Journal of Arts & Social Sciences

Vol 6, Issue 2, 26-44 (2023)

The Impact of Procurement Practices on the Organizational

Performance in Small and Medium-Sized Enterprises (SMEs) in
Services Sector in Johor Bahru, Malaysia
Toh Li Yen
Faculty of Business, Raffles University Iskandar
Johor Bahru, Malaysia. Email: [email protected]
__________________________________________________________________________
Abstract
Procurement practices play a vital role in every organization that involves procurement of goods or services. It
must be effectively managed and handled by organizations to accomplish high organizational performance,
especially in services sectors of Small and Medium Enterprises (SMEs) as services sector is one of the major
contributors which brings growth in Malaysia’s economy. Due to this, services sector should enhance their
procurement practices with the objective of increasing their organizational performance. Hence, the main
objective of this study is to examine the impact of procurement practices on the organizational performance of
the services sector of SMEs, as well as to identify which dimension of procurement practices (procurement
planning, supplier selection, buyer-supplier relationship, and e-procurement) impact most of the organizational
performance of SMEs in Johor Bahru, Malaysia. To conduct the study, questionnaire is prepared and distributed
to 60 respondents who work in procurement-related position in services sector of SMEs in Johor Bahru. Data
was then collected and analyzed using PSPP software and SmartPLS software. The findings of the study allow
organizations to gain knowledge and improve their procurement practices in order to achieve better
organizational performance.

Key words: Procurement practices, procurement planning, supplier selection, buyer-supplier relationship, e-
procurement, organizational performance
___________________________________________________________________________________

Introduction

SME is one of the key drivers of growth in Malaysia's economy (SME Corporation Malaysia,
2021). SMEs has contributed 38.9% to Malaysia’s Gross Domestic Product (GDP). Among all sectors
in SME, the services sector is the largest contributor to the SME for Malaysia’s GDP in 2020, with
62.1%. All these facts are striking the attention of the SME, especially for the service sectors, to fully
acknowledge the importance of procurement management and adopt key purchasing practices in order
to sustain its organizational performance. However, SMEs faced economic crisis and economic
uncertainties when the COVID-19 disease struck globally, including Malaysia. SMEs in Malaysia
were hugely affected by the COVID-19 pandemic due to the announcement of Movement Control
Order (MCO) in March 2020 which led to temporary closure of some of the business (Uthamaputhran
et al., 2021). According to Tong and Gong (2020), SMEs in Malaysia has relatively low performance
in digitalization as they do not implement any technologies in their businesses. Hence, this is one of
the reasons that most of the SMEs are unable to sustain its business during the pandemic as they do
not engage in any digital platforms. The organizational performance is affected by the overall supply
chain operations and activities which include procurement management. The efficiency of the
procurement management is highly impacted by the types of procurement practices as well. The
effectiveness of key procurement practices has to be identified, examined and correctly adopted by
organizations in order to enhance the organizational performance. Hence, this study is to examine the
impact of the procurement practices on the overall performance of Small and Medium Enterprises
(SME) services sectors in Johor, Malaysia.
In 2022, SME is expected to have a worse performance due to COVID-19 related
uncertainties, increased costs of raw materials and transportation, uncertain supplies of raw materials
and transportations, shortage of manpower and low customer confidence (Azman and Naharul, 2021).
Due to MCO, the growth of SME has been slowed down and led to low profit margins or even
liquidation. With selecting appropriate suppliers as well as gaining stable relationships with suppliers,
organizations could prevent the issues such as uncertainty and unavailability of raw materials as well

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as the unstable cost controlled by the suppliers. Similar to the buyer-supplier relationship, it is built by
trust, openness, shared risks and rewards, and commitment, so a good buyer-supplier relationship
enhances the procurement management of the SMEs. All of these issues impose risks to the SMEs.

Literature Review

Procurement practices come in many shapes and include a variety of tasks, including defining
business requirements, creating business cases, evaluating market potential, developing and putting
into practice procurement strategies, assessing supply-related risk, and establishing and growing the
right buyer-supplier relationships (Kalatya and Moronge, 2017). Mokogi et al., (2015) stated that
procurement should focus on controlling costs in order to help public organizations to achieve their
goals. Procurement is a department that are concerned by organizations to improve its performance. It
is because the purchasing of goods, materials or value-adding items through appropriate suppliers or
channels benefits the organizational performance (Leiyan, 2021). Looking at the functions of
procurement practices, Karanja and Kiarie (2015) cited Shah (2010) study that described when
managing performance, resources, costs, and operational logistics from moved departments and
manufacturing plants, procurement practices provide the correct measurements and key performance
indicators that may help the organizations. Kipkemoi (2017) expressed that the goal of procurement
practices is to make sure that businesses obtain profitability when they are spending. This entails the
business achieving its strategic goals by effectively sourcing the necessary products and services from
the appropriate vendors. In the long term, procurement strategies assist firms in cost savings. Cost
reductions are attained through procurement of quality goods, economies of scale, and reducing
inventory holding costs (Kipkemoi, 2017).

