the research
sought to answer, limitations of the study and concludes with the scope of the study.

1.1Background of the study

Early supplier involvement (ESI) has gained its importance in manufacturing sector in
developing competitive advantage and to outperform rivals in market share while
defending against competitive forces. It is generally known that approximately 80 per
cent of the manufacturing cost of a product is determined by the design of the product
(Mikkola and Larsen, 2003). Original Equipment Manufacturers (OEMs) today are
relying on their approved suppliers to drive efficiencies, heighten visibility, and help
them get to market faster (McKeefry,2000). OEM is similar to component integration or
value added reselling and specifically refers to those manufacturers who re-labeling a
product to sell it under their own brand name. By practicing early supplier involvement
(ESI), suppliers in Approved Suppliers List (ASL) will work closely together with
manufacturers (customers) in sharing information, technological capabilities, knowledge,
technical skills and experience. On the other hand the buyer will evaluate the suppliers
evenly, improve supplier performance by developing suppliers capability through training
and interchange of human resources. Both the supplier and buyer ensures that the
relationship between them is maintained through formation of teams responsible for
managing the relationship Mikkola and Larsen ( 2003)

In numerous industries, shorter product life cycles and increased competition have raised
the level of interest in the management of new product development (NPD) processes.
Many firms are looking for ways to decrease concept to customer development time and,
improve quality and significantly reduce the cost of the resulting product simultaneously.
One approach which many companies are taking is to involve material suppliers earlier in
the design process. According to Monczka, et. al. (1997), supplier involvement ranges
from simple consultation on design ideas to making suppliers fully responsible for the
design of components, systems, processes, or services they will supply.
1
Early supplier involvement (ESI) has been advocated as a means of integrating suppliers’
capabilities in the buying firm’s supply chain system and operations. Partnerships with
suppliers were formed together to take advantage of their technological expertise in
designing and manufacturing (Dowlatshahi, 1998)
The implementation of early supplier involvement (ESI) in these manufacturing sectors
focusing on electrics and electronics industries is one of the strategies that companies
should acquired to face the challenges in globalizations. In addition, nowadays, designing
the relationship between customers and suppliers is very important and essential to
sustain competitiveness within the marketplace. Liker, et.al. (1998), leading companies
need more specific guidance in defining the optimal timing and integration of suppliers.
Great benefits and advantages can be obtained if suppliers are involved in the customer’s
product development as early as possible. Huang and Mak (2000) proposed that the
rationale is that suppliers frequently possess vital product and process technology that can
lead to improvements in product design and the new product development process itself.

A cross-national study by Clark (1989) showed that much of the Japanese advantage in
concept-to-market time was attributed to supplier involvement in the new product
development process. Smith and Zsidisin (2002) also proved that by engaging suppliers
early in product design, the organization has recognized significant cost savings and
enhanced its competitive position. ESI has come to be considered a critical activity since
that 80 percent of the products’ cost are locked during the design phase. And
organizational contribution from ESI includes obtaining leverage with the supply base,
improving design capabilities and instituting internal documentation of best practices for
organization learning. Early supplier involvement is beneficial to both suppliers and
buyers. Benefits of ESI practices include reduced development costs, early availability of
prototypes, standardization of components, visibility of the cost performance tradeoff,
consistency between design and supplier’s process capabilities, reduced engineering
changes, higher quality with low defects, consistency between product tolerances and
process capabilities, refinement of the supplier’s processes, availability of detailed
process data, reduced time to market, early identification of technical problems, reduced

2
supplier’s engineering time, acquisition of supplier’s production capacity and supplier
innovation (Bonaccorsi and Lipparini, 1994).

1.2 STATEMENT OF THE PROBLEM

Supply chain performance is an important and multi-faced issue in supply chain
management. Performance measurement is defined as the information regarding the
process and products results this allow the evaluation and the comparison in relation to
goals, patterns, past results and with other processes and products (Petrovic- Lazarevic
and Sohal 2012)
In today’s manufacturing world, globalization policies and rejuvenation have created a
more intensive competition amongst manufactures; on the other hand manufacturers have
turned to the option of innovative technologies, process reengineering and strategies such
as efficient supply chain management to achieve a sustainable competitive advantage.
The supply chain performance measurement using fuzzy logic operation was identified as
a new direction in measuring the uncertainty and ambiguity surrounding supply chain
performance measurement. (Ezutah 2009)
Measuring and evaluating performance, including purchasing and supply chain
performance, historically has had certain problems and limitations. Expert on
performance measurement argues that most managers and professionals today’s are like
pilot trying to fly as plane with only a half the instrument that measure irrelevant data
(mark graham brown, 2003).
Therefore this research work will seek to provide information on the impact which may
arise when a firm early involves its suppliers focusing on the impact of such strategies on
supply chain performance

1.3 PURPOSE OF THE STUDY

The purpose of this study is to investigate the impact of Early Supplier Involvement on
the supply chain performance of Murang’a South Water and Sanitation Company.

3
1.4 OBJECTIVES OF THE STUDY
1.4.1 General objectives
The general objective of this study will be examine impacts of early supplier
involvement on supply chain performance in an organization.
Cv
1.4.2 Specific objectives
1. To determine the impact of information sharing on supply chain performance.
2. To investigate the role played by supplier development on supply chain performance.
3. To determine the benefit of supplier evaluation on the supply chain
4. To investigate the impacts of buyer-supplier relationship management on supply
chain performance.

1.5 Research Questions

1. What is the impact of information sharing on supply chain performance?
2. What is the impact of supplier development on supply chain performance?
3. What are the benefits of supplier evaluation and certification on supply chain
performance
4. What are the impacts of buyer-supplier relationship management on supply chain
performance?

1.6 Significance of the study

The success of any organization lies not only with the strength and the commitment of its
employees to work towards the accomplishment of the organizations strategic goals and
objectives but the support the organization from quality products offered at value in order
to satisfy customer’s needs. The study will be significant to the following stakeholders.

