Supplier Development Not Leading to Job Creation

Let’s be honest with ourselves. In a contracting economy supplier development does not lead to job creation. Perhaps small black owned companies are employing more black owned staff or that jobs are being localised around a specific region.  In a contracting economy the goal of supplier development is, however, not job creation, but rather optimization.

That said there are some excellent examples in the world, such as in Chile where Supplier Development did lead to job creation. The focus here, however, was innovation in the supply chain and not development in the supply chain. Is there really a difference? Yes, the difference is quite simple. The majority of radical innovation is done by domain experts. Radical innovation feeds the economy, by stimulating new economic revenue streams. Incremental innovation leads to increased efficiency, but optimises the current revenue streams.

When we look at the context of development in South Africa, most of the development is done through replication.
Creating the same value, just in a different area or through owners of another race. Is this bad? – not at all, our country desperately requires transformation, but it does not necessarily lead to job creation. As discussed in a previous post on the subject of job creation, it is almost impossible to measure in the area of supplier development. The main reason for this is that with transformation we are taking from one area and giving to another area. The National Development Plan has recognised this problem and states that the trade-offs become much more difficult to manage in an economy that is not expanding.

With all the hype around Supplier Development it is crucial that private companies recognise that most of the value creation in the economy takes place in the area of Enterprise Development. It is therefore quite sad that the BBBEE codes have called for the most significant spend (2% NPAT) in the area of Supplier Development.  If Supplier Development were to be correctly done it would lead to increased efficiency and a possible scenario with a decrease in jobs.

The idea behind Supplier Development is that the smaller supplier will benefit from the scale of the large company. In many cases, however, if there were to be a direct correlation with an increase in scale, the larger company could very well recognise the work done by the supplier as core to their operations and as having possible benefits to optimisation. In this case the larger company would be wise to in-source what is being done.

This might not be the case in some peripheral commodity areas such as cleaning, catering, warehousing and construction, but an in-sourcing approach would make sense once the company discovers that they can do backward integration in order to increase their profitability.

What is the alternative? As in the Chilean example the goal of the supplier development or enterprise development initiative is firstly value creation. This should be the goal with most or all of our ESD efforts. Rather significantly increase the BBBEE points related to minority investments. Further build in a clause stating that the value of the BBBEE points would increase in relation to the increase in the equity value of the beneficiary company. Limit this benefit to three years.

In this case what would happen is that we will be seeking new markets, different markets. Our focus will be on value creation, not efficiency. Corporate companies will specifically be focusing on creating departments that will be desperately seeking constant radical innovation.

Given, there might be complications to determining value and equity of a company, but nothing compared to the current complexity of the BBBEE codes. Unfortunately our ESD plans are focused around public industry and not private industry.  With this in mind it will be difficult to move away from our focus on incremental development to rather focus on innovation and sustainable job creation.