October 13, 2005
Preferential Procurement: Destroying or enhancing procurement value….?
Whether it’s Green (Environmental) Procurement, developing historically disadvantaged individuals (HDI / BEE) or other forms of socially responsible procurement… powerful market forces guided by special interests play an increasing, and major role in defining procurement success. Will these issues destroy value created by strategic sourcing initiatives or will it raise the profile of the procurement organisation to the next level?
Recent procurement history saw a move away from price reduction to optimising Total Cost of Ownership (TCO). Managing TCO introduced more complexity to the procurement organisation and required a far greater level of sophistication than before. In some organisations the “narrowly focused” reduction of TCO has become synonymous with “Strategic Sourcing”.
A question I’ve often heard is: “Why should we engage with a supplier at a higher cost purely because they’ve been historically disadvantaged or more environmentally friendly?” Surely this defeats the objectives of strategic sourcing?
On the other hand:
“What is the point of dramatically reducing lifecycle costs only to find that the company will lose a major contract because it cannot meet its preferential procurement objectives?”
For most organisations, the cost of bought in goods and services are by far their greatest area of expense. Even in service industries the cost of bought in goods and services is significant.
No wonder then that legislators or special interest groups will target this immensely powerful driver of social change.
Instead of resisting these trends within the procurement spend, the procurement organisation should pro-actively study these trends and embrace them in advance so that the organisation can have sustainable competitive advantage in the marketplace.
Arguably, the most prolific global case study for harnessing the power of preferential procurement is the current situation in South Africa. Procurement objectives are set for all organisations (Public and Private Sector) to ensure that they procure in a manner that develops the previously disadvantaged. (Understandably, these co called BEE (Black Economic Empowerment)policies are the source of major debates when it comes to TCO reduction strategies)
Although painful for buying organisations, if one had to compare this with the anarchy that would ensued from a violent political revolution in South Africa, it’s a much more sophisticated and intelligent way to redress past imbalances.
As governments globally and special interest groups latch on to this powerful driver of social change, more pressure would be experienced by the procurement function to comply.
The key “take away” is not to resist preferential procurement trends but to study them in advance and assist the organisation in rapid compliance. Rapid compliance will result in the organisation having advantage over its competitors when it comes to winning large contracts. There is usually a “lag” time before compliance can be achieved. Until competitors comply (which might take a year or two) your organisation will have competitive advantage.
Once rapid compliance is achieved, the procurement organisation should continually establish leadership for the organisation in this regard, as long as preferential procurement excellence is a provider of competitive advantage.
The implication of these powerful trends is that “narrow based” TCO needs to be reviewed (and measured) in the wider context that surrounds the commodity under
Commodity strategy documents should include strategies that address ALL important issues surrounding the item and not just lifecycle costs but the total impact / value that can be created.
Although many procurement professionals agree on this, many organisations do not measure the success of commodity strategies on these factors but on a narrow based definition of TCO.
It is not prudent for any organisation to indiscriminately add the additional pressures such as preferential procurement compliance without adjusting its cost saving expectations. “Having your cake and eating it” springs to mind.
A balanced commodity scorecard might be more appropriate.
Preferential Procurement trends can create an excellent opportunity to engage the company’s senior management at a more strategic level. Instead of engaging onley at the cost reduction level, procurement can become an active contributor to the strategic debate.
Posted by Bernie at 04:19 PM | Comments (1)
January 21, 2005
Highlights: BEE Codes of Good Practice (Part 1)
Supplier complaints that "different South African customer rate our BEE (Black Economic Empowerment) efforts differently" and "each time we think that we've met the criteria, everything changes", might be coming to and end soon with the recent introduction of the government's Draft BEE Codes of Good Practice..
I've tried to put the salient points of the new code as they apply to South African Procurement Professionals in this article. This includes an on-line calculator (see below) which you can use to calculate your Supplier's BBBEE rating. (or send the article to them so they can do it themselves!) Links to the various detail documents as supplied by the Department of Trade and Industry (DTI) are also included.
Please keep in mind that the Code is in DRAFT format, and for comment. (Now might be the time to make your views heard!)
Some of the key take-aways for South African procurement professionals are:
1. The government is moving towards Broad Based Black Economic Empowerment. Simply put, the intention is to empower all black people and not only a select few as is currently the case.
Differentiation is now made between "Narrow" and "Broad" based empowerment.
Narrow based empowerment scored (solely black ownership based) will apply only for another 12 months. Thereafter a broadbased scorecard will apply.
2. The government has put forward a balanced scorecard in order to measure its success in this regard.
The scorecard will measure three core elements of BEE:
a) Direct empowerment through ownership and control of enterprises and
assets,
b) Human resource development and employment equity, and
c) Indirect empowerment through preferential procurement and enterprise development.
Entities will be viewed regarding their BEE contribution as follows:
(a) “Excellent contributor to broad-based BEE” - total score of 80% and above
(b) “Good contributor to broad-based BEE” - total score of 65% to 79.9%
(c) “Satisfactory contributor to broad-based BEE” - total score of 40% to 64.9%
(d) “Limited contributor to broad-based BEE” - total score of below 40%
How are these ratings determined?
