KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGYKUMASI

INSTITUTE OF DISANCE LEARNING

TOPIC: ASSESSING EFFETIVE NEGOTIATION PRACTICE IN THE

ACQUISITION OF RAW MATERIALS AND ITS EFFECT ON OPERATION
COST

(A CASE STUDY OF GUINNESS GHANA BREWERIES LIMITED)

NAME

INDEX NO

CONTACT

SAMUEL O.ACQUAH

6814011

0208611666

JOSEPH NGOSWINI

6882811

0249351710

ROSELYN SINTIM-GYIMAH

6900411

0243327840

ROSEMOND NARKO OCANSEY

6887111

0274395646

CHAPTER ONE
GENERAL INTRODUCTION

1.0

Introduction

This chapter deals with the Background of the study, the Statement of the problem,
Objectives of the study, Research Questions, the Methodology, and Scope of the study
and Organization of the study.
1.1

Background of the study

Negotiations and bargaining are an integral part of the lives of nearly all people, and
people negotiate about almost all aspects of life. For example at work place, employees
negotiate for increase in salary, in business people negotiate to make a contract. Business
negotiations most commonly take the form of buyer-seller negotiations. According to
Spangle and Isenhart (2003), Negotiation process precedes almost every important
decision and it plays a significant part in the business world and this has led to
negotiation and bargaining becoming a core activity of buyers, consultants, salespeople,
brokers, administrators, and all people who are involved in the business sector.

Whether one is negotiating internally with a colleague or negotiating externally with a

business partner, there is the need to prepare for every negotiation process. Mandelbum
(2010) argued that the ability to prepare for the negotiation process and discover optimal
solutions is critical to success in business.

Steele and Beasor (1999) defined negotiation as a process through which parties move
from their initially divergent positions to a point where agreement may be reached. It is a
type of communication which enables two parties to reach an agreement in the situations
when people have different opinions. Negotiations take place for a great number of
reasons which, according to Lewicki, Barry and Saunders (2007) can be grouped into
three main categories namely to agree on sharing or dividing of a limited resources; to
develop something new with common efforts of the parties and finally to solve a problem
occurred. Generally, manufacturing organizations are known to have a high production
cost with raw material costs typically comprising up to 80% of the total production cost.
According to Invento Raw material survey in 2011, an average manufacturing company
has 20% of its total annual cost emanating from raw materials. Since manufacturing
companies mainly convert raw materials into finished goods, they face huge challenges in
managing their raw materials. The prices of many of the worlds key commodities are
increasing at a fast pace, and volatility across the markets are enough to create huge
problems for companies in the industrial manufacturing and consumer products
industries.
Martinot and Poot (2012) reckoned that high raw material prices are profits killer for
many companies and usually sales people are often reluctant to pass on those price
increases to their customers in fear of damaging customer relationships. Tight control of
material costs is therefore, key to ensuring best value for money and increased
profitability. By engaging suppliers of raw materials in an effective negotiation,
procurement managers are able to obtain the best value purchased material through
reduction in prices of materials. Negotiation helps to obtain the best price in other to save
3

cost, maximize returns as well as establish long term relationships with suppliers, the
importance of negotiation enables companies to thrive, grow and become leaders in their
field of business.
Ghana has few large companies in the manufacturing sector who are multinational. Such
multinational manufacturing companies include Unilever Ghana Ltd, Nestle Ghana Ltd,
Guinness Ghana Breweries Ltd, PZ Curson Ltd, Accra Breweries Ltd etc.

These

organizations convert large quantities of raw materials into finished goods annual.
1.2

Problem statement

According to the Ghana Statistical Service National Accounts Statistics (2013)

Provisional estimates of Gross Domestic Products (GDP) for 2012 showed a growth of
7.1 percent. Industry, the second largest sector which represents 27.6% of GDP, declined
in growth from 41.1 percent in 2011 to 7.0 percent in 2012. The manufacturing subsector
within the industry sector has experienced lower growth rates over the last decade
compared with the industrial sector and the economy as a whole. Specifically, whilst the
industrial sector recorded an annual average growth rate of 8.8% between 2002 and 2011,
the manufacturing subsector registered only an annual average growth rate of 2.3% over
the same period. What is more worrying is the development in the last five years, where
the sector recorded declined growth rates of -2.3% and -1.3% in 2007 and 2009,
respectively. These statistics however, do not outline the major causes of this poor
performance over the years. A critical look at the financial statement of Guinness Ghana
Breweries Ltd (GGBL) over the last three years from 2011 to 2013 indicates that, the

companys direct cost keeps increasing at an average of 25% and direct cost represents
about an average of 70% of Net Turnover.
Several statistics from the Ghana Statistical Services calculates the contribution of the
manufacturing sector to Ghanas economy. However, the above statistics calculated over
the years do not show individual causes of the poor performance of the manufacturing
sector. The major gap in knowledge which motivated this study is to examine the
operational cost of GGBL through effective negotiation of its raw materials.
1.3

Research Objectives

The underlying premise of the study is to assess effectiveness of negotiation practice by

GGBL in the acquisition of raw materials and its effect on operation cost. As a result, the
following research objectives were set:
1) To examine the procurement process of GGBL in the acquisition of its raw
materials.
2) To examine the skills and styles adopted in the negotiation process of GGBL in
the acquisition of its raw materials.
3) To analyze the impact of raw materials cost on the profitability of GGBL over the
past 5 years.
4) To examine how GGBL is able to employ various negotiation style/skills in
improving its profitability through raw material acquisition

1.4

Research Questions

The following are the research questions of concern in this study:

1) What are the procurement processes of GGBL in acquisition of its raw materials?
2) What skills/styles are adopted in the negotiation process of GGBL?
3) What is the impact of raw materials cost on the profitability of GGBL for the past
five (5) years?
4) How does GGBL employ negotiation style/skills to reduce cost and its
profitability?

1.5

Relevance of the Study

This study carries much importance in view of the fact that the manufacturing sector in
Ghanas economy has performed poorly with no empirical study into the causes of the
poor performance. This study will contribute to understanding the current situation of
why such companies perform badly.
The findings of this study would draw the attention of procurement managers to the
benefits of effective negotiations in business. The study will also provide direction for

future research in Ghana and other African countries on the effective negotiation in
manufacturing companies.

1.6

Limitation of the study

The study may have some limitations as is typical of every research method. The study is
carried out in GGBL which is just one of the several manufacturing companies in Ghana.
This case study may make the findings less generalizable. In addition, GGBL is a bigger
multinational company and so may create bias in the applicability and generalizability of
the research findings to smaller manufacturing companies in Ghana.
1.7

Organization of the thesis

This thesis has been organized into five chapters. Chapter one introduced the topic,
discussed the need for the research or the research problem, the research objectives, and
establishes the various questions on which the research objectives were based, the
relevance of the study, limitation of the study and the organisation of the thesis. Chapter
two provides a comprehensive review of the literature on Negotiation. It also summarized
the related research necessary to understand the topic in the context of Ghanaian
environment. The methods employed in the study have been the subject matter of the
third chapter. Chapter four concentrated on analyzing the data and discussing the findings
of the study in the context of the literature reviewed. The fifth chapter summarized the

key findings, the main conclusions, and some recommendations and suggestions for
further studies on other related areas of concerned.