Theories and Models Relate to Variables

This study explains a few theory used by the previous researchers. Firstly, Partner Selection
Theory is one of the most significant aspects on purchasing practices is the selection of suppliers or
partners. Partnership is formed when two or more people work together and have a collaborative
relationship and mutual goal. Partnerships between suppliers are mutually connected which means
both parties are eligible to choose each other based on certain criteria. There is a lack of partner
selection literature that focuses on partner selection criteria instead of focusing on the process of
partner selection itself (Mokogi et al., 2015). Hence, partner selection theory does not have a proper
method that shows how it is conducted so there is a lack of support of to justify supplier selection.
Most journal articles use the assumption that readers will make reasonable decisions based on
narrowly defined selection criteria. Specific partner characteristics will be beneficial depending on the
motivation of the alliance as a whole. The partner’s qualities are frequently given priority in the
development of a logical selection criterion. Secondly, Resource-Based View (RBV) Theory serves to
determine and analyze the strategic resources and capabilities of an organization to achieve
organizational goals (Barney, 1991). RBV helps organizations to achieve a sustainable competitive
advantage (SCA) and differentiates themselves from their competitors. Mokogi et al., (2015) stated
that the RBV of the company, which includes technical, human, and physical assets, is therefore an
appropriate method for comprehending the competitive dynamics in which resources are intangible
and tangible assets tied to the firm in a semi-permanent manner. Organizations are urged to find out
its own uniqueness and differentiations from its resources as well as maximizes its long-term
capabilities to enhance its sustainable competitive advantage so that competitors are unable to imitate
it. Wong and Karia (2010) added in that the RBV theory adds a category of capabilities that come
through some extensive patterns of interactions and coordination between resources since only having
resources but without capabilities are insufficient. Barney (2012) concluded that both procurement
and supply chain management have the attributes or characteristics that at least bring temporary
competitive advantage to the organization, not completely zero advantage. RBV theory is relevant in
this study as it stated that well-planned and functionable procurement practices helps organization to
gain competitive advantage. Thirdly, Diffusion of innovation (DOI) theory elaborates on how an idea
or product develops popularity and spreads through different social systems over a period of time. The

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outcome is that individuals within a social system either embrace or refuse the new idea, behavior, or
item. The new idea must be a value-adding idea as well in order to benefit one’s life. There are 5
adopter characteristics that are dominant in the DOI theory which are innovators, early adopters, early
majority, late majority and laggards (Rogers, 1962). Kalatya and Moronge (2017) stated that DOI
theory is the main theory in guiding their study of the relationship between E-procurement and
performance of logistic firms in Kenya. The diffusion of technology and the uptake of innovation may
be problems with the integration of the e-procurement concept. Palmer and Butt (2008) stated that
since the theory has also lately been heavily utilized as a key theoretical foundation for diffusion of
innovation’s research in the field of Information Technology (IT), it is fair that it may be employed to
comprehend e-Procurement (as cited in Kalatya and Moronge, 2017).

Procurement Practices: Procurement practices come in many shapes and include a variety of tasks,
including defining business requirements, creating business cases, evaluating market potential,
developing and putting into practice procurement strategies, assessing supply-related risk, and
establishing and growing the right buyer-supplier relationships (Kalatya and Moronge, 2017). Mokogi
et al., (2015) stated that procurement should focus on controlling costs in order to help public
organizations to achieve their goals. Procurement is a department that are concerned by organizations
to improve its performance. It is because the purchasing of goods, materials or value-adding items
through appropriate suppliers or channels benefits the organizational performance (Leiyan, 2021).
Looking at the functions of procurement practices, Karanja and Kiarie (2015) cited Shah (2010) study
that described when managing performance, resources, costs, and operational logistics from moved
departments and manufacturing plants, procurement practices provide the correct measurements and
key performance indicators that may help the organizations. In the long term, procurement strategies
assist firms in cost savings. Cost reductions are attained through procurement of quality goods,
economies of scale, and reducing inventory holding costs (Kipkemoi, 2017).

Procurement Planning is defined as a plan of major procurement activities involved in an

organization. They also pointed out that procurement planning has to be done before budgeting
process because every department has to calculate their budget for human resources, expenditures and
purchases beforehand. Another researcher Leiyan (2016) who further stated that procurement
planning is the overall determination of procurement purpose, job scope, budgeting, customer
requirements, procurement activities, responsibilities and time. Leiyan (2016) argued that
procurement planning is not only covering main procurement activities but the entire procurement
process. It plays a crucial role as it helps the company to identify whether the procurement planning is
realistic and feasible or not. Abdiaziz (2019) stated that procurement planning is significant in
contributing to organizational performance because procurement needs systematic approaches and
suitable strategies to fulfil both organization and customers’ requirement. Moreover, procurement
planning needs to be constantly revised and renewed as demands for better quality of service are
increasing. Next, Supplier selection is one of the examined independent variables as it is closely
related to procurement department as it can affect the decision-making process of the purchases. This
led to Nyaberi et al. (2018) argued that the relationship between companies and their suppliers are one
of the main contributes to organizational success. As a result, the selection of supplier is significant to
the organization’s performance. Chai, Liu and Ngai (2013) stated that there are 5 stages of supplier
selection which are need recognition of new supplier, identify and formulate decision criteria, pre-
qualification, final supplier selection and monitor of supplier selection (as cited in Nyaberi et al.,
2018). For example, evaluation and assessment to measure the potential supplier’s characteristics,
appropriateness and performance. Kipkemoi (2017) had different view on supplier selection, so the
researcher argued that ISO 14001 certification, Request for Quotations, proper pre-qualification is the
most essential supporting evidence in the supplier selection procedures because the suppliers are
qualified and assessed through official standards and requirements. Thirdly, Buyer-supplier
Relationship is that both parties of buyer and supplier work mutually as they have shared values and
motives that benefits their own way. For example, organizations (buyer) can have better performance
while cooperating with a few significant suppliers who are ready to share accountability for the
success of goods through forming strategic relationships with them. This also depends on the ability

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of the organization when coordinate and gathering the resources with its suppliers. Early-stage
suppliers can provide more cost-effective design options, assist in choosing the finest materials and
technologies, and aid in design evaluation. The researchers had different perspective on this variable.
Loice (2015) believed that buyer-supplier relationship has a new revolution that helps to intensify
competition between organizations. The researcher stated that the collaboration between buyer and
supplier is closer now due to the globalization and competitive environment in the market which
focused on cost, quality, flexibility and technology used. While Kipkemoi (2017) studied the level of
buyer-supplier relationship by focusing on the extent of information sharing, long-term relationships
and dependability of goods and services’ delivery. Fourthly, E-procurement is a technological tool to
facilitate and coordinate all procurement-related practices through the usage of Internet-based
(integrated) information and communication technologies (ICTs). E-procurement can also be viewed
more broadly as an end-to-end solution that combines and consolidates numerous procurement
processes across the organization (Kalatya and Moronge, 2017). On the other hand, Kipkemoi (2017)
claimed that e-procurement systems are still new and employees in the procurement department need
time to develop the skills and knowledge. Therefore, adequate trainings and lessons are essential to
build skills and adapt to the e-procurement systems. Furthermore, Kipkemoi (2017) proposed that by
engaging in e-procurement practices helps sustaining the environment as excessive paperwork are not
required anymore. It can eliminate waste and promotes eco-friendly. Masudin et al., (2021) stated that
the execution of procurement can be made visible, effective, and fair with the use of e-procurement.
Applying e-procurement has two advantages and benefits: direct benefits that improve operation
process effectiveness, data quality, and useful application process; indirect benefits can enhance
customer services.

