Reducing the Total Cost of Affirmative Procurement

The unfortunate and sometimes “uncomfortable” truth is that the total life costs associated with engaging historically disadvantaged suppliers are often unexpectedly higher than engaging in business as usual. With existing and looming charter obligations, preferential procurement has become a strategic imperative and firms need to focus on reducing these costs.

‘Total Cost of Ownership’ (TCO) refers to assessing the lifecycle costs of an item rather than just the visible capital expenditure. TCO can provide a vivid demonstration of the difference between purchase price and ownership cost, which many customers of historically disadvantaged suppliers still find surprising, particularly when preferential procurement budgets are discussed. Until recently, South Africa procurement groups haven’t considered this aspect of engaging BEE suppliers. In this article we examine one methodology for coordinating and integrating the various processes associated with engaging in preferential procurement that we believe will go far to reduce the TCO of conducting preferential procurement.

Integrating and coordinating processes

What’s required to reduce costs? The most effective affirmative procurement models deliver repeatable, reliable, managed services based on proven methodologies. They are usually policy-driven, and are underpinned by their use of guarantee facilities, incubation processes and donor engagement strategies. The most effective systems can enable firms to manage engagements with historically disadvantaged suppliers at a fraction of traditional costs.
Below we propose a sourcing methodology that is designed to address preferential procurement.

State-of-the-art preferential procurement methodologies like this one allow an organization to adopt a highly structured approach to understanding their business requirements, developing and supporting supply chain transformation strategies, and implementing more effective and profitable preferential procurement.
This preferential procurement strategy supports the operation of external stakeholders (like government, service providers, banks, investors, donors—points 1-3 in the diagram) to realise shared market development objectives for supply chain transformation.

Making use of external services and stakeholders

In an environment where emerging suppliers often have relatively little to offer in terms of a balance sheet, this model features the use of cashflow-based financing to enable suppliers to access financial markets. Contract financing would be provided on ‘future-flow’ transaction-basis, with the aid of guarantee facilities sponsored by procurement groