Five Cs of Supplier Development Risk

Managing the Five C’s of Supplier Development Risk

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With all the discussion about Enterprise and Supplier Development Risk, many in South Africa have missed one of the biggest areas that will soon be affecting their BBBEE score.  BBBEE in South Africa is driven through the procurement process.  In this process most of the discussion in the past was around a company’s BBBEE Level Status.  In the amended codes the change to Preferential Procurement has significantly decreased the points around BBBEE status instead increasing the preference for procuring from Black Owned suppliers.  The other most drastic change has been in the increase in points from procuring from small and medium sized companies.
As procurement professionals there has been a lot of debate around Transformation and what the impact has been on the country.  In all of this there is one singular element that screams louder than all the others – RISK.  At first you may ignore this.  You may continue to source from suppliers as you have always done leaving the job of Enterprise Development to the BBBEE, Sustainability or HR department.  Unfortunately there is no ignoring the fact that soon you will reap the fruit of what has been done in the Enterprise Development domain.
Working in procurement you are quite used to having tough discussions with end users.  Every single day you have end users shouting at you about another supplier that is not delivering.  Up until now you have sourced as best you can at the best cost.  Your leverage has always been your purchasing power together with a long term contract. Hold on to your seat – your job is about to change.
In the future your job will involve managing a supply relationship around small and medium companies (Up to 30% of your total spend).  These are the companies that you have sought to push into the tactical domain.  Consider that in the future these companies will provide a significant amount of your BBBEE points.
In the near future you will need to carefully manage the five C’s of Supplier Development Risk.

Consistency

In the past you were less concerned about the consistent supply of goods over a period of time.  You managed Payment in Full on Time (PIFOT) as a necessary evil and if you checked supplier financials it was on strategic suppliers.  As many of your BBBEE points will now come from suppliers that daily battle with cash flow and sustainability issues this will become a risk that you will need to be cautiously aware of in the future.  Fortunately most business incubators are geared to cater to this risk.

Compliance

Compliance risk differs from industry to industry.  In some industries this might be safety related, while in others it might be IT security related.  Cost and compliance always has a trade-off, but for smaller companies the trade-off is more extreme due to smaller economies of scale.  In the future procurement practitioners will need to carefully evaluate which compliance related risks they might need to lower in order to eliminate the barriers to entry.

Capacity

Capacity relates to consistency, but also has to do with the ebb and flow of your demand and supply needs.  Smaller suppliers have higher capacity constraints.  In many cases you will need to consider unbundling contracts in order to allow suppliers to grow.  This will have a cost impact.

Capability

This will be one of your largest Supplier Development risks in the future.  Surprisingly it is also the area that the least amount of incubators have focused on.  Hopefully, as Enterprise and Supplier Development (ESD) becomes more aligned, you will find this changing in the future.  In the meantime you will need to make sure that your suppliers can do what they say they can do.  This will require onsite audits in order to gauge the risk as well as the capability gap with your SLA.

Cost

ESD will cost you money.  There are ways to achieve ROI in supplier development, but they require highly mature supplier relationships that extend into your operations.  Your concern is RISK and managing it will require money.  Consider further that many smaller black owned companies are on-selling the services of a majority white owned company.  Not only does this practise increase your costs, but it also has a risk impact on the other C’s of your business.

What do you need to do?

  • Closely monitor your Preferential Procurement points

Know where the gaps are and where you will be required to develop companies.
  • Align ESD to your supply chain

As far as possible you need to seek to align Enterprise and Supplier Development (You can read our article around this alignment here).
  • Understand the risks involved in procuring from a supplier

Know where the gaps are and how you will close those gaps.  There is no need to develop your supplier to become the next listed entity.
  • Consider outsourcing ESD

From an ESD perspective the codes favour outsourcing ESD.  Outsourcing ESD further allows you to quantify expenditure better and manage the impartiality between your supply chain practitioners and your suppliers.

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