1.6.1 MUSWACO

The study will help the company to manage its supplies and to improve trust and
collaboration among supply chain partners thus improving inventory visibility and
velocity of inventory movement.

4
1.6.2 The researcher

The study entails direct contact and involvement in carrying out the study and this give
the researcher an opportunity to analyze and present findings taking into considerations
the professional requirement of project writing.

1.6.3 Other researchers

The study will be of great important to other researchers who will have interest in the
same field since it will act as a point of reference.

1.7 Delimitation of the Study.

The study is limited to Kandara district, Murang’a County, in the Republic of Kenya. The
researcher has access to the place in terms of time, distance and research materials. The
study will be carried out at Muranga South Water and Sanitation Company as a case
study and the researcher will specifically focus on the purchasing and supply department.

1.8 Limitation of the study

The main limitations the researcher is bound to face during collection of data are;

1.8.1 Confidentiality

Confidentiality of data may be a big barrier that may be faced during the conduct of the
study every company has its own secrets that are not revealed to others. The employees
will consider some information as private and fail to divulge it for the risk of reprisal.
This will greatly curtail data collection. I will assure the respondents that the research is
purely for education purposes and may never be used for any other purpose.

1.8.2 Biasness

Some of the respondents may not return the questionnaires in time while others will not
be sure of the intended purpose and will not be free in answering the questions. I create a
good rapport the my respondents and will issue the questionnaires in advance to give
them time enough time to respond to the questions.

5
1.8.3 Lack of co-operation

Some respondents will not be willing to divulge much information to a stranger for fear
of their personal information being known. The researcher will produce the authority
letter from the University of Nairobi.

1.9 Assumptions of the Study

i. The researcher undertakes this study with the assumption that, the respondents
will be capable of giving correct and forthright information to the questions in the
questionnaire
ii. They will answer all the questions in the questionnaire and return them
immediately.

1.10 Definitions of Significant terms

Supply chain management -refers to planning and control of different activities

involved in the conversion of materials through manufacturing into finished products as
major component of competitive strategy to enhance organizational productivity and
profitability.

Supply chain- this network of supplies, manufacturers, assembly, distribution and

logistics facilities that perform the functions of procurement of materials, transformation
of these materials into intermediate and finished products, and distribution of these
products to customers.

Early supplier involvement- it is generally defined as a form of vertical cooperation in which

manufacturers involve suppliers at an early stage in the product development and/ or innovation
process.

Organization performance- comprises the actual output or results of an organization as

measured against its intended outputs (or goals and objectives).

6
Supplier evaluation - is a term used in business and refers to the process of evaluating and
approving potential suppliers by quantitative assessment. The purpose of supplier evaluation is to
ensure a portfolio of best in class suppliers is available for use.[1] Supplier evaluation is also a
process applied to current suppliers in order to measure and monitor their performance for the
purposes of reducing costs, mitigating risk and driving continuous improvement

Supplier development –define as the process of working collaboratively with suppliers to

improve or expand their capabilities.

7
 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 INTRODUCTION

This chapter reviewed literature related to the problem area that is an investigation on the
impacts of early supplier involvement on supply chain performance in Murang’a South
Water and Sanitation Company. It looked at the past studies that have been carried out
and then critical review gave opinion of the researcher based on the literature. It reflected
on what might have come up in the previous studies. The review provided specific
information on research topic enabling the researcher to familiarize herself, clarify the
research problem, understand variables under the study and provide theoretical
orientation.

2.2 THEORITICAL REVIEW

The extended enterprise theory by (Christopher Dyer, 2010) calls for cooperation and
tight integration of firms and their supply chain partners, as opposed to discrete,
independent and isolated activities across the supply chain (Dyer, 2010).The extended
enterprise theory builds on the SCM approach by seeing all the members and partners of
a value network as working towards a common goal of opportunity. A key aspect in the
integration of the value chains of the various supply-chain partners into the organization’s
internal value chain to yield new value configurations (stabell,& Fjeldstad, 1998).The
aim was for organization located in Muranga to apply inter-organizational arrangement
that uses the best strategies in integrating the supply chain as a whole network of business
relationship.

The theory of quick service by (Rajan, 2010) provides enterprise-wide strategies that are
particularly effective at serving 21st century markets. Specifically, it enables organizations
to dramatically shorten their lead time to deliver products for these markets, while at the
same time improving product quality and reducing costs. The importance of this theory in

8
supply chain management is to encourage firms to focus on customer’s satisfaction while
achieving efficiency.

2.2.1 Information sharing

Information sharing is basic to effective coordination in a supply chain. Many studies

have found that information sharing has great impacts on supply chain performance,
especially in reducing the bullwhip effect (Lee & whang 2000)

Information sharing enables companies to make better decision in their operation leading
to better resource utilization and power supply chain cost. Better management of
information allows companies to be more responsive to customers’ demands (Mentzer,
2004)

Kulp, (2004) did a survey to investigate the impact of information sharing on companies
performance. He found that the highest profit margin companies are not simply
exchanging information but the combine it with close collaboration. Lee and Wang
(2000) argue that information sharing is the only enabler for achieving supply chain
efficiency. The types of shared information can vary from strategic to operational
information and from consumer and market information to logistic information (Huang,
2003). The impact of information sharing on SCM depends on what information is
shared, quality on shared information, and companies’ capability in using and translating
the information in to a supply chain strategy and operation activities (Lee & whang,
2000; Moberg, 2002)

Huang, (2004) studied various degree of information sharing in a four-stage supply chain
comprises customers, retailers, distributors, wholesaler, and manufactures, in which each
stage comprises several players. Two scenarios are analyzed: no information sharing;
partial information sharing. The simulation study found that increasing degree of
information sharing resulted in decreased inventory levels at wholesalers. The benefits
are higher when demand is highly variable. The study concludes that parties obtain
different benefits from information sharing.

9
Research determining with which partners in a supply chain accompany should share
information is very limited. Raghunatan (2003) examines demand information sharing in
a supply chain comprising a manufacturer serving many retailers and analyzes the
optimal number of retailers that should be involved in information sharing. He found that
the suppliers will more likely include more sharing partners when demand amongst
retailers are independent, as the value of information sharing will increase significantly
with the increase number of sharing partners. This study confirms Cooper, (1997)
argument that decision on how many retailers should be involved in information sharing
depends on the products characteristics. The correlation of the demand amongst retailers
depends on the nature of products, consumer segments, and geographical location of
partners. Tang, (2000) also found that benefit of information sharing increase with the
number of retailers involved when the demand processes variance are correlated over
time.

With information shared among the manufacturer and the retailers, the manufacture can
use the information about the inventory level of the retailer to manage the frequency,
quantity, and timing of the shipments instead of waiting for the retailer to place orders.
This practice, referred to as continuous replenishment process (CRP), enables the
manufactures to reduce the inventory necessary and to plan the shipments more
efficiently (Clark and Lee, 2000)

Chen and Zheng, (1997) compare the optimal installation stock and echelon stock
policies for a simple two-stage serial system with batch ordering. In an installation stock
policy, the inventory policy of each facility is determined so as to minimize the expected
supply chain cost, thus the supply chain is under centralized control. But each stage is
managed based on the corresponding policy using only local information available to this
stage (local information). In an echelon inventory policy, while the objective remains the
same, each stage is managed using information from all of its downstream facilities
(centralized information). Chen and Zheng (1997) observe that the value of centralized
stock information is insignificant for their test.

Similarly, Chen (1998) studies multi-stage serial production-inventory systems, and

compares the optimal echelon inventory policy (centralized information) with the optimal

10
installation inventory policy (local information). Assuming external demand, Chen shows
that the benefit of centralized information is 0-9% with an average of 1.75%, and the
benefit increases as lead-times and batch sizes increase.

Fisher (2000) studies the impact of centralized information on a periodic review single
supplier and multi-retailer system under centralized control. They compared the
following three strategies: first, no demand and inventory information is shared between
the retailers and the supplier, and the supplier uses first come first serve (FCFS) principle
to satisfy retailers’ orders. In the second strategy, each time retailers place orders, they
also transfer inventory information to the supplier so that the supplier can choose an
effective inventory allocation scheme. The third strategy allows the retailers to transfer
inventory information to the supplier each time period, independent of whether an order
is made. This information allows the supplier to better manage its own inventory as well
as more effectively allocate inventory among the different retailers. Using a
computational study, they report that the gap between the first strategy and the third
strategy is 2.2% on average, and can be as high as 12%, he concludes that the benefits of
information sharing is small, while the benefits of automating transactions maybe much
larger since it helps reducing the lead-times and batch sizes.
Gallego, (2001) consider a decentralized controlled system with one supplier and one
retailer. In a decentralized control system each party optimizes decisions by looking at its
own costs. The supplier, however, is charged with a penalty costs proportional to its
backlogged level. The supplier uses a base-stock policy while the retailer uses a (Q, r)
policy. All policies are continuously reviewed. With continuous information sharing, the
supplier knows exactly the retailer’s inventory position at any time. She can reduce her
cost by delaying her orders until the retailer’s inventory position drop to a certain level.
Thus, the supplier can obtain substantial benefits from information sharing, while the
retailer maybe slightly better off, or even worse off due to the delayed supplier lead-time.

Tayur (1999) focuses exclusively on the party receiving the information. They analyze a
simple two-stage supply chain with a single capacitated supplier and a single retailer. In
this periodic review model, the retailer makes ordering decisions every period, using an
inventory policy, and transfers demand information to the manufacturer every period,

11
independent of whether an order is made. Assuming the retailer can acquire from another
supplier any part of the order that manufacturer cannot satisfy. They show that the
benefit, for example, the supplier cost savings, due to information sharing, increases as
production capacity increases and it ranges from 1% to 35%.

It is an essential prerequisite for securing information accessibility to all supply chain

partners involved in supply chain. The creation of distributed databases accelerates the
development of relationships with other operators in the supply chain. In addition, the
availability of consistent information improves decision-making process for operators.
Data sharing has always been important in the transport and logistics of the
manufacturing companies. Access to and availability of information in intermodal
transport, for instance, contribute to substantially reduced processes and thus time
savings in freight transfer from one mode of transport to another and minimize errors in
drawing up freight documentation, thereby increasing overall transport efficiency hence
improve supply chain performance (Chen 2002).

2.2.2 Supplier development

Suppler development is any activity that a buyer undertakes to improve a supplier

performance and /or capacities to improve to meet the buyers short term and long term
supply needs (Wong 2009).supplier development requires financial and human resources
investments by both partners and includes a wide range of activities such as training of
supplier personnel, investing in the supplier operations, and ongoing performance
assessment. He further states that 50%of suppliers have supplier development programs,
even though more than 85% have supplier rating systems. This indicates that there are
still many companies that do not practice supplier development.

As companies outsource more and more parts, a larger portion of costs lie outside the
company in supply chain and it becomes increasingly difficult to achieve further cost
savings internally, one way out of this dilemma is for the companies to work with their
suppliers to lower the cost of materials purchased. (Joel D Winser, Keah-
Choontan&G.Keong leong 2009).They further states that companies that are able to

12
leverage their supply chain based to influence their total cost structure will have
competitive advantage in their market. They propose a seven-step approach to supplier
development as outlined; Identify critical products and services: Assess the relative
importance of the product and services from a strategic perspective. Products and
services that are purchased in high volume, do not serve as a good substitute, or have
limited source of supply are considered strategic supplies, Identify critical supplier:
Suppliers of strategic supplies that do not meet minimum performance in quality, on time
delivery, costs, technology, or cycle time are target for development, Form cross
functional team: Next, the buyer must develop an internal cross functional team with a
clear agreement for the development initiative, Meet with top management of supplier:
The buyers cross functional team meets with the supplier top management team to
discuss details for strategic alignment, supplier performance measurement, improvement,
and professionalism, Identify key projects: After the promising opportunities have been
identified they are evaluated in terms of feasibility, resource and time commitment, and
expected return on investment. The most promising projects are selected, Define details
of agreement: After agreement has been reached on development projects, the partners
must jointly decide on the merits to be monitored such as percentage improvement in
quality, delivery, and cycle time and Monitor status and modify strategies: To ensure
continued success management must actively monitor progress, promote exchange of
information, and reverse the strategy as business conditions warrant.

There is considerable theoretical support for the assertion that supply chain performance
can be enhanced through supplier development, especially investments in specialized
assets (Williamson, 1985; Asanuma, 1989; North, 1990; Buvik and Gronhaug; 2000).
Barney (1991) argued, based on the resource-based view of the firm, that firms that are
able to accumulate resources and capabilities that are valuable, non-substitutable, and
difficult to imitate will achieve a competitive advantage over competing firms. Supplier
development could be considered as action taken by buying firm to strengthen the
competitive capacity of its suppliers. Improvement in performance will happen within the
unique exchange relationship development between the buyer and the supplier firms. This
will become unique resource and capabilities of buying firm (Chen,lin, and huang,2006).

13
Hence, ultimately, the buying firm will reap benefits from its supplier’s development
effort.
Economists have long recognized that “resource owners increase productivity through
cooperative specialization” (Alchian and Demsetz, 1972). Perry (1989) pointed out that
gains from trade between trading partners are enhanced by investments in assets that are
specialized to their exchange. This suggests that firms can choose to seek efficiency
advantages in supply function by creating assets that are specialized in conjunction with
the assets of trading partners (Dyer, 1996)

2.2.3Supplier evaluation

Only the best suppliers are targeted as partners. Companies want to develop partnerships
with the best suppliers to leverage suppliers expertise and technologies to create a
competitive advantage learning more about how an organization’s key suppliers are
performing can lead to greater visibility, which can provide opportunities for
collaborative involvement in value-added activities Joel D.wisner,keah-
chonton&G.keongteong(2009).According to a survey by Accenture 2005 85%of
purchasing organizations are tracking product and service quality, on time deliveries,
customer service effort and cost control programs as part of their supplier rating system.
However only 52%use the information to develop supplier programs that will help to
eliminate problems or improve supply chain performance.

A supplier evaluation and certification process must be in place so that organizations can
identify their best and most reliable suppliers. In addition, sourcing decisions are made
based on facts and not perceptions of supplier’s capabilities. providing frequent feedback
on supplier performance can help organizations avoid major surprises and maintain good
relationships(Ettenson and Wagner 1986;Wagner 1989).they further states that
organizations should develop supply lines e.g. websites, where suppliers can access
monthly” report cards” containing supplier performance information such as quality,
timeliness of deliveries, conformity to specifications, and service. These enables both
buyer and supplier to be more efficient by spending less time on administrative work
involving faxes and mail or manually tracking supplier performance. Productivity is
improved because fewer employees are needed and decisions can be made faster as a

14
result of speeder transmission of information between the companies involved. Mike
mitchley 2002 states that one of the goals of evaluating suppliers is to determine if the
supplier is performing according to the buyer’s requirements.

An extension of supplier evaluation is supplier certification which is an organization’s

process for evaluating the quality systems of key suppliers in an effort to eliminate
incoming inspections Troy (2009).he further states the certification process implies a
willingness on the buyer and supplies to share goals, commitment and risks to improve
their relationship which involves making visits to observe the operations at the supplier
organization. For example, easily visible things such as dirty bathrooms could indicate
that the attitude towards quality is lacking in the suppliers production facility. A supplier
certification program also indicates long-term mutual commitment. For example, a
certification program might provide incentives for suppliers to deliver parts directly to the
point of use in the buyer firms, thus reducing costs associated with incoming inspection
and storage of inventory.

Implementing an effective supplier certification process is critical to reducing the

supplier base, building long-term relationships, reducing time spent on incoming
inspections improving delivery and responsiveness, recognizing excellence, developing a
commitment to continuous improvement, and improving overall
performance(Ganesan,1994).supplier certification allows organizations to indentify the
suppliers who are most committed to creating and maintaining a partnership and who
have the best capabilities (Sank,2001).Hannon,2007 describes the following criteria for
evaluating and certifying suppliers using the weighted criteria evaluating system.
Selecting the key dimensions of supplier performance mutually acceptable to both
customer and supplier, Monitor and collect supplier performance data, Assign weights to
each of the dimensions of performance based on their relative importance to the
company’s objectives. The weights for all dimensions must sum to 1, Evaluating each of
the performance measures on the rating between zero (fails to meet any intended purpose
or performance) and 100(exceptional in meeting intended purpose or performance),
Multiply the dimension rating by the importance weight and sum to get an overall score
and perform an on-going supplier evaluation process review.

15
Today, external certifications such as ISO9000 and ISO 14000 have gained popularity
globally as a natural extension of an organization’s internal supplier evaluation and
certification programs Fedel-mogul (2003). In 1987 the international organization for
standardization (ISO) developed ISO 9000,a series of management and quality assurance
standards in design, development, production, installation and service. The European
union in 1992 adopted a plan that recognized ISO 9000 as a third-party certification, the
result is that many European companies today prefers suppliers with ISO 9000
certification. A recent study found that ISO 9000 certification and a total quality
management practice has a significant positive relationship. This result suggests that
organizations should seriously consider ISO 9000 as the first step to total quality
management.

In 1996, ISO 14000 a family or international standards for environmental management,

was first introduced. In 2004 ISO 14000 was revised to make the standards easier to
understand and emphasized compliance and compatibility with ISO 9000 for businesses
that wanted to combine their environmental management and quality management
systems. Companies that implemented ISO14000 found benefits from cost savings
(conserving materials, reduced water and energy use. Public image and decreased
liability due to reduced waste clean-up costs. The benefit of investing in environmental
management systems (EMS) based on ISO 14000 standards include reduced energy and
other resource consumption, decreased environmental liability and risk, reduced waste
and pollution and improved community goodwill. As more organizations are certified in
ISO 14000, they are likely to pass this requirement on to their suppliers in the future. Joel
D Winser, Keah-Choontan&G.Keong leong (2009).

