This paper was first delivered and presented on the 12 – 14 June 2016 at the 38th Annual SAPICS Conference & Exhibition where after it was republished by transportworldafrica.co.za on 16 June 2016. The article can be downloaded here from TransportworldAfrica.co.za.
History of BBBEE & Preferential Procurement
Supplier Diversity as we know it today has its roots in the Civil Rights movement in the United States and started coming into effect during the 70’s to 80’s when President Nixon directed plans for a national Minority Business Enterprise contracting program (Diversity Business Blog, 2010). South Africa included Preferential Procurement in our constitution in 1996 by stipulating that government entities can preference certain categories of people who have been disadvantaged in the past. The Preferential Procurement Framework Act came into effect in 2000 allowing government entities to make purchasing decisions based on prescribed criteria (Barclay, 2012). The 2003 BBBEE Codes of Good Practice encouraged both public and private entities to implement preferential procurement with the 2007 BBBEE Codes including the element of Enterprise and Supplier Development.
South Africa along with America and Australia have pioneered national regulation around diversity and preferential procurement, yet from a South African private industry perspective relatively little has been done to establish a strategic decision making framework by which to manage the business case for Preferential Procurement and Enterprise and Supplier Development (ESD).
Research findings on Diversity
The research findings around diversity have been varied. A report by McKinsey has shown that companies that have higher employee diversity, and more especially diversity in their executive team, have on average a higher Return on Investment (Vivian, Dennis, & Sara , 2015) than other companies. Findings from the United States on how Supplier Diversity benefits the bottom line have been overwhelmingly in favour of Supplier Diversity (Saunders, 2014). Various case studies have also shown how diversity can be used to acquire higher levels of market share as well as how diversity assists the organisation in upselling and cross selling.
Some researchers though have been sceptical about the correlation between diversity and innovation arguing that if diversity has such a high correlation with innovation then Silicone Valley should be one of the most diverse industries in the world. Instead Silicone Valley is one of the industries that is the least diverse in the world and is one of the most innovative clusters in the world. The same research has however indicated that well managed diversity creates much more favourable conditions for employee morale which leads to higher levels of productivity (Pittinsky, 2016).
With the general public and communities becoming much more informed, companies have also started noting the risk of not diversifying. Many corporate reports are now not only displaying figures regarding the diversity of the internal employee base, but are also requesting information regarding local procurement and supplier diversity.
These research findings provide rich content for how we as procurement practitioners consider the impact that diversity, and the amended BBBEE codes, has on the business case for each organisation.
The strategic context of Enterprise and Supplier Development
Before we discuss the strategic benefit relating to Enterprise and Supplier Development, it is wise to consider some of the motivation behind Supplier Diversity efforts in the past.
Companies have been driving the social good agenda around social inclusion, enterprise development and diversity long before they realised that there was a business case for it. Thomas & Ely (1996) have indicated to the “Discrimination and Fairness paradigm” as a paradigm that believes in rectifying the inequalities of the past. They have argued that rectifying these inequalities is important, but could lead to highly bureaucratic outcomes which focuses on the numbers, but not necessarily the value of inclusion or diversity. It could be argued that most of the South African dialogue relating to diversity and inclusion takes place from within this paradigm.
Later on, the “Access-and-Legitimacy Paradigm” became more entrenched when organisations realised the benefit diversity management has in relating to diverse communities. In this approach, for instance, the understanding is that a black female owned company would have a greater understanding of the needs of the black female community and therefore have an advantage when selling goods in these communities.
Recent thinking around social impact and sustainability has argued that in order for social value creation to become sustainable the value needs to be shared (Porter & Kramer, 2011) between the private company and the community. Shared Value Creation has therefore brought a fresh perspective to how organisations consider social impact. The example of Nestle (Porter & Kramer, 2011) has been used to demonstrate how a more stable coffee bean supply for Nestle was created through the development of local farmers thereby directly benefitting Nestle. More recently it has been argued that by investing and developing diversity in and of itself there is direct benefit to the organisation through an increase in social wellness and productivity (Pittinsky, 2016).
The prevailing South African paradigm
Given the above findings we still note that decisions that impact diversity, and more specifically supplier diversity in South Africa, are frequently made based on the relationship between two variables, namely cost and compliance. This prevailing paradigm has led to the optimisation between cost for compliance being the point of departure for most diversity related procurement and developmental related decisions. Some companies even going as far as to justify the Total Cost of Ownership per Point, or per subcategory point, on their BBBEE scorecard.
To further complicate the decision making framework even further there is also the perspective that the more money that is spent in social development and local procurement the higher the social good impact that this has. Even though we now know that there is no correlation between money spent and social impact the dialogue in most companies remain in reporting on money spent to justify social citizenship requirements.