In can become quite complicated but for now a simplistic calculator is provided here to illustrate the concept.... (I will be send out the more involved / detailed version of this a bit later)
Posted by Bernie at 03:28 PM
| Comments (6)
By Bernie van Niekerk No doubt, BEE is an ultra-hot topic. In this election year, it will dominate many political speeches. It will also dominate many deals and already is. (see BEE News section). For procurement professionals in Government and the Private sector this means meeting BEE targets. And the more broad-based the empowerment targets, the hotter it will get for the procurement fraternity. “But there aren’t any good BEE suppliers available”, I hear some end-users say. “And we’re spreading the spend too thin for decent negotiations”, says Procurement. “And the amount of admin…!” Earlier when companies could do a couple of big deals with huge companies, it was easier to meet targets. (Not easy, but easier) But with broad-based empowerment becoming an issue, it means more deals with more suppliers. Each time I’ve presented to South Africans on World-Class Supplier Management, they all agree with the wisdom of reducing the supply base, of partnering with key suppliers, of measuring total performance and going for win-win. But without exception, someone in the audience asks something like this: “How do you reconcile BEE Development with World-Class Procurement principles?” Where we are (and people in government will identify quite strongly), it means more suppliers. Many, many more than we’ve had before. More orders, invoices, delivery notes, payments, cheques, supplier registration info (Big One!!), phone calls, credit checks, goods received notes… and that’s just the paperwork. We have duplicates on the system and entire departments involved. “Where is the time to act strategically?” they ask. Those in the private sector might find it interesting to note that government organisations are not allowed to turn suppliers away from being on the database. This means that the number of suppliers on the system just GROWS and GROWS! Then there are the other issues, such as front companies, greater scope for fraud and of course “I personally know your CEO, and he told me I would get business.” The conclusion must therefore be that in SOUTH AFRICA, we are obviously different. Therefore World-Class Supplier management is good in theory but cannot be practiced …. in practice! But procurement is a key determinant of overall supply chain performance. Therefore, our economy and our companies cannot afford to have a sub-optimal supply base. The ultimate performance of our supply chains is greatly influenced by the performance of our suppliers. This means fewer, better suppliers. It’s a fact. “How to reach out to more suppliers but have fewer suppliers to deal with,” then becomes the question. In trying to deal with a very administratively intensive environment, the following questions are always helpful: a. Can it (the process, the issue etc) be eliminated? If not, Regarding question a.) I think the BEE issue is here to stay and will be for the foreseeable future. There may however be certain parts of the spend that we can remove from the BEE measurement criteria for reasons that it can’t be sourced form anywhere else. Its OK to do this. Many governmental organisations do this as well. However, there are some good possibilities arising from b,c and d. Firstly, get somebody else to take over the development of many BEE suppliers. By identifying areas of spend where there are many suppliers, an opportunity may exist to outsource it to a single entity. For example: Combining cleaning, mail and messenger services, gardening, landscaping, security and catering with a single facilities management company, that already has BEE credentials (Example: TSEBO Outsourcing-Group Subsidiary: Drake and Scull)), has the following effect. A greatly reduced supplier base BEE credentials on a substantial part of the supplier base. (“We bought from a large BEE supplier”.) AND As part of the service-level agreement (SLA), the supplier in question agrees to procure from a “Broad-based empowerment” set of suppliers. The supplier has broadbased BEE targets that it feeds back to the buying company, that it uses for its own reporting. (“Therefore, at the same time we promoted broad based empowerment”) Access to the specialised management expertise, infrastructure and systems inherent in the outsourced provider. This allows for more effective and cost effective management of the specialised, non-core activities This type of deal is clearly not a front company, but that of a value added service provider. SO in effect, the outsourcing supplier does the work on developing the BEE’s but your procurement function can still claim the credit. Secondly, for b) getting someone else to do it, c) simplifying and d) automating it, I say “Give it to the Bank!”. I would suggest that companies re-evaluate the humble Procurement Card. Available from Mastercard, VISA and Diners, the cards will: 1. Ensure that BEE suppliers get paid in 5 days. (Major reduction in accounts payable admin, and the supplier is very happy!) I agree that not all of the areas of spend can be addressed in this manner. But perhaps the 20% of the BEE spend that is causing 80% of the admin, headache and work can be addressed. This will then free up time to spend working on the more strategic areas of the spend (and the BEE spend) where World-Class Supplier Management can make a major difference. To your success! Bernie van Niekerk
Posted by Bernie at 08:30 PM
| Comments (1)
The above is simplistic because there is a further level of information that needs to be considered and calculated before the actual numbers as indicated above can be entered correctly. They can be found on the DTI's website provided here
Bernie.March 15, 2004
BEE Supplier Development: How to pass the buck but still get the credit
b. Can I get somebody else to do it? If not,
c. Can I simplify it? if not,
d. Can I automate it?
2. More controls are available than at present
3. You can measure end-users on how much they buy from BEE suppliers
4. Reduce transation processing costs by 70%
5. AND, the supplier does not have to be on your system, but the bank will give you the info as to how much was bought, on what and from whom.