2.2.4 Buyer supplier relationship management

Buyer and supplier relationship management is defined as a set of firms’ activities in

managing its relationships with customers and supplies to improve customers satisfaction
and synchronize supply chain activities with supplies, leverage supplies, capability to
deliver superior product to customers.SCM suggests that firms needs to integrate with
their suppliers and customers to achieve financial and growth objectives.(Tan, 2001)

16
Sank, (2001) reveal that industry leaders increasingly build competencies to integrate
with suppliers and customers and find that these competencies lead them to supply chain
excellence. Buyer-supplier relationships in the supply chain are one of the most important
elements of supply chain integration. Establishing and managing effective relationships at
every link in the supply chain is becoming the prerequisite of business success. High
volatility in the retail industry reflects rapid fluctuations in customer demand and
unpredictable market trends. In addition, environmental diversity reveals uncertainty in
the global business environment. Facing market volatility and diversity, retailers are
encouraged to develop relatively flexible relationships with multiple channel partners to
deal with unexpected market demands and thus reduce the dependence on the vendor
(Ganesan, 1994).

Building long-term relationships with supply chain partners often results in improved
collaboration and enhanced administrative efficiency. This represents an opportunity for
greater coordination in business decisions (Hartley 1996).

Several empirical studies support that buyer-supplier relationships have a positive effect
on a firm’s financial performance (Tung, 1996) Firms engaged in long-term relationship
with their customers achieve higher profitability and ROI than firms using a transactional
approach (Kalwani, 1995).Maloni and Benton (2000) found that strong buyer-supplier
relationships have a significant positive effect on manufacturer performance, supplier
performance, and performance of the entire supply chain.

The study of buyer-supplier relationships and their impact on supply chain management
is pertinent for two reasons. Firstly, the prevailing culture in distribution system
emphasizes personal relationship between the manufacturers, wholesalers and retailers.
Secondly, the literature of relational marketing or channel relationships may not fully
explain the true essence of cross-cultural contextual factors Thus, the cultural perspective
in retailer-supplier relationships should be considered in deriving theoretical constructs.
(Mavondo, 2001).

17
On the other hand, both academics and practitioners have recognized that purchasing is
the key to a firm’s competitive advantage, and that increased profitability, market share
and technological innovation can be achieved through an appropriate purchasing strategy.
(Lai, 1996)
A company’s purchasing practices can impact the effectiveness of its SCM strategy and
it’s financial and market performance. In current purchasing practice, orders from
retailers are placed with the international suppliers many months ahead of the season, so
the risk of both obsolescence and stock-outs is high. The lengthy pipeline increases
inventory carrying cost and inefficiency in the supply chain. Besides, when it comes to
the selling season, market demand may change and sales can be affected for various
reasons such as economy, climate, consumer preference, sports events, and unmatched
supplies, (Fisher, 1994).Prominent dimensions of the buyer-supplier relationship: trust,
communication, interpersonal relationship, cooperation, and power-dependence, will be
explored in the following discussions. Therefore, this study makes an important
contribution to the relational literature and supply chain management literature through
the investigation of the phenomena of buyer-supplier relationships and their impact on
supply chains. (Wang, 2000).
Trust is a crucial factor in sustaining the complex business network and contributing to
the success of a firm in business communities. Trust indicates “a person’s reputation for
trustworthiness on both a professional and personal level as well as credibility in a
business situation” (Woo, 1999). Businessmen deem the trustworthiness and a person’s
credibility of their trade partners important in business dealings. Similarly, reported that
the reputation of the supplier’s fairness has a significant effect on its credibility in the
business, and consequently satisfactory credibility will create higher level of trust.
Building trust in business relationship has the following benefit; Decrease transaction
costs in an exchange relationship, Reduce the risk of opportunistic behavior, Increase
long-term orientation, willing to make idiosyncratic investments, willing to engage in
future business opportunity and Facilitate cooperative transaction (Ganesan (1994)

According to Peterson (1982), the essence of trust is described as “…where the parties
have trust in one another, then there will be ways by which the two parties can work out

18
difficulties such as power conflict, low profitability, and so forth.”Trust leads retail
buyers and sellers to the focus on long-term benefits of the relationship (Ganesan 1994),
and eventually enhance the performance outcomes in buyer-supplier relationships,
including firm competitiveness and transaction costs reduction (Noordewier, 1990).
Cannon (1997) indicated that trust influences long-term relationships, while Morgan
(1994) found trust has the strongest effect on achieving cooperation in relationship.
Anderson (1989) demonstrates the evidence that trust is the key to maintaining continuity
in conventional channel relationships. Furthermore, Siguaw (1998) concluded distributor
trust is related significantly and positively to both cooperative norms and distributor
satisfaction with financial performance.

Two major aspects of trust are personal trust and organizational trust will be focused to
give more insights on how trust plays an important in the buyer-supplier relationship in
Kenya. First, Personal trust emphasis on trust has prevailed among business industries
.Trust was the crucial factor in upholding the complex network of trading relations
(Wong 1996). The business relationships in Kenya appear to be highly personalized
based on personal trust (Kiong 1998). Kao’s (1996) study of “personal trust” in large
businesses indicated that personal trust plays a prominent role in the establishment of
partnerships. Business practices are based on personal trust, with less formally defined
rights and obligations. The formal contracts are just as a backup of legal commitment.
Kee (1998) conclude that the non-use of written contracts characterize the mutual trust
between the channel members. The second aspect of trust is organizational trust, this
ensures that business companies usually check their first-time customer’s credit history
before business transactions and credit position. If a supplier has a good reputation in his
history of dealing with other firms, trust and credibility are easily built consequently.
Generally refers to the “integrity, credibility, trustworthiness, or the reputation and
character of a person,” and “a person’s credit rating” in business circles (Kiong and Kee
1998).