Organizational Performance: Here organizational performance is compared to other organizations’

performance within the same industry. Kipkemoi (2017) measured organizational performance based
on the extent of organization on recognizing its main goals in terms of profitability, market share,
productivity, effectiveness, cost reductions and others. Better supply chain management and the
professionalism of the procurement function inside firms are two ways to save money on procurement
management (Kipkemoi, 2017). Activities related to procurement plan for needs, find and evaluate
suppliers, and thus improves organizational performance. Successful procurement practices of an
organization satisfy customers’ needs and maximize value with the existing resources and capabilities.
On the same note, Leiyan (2016) also stated that organizational performance can be indicated by the
customer satisfaction towards the effectiveness and efficiency of the procurement labor force.

Previous Studies on the Relationship Between Procurement Practices and Organizational

Performance

Mokogi, Mairura and Ombui (2015) study shows that there is a strong and positive
relationship between procurement practices and the organizational performance in Nairobi County.
There is also positive relationship between all variables of procurement practices and organizational
performance. Procurement practices had enhanced the performance of the enterprises.
Karanja and Kiarie (2015) have investigated the influence of procurement practices on
organization performance in private sector in Kenya. Findings showed that procurement practices
have a positive and great impact on organizational performance in the private sector in Kenya. The
study also concluded that procurement practices influenced greatly on the performance of the
organizations in the private sector and help to save costs. The study also stated that procurement
planning is the major contributor of the organizational performance.
Kipkemoi (2017) examined the effects of procurement practices on organizational
performance within the public sector. The findings showed that procurement practices have positive
impact on organizational performance. Supplier selection is the most important variable as
organizational success has shown greatly depend on the supplier selection procedures.
Loice (2015) has studied on the effect of buyer-supplier relationships on procurement
performance at Kenyan Supermarkets. The findings showed that buyer-supplier relationship has a
positive relationship on procurement performance. Hence, the study recommended that organizations

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are needed to develop long-term partnership with the main suppliers as well as concentrating on the
needs of the suppliers in order to maintain relationships and gain competitive advantage.
Kalatya and Moronge (2017) studied the influence of procurement practices on performance
of logistic firms in Kenya. The result showed that there was a strong and positive relationship between
the independent variables and dependent variable, especially the independent variables were
significant. Hence, Kalatya and Moronge (2017) concluded that both e-procurement and procurement
planning were the major factors that affect the logistic firms’ performance in Kenya.
Abdiaziz (2019) has studied on the effect of procurement practices on organizational
performance in selected telecommunication industry in Hargeisa, Somaliland. The result showed that
all 3 independent variables are significantly and highly affects the organizational performance in the
telecommunication industry in Hargeisa, Somaliland. The study also concluded that procurement
planning considerably has an effect on the organization’s overall performance in telecommunication
industry. Telecommunication industry must have positive procurement planning such as decent
purchasing forecasting.
Nyaberi, Iravo and Sakwa (2018) investigated the role of supplier selections on organizational
performance in manufacturing firms in Kenya. The result indicated that supplier selection affects
organizational performance with a p-value of less than 0.05. The study recommended that
manufacturing firms should emphasize on supplier selection in order to get higher profit margins.
Train the supplier selection committees and procurement managers are one of the ways to select the
best suppliers.
Oloo, Atambo and Muturi (2017) examined the effects of procurement practices on the
organizational performance of public hospital in Kenya. The result revealed that supplier selection
had the strongest Pearson correlation coefficient, which was 0.606 so it indicated that there was a high
relationship between procurement practices and organizational performance of public hospitals.
Hence, it concluded that procurement practices as the independent variable had significant impact on
the organizational performance of the public hospitals in Kenya. The study also established that
supplier selection affects organizational performance.
Leiyan (2016) has studied the procurement practices and organizational performance of the
University of Nairobi (UoN). The findings have showed that there was a relationship between all of
the examined variables of procurement practices and organizational performance. Among the 5
independent variables, procurement planning has a major impact on the organizational performance in
UoN. It is because from the result on the regression coefficient of the variables, procurement planning
has the highest coefficient value of 0.444 and a p-value of 0.014. Based on the analysis, UoN is found
to have a moderate extent on procurement planning.
Masudin, Aprilia, Nugraha and Restuputri (2021) studied on the impact of E-procurement
adoption on performance of manufacturing companies in Indonesia. The result from path coefficient
value showed that the implementation of E-procurement had the highest path coefficient value of 0.86
so it was the most significant influence on company performance among the other 3 independent
variables. Finally, the study concluded that E-procurement has a significant effect on company
performance, and it can help to increase the competitive advantage of the company.

Hypothesis Development
Based on the previous studies and literature review, there are 4 hypotheses developed from
procurement practices and organizational performance. The hypotheses for this study are:

H1: Procurement planning has a significant relationship with organizational performance.

H2: Supplier selection has a significant relationship with organizational performance.
H3: Buyer-supplier relationship has a significant relationship with organizational performance.
H4: E-procurement has a significant relationship with organizational performance.

Conceptual Framework

Based on the literature review, the conceptual framework is constructed. Figure 1 illustrates the
conceptual framework of this study that presents the effect of procurement practices consisting of

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supplier selection, procurement planning, e-procurement, and buyer-supplier relationship on

organizational performance.