The trilogy of Preferential Procurement and Enterprise and Supplier Development
This emphasis on cost per point has probably led to most Enterprise Development initiatives having relatively little impact and being removed from the company’s value chain. With the introduction of Supplier Development and the change in the 2013 amended BBBEE codes, companies are now needing to consider the direct impact that Enterprise and Supplier Development has on their organisation.
In the past the transformation and diversity discussion has therefore been fairly removed from most South African strategic sourcing and procurement deliberations, but with the amendment of the BBBEE codes and the integration between Enterprise and Supplier Development and Preferential Procurement, we are now undergoing a renewed dialogue.
The departure point to this discussion is the alignment between Enterprise and Supplier Development on the one side and Preferential Procurement on the other. The idea being that in order to increase supply for specific commodities companies need to develop or transform companies that supply these commodities.
Arguably this alignment could lead companies to create diverse local suppliers that show a higher level of sustainable growth. This is due to the development work done on the one side and access to market provided on the other. Therefore, both targeted procurement and targeted development are required when considering preferential procurement and enterprise and supplier development.
The Strategic Intent of Enterprise and Supplier Development
In recent years the business cases that justify Preferential Procurement and Enterprise and Supplier Development have become increasingly focused on the benefit to the organisation in the context of the community in which it operates. It is now becoming prevalent that there is a strategic business case to be made for implementing Preferential Procurement and Enterprise and Supplier Development and Procurement Practitioners should take cognisance of aligning this business case into their strategic sourcing decisions.
- The Risk Mitigation Strategy
Companies engaging in South Africa and other developing countries have a strong business case for optimising development outcomes to reduce the risk from discontented communities (van den Berg, 2014). Considering the benefit that local community based procurement programmes and business linkages programmes can play it makes sense for companies to consider the effect that procurement can have in managing and mitigating this risk (Ospina, 2014). Mining companies have become quite active in managing this risk and in understanding the local supply and demand situations as well as the engagement with local communities.
In a case study Anadarko Petroleum Corporation started developing local entrepreneurs in Mozambique as a first phase in the construction of a liquefied natural gas (LNG) park. By doing this they determined the local supply gap along with what their future demand requirements will be, before negotiating offtake agreements with the local government (Levey, 2014). This allowed the company to understand the local market, access the local risk and organize for the future supply of goods and services from the local market.
Companies seeking to grow local communities through local procurement have gone about using business linkages systems to understand the gap in the market and to direct their development efforts specifically towards closing these gaps. The BMA Local Buying Programme in Queensland has been specifically targeting small businesses. A percentage that is spent through every transaction in the programme has helped to fund the development of other small businesses for future supply (BHP Billiton, 2014).
Companies that start to ‘cost’ the impact of conflict are able to much clearer understand the local content needs and build a business case around this. It has been estimated that for large mining companies the cost per week of lost production from community conflict can be in excess of roughly US$ 20 million per week in Net Present Value terms (Davis & Franks, 2011).
- The Competitive Compliance Strategy
We have already discussed the emphasis on compliance, but compliance in the South African and other global marketplaces is a very realistic objective in competing successfully. South Africa is one of 7 other African countries where indigenisation policies have been implemented and South Africa’s BBBEE legislation has been viewed as the most sophisticated (Nolan, 2015).
Even though compliance in and of itself does not strategically differentiate a company it could still contribute to competitive advantage over other B2B competitors and needs to be taken into consideration in and of itself. This is especially true in relation to BBBEE where the Empowerment Level of the company is specifically requested during the tendering process. In order to compete in tenders of this kind, companies need to justify not only how they are performing in relation to overall Diversity targets, but more specifically in relation to Local Procurement and the related development of SMME’s.
Companies competing on procurement related social compliance targets either do so by 1) being able to access specific global or national markets or 2) gaining a competitive edge within these markets. Hewlett Packard is one company that indicated it’s need to demonstrate supplier diversity related efforts for $ 10 Billion worth of business (Hewlett Packard, 2009). Some transformation managers in South Africa have even gone about displaying the correlation between the progress on their BBBEE scorecard with increased B2B sales to justify the efforts relating to procurement. In this case the calculation has moved from cost per compliant BBBEE point to profit per compliant BBBEE point.
- The Competitive Local Supplier Development Strategy
The shared value movement has recently focused a lot of attention on how local procurement could be used to benefit organisations as well as society. A case study from Rio Tinto has demonstrated how the mine uses micro loans to assist local suppliers to get access to SHEQ related goods and services. By doing this the mine has developed local suppliers and decreased their unit costs for the purchasing of items locally (Macleod, 2014).
