ESD Value Chain Development

ESD Value Chain Development for Entrepreneurs

Enterprise and Supplier Development Insights Leave a Comment

Enterprise and Supplier Development can be defined as the development of sustainable small and medium black owned businesses in a companies value chain.
In order to understand ESD (Enterprise and Supplier Development) you need to understand the linkages between Enterprise Development, Supplier Development and Preferential Procurement.  This article considers some of the background to these linkages and why the BBBEE codes have changed in 2013.

The emphasis is on development

The Department of Trade and Industry (DTI) has a tough mandate.  Broadly speaking they need encourage economic growth and simultaneously transform the wealth disparity between black and white South African’s in the county.  This income disparity in South Africa is one of the highest in the world.  The role of the DTI is to address this disparity through economic policies and interventions.  One of these policies is Broad Based Black Economic Empowerment (BBBEE).
The intention in the previous codes has been to link the various elements of the BBBEE codes so that a companies BBBEE transformation plan really is their social development/social transformation plan.  The goal is for companies to intentionally change the socio-economic landscape in South Africa. In this policy the various developmental elements at the bottom of the scorecard would lead to the intended outcomes at the top of the scorecard.
BBBEE Development Plan
So for instance,the area of Enterprise Development was intended to contribute to Preferential Procurement and the area of Skills Development was intended to contribute to Employment Equity.
Unfortunately these paths were not clear, and led to many companies doing work in the areas of Skills Development, Enterprise Development and Socio-Economic development that were unrelated to the rest of the company.  Companies ended up contributing to activities that would benefit their BBBEE scorecard rather than their business activities or their ecosystem.  In this way many of the contributions made by companies lead to little or no transformation.
In 2013 the BBBEE codes were amended or changed.   In the amended codes the DTI forced companies to consider the linkages between the different elements.  The way in which they did this in Enterprise Development, was by introducing Supplier Development and combining Enterprise Development, Supplier Development and Preferential Procurement into one element.  This element is now called Enterprise and Supplier Development (ESD).  See the article The Trilogy of Enterprise and Supplier Development to understand more about how this fits together.
The DTI highlighted the importance of this element by making it score more points than any other element in the BBBEE codes. This forces companies to consider it as part of a value chain approach to development.

The value chain approach to development

The value chain approach to development is not unique to South Africa.  In fact it is a major international approach to economic development, especially in developing nations.  Have a look at the International Labour Organisation’s focus on Value Chain development.

The emphasis in a value chain approach is on creating commercial linkages or business linkages between small and large businesses. This enables small companies to take part in larger value chains.

This approach emphasises localisation.  It requires companies to determine how they will be sourcing their imported products nationally.  Previously the goods that companies have imported were excluded from a companies preferential procurement scorecard. In the amended codes those goods are included, except where the organisation can justify how a company will be developed to supply those goods in the future.

Which companies should be developed?

The development targets companies that are more than 51% Black Owned and fall under a turnover of 50 ZARM per year.  These companies are seperated into two groups.  Majority black owned companies that are under 10 ZARM in turnover are called Exempt Micro Enterprises.  Companies that are over 10 ZARM n turnover, but under 50 ZARM in turnover are called Qualifying Small Enterprises.  Both these companies are recognised as Small Medium Enterprises (SME’s) and are eligible for Enterprise and Supplier Development (ESD) contributions.

What is Enterprise Development?

In the context of ESD, Enterprise Development is the development of small and medium black owned enterprises, before they partake in the value chain or supply chain of your company.  It is the precursor to Supplier Development, or Preferential Procurement.

What is Supplier Development?

Supplier Development is the development of small and medium black owned companies that are already in your supply chain.  The emphasis is on the transaction, and if a transaction or a contract is in place between the company doing the development and the company being developed.  If this is the case, then it is supplier development.  If not then Enterprise Development.

Developing you ESD Plan

Your ESD plan is an important document in determining, not only how you can go about developing your suppliers, but also how you will localise your supply base.  A long term localisation plan will be able to provide the DTI with justification on how localisation will take place.  This will enable you to exclude imports over the short term while you develop the required suppliers nationally.  Your ESD plan should first start with Preferential Procurement.  Working your way back from there will provide you with the best guide to where the gaps are and how to close them.