Some studies have also revealed the importance of business transactions and the positive
impact on the trust-based exchange relationships also addresses the importance of

19
integrity in business and explains further that integrity is evaluated upon one’s business
performance. If a firm does not keep its word or cheats, it will lose its integrity. (Barton
1983).In a word, based on mutual trust, integrity further ensures the security and
reliability in business deals. Additionally, Ganesan (1994) asserted credibility has a
significant effect on long-term relationship. In conclusion, the benefits and impact of
trust, along with the background of different aspects of trust, explain the critical role of
trust as a key success factor in buyer-supplier relationships. Therefore, trust will have a
positive impact on supply chain performance.
Owing to the risk of seasonal and short product life, small firms are naturally inclined to
reduce inventory carrying costs and maximize profits from the products provided by the
suppliers. Many companies in Kenya have perceived the importance of substituting
information for inventory as a potentially powerful source of competitive advantage
(Spekman, 1999). Therefore, effective communication plays a critical role in social and
business relationships.

Anderson (1990) defines communication as “the formal as well as informal sharing of

meaningful and timely information between firms.” Cannon (1999) suggest more open
sharing of information is indicated by the willingness of both parties to share important
information. However, lack of trust can be translated to unwillingness to share
information (Marnan 2001), and can make it difficult to share sensitive information such
as financial data, especially in business. Therefore, bring up the issue of difficulties in
cross-cultural communication and information sharing as they can be a significant
obstacle to business.Effective communication in channel relationships can enhance levels
of channel member coordination, satisfaction, commitment levels, and performance
moreover frequent communication between retailers and suppliers can expedite quick and
accurate response to volatile market, and reduce the costs and impact of inaccurate
forecasts (Fisher, 1994).

With the presence of trust and support, channel members are more willing to pass
information upward and promote bidirectional communication. Consequently, it will help
better match supply with demand and increase profitability for channel members. On the

20
other hand, under unequal power relationship a less powerful channel party has a
tendency not to provide information and feedback to more powerful ones, thus the
restricted information flow will impede the channel relationships and affect the supply
chain performance as well. Effective communication is crucial to maintain a long-term
buyer-relationship and achieve high performance (Hunt 1994).

According to Davies (1995) Interpersonal Relationship is recognized as an “emergent

form” of relationship marketing and has attracted researchers’ attention to how it works
in business relationships. Interpersonal Relationship is a deep-rooted socio-cultural
phenomenon and plays an extremely important role in the business world, as well as in
daily life. People attach great importance to cultivating, maintaining and developing
Interpersonal Relationship.Liu and Wang (2000) referred Interpersonal Relationship as
the concept of drawing on connections or networks, and it involves reciprocal obligations
and favors between two parties in personal or business relations. People tend to
incorporate personal relationships in business decision-making and manage their business
enterprises under personal control (Kiong and Kee 1998).

Kao (1996) indicate that, Personal trust plays a prominent role in the establishment of
Interpersonal Relationship and partnerships in the business community. As most
businesses are small and managed by core family members, they are heavily dependent
on business opportunities and credit lines provided by their Interpersonal Relationship
network. The prevailing culture in Kenya emphasizes personal relationship between
manufacturers, wholesalers and retailers, and suggests that retailers must devote a great
amount of time and effort to building and maintaining relationships.On the other hand,
most literature focuses on inter-organizational relationships between the suppliers and
buyers (Fang 2000). Mavondo (2001) pointed out that the existing literature overlooks
the area of interpersonal relationships in the context of business-to-business marketing.
Therefore, this research will focus on why Interpersonal Relationship are important in the
context of abundant small retail firms, their Interpersonal Relationship with international
suppliers and local suppliers, and its impact on supply chain performance.

21
Davies (1995) report that highly important benefits arise from Interpersonal Relationship
such as smoothing business transactions, providing information and obtaining resources,
he also concluded that the social networks help coordinate transnational (cross-regional)
collaborations in high-technology regional development. Personal relationships play a
significant role in business and are a critical precondition for effective business. Many
companies in Kenya lacking the understanding of cultural differences in relationships and
networks were not able to manage long-term business relationships successfully. Thus,
building and maintaining Interpersonal Relationship network is a key in achieving long-
term success in business markets. Therefore, Interpersonal relationships will have a
positive impact on supply chain performance.
Anderson (1990) defines cooperation as “similar or complementary coordinated actions
taken by firms in an interdependent relationship to achieve mutual or singular outcomes
with expected reciprocation over time.” Cooperation between the exchange parties
reflects the expectations of working together to achieve mutual and individual goals
jointly.The cooperative inter-business relationship is primarily based upon personal trust
between business parties. Most businessmen in Kenya say that the most reliable sources
of information come from close relationships within and among business organizations.
Without close relationship, the suppliers or buyers are not willing to share information
and have less intention to cooperate. Ambler (1999), state that active cooperation plays a
role in sales growth. Previous research on channel distribution has suggested that there is
a positive relationship between cooperation and satisfaction Cooperation between
channel members will increase channel efficiency and help members attain their mutual
goals. (Skinner, 1992).
The issue of power is closely associated with the nature of dependency in business
relationships. Gaski (1984,) pinpointed the roles of power and dependence in channels of
distribution by noting that “channel member dependence and sources of power in
marketing channels are conceptually inseparable,” and “dependence is a component or
dimension of these power sources rather than a separate phenomenon.” Brown (1995)
defines marketing channel power as the ability of one channel member (supplier) to
control the decision variable in the marketing strategy of another member at a different
level of distribution (retailer). Power plays a significant role in the supply chain, and the

22
different sources of power have differing impact on inter-firm relationships and the
performance of the entire supply chain (Benton 2000). As most constructs associated
with power are mainly built on concepts and findings in firms, it is important to identify
constructs that better fit a firm context (Wang 2000). Lee (2001) also recommends that
channel members in different cultures may have different perceptions of power sources.
Though the importance of power and dependence has received the attention of academic
scholars and practitioners, research investigating how power and dependence affect the
retailer’s purchasing decision and supply chain performance is rare.

According to Skinner (1992), the bases of power are defined for this research as the
resources the supplier has available to influence the retailer’s purchase decisions. The
bases of power are classified as coercive power and non-coercive power (reward,
legitimate, referent, and expert). Coercion on one hand is the retailer’s perception that the
supplier has the ability to mediate punishment; supplier cancels business or withholds
orders with retailer. Second is the reward, the retailer’s perception that the supplier can
mediate rewards of it. Supplier offers bonus or cash discount to retailer for reaching a
sales target in a season, special offer for sales promotion allowances and better credit
terms. Thirdly, expert; Supplier has information or expertise knowledge and skills desired
by retailer. Supplier has good knowledge in product and retail selling skills. Forth,
referent; the retailer desires a sense of identification and association with the supplier.
Some suppliers pride themselves on having their brands carried in certain outlets. Fifth,
traditional legitimate; the supplier is perceived to have a legitimate right to influence the
retailer and the retailer is obliged to accept this influence. Large suppliers may be felt to
legitimately influence certain marketing policies. Finally, legal legitimate; based on
contractual arrangement Supplier and retailer maintain a formal sales contract. Several
studies on power have shown that channel power has significant impact on the Buyer-
supplier relationship and performance in channel distribution (Liu and Wang 2000)

Channel member performance can be affected by power as well as countervailing power,

Supplier’s use of mediated power results in attributing lower performance to supplier and
the use of non-mediated power results in retailer attributing higher performance to

23
supplier. (Brown1995).The use of power affects marketing channel member performance
international joint venture supplier’s use of aggressive power is negatively related to the
distributors’ satisfaction with the relationship. The use of non-aggressive power is
positively related to the distributors’ satisfaction (Lee 2001)

Rewards (non-coercive power) are negatively related to financial performance. Coercive

power has a negative impact on financial performance and operational performance. (Liu
and Wang 2000) Coercive and legal legitimate power each has a significant negative
effect on the buyer-supplier relationship. Expert and referent power each has a significant
positive effect on the buyer-supplier relationship (Maloni and Benton 2000)Dependence
and non-coercive bases of power have a positive impact on cooperation, while coercive
bases of power have a negative impact on cooperation. Coercive bases of power are
positively related to conflict and non-coercive bases of power are inversely related to
conflict. (Skinner, 1992) Based on the empirical findings discussed above, the coercive
power and non-coercive power exercised by international suppliers and local suppliers
can have positive and negative impact on retail supply chain performance.
The strong buyer supplier relationship have a significant positive effect on an
organization performance, supplier performance and performance of the entire supply
chain Maloni and Benton (2000).The good relationship is important element of supply
chain integration as it improves customer satisfaction and synchronize supply chain
activities therefore establishing and managing effective relationship at every link in the
supply chain is an important prerequisite of business success as it enables the supplier
and customer to achieve financial and growth objectives Tan(2001).

2.4 Conceptual frame work

Figure 1.1 shows the variables associated with the performance of supply chains. The
figure clarifies how the factors integrate together to influence the performance of the
supply chain.

24
Figure 1.1 conceptual framework

Independent variable Dependent variable

INFORMATION SHARING

SUPPLIER DEVELOPMENT
SUPPLY CHAIN
PERFORMANCE
SUPPLIER EVALUATION

BUYER SUPPLIER RELATIONSHIP

MANAGEMENT

Source; author (2013)

2.4 Summary of the literature Review

Procurement is a key activity in the supply chain: it can significantly influence the overall
success of an emergency response depending on how it is managed. Procurement
represents a very large proportion of the total spends and should be managed effectively
to achieve optimum value. The effectiveness of the purchasing process at supply chain
might be evaluated by reviewing how the critical suppliers are assessed, or determined
the frequency of frequency of product rejection and the volume of concessions that have
been raised for previously rejected products.

Information sharing enables organizations to make better decisions in their operations

leading to better resource utilization and lower supply chain cost. Better management of
information allows organizations to be responsive to customer demands (Lee, 2000;
Mentzer (2004).

Supply chain performance is a process centered approach towards business decision

making. It helps manage supply chain performance using a metrics frame work for
stakeholders, managers and employees within an integrated management environment.
SCPM should be a business critical process driven by metrics and supported by business

25
intelligence with increasing competition and changing market forces, tapping into this
critical asset essential in sustaining competitive advantage. The study looked at the gaps
in early supplier involvement. This was examined and analyzed used to bridge the
existing gaps

2.4.1 Information sharing

Information sharing is an important aspect in achieving seamless integration in a supply

chain Lee (2000). This result in achieving SCM endeavors. Cross functional integration
and inter organizational integration requires the visibility of information across the
supply chain. Indeed, information sharing is highly considered as the way to reduce
demand uncertainty.

Many studies have shown that information sharing can bring many benefits both to
suppliers and buyers, such as inventory reduction, and reduce purchasing costs Huang
and Gangopadhy, (2004);Raghunatahan,2003;Ramaras,(2003);Ye( 2001).

The type of information shared vary from strategic to operational information and impact
of information sharing on supply chain performance depends on what information is
shared ,quality on shared information and company`s capacity in using and translating
the information into a supply chain strategy and operational activities Lee and Whang
(2000) ; Moberg (20002)

2.4.2 Supplier development

As more and more organizations have realized the importance of the performance of their
supplies to establishment and sustaining of their competitive advantage (Goffin2006,Li
2006), purchasing research has begun to focus on supplier development programs and
study how these initiatives impact on supply chain
performances.(Hahn,1990;Monczka,1993;Htrley and Choi; 1996) this studies have shown
the importance of such initiative on supply chain, though researchers such as
Gunasekaran and Ngai(,2005) that such initiatives can be expensive.