Figure 1: Conceptual Framework

Research Methodology

Research Design: In this study, a quantitative research design is used to examine the impact of
procurement practices on organizational performance of the services sector of SMEs in Johor,
Malaysia. Quantitative research design collects numerical data and statistically or mathematically
analyze the data collected through polls, interviews, questionnaires, or surveys (Creswell, 2013). The
reason that quantitative research design is chosen to use in this study is that it can collect data from
large samples, to compare results analytically as well as to demonstrate hypothesis testing approach
(Bhandari, 2021). Hence, it is easy and less time-consuming. Both quantitative research design and
both descriptive research and correlational research will be used in this study. Hence, questionnaires
with rating scales will be generated to investigate the impact of procurement practices on
organizational performance of the services sector of SMEs in Johor, Malaysia as well as which
variables of procurement practices has the most significant influence on the organizational
performance.

Sampling Method: The target respondents are employees from procurement-related department in
the services sector of SMEs in Johor Bahru, Malaysia. To decide the sample size, we look at “10-
times rule” to determine the minimum sample size in which the sample size must be greater than 10
times the maximum number of either the inner or outer model links directing at any latent variable in
the conceptual model (Hair et al., 2011a). In this case, based on the conceptual framework from
Figure 1, there are 4 arrows pointing from independent variables to the dependent variable. Hence, the
minimum sample size calculated from the “10-times rule” is 40 respondents. As a result, the sample
size of this study is 60 respondents, and it fulfils both of the decision rules developed by Sekaran
(2003) and Hair et al. (2011a). In this study, non-probability sampling technique will be used. Non-
probability sampling technique is also easy and cost-effective as well as helps to develop
understanding of an under-researched population (McCombes, 2022). This relates to this study as
SMEs in Johor area is an under-researched population and the study of this area is limited. In this
study, convenience sampling will be used. Convenience sampling selects individuals who are
convenient and relevant to the researchers (Jain and Chetty, 2020). Convenience sampling is chosen

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to conduct in this study as it is cost-effective, less time-consuming, and easy to gather data from a
large population compared to other sampling techniques.

Research Instruments: In this study, questionnaires are used to collect the required
information as well as critical data which will help to answer the research questions and achieve the
research objectives. Questionnaires will be created in Microsoft Forms and distributed through online
platforms such as emails and social medias. In addition, the questionnaires are generated based on the
questionnaires used by a few of previous studies so that the questionnaire is relevant in order to
collect valid data. The questionnaires also target employees who work in procurement-related
department in services sector of SMEs in Johor Bahru, Malaysia. The questionnaires are divided into
3 sections which are Section A, Section B and Section C. Firstly, Section A collects the demographic
information of all respondents such as gender, age group, education level, current job position and
current job experience. Next, Section B is divided into 4 sections which are the variables of
independent variable, procurement practices which are procurement planning, supplier selection,
buyer-supplier relationship, and e-procurement. Section C of the questionnaires is about the
dependent variable which is organizational performance. Table 1 shows the layout of the
questionnaires. In this study, 5-point Likert scale is used to measure the impact of procurement
practices on the performance of the services sector of SMEs in Johor, Malaysia. On a Likert scale of 1
to 5, 1 indicates strongly disagree, 2 indicates disagree, 3 indicates neutral, 4 indicates agree and 5
indicates strongly agree. These five points are able to increase the validity and reliability of the data.

Table 1: Layout of the Questionnaire

Section Topic of section Number of questions
A Demographic information 5

B Procurement practices
Procurement Planning 5
Supplier Selection 5
Buyer-supplier Relationship 5
E-procurement 5
C Organizational Performance 5
Total number of questions 30

Results of the study

Table 2 shows the overall demographic information of all respondents will be discussed
accordingly, which are gender, age group, education level, current job position and current job
experience. Based on the findings, there are more male employees participated in this study than
female employees. Only 38% of respondents were female. Next, most respondents were aged between
36 to 45 years old which contributed 30% among other respondents. This is followed by between 18
and 25 years old (27%), between 26 and 35 years old (30%), between 46 and 55 years old (15%), and
above 56 years old (5%). Furthermore, most respondents were holding Bachelor’s Degree which
contributed 48% among other respondents. This is followed by Master’s Degree (27%), Diploma or
equivalent (17%), SPM level or equivalent (7%), and PHD holder (1%). Moreover, most respondents
were working as Purchasing Manager, which contributed 25% among other respondents. This is
followed by Procurement Specialist (22%), Sourcing Manager (21%), Senior Purchasing Executive
(17%), and Assistant Purchasing Manager (15%). Lastly, most of the respondents had 3 to 4 years
working experience which contributed 30% among other respondents. This is followed by above 6
years (22%), 1 to 2 years (20%), 5 to 6 years (15%), and less than 1 year (13%).

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Table 2: Demographic Profile of Respondents (N=60)

Background Categories Frequency Percentage (%)
Gender Male 37 62%
Female 23 38%

Age Group 18-25 years old 16 27%

26-35 years old 14 23%
36-45 years old 18 30%
46-55 years old 9 15%
56 years old and more 3 5%

Education Level SPM level or equivalent 4 7%

Diploma or equivalent 10 17%
Bachelor’s Degree 29 48%
Master’s Degree 16 27%
PHD 1 1%
Current Job Position Purchasing Manager 15 25%
Assistant Purchasing Manager 9 15%
Sourcing Manager 13 21%
Senior Purchasing Executive 10 17%
Procurement Specialist 13 22%

Current Job Experience Less than 1 year 8 13%

1-2 years 12 20%
3-4 years 18 30%
5-6 years 9 15%
Above 6 Years 13 22%

Reliability Test

In this study, reliability test is conducted to ensure that the measurements and results are
consistent and reliable. Hence, Cronbach’s Alpha value and Composite Reliability (CR) are
implemented to determine the reliability of this study for procurement practices and organizational
performance. Table 3 shows the result of each variable’s Cronbach’s Alpha value. The Cronbach’s
Alpha value for Organizational Performance is 0.875; Procurement Planning is 0.843; Supplier
Selection is 0.905, Buyer-supplier Relationship is 0.905; and E-procurement is 0.934. According to
the Rule of Thumb about Cronbach’s Alpha value from Hair et al. (2016), any variables with a
Cronbach’s Alpha value of 0.70 or higher are considered as good strength of reliability. As the
variables’ Cronbach’s Alpha value are ranging around 0.8 and 0.9, it shows that the strength of
reliability test are very good.