Consider the cost discount opportunities that one large construction company received by allowing their smaller suppliers to make use of the pricing discounts on their long term fuel contracts or the benefits that a large multinational received when they started sharing their shared services operation with their suppliers.
Anglo American follows a similar approach to Shared Value and Local Procurement. Anglo American have defined a 10 Step Local Procurement Framework that has been integrated with Deming’s PDCA cycle in order to test and refine the business case for local procurement (Anglo American, 2015). The basic premises of most business cases regarding local procurement is that by increasing local supply companies can save significant cost on transport and import duties.
A further business case can also now be made around the rand/dollar exchange rate, depending on the increased competitiveness of local production. Rather than establish and develop new local suppliers the emphasis here is on the decrease of cost and the increased supply stability of goods and services from existing local suppliers.
Supplier Development has the aim to re-actively or strategically enhance the operational efficiency of the supplier. A strong emphasis is placed here on Operational Management and Continuous Improvement methodologies linked to quality improvement. Service Level Agreements start to become an important instrument in the Supplier Development process which emphasizes areas such as Mean Time to Deliver, Delivery in Full on Time, a decrease in cost and an increase in reliability and quality (Ganzevoort, 2014).
The Competitive Supplier Development Programme was launched with the purpose of creating these efficiencies and skills transfer to local companies in South Africa. The focus is on a long term supply partnership between State Owned Enterprises and local companies over the product life-cycle (Department of Public Enterprises, 2013).
- The Innovation Centric Supplier Development approach
It has been argued that one of the key times to incorporate diverse suppliers is when organisations seek to develop or gain access to new markets. By leveraging the knowledge and understanding of the diverse communities’ companies are able to gain a better understanding of what needs these markets have and how to service the markets better.
While engaging in an enterprise development programme in one of South Africa’s township communities an international energy firm was able to understand the buying behaviour of the local communities. While the firm sought to sell its solar light solution to a large informal settlement through one of their installation suppliers they realised the need of the local community to use the light they sell to charge their cell phones through the USB port on the light. By understanding this need they could move away from seeking to only sell the features of the light and rather focus on how you could use the light for other purposes.
Through a similar programme an international cosmetic company realised that they were unable to access the township communities in South Africa. By making use of a small black female owned promotions company within the township they were able to much more effectively access the market. This also immediately provided them with deeper perspectives on what the requirements of the local customers were regarding their products. Companies that are open to collaborate with local suppliers around the problems faced in the local markets are therefore able to much more effectively innovate based on the customer needs.
Massmart makes use of their Supplier Development Fund to market South African wines internationally. By choosing unique wines such as Bayede by King Goodwill Zwelithini and Seven Sisters, Massmart, through their international network, are able to sell these wines to China and the USA (Massmart, 2013)
An example of Supplier Development Innovation was implemented by the mining company BHP Billiton in the Chilean World-Class Supplier Programme. The goal of the programme was to focus on innovation within the operations of the sponsoring organisation. “Five areas – water, energy, HSEC (health, safety, environment and community), human capital and operational efficiency – were defined as priorities for the programme (BHP Billiton, 2012).” By doing so the company created unique and viable world class suppliers with competitive market offerings. The programme has led to US$ 121 million worth of cost savings to date (Business in the Community, 2013).
Supply Chain innovation require the sponsoring organisation to be highly mature regarding its strategic sourcing practices, cross functional collaboration and supplier relationship management as well as have a clear understanding of the entrepreneurial and market development needs.
The “learning and effectiveness paradigm” has been viewed as a paradigm that incorporates the diverse perspectives of people from different cultures and backgrounds to define new processes, tasks and markets. This perspective taps into diversity people bring to an organisation in order to create new outcomes (Thomas & Ely, 1996). The learning orientation brought by this perspective leads to the integration between cultures leading to the creation of dynamic capabilities rather than using diversity to focus on a resource based orientation.
Towards a Strategic Decision Making Framework for South African Enterprise and Supplier Development
This paper has looked at Preferential Procurement and Enterprise and Supplier Development in light of the various different strategies that procurement practitioners can follow. It has argued that Procurement Practitioners need to think through the benefits of their Preferential Procurement and Enterprise and Supplier Development Investment based on the business case of each of the various different strategic approaches.
The strategic approaches are not mutually exclusive and in many cases companies might pursue more than one strategy. It does, however, seem that companies choose to follow a strategy that is related to their maturity around collaboration and trust and their paradigm relating to supplier diversity.
Figure 3 Hypothetical correlation between Level of Collaboration and Learning and Return on Investment
A strong case could therefore be made for a correlation between collaboration with local Black Owned / Black Female Owned SMME’s and Return on the Preferential Procurement and Enterprise and Supplier Development Investment of the company.
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