2.4.3Supplier evaluation and certification

26
Implementing an effective supplier certification process is critical to reducing the
supplier base, building long-term relationships, reducing time spent on incoming
inspections improving delivery and responsiveness, recognizing excellence, developing a
commitment to continuous improvement, and improving overall
performance(Ganesan,1994).supplier certification allows organizations to indentify the
suppliers who are most committed to creating and maintaining a partnership and who
have the best capabilities (Sank,2001).

2.4.4 Buyer supplier relationship management

According to Hand field (1999) good buyer supplier relationship management allows
organization to make better use of their suppliers` capability and technology to deliver
competitive products. Difficulties experience in coordinating operational activities
through joint planning with suppliers can improve inventory management, smoothen
production, improve product quality, and lead time reduction.

The integration with suppliers throughout the product life cycle is an effective strategy in
reducing supply uncertainty. The ultimate objective of SCM is product to the satisfaction
of end customers. Customers` relevancy then becomes a key strategic commitment of
leading organizations Ansari (2000)

According to Bowersoz (1999) inefficient customer relationship limits organizations

from being responsive in fulfilling customers demand and improving customer
satisfaction by proactively seeking customer needs and requirements. Inability to build
close relationship with customers’ will not lead organizations into a lasting competitive
advantage.

27
 CHAPTER THREE.

RESEARCH DESIGN AND METHODOLOGY.

3.1 Introduction.
This section of the study will discuss the design and methods to be adopted in process of
data collection and explain why they were used. It gives details of research design, target
population, sampling design, data collection procedures, data collection tools, and data
analysis techniques

3.2 Research design.

This is a conceptual structure within which research was conducted. It provides a basis
for the collection of relevant evidence with minimal expenditure of time, effort and
money. (Cooper 2006)
The researcher adopted descriptive research design with an aim of minimizing bias and
maximizing reliability. It was taken to be one of the best methods of analysis due to the
fact that the data were both quantitative and qualitative and ensure that no relevant
information was omitted. (Mugendas & Mugenda, 1999).
The researcher used both primary and secondary data. Primary data was obtained using
interviews and questionnaires while secondary data was taken from internet, books,
journals and other written materials. In structured questions, questions were accompanied
by a list of possible alternatives for respondents to choose the appropriate answers and on
the other hand unstructured questions gives respondents freedom to respond in their own
words.

3.3 Target population.

The data was collected from a total population of the 162 employees of Murang’a South
Water and sanitation Company who are directly involved in the SCM since they are more

28
 familiar with activities of the supply chain and be in a position to provide adequate data
as compared to their counterpart from other functions.

The researcher will target a total 162 employees specifically from four department of the
company under research that is; purchasing and supply department, marketing
department, quality department and production department. The table below summarizes
the target population.
Table 3.1 Target population.
Population category Number of staff Percentage of target population
Purchasing department 45 29%
Marketing department 54 33%
Human Resource and 21 11%
Administration department
Technical department 42 27%
Total 162 100%

Source; Author (2012)

3.4 Sample and sampling procedure
The researcher selected samples using stratified sampling technique and by a random
selection of subjects in the strata’s identified. In stratified sampling technique the
population is divided into homogenous groups “strata” and the sample was drawn for
each strata using random sampling techniques. The goal was to obtain a sample which
gives good understanding of the problem and “unbiased” representation of the total
population. The goal of this method was to achieve the desired representation from
various sub-groups in the population (Mugendas & Mugenda, 1999). The researcher only
investigated 50% of each department from the targeted population. The sample consisted
of 49 employees from the four departments namely; purchasing and supplies department,
marketing department, quality department and operational department.

Table 3.2 Sample size

Category Target population Sample size Percentage

29
Purchasing department 45 14 28.6%
Marketing department 54 16 32.7%
Human Resource and 21 6 12.2%
Administration
department
Technical department 42 13 26.5%
Total 162 49 100%

Source; Author (2012)

3.5 Data collection instrument.

Questionnaires and interviews will be used to collect data for the evaluation of the Supply
chain activities. These instruments will be appropriate since the researcher is interested in
collecting in-depth data. The researcher undertakes intensive interviews after
administering questionnaires (Mugenda & Mugenda, 1999). They further states that a
reliable sample size can be obtained from 30% of the total population hence the
researcher obtained a sample size of 49.

3.5. 1 Piloting of the instruments.

The questionnaires will be pre-tested using a small sample before use. Improvement in
the same will be made based on the outcome of the pre-test. The questionnaires used
contained a list of questions in closed ended format. This was to allow a great depth of
response and one doesn’t have to come up with appropriate responses to categories.

3.5.2 Reliability and validity of the research instruments.

The validity of the research instrument will be achieved with the assistance of research
experts from the University of Nairobi. The reliability of the research will also achieved
by pre-testing the questionnaire in a pilot study in an area not covered by the scope of
research. Thika Water and Sanitation company in Thika will be chosen to avoid any

30
interaction between the respondents used during the pilot study and those of the main
study as a way of eliminating contamination.

3.6 Data collection procedure.

The researcher will use closed ended questionnaire which will be self administered
which will be served to employees in purchasing and supplies department, marketing
department, quality department and operational department and arrangement will be
made to pick them after three days.

3.7 Data Analysis Technical

After field work before analysis all the questionnaires was adequately checked for
reliability and verification. Data was edited then coded and then was entered into a
spreadsheet and analyzed using (ms word) Microsoft word. The data was analyzed using
qualitative and quantitative techniques. This involves creating the descriptive statistics
namely percentage and frequencies. The data was presented by use of table, pie charts
and graphs.

3.8 ETHICAL ISSUES

The researcher informed MUSWASCO about the research intension and request for
permission to carry out the process, carefully citing the benefits of carrying out such
research study to the company. The researcher will produce relevant documentary
evidence to show course for the study and permission granted. The researcher assured
confidentiality of their responses.

31