Table 3: Cronbach’s Alpha Reliability Test

Variables Number of Item Cronbach’s Alpha Composite Reliability (CR)
Organizational 5 0.875 0.910
Performance
Procurement Planning 5 0.843 0.882
Supplier Selection 5 0.905 0.929
Buyer-supplier 5 0.905 0.930
Relationship
E-procurement 5 0.934 0.950

Construct Validity
In this study, Construct validity helps to test whether the questionnaire is really measuring the
constructs of procurement practices by looking at the association between test scores and theoretical

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trait prediction. There are 2 methods to be conducted under the Construct validity which are
Convergent validity and Discriminant validity.

Convergent Validity
Table 4 shows the result of the measurement model for Convergent validity. From Table 4.4,
the AVE for procurement planning is 0.600, supplier selection is 0.723, buyer-supplier relationship is
0.727, e-procurement is 0.791 and organizational performance is 0.669. According to Hamid et al.
(2017), the AVE must be higher than 0.5 to show that the study is valid. Here the AVEs of all
construct are between 0.6 to 0.791, which are higher than 0.5. Hence, it indicates that the study is
valid. Moreover, Table 4.4 also shows the result of the range for each item’s loading and CR value.
Procurement planning’s loadings are ranged between 0.767 to 0.839; supplier selection’s loadings are
ranged between 0.836 to 0.871; buyer-supplier relationship’s loadings are ranged between 0.702 to
0.921; e-procurement’s loadings are ranged between 0.884 to 0.908; organization performance’s
loadings are ranged between 0.757 to 0.876. According to Hair et al. (2010), each item’s loadings
must be higher than 0.5 in order to be considered as having a positive relationship. Here all item’s
loadings are higher than 0.5 so it indicates that all item has a positive relationship. For CR value,
every construct’s CR value has to be higher than 0.7 to be considered as having a positive
relationship. From Table 4, procurement planning has a CR value of 0.882; supplier selection has a
CR value of 0.929; buyer-supplier relationship has a CR value of 0.930; e-procurement has a CR
value of 0.950; organizational performance has a CR value of 0.910. All construct has the CR value of
higher than 0.7 therefore it is having a positive relationship.

Table 4: Result of the Measurement Model for Convergent Validity

Construct Items Loadings Average Variance Composite Reliability
Extracted (AVE) (CR)
Procurement Planning PP1 0.762
PP2 0.747
PP3 0.762 0.600 0.882
PP4 0.839
PP5 0.761
Supplier Selection SS1 0.847
SS2 0.836
SS3 0.857 0.723 0.929
SS4 0.841
SS5 0.871
Buyer-supplier BSR1 0.702
Relationship BSR2 0.921
BSR3 0.835 0.727 0.930
BSR4 0.914
BSR5 0.872
E-procurement E1 0.887
E2 0.899
E3 0.884 0.791 0.950
E4 0.908
E5 0.868
Organizational OP1 0.836
Performance OP2 0.757
OP3 0.799 0.669 0.910
OP4 0.817
OP5 0.876

Discriminant Validity

Discriminant validity refers to the extent to which a variable is different from other variables
(Campbell and Fiske, 1959). Fornell-Larcker Criterion is used to test the discriminant validity of the
study. Table 5 shows the Fornell-Lacker Criterion for Discriminant Validity. It shows that when each
construct is comparing with other constructs, each construct’s difference is becoming larger. To have
high discriminant validity, the value of the square root of each constructs’ AVE must be higher than

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the correlations with other latent constructs (Hamid et al., 2017). Hence, the discriminant validity of
this study is valid and therefore acceptable.
Table 5: Fornell-Lacker Criterion for Discriminant Validity
Construct Buyer-supplier E-procurement Organizational Procurement Supplier
Relationship Performance Planning Selection

Buyer-supplier 0.853
Relationship

E-procurement 0.628 0.890

Organizational 0.768 0.734 0.818

Performance

Procurement 0.334 0.380 0.501 0.775

Planning

Supplier Selection 0.685 0.369 0.612 0.546 0.851

Path Coefficient and Hypotheses Testing

In this study, path analysis is the first method to test the 4 hypotheses developed earlier and
the results are shown in both Figure 2 and Table 6. The R Square value is 0.734, which indicates
73.4% of the variance in the organizational performance could be interpreted by the 4 independent
variables, which are procurement planning, supplier selection, buyer-supplier relationship, and e-
procurement. Next, the Beta Value for procurement planning is 0.163; supplier selection is 0.108;
buyer-supplier relationship is 0.399; e-procurement is 0.38. According to Hair et al. (2011b), a
structural model is acceptable when Beta Values for each variable is higher than 0.1. Hence, all 4
independent variables are significant as all Beta Values are above 0.1. Hair et al. (2017) stated that
when t-value is higher than 1.645 and p-value is lower than 0.05 (t < 1.645, p > 0.05), there is a
positive relationship between independent variables and dependent variable and therefore null
hypotheses should be rejected. Based on Table 6, procurement planning has a t-value of 1.857 and a
p-value of 0.032; buyer-supplier relationship has a t-value of 2.688 and a p-value of 0.004; and e-
procurement has a t-value of 2.663 and a p-value of 0.004. These results indicate that the independent
variables which are procurement planning, buyer-supplier relationship, and e-procurement has a
positive relationship towards the dependent variable which is organizational performance due to all t-
value is higher than 1.645 and p-value is lower than 0.05 (t > 1.645, p < 0.05). Therefore, null
hypotheses are rejected here. Conversely, supplier selection has a t-value of 0.930 and a p-value of
0.176, which indicates that supplier selection has no positive relationship towards organizational
performance due to its p-value is higher than 0.05 (t < 1.645, p > 0.05). Therefore, null hypothesis is
accepted. In this study, H1, H3 and H4 is supported while H2 is not supported. From Figure 4.6 and
Table 4.6, it shows that buyer-supplier relationship contributes the most to organizational
performance. This is due to the Beta Value for buyer-supplier relationship is the highest among the 4
independent variables, which is 0.399. Moreover, this result also reveals that more than half of the R
Square value of 0.734 is retrieved from buyer-supplier relationship alone. Hence, buyer-supplier
relationship has the most significant impact on the organizational performance of SMEs in the
services sector in Johor Bahru if compared to other independent variables which are procurement
planning, supplier selection and e-procurement.

