Allon Raiz – Common mistakes corporates make in their supply chain strategies

Alon Raiz

Raizcorp has been developing and growing small businesses for almost two decades now and has worked with numerous large corporate companies on their enterprise and supplier development strategies. Over time, we have seen that corporate supplier development programmes often do not achieve the expected results owing to a number of issues relating to the companies’ supply chain strategies. Below are five alltoo- common mistakes relating to supplier development that are being made by corporates – particularly in the mining sector.

Sharing too widely

Owing to localised political pressure – particularly in the mining context – contracts are shared widely to try to encompass as many members of the surrounding community as possible. The unintended consequence of this altruistic and egalitarian approach is that business opportunities effectively become projects which move from one project awardee to the next. In the time between projects, profits that might have been derived through the project are effectively wiped out, jobs that were created are lost, the appetite for permanent employment is destroyed, and therefore there is no vested interest in training employees for skills. From a more macro perspective, labour and skills are less likely to settle in the geographic region as they will be transient and looking for the next project. Finally, there will be no role model opportunities created; in other words, a small business starting, building up and becoming a positive example of what can be done in the surrounding community. By awarding fewer companies more regular work, you give those businesses an opportunity to build permanent staff and attract better skills, and a platform from which they can look for additional business. The company itself becomes a consumer of other products and services, thus attracting other businesses to the region. Those businesses, in turn, also become consumers of products and services and so on. Effectively, more permanent contracting precipitates the substrate of a local economy which becomes a virtuous cycle.

Everyone is welcome

Entrepreneurial selection has been a big bugbear of mine for many years and I believe it is even more important in the supplier development context. The biggest mistake made in the selection of suppliers is that it is generally focused on technical capabilities (quality of work and price). The problem is that if the selected supplier is not entrepreneurial, there is a very high probability that the business will not be sustainable and in the medium to long run will close down. The consequence to the corporate client is an erratic supply chain and the costly exercise of choosing and rechoosing suppliers. It makes far more sense to add a third component to the selection criteria which is that the business owner being selected is entrepreneurial and therefore more likely to build a sustainable and stable business that can supply the corporate over the long term.

Contracting badly

Many of the supplier contracts that I have read through, particularly in the mining and construction sectors, include a clause that requires the supplier (or entrepreneur) to be on site permanently throughout the project. The reason for this clause is often based on previous experiences of abuse by suppliers who, once the contract has been awarded, outsource the work to third parties whose quality and commitment are questionable. There is, of course, validity in such a clause but the unintended consequence is that the entrepreneur – while legally required to be on site – cannot look for new work and cannot go for further business development training. This once again reduces the socalled business to a project because the entrepreneur can only begin to search for work at the end of the contract, and during this time he or she will burn through any profits that might have been created from the project. Allowing the entrepreneur to participate in business development training and giving them the time and opportunity to look for new work ensures that the entrepreneurial project business can transform into a legitimate, sustainable business. The corporate mine or construction corporate can modify such clauses to ensure that there are sufficient controls in place that prevent abuse and that they are not a sweeping catch-all clause which has devastating sustainability consequences.

Inappropriate funding

Many supplier development projects include a funding element and, although I think it’s important for funding to be part of the support mix, the way in which funding is actually administered by many corporates is to make a full upfront payment to the selected supplier. It is my strong view that inappropriate funding has the counterintuitive effect of actually destroying businesses rather than growing them. Most often, early-stage businesses have not finessed their models and consequential pricing. Pricing in early stages is often a function of market price less 5% or more. The business may be projecting profits but, on deeper investigation, one sees that there is no rental associated with the model as the entrepreneur often works from home, and salaries are significantly below market rates with previously long unemployed family members being used as the labour force at below market rates. Once the business is funded and begins to “scale”, there is often a requirement for it to move to more formal premises and to employ additional people at market-related salaries.

The normalisation of costs very often generates a loss in the business which means that additional funding for scale is exacerbating a broken business model and, in fact, can lead to the death of the business. In my opinion, the first thing to do when supporting a supplier is to ensure that their business model is a) profitable and b) scalable. The second thing to do is to ensure that the entrepreneur’s personal paradigm is aligned to building a sustainable business as opposed to an opportunistic, short-term mindset that is programmed to deplete the company of all excess funds and preventing any long-term growth. Only once the model is fixed and the personal paradigm aligned to scale should funding become available to a supplier, initially in a more conservative manner and then slowly opening the tap as the entrepreneur builds confidence and the business manages the learning-curve lessons that will no doubt take place. Easy and inappropriate funding is the crack cocaine of ESD, creating dependency and death.

Silo approach within the corporate

My experience has been that many large corporates house the ownership of the various components of the BBBEE scorecard within different departments. Social economic development (or CSI) is usually housed within the HR or CSI department; skills development usually falls under HR; enterprise development is mainly housed in the transformation department; and supplier development and preferential procurement usually falls under the aegis of the purchasing or procurement department. In many cases each of these departments runs completely disparate programmes to serve their particular component of the scorecard. There is no holistic approach which sees CSI dovetailing into skills development dovetailing into enterprise development dovetailing into supplier development dovetailing into preferential procurement. The dovetailing of these components may be a complex ideal but the efficiencies and benefits are well worth the effort. For example, a CSI initiative could be aimed at unemployed youth to expose them to the idea and concept of entrepreneurship. This becomes a feeder into a skills development programme where unemployed youth are further trained on entrepreneurial skills and concepts, and encouraged to ideate a business. Those early-stage businesses are then incubated using enterprise development funding to a point where they can produce products and services that are appropriate for the corporate’s supply chain. Supplier development funding can then be used to help scale these businesses to a point where they have genuine impact on the preferential procurement element of the scorecard. Even the YES programme can be used by the corporate to provide “free (paid for by the corporate)” interns to small businesses allowing them to scale more effectively and profitably. This requires a huge amount of co-ordination and collaboration within a large corporate but is completely  doable and, in my opinion, necessary.

Expecting new players to compete

It is almost impossible for a new, small player to compete with the dominant incumbent  supplier in the market. The dominant supplier has decades of experience; they have worked through the learning curve and have structural efficiencies and economies of scale. A new, small player has none of these. Procurement managers who expect new entrants to compete on price (and often quality) are delusional. My experience has been what we at Raizcorp call the “tuning fork effect”. The tuning fork effect shows that the real benefits of including new black suppliers in a supply chain actually accrue from the incumbent supplier to the corporate. Over many years of supply, the incumbent supplier adds the traditional CPI annual increase and usually has a very low level of innovation. The new entry of a black supplier results in the incumbent supplier being shocked into a new and better pricing structure and better innovation which serves both themselves and the corporate. Forwardthinking procurement officers see the net effect of better pricing and better innovation as the payoff for the higher prices they may be paying to the new supplier. The net effect on cost therefore becomes zero for the corporate.

There is a huge opportunity for corporate South Africa to use BBBEE as a strategic tool to benefit their own organisations and as an instrument of change to benefit society. All it takes, in my opinion, is a little more care in the construction of BBBEE strategies. A few minor shifts as mentioned above can make all the difference.

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