"It becomes more interesting when there are regulations such as the BBBEE Act, PPPFA and SCM Regulations, as these are expected to impact on organisations’ (public sector) bottom-line while complying to the legislation. This does not mean that those in private sector must not take these regulations into account, especially those willing to do business with government”, Sandile Ngcobo, Chairperson of the KZN Institute of Purchasing and Supply South Africa, told SmartProcurement.

The aim of this article, however, is not to discuss these regulations, but rather to indicate Supply Chain Management functions in South Africa, especially within government.

Why purchasing is key - The message to business leaders/CEO’s
Have you, as business leader/CEO, ever asked yourself the following reality check questions:

• Do you have a really good understanding of the corporate strategy/plans/priorities within your organisation?
• What are the particular problems/opportunities for the CEO and key leaders of change/business development?
• What is the background/business interest of key influencers in the organisation?
• Which language, culture, etc do they best relate to? For example, when speaking with the Finance Director, are figures the only language understood?
• What do these stakeholders think about purchasing and supply management, and about you and your colleagues?
• Can they answer the checklist at the end of this guide? If not, how do you get the answers on their behalf to help inform them about the benefits?
• How can purchasing and supply management really contribute when dealing with hot issues and major business challenges? What benefits can you bring that relate to cost, innovation, security, reduced risk, improved quality, etc?

Cutting costs, improving efficiency
Over the past few decades, efforts to cut costs have tended to focus on headcount. The elimination of unnecessary activities, productivity drives, automation and contracting out (or outsourcing) have all seen workforces shrink. “Although right and necessary in many cases, such strategies have obvious drawbacks. Telkom is a well know case: When they implemented their turnaround strategy, we all saw some interesting results in the balance sheet. The question that one can ask is whether this is attributed to labour layoffs or due to business improvements. This re-engineering can also create possible difficulties for the future: If you let good staff go you might have a skills crisis when things pick up again. The emphasis on personnel reduction has been combined with actions to reduce the number of facilities required to run the business. This has resulted in the amalgamation or shut down of manufacturing plants and sales, service and administration offices”, Ngcobo continued.

In many organisations, such ‘re-engineering’ is now complete. Having exhausted opportunities to save money by cutting staff numbers and rationalising operations, directors are having to look elsewhere. Procurement is the obvious place. This is because the value of bought-in goods and services is usually a high percentage of turnover or revenue. The amount varies between 30% to 80%.

In both the process and the service sectors, the values will equal, if not exceed, the amount spent on payroll and facilities. In the public sector, expenditure on goods and services is in the region of 50% to 60% of total expenditure. It is clear then, that cutting the cost of in-bought goods, services and capital items can make a dramatic improvement to an organisation’s bottom-line. A simple calculation shows that if an organisation saved just 10% of its total spend on purchases, its profit would increase by 5% of turnover, nearly doubling to 11%.

Coming back to the subject at hand, government has a duty to promote social and economic development. The creation and maintenance of public assets and the provision of municipal services is within the direct control of a local authority and as such can form the first part of a phased approach to local economic development. “We have seen the use of procurement as an instrument of local economic development, which include black economic empowerment, targeted procurement policies and later BBBEE codes of good practice: These policies are specifically aimed at achieving certain government policy objectives”, Ngcobo said.

Government can further influence the direction and structure of the local economy through its expenditure on assets and the provision of services particularly in so far as employment and business opportunities are concerned. Inappropriate policies can be detrimental to the local economy and result in fewer business and employment opportunities and, in turn, a lower standard of living. It is therefore important that such policies be holistic in nature and that it takes cognisance of all possible consequences, both positive and unintended.

Having highlighted the above issues, the nature and complexity of public sector procurement is at least comparable to that in the private sector, and must thus be given at least similar priority as a result. The challenge is to meet the public’s demands for increasingly high quality public services at a good value for money level and in a sustainable way. To do this government needs to harness the benefits that organisations can offer through their commercial expertise and ability to innovate, through a procurement function. To bring this about, the following step-changes are required:

1. A higher caliber of professionalism need to be developed in order to deliver on improved standards, and focus on driving better value for money from procurement on a whole-life costing basis. This so-called ‘new breeds’ should constantly remind the Chief Executive/Accounting Officer of the above key message of business leaders.
2. Government needs to focus its top talent on its most complex and critical procurement projects by way of introducing strategic sourcing into their procurement function.
3. Government must recognise the importance of public service delivery and value for money, and departments must strengthen their procurement capability through greater direction and support from the top.
4. Government departments need to collaborate more in their purchasing of goods and services across more than one department in order to get better value for money.
5. Government must seek to synergise benefits where necessary: This can be achieved through collaborative efforts by provincial or local government procurement initiatives.

In conclusion, the South African Government seems determined to step up its drive to deliver high quality public services that are good value for money and of a sustainable nature. “We have witnessed this through National Treasury legislation (PFMA/MFMA) and Supply Chain Management Regulations. Procurement is also an important means of delivering these objectives. The reform set out above suggest strategic interventions or initiatives, from a strategic commissioning point of view, that government can implement into its procurement processes and standards”, Ngcobo concluded.

Article submitted by Sandile Ngcobo, Chairperson of the Institute of Purchasing & Supply South Africa.