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Figure 2: Structural Framework

Table 6: Path Coefficients and Hypotheses Testing

Hypotheses Relationship Std. T-value P-value Decision 𝐑𝟐
Beta
H1 Procurement Planning -> 0.163 1.857 0.032 Supported
Organizational Performance
H2 Supplier Selection -> 0.108 0.930 0.176 Not Supported
Organizational Performance

H3 Buyer-supplier Relationship - 0.399 2.688 0.004 Supported 0.734

> Organizational
Performance
H4 E-procurement -> 0.381 2.663 0.004 Supported
Organizational Performance

Discussion

The Relationship between Procurement Planning and Organizational Performance

The first research objective of this study is to examine the impact of procurement planning on
organizational performance of SMEs in services sector in Johor Bahru, Malaysia. As shown in Table
6, procurement planning has a positive and significant impact on organizational performance in which
its Beta Value of β = 0.163, p < 0.05, t > 1.645. This represents that the organizational performance
will be impacted by procurement planning. Karanja and Kiarie (2015) reflected that procurement
planning is the major contributor of organizational performance, especially in private sectors. This is
relevant to the study as most of the SMEs are private sectors as well. Findings from Karanja and
Kiarie (2015) implied that organization should bring focus and accountability in procurement
planning of the entire procurement process which helps to maximize efficiency and effectiveness of a

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procurement function. Karanja and Kiarie (2015) also pointed out one of the key setbacks in
procurement management is about substandard planning and managing of the procurement process
which leads to unrealistic budget allocation, incorrect forecasting of customer demand, inadequacy of
staffs’ skills and others. Hence, this also once again highlights the point of having an effective
procurement planning is crucial for organizations’ success. Moreover, the finding of this study is also
concurring with Kalatya and Moronge (2017) that procurement planning is the major factor that
affects an organization’s performance. Procurement planning contributes in terms of quality, delivery
and cost, which has a significant impact on how well an organization could perform. For instance,
with constructive procurement planning, purchasers could identify whether their expectations of the
stakeholders are realistic or not. This finding is also consistent with other previous studies conducted
by Abdiaziz (2019) and Leiyan (2016) which stated that procurement planning has a positive and
significant impact on the organizational performance. On the basis of the findings from previous
studies, it could be stated that organizations should hire employees who acquire good knowledge and
experience on procurement planning so that they could assist their companies to strengthen and
improve their procurement process which will lead to higher organizational performance.
Correspondingly, SMEs in Johor Bahru can improve its organizational performance by concerning on
procurement planning in procurement management. As such, H1 is supported.

The Relationship between Supplier Selection and Organizational Performance

The second research objective of this study is to examine the impact of supplier selection on
organizational performance of SMEs in services sector in Johor Bahru, Malaysia. As shown in Table
6, supplier selection has no positive and significant impact on the organizational performance of
SMEs of services sector in Johor Bahru in which its Beta Value of β = 0.108, p > 0.05, t < 1.645.
Therefore, H2 is rejected. This contrasts with the findings from Mokogi et al. (2015), Kipkemoi
(2017), Nyaberi et al., (2018), and Oloo et al., (2017), where they stated that supplier selection has
highly impacted on organizational performance. According to Kipkemoi (2017), the selection of right
suppliers ensures the product quality is consistent to the customers’ expectations which lead to the
enhancement of organizational performance. Since the finding of the impact of supplier selection on
organizational performance is contrasting to the findings of the previous studies, this could be due to a
few factors. Firstly, the sample size in this study is smaller than the previous studies conducted by
Oloo et al., (2017) and Nyaberi et al., (2018) which may possibly cause the results to be inconsistent
as the usage of sample size is distinct. This study uses 60 respondents while Oloo et al., (2017) uses
279 respondents and Nyaberi et al., (2018) uses 399 respondents, it is considered as a huge difference
between the sample size used. According to Faber and Fonseca (2014), the usage of sample size could
directly influence the research findings where smaller sample sizes can undermine internal and
external validity, or extrapolate the results. Next, the geographical location of this study is also
different from the previous studies by Mokogi et al. (2015), Kipkemoi (2017), Nyaberi et al., (2018),
and Oloo et al., (2017). This study is conducted in Johor Bahru, Malaysia while other studies are
conducted in Kenya, East Africa. Different regions, countries, cultures and economic background that
have unique characteristics which would influence the findings of the study to be inconsistent.
According to World Data Info (n.d.), the overall economy, quality of life, and job opportunities in
Kenya is much lower than in Malaysia. This indicates that Kenya’s economy level is different from
Malaysia thus the focus of the procurement practices applied may be different as well. Due to these
distinctness, they lead to the inconsistency of findings. This also implies that supplier selection in
SMEs does not have impact on organizational performance. Thus, H2 is rejected.

