The Conscious Courtship

Enterprise and Supplier Development Relationship

Enterprise and Supplier Development in South Africa has two polar extremes. On the one end of the spectrum are supply chain practitioners and end users who want better results from incoming suppliers than those delivered by the current suppliers. On the other end of the spectrum are development practitioners who are assisting individual entrepreneurs that are competing with a large resource and skills disadvantage.

In developing countries where this disequilibrium is understood and accepted the development process becomes a conscious courtship that over time grows into a mature relationship. Here the supplying relationship is viewed as a long term investment that will provide the necessary ROI through local efficiencies. During the contractual transfer process there is an understanding of cultural diversity, the necessary skills deficit is estimated and planned for and resources are transferred based on growth.

Consider the case of one of South Africa’s largest hotel groups that built a hotel in one of our neighbouring countries. An immediate area of concern for this hotel was finding fresh eggs at the quantities that the hotel required them in. The only other available option was for these eggs to be transported daily from South Africa. As a result of the inefficiencies that this created the hotel decided to discuss their requirements with local farmers. Having agreed to supply to the hotel the farmers increased the egg supply over an agreed period of time. Having a good understanding of their long term objectives the hotel slowly weaned themselves off the South African supply, putting up with the pain of defects and lower than anticipated quantities of supply.

The Growth Gap

This is not necessarily the case in South Africa where the local industry is strong enough to compete and the need to replicate supplier resources and capabilities based on the grounds of diversity does not allow short term gains. In this scenario many companies do not anticipate any negative impact in the consistency of quality or delivery, anticipating similar performance expectations than those they have always experienced.

Staying with the theme of eggs, let’s take a further example of an egg incubator to explain the dilemma in the South African supplier development environment. (This is a relevant example as many companies make use of a business incubator to develop entrepreneurial companies.) If we consider an incubator the goal of the incubator is to create the correct temperatures and environment for the chicks to hatch. Once the chick is hatched it needs to be exposed to a different type of environment, a brooder, in order to grow, and then once it is able to protect itself with adequate feathers it can be released into the chicken coop with the rest of the chickens. This is a gradual development process that is managed very specifically. In South Africa however our expectation is that entrepreneurs should immediately be able to satisfy all the demand criteria of the company that is procuring a specific product or service.

Outsourcing the development process

One of the reasons for this gap is that there has been little involvement from the end user and supply chain in the development process. The development process normally fully outsourced to a Business Development Support (BDS) provider and the expectation is that this company would deliver the finished product, in this case being a company that adheres to all the SLA requirements. This way of thinking has been exacerbated by entrepreneurial development companies seeking to protect the IP of their development processes, leading to broken communication between the measured entity paying for the development of the entrepreneurial venture and the company developing the entrepreneurial venture.

Ideally supply chain practitioners and end users demand black-owned companies that has a track record of work with industry peers. This has led to a growing sense of frustration from entrepreneurs who enter supplier development programmes with a high expectation to become part of the supply chain. The company paying for the supplier development process however has the expectation that the entrepreneurial ventures in the programme will graduate with experience form their industry peers, before accepting them into their own supply chain. As this barrier to entry is never explicitly communicated both parties end up disillusioned by the developmental relationship.

Most companies today outsource their supplier development process. The reason for outsourcing the relationship could be blamed on a lack of clarity in the early stages of the BBBEE codes. At inception of the BBBEE codes the linkage between Socio Economic Development, Entrepreneurial Development and Preferential Procurement was never specifically stated. Even today it might be argued that there is no specific argument in the codes that link Socio Economic Development with Enterprise and Supplier Development or with Skills Development.

In the 2013 BBBEE codes the link between Enterprise and Supplier Development has now been explicitly communicated, but the Enterprise and Supplier Development sections in the codes still place higher recognition on outsourced development work than it does when the company does their own development work.

The move towards a conscious relationship

In South Africa most large companies have designed their procurement processes to keep small companies out and to best accommodate larger companies. The rationale for this design is firstly based on economies of scale reasoning and secondly on the administrative cost difference between managing many small vendors as opposed to managing a few large vendors.

