Reactive or Strategic Supplier

Reactive or Strategic Supplier Development

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When considering Supplier Development as part of your ESD plan it is wise to consider the two different processes of supplier development as defined by Krause, Handfield and Scannel (1997).  The one process is reactive in nature while the other is strategic in nature.  The reactive process is what you focus on to assist companies to improve their performance.  Suppliers are struggling to meet performance expectations from the buying company and will therefore be targeted through a supplier development intervention.

Reactive or Strategic Supplier Development

Most of the companies in South Africa will be applying reactive supplier development strategies due to the lack of black owned/ black woman owned QSE/EME’s in current supply chains and the perception that these small companies need development.  Most of the ESD strategies in South Africa will further target job creation and growth in turnover of the beneficiaries.
Reactive supplier development could have problems though, consider for a moment the following scenario.  Let’s say three major mining companies in the same region were to decide that they don’t have any black woman owned survey companies in supply chain.  This is not so difficult to imagine as survey companies are normally small in nature and the barriers to entry are not that high.  Let’s now say all three of these companies decide to follow the same target regarding supplier development.  What would be the outcome of this process?  What we might find over the short term is the following:
  • All three mining companies would compete for the same resources (black woman owned surveyors) in the same region.
  • It might occur that the three mining companies might develop the same company, but the more likely scenario is that they would develop three different companies
  • All three mining companies would claim that they have created jobs
  • After three years of contracting with the surveying supplier that they have been supplying from at a premium (due to being the only black woman owned company) they would send out a tender into the region and might find that there are now three companies to choose from
  • As the only differentiator is that the company would be black woman owned the only other differentiator would be price which means that only one of the three companies can be the most cost effective.  Over the long term there would therefore be limited sustainability (1/3 of the companies would survive) and no job creation.
  • An even worse outcome might be that the companies were also loaned money and now are having to also repay debt after they no longer have any contracts.
You might think this scenario is unrealistic, but consider the various categories with lower barriers to entry where most of the supplier development effort in the country will be going into and has gone into.  Some of these categories are Catering, Cleaning, Building, General Maintenance as well as any commodity supply that takes place through reselling.
Let’s now discuss the other process which is strategic.  The goal of the strategic process is to create competitive advantage for the buying company.  Very few companies in South Africa will be following this approach as it would require a much more active involvement from the buying company as well as a focus on value creation rather than short term risk mitigation. Unlike in the case of the reactive process the strategic process is planned and is focused on innovation.
A very good example of the strategic process is the Chilean Supplier Development program which I came to know about while working for BHP Billiton (Read more here.)  The strategic supplier development program was formulated around specific projects that were identified by key operational and engineering personnel in the company to address specific needs of the company and to make the buying company more competitive in nature.
It might however be that when applying the reactive supplier development process there is a focus on local economic development.  By focusing on the development of the local economic region, companies would have to think broader than just the development of their individual preferential procurement gaps and start moving towards a collective value creation approach in supplier development.  By doing this they might improve the value proposition that companies in the region currently have as well as improving their own social goodwill in the communities in which they are active in.
If South Africa were to spend significant resources in the area of Enterprise and Strategic Supplier Development, which of these approaches would lead to greater economic development for our country?

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