The Relationship between Buyer-supplier Relationship and Organizational Performance

The third research objective of this study is to examine the impact of buyer-supplier
relationship on organizational performance of SMEs in services sector in Johor Bahru, Malaysia. As
shown in Table 6, buyer-supplier relationship has a positive and significant impact on organizational
performance in which its Beta Value of β = 0.399, p < 0.05, t > 1.645. This represents that the
organizational performance will be affected by buyer-supplier relationship. This finding is similar
with several previous studies conducted by Mokogi et al. (2015), Loice (2015), and Karanja and

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Kiarie (2015). According to Loice (2015), buyer-supplier relationship consists of commitment, trust,
communication, and cooperation which allows SMEs to gain sustainable competitive advantage thus
improving organizational performance. Through building trust and communication, both parties keep
each other informed about important changes, especially organizations have to let their suppliers to
know what they expect of them at all times. Establishing a cooperative connection with the right
suppliers is one of the strategies that SMEs may employ to enhance the performance of its supply
chain, service to other functions, and help the company become more competitive. For instance,
frequent and timely communication with suppliers is essential, such as informing suppliers about the
unforeseen circumstances and offer credible information to make the best interest of the organization.
This is supported by Hunt (2000) that buyer-supplier relationships may represent an organization's
resource as well as a component of its capital. To add in, Karanja and Kiarie (2015) also stated that
strengthening buyer-supplier relationship is also one important part in procurement practices for
organizations to practice. This is due to buyer-supplier relationship is observed to have improvements
on the private sector organizational performance over the past 5 years. In light of the research
findings, it is important that organizations to keep good communication, commitment, cooperation,
and trust with their suppliers, as well as suppliers have to improve their visibility and do their best to
support the organizations. As buyer-supplier relationship is a two-way mutual relationship, it requires
both parties to give their maximum attention to each other’s in order to improve organizational
performance. Once again, buyer-supplier relationship has shown positive and significant impact on
the organizational performance in this study. Hence, H3 is accepted.

The Relationship between E-procurement and Organizational Performance

The fourth research objective of this study is to examine the impact of e-procurement on
organizational performance of SMEs in services sector in Johor Bahru, Malaysia. As shown in Table
4.6, e-procurement has a positive and significant impact on organizational performance in which its
Beta Value of β = 0.381, p < 0.05, t > 1.645. This represents that the organizational performance will
be affected by e-procurement. This finding is also consistent with several previous studies conducted
by Kalatya and Moronge (2017), Karanja and Kiarie (2015), and Masudin et al. (2021). The result is
supported by Karanja and Kiarie (2015) who elaborated the fact that many organizations have
improved performance through the implementation of e-procurement systems. This is supported by
Masudin et al. (2021) who stated that any changes in procurement processes and technologies used
will have positive impact on company performance. As e-procurement is involved in enhancing the
procurement process, it can affect organizational performance both from a financial and non-financial
viewpoint. SMEs can reduce transaction costs, strengthen supplier collaboration, and improve internal
procurement process efficiency by implementing web-based e-procurement systems in B2B
purchasing transactions. Furthermore, e-procurement assists organizations to evaluate tradeoffs to
meet their customers’ needs but at the same time making profits. This result also consistent with
Kalatya and Moronge (2017) who agrees that computerized tendering process can indeed increases
the accuracy of forecasting and through online communication, organizations could execute better
fleet management, warehousing and distribution process that ensures order fulfillments to be smoothly
done. From the results of the Beta Value, it can be seen that the impact of e-procurement on
organizational performance has the second highest significant level among the other 4 variables. This
result is also supported by the previous studies. Hence, H4 is accepted.

Managerial Implication

In this study, the research objective is to examine the impact of procurement practices on the
organizational performance of services sectors of SMEs in Johor Bahru, Malaysia. As a result, the
findings revealed that procurement planning, buyer-supplier relationship, and e-procurement has
positive and significant impact on the organizational performance. Among the 3 procurement
practices, buyer-supplier relationship has the most positive and significant relationship with
organizational performance. Conversely, supplier selection has no impact on the organizational
performance. Therefore, it is important for SMEs of services sector to focus on these 3 procurement
practices in order to enhance their organizational performance.

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Procurement planning is a vital component in procurement practices which impacts on the

organizational performance. It is critical to the success of organization as it ensures the needs of the
organizations are able to be fulfilled. It also involves processes such as identifying items to be
procured, when the items are needed, and how it will be acquired. In order to sustain efficient
procurement processes, procurement managers must always concern on the training and competencies
of their employees of the procurement team (Issa, 2018). According to Issa (2018), staff competencies
affects the performance of humanitarian organizations on a great level. Staff competencies in
procurement planning could bring internal competition between the procurement staffs which enhance
quality and workflow in the organization. Hence, SMEs should conduct professional trainings for
their staffs on a regular basis in order to enhance their knowledge and skills on the procurement side.

Next, managers should have necessary concerns on strengthening their relationships with
their suppliers by promoting mutual trust and understanding. Buyer-supplier relationship relies on the
economic interest, mutual trust and understanding, commitment, and cooperation (Han et al., 1993;
Moros and Corsten, 2015). It is a relationship that encompasses trust, dependency, reciprocity and
value creation (Hoque and Rana, 2019). It is complex and complicated to be managed but it is an
important stepping stone for organizations to enhance their performance and ensure long-term
opportunities. Managers should understand that both buyers and suppliers have to constantly
developing competitive and unique capabilities in order to increase the performance and product
quality of the organization, especially under this rapid changing of market conditions. Managers also
could look into how themselves can participate in their suppliers’ capability and innovative
development process to create more values (Hoque and Rana, 2019). This could lead to a sustainable
relationship between buyers and suppliers in terms of long-term orientation, competitive advantage,
collaboration, and innovation.

Besides that, e-procurement plays a primary role in procurement by streamlining and

integrating buying process as well as providing the information required for procurement managers to
make more effective procurement decisions (Paul et al., 2017). The use of web-based e-procurement
systems in business-to-business (B2B) transactions enables organizations to lower transaction costs,
increase internal procurement process efficiency, and improve suppliers’ collaboration. For example,
through implementing e-procurement, organizations could speed up order fulfilment process, reduces
inventory levels and associated costs through product standardization and consolidation. E-
procurement function may be a complex process and there are many aspects to be considered by the
organizations. Actions performed by procurement staffs are also significant as they represent the
reputation of the organization and how people will perceive from it. It is also important to ensure
procurement staffs to behave ethically and comply to regulations. This could be done through
enforcing and creating appropriate ethics policy and continuous trainings and education, as well as
emphasizing it into the company culture.