Firstly it should be understood that procurement is about volumes. The higher the volumes and the longer the contract life cycle, the higher the potential economies of scale that can be developed. The rationale therefore states that if you could bundle more contracts together the suppliers efficiencies will increase which will put you in the place to negotiate a higher cost discount. This reasoning is not always sound, but is universally excepted between supply chain practitioners.

Secondly the idea is that the more contracts you can place with one company the less relationships you have to manage as a company. This includes the commercial as well as the human interaction between companies. This is a valid argument, although the cost discounts that electronic procurement systems have brought should have already led to savings, the personal engagement time should needs to also be calculated.

Large companies in South Africa have therefore created the habit of bundling contracts together. For example, when you purchase a printer, why not purchase printing cartridges from the company as well, and while doing this, why not just purchase all the paper that goes with it as well as the services that the printer requires from the same company. In the end it might be easier to just outsource the whole printing process and pay per printed copy. Now the company can put one contract in place with the printing company supplying them all of the requirements for x amount of printed copies. Here is the difficulty however. When a small company now wants to compete in the printing market by supplying cartridges that are for instance, more environmentally friendly, they need to sell the total printing solution and not only the cartridges. This places them at a disadvantage as the only way to enter into this market is by having significant scale across the total printing process.

The Integration Process

What some successful companies in the area of Supplier Development have done is to understand how a company can integrate into specific areas in the supply chain and to specifically plan through this integration process.

Discovery

The first step in this journey is discovery. This denotes the way in which new companies are discovered as well as the region in which these companies are discovered. The discovery stage is one of the most neglected areas in Enterprise and Supplier Development as many companies have left it to the BDS suppliers to discover the companies that should be developed. This has therefore led to a significant disconnect to start with as the companies that are chosen for development might not be related to the demands required by the supply chain.

A recent change in this area has been the creation of business linkages programmes that could facilitate the discovery process. Currently there are many BBBEE listing databases where companies can register their details with the hope of being discovered by a larger entity. In many cases the listing is free, but costs the company money if they want to promote themselves somehow on the listing portal.

It is important that during the discovery stage the company wanting to do supplier development should have a realistic idea of what it is that they want to develop? For instance, are they looking for companies that supply specific items, but need to grow in technical competencies or are they looking for a company that is needing to grow in volume or delivery time?

Matching

The matching process is where the company sponsoring the intervention believes the company will be entering the supply chain. This might require the unbundling of contracts in order to provide the supplier an entry position into the company. Normally pricing is the most important criteria here.

In many companies the matching process happens sporadically without planning around who or when a new company enters the supply chain, however once a company is in it provides a much better footing from which to compete for other business. Many times this is where an entrepreneur gets their first chance to interact with people in the supply chain and the operations and to understand both the technical requirements of the company as well as the culture of the company.

End-User Acceptance

It is at this stage that the entrepreneurial company or small business gets the opportunity to build a relationship with the end users in the business. This relationship should be viewed as important both from a human interaction point of view, but also from a further technical competency point of view.

One of the most neglected development areas is the relational “airtime” that the entrepreneur has with the end user. It is during the engagements and conversations with the end user that the entrepreneur gets to understand the experiential knowledge that the company has built up over a period of years and the problems that the end user is currently experiencing. Arguably this is the most valuable knowledge that an entrepreneur can have and the area of development most lacking in the South African Supplier Development landscape.

Optimising

Only once this relationship has been formed can the entrepreneurial venture start really optimising for efficiency. During the optimisation stage the company has now also had a chance to form its trust relationship with the entrepreneurial venture which allows the company to contract and develop further efficiencies.

By this time the company sponsoring the development also has a very good sense of what a company can do and where to spend its core development focus on.

Conclusion

South African supply chain practitioners need to start focusing on relationship management with small black owned businesses. The risks and the investment loss of not doing so is substantial. This process should be consciously planned, rather than left to spontaneous happenstance that is currently the case in most companies.

** This article was adapted from an article published in TFM Magazine and is republished here with the expressed permission of TFM Magazine.