Limitations of the Study

There are a number of limitations found in this study when the researcher is conducting this
study. Firstly, the sample size of this study is considered as limited as it only involved 60 respondents
to answer the questionnaire. This may be unable to represent the answer of the employees in
procurement-related enterprises from the entire population. Secondly, the geographical location of this
study is also limited as it covered only 1 state out of 13 states in Malaysia, which is the Johor Bahru
area. Hence, this may also be unable to represent the entire services sector of SMEs in Malaysia and
leads to the inadequate in employee’s viewpoint on procurement practices and organizational
performance. Thirdly, this study only tested on 4 independent variables which are procurement
planning, supplier selection, buyer-supplier relationship and e-procurement that will not be able to
completely explain for the organizational performance of SMEs in services sector in Johor Bahru.
Therefore, this may be one of the limiting factors on the data collection part as well as the data
analysis part.

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Recommendations for Further Research

There are a number of recommendations provided in order to improve and have better future
researches. Firstly, future researchers could increase the sample size of the study. This is because a
larger sample size can be a better representative of a population so that accurate results could be
generated (Andrade, 2020). As per mentioned, the sample size of 60 is deemed small, in order to have
a more precise and reliable results, researcher could enlarge the sample size as well as looking for a
longer period of time to collect more data because more time is required in order to collect data from a
larger sample size. Secondly, future researchers could conduct study on other states in Malaysia other
than Johor. Researcher could conduct study on other states such as Pahang, Negeri Sembilan, Penang,
Sarawak and more. This is to widen the representative of the services sector of SMEs in Malaysia as
different employees from different states may have different viewpoints on the impact of procurement
practices on organizational performance in services sector of SMEs in Malaysia. Thirdly, future
researchers could examine other procurement practices when conducting the study in order to be more
integrated in terms of explaining organizational performance. For example, researchers could examine
on other procurement practices such as green purchasing, staff training, procurement controls and
organizational capacity in order to have a broader understanding and knowledge on the impact of
procurement practices and organizational performance in services sector of SMEs in Malaysia.

5.6 Conclusion

In conclusion, this study examined the impact of procurement practices (procurement

planning, supplier selection, buyer-supplier relationship and e-procurement) on the organizational
performance in services sector of SMEs in Johor Bahru, Malaysia. From the results, the study showed
that procurement planning, buyer-supplier relationship and e-procurement have positive and
significant impact on the organizational performance. On the other hand, supplier selection does not
have positive and significant impact on the organizational performance. Additionally, buyer-supplier
relationship has contributed the most to the organizational performance. This study had demonstrated
that procurement practices did impact the organizational performance therefore it is vital for SMEs in
Malaysia to improve their strategies on procurement planning; build stronger relationships with
existing suppliers; as well as embracing e-procurement in order to enhance their organizational
performance.

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APPENDIX: QUESTIONNAIRE

a) Procurement Planning
Instruction: On the 5-point Likert scale, please select one answer according to the statements of
procurement planning in your organization. Where 1 = Strongly Disagree, 2 = Disagree, 3 = Neutral,
4 = Agree, 5 = Strongly Agree.
No Questions 1 2 3 4 5

1 My organization obtains budget approval for the required

items before purchase orders are placed.

2 My organization’s top management is involved in the

procurement planning.

3 My organization carries out market capability analysis to

determine where to procure from.

4 My organization’s procurement needs are clearly defined by

the heads of department.

5 My organization’s delivery schedules that fit in the

organization requirements are drawn with the suppliers.

b) Supplier Selection

Instruction: On the 5-point Likert scale, please select one answer according to the statements of
supplier selection in your organization. Where 1 = Strongly Disagree, 2 = Disagree, 3 = Neutral, 4 =
Agree, 5 = Strongly Agree.
No Questions 1 2 3 4 5

1 My organization has an assessment process that identifies

which suppliers meet firms’ quality standard.

2 My organization has criteria on only selecting suppliers with

high performance reputation.

3 My organization only selects supplier who possess positive

market reputation.

4 My organization’s supplier selection is guided by the least cost

suppliers.

5 My organization’s supplier selection process has often

identified suppliers with the history of high performance.

c) Buyer-supplier Relationship

Instruction: On the 5-point Likert scale, please select one answer according to the statements of
buyer-supplier relationship in your organization. Where 1 = Strongly Disagree, 2 = Disagree, 3 =
Neutral, 4 = Agree, 5 = Strongly Agree.

No Questions 1 2 3 4 5

1 My organization concerns on generating strong relationships

with the suppliers.

2 My organization has confidence on the suppliers.

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Vol 6, Issue 2, 26-44 (2023)

3 My organization knows my suppliers’ capabilities.

4 There are information sharing between my organization and

my suppliers.

5 My organization conducts joint improvement activities

between suppliers.

d) E-procurement

Instruction: On the 5-point Likert scale, please select one answer according to the statements of e-
procurement in your organization. Where 1 = Strongly Disagree, 2 = Disagree, 3 = Neutral, 4 =
Agree. 5 = Strongly Agree.

No Questions 1 2 3 4 5

1 My organization uses computerized-tendering process to help

maintain good quantity level of goods to have regular supply
of goods.

2 My organization uses online communication that synchronize

and balance 2 opposing business objectives of achieving
ultimate customer service at a low cost.

3 E-procurement enables my organization to assess tradeoffs to

meet customers’ needs, but in a way that allows my
organization to make profit.

4 Computerized tendering process enhance my organization’s

accuracy in forecasting.

5 My organization uses online communication to create plan

attuned to the market, execute reliable transportation,
warehousing, and distribution to ensure cost-effective order
fulfilments and on-time deliveries.

Organizational Performance
Instruction: On the 5-point Likert scale, please select one answer according to the statements of
organizational performance in your organization. Where 1 = Strongly Disagree, 2 = Disagree, 3 =
Neutral, 4 = Agree, 5 = Strongly Agree.
No Questions 1 2 3 4 5

1 My organization has increased profits.

2 My organization has high return on assets (ROA).

3 My organization is successful in attaining customer

satisfaction.

4 My organization is successful in minimizing cost of operation.

5 My organization’s capital expenditure is optimum with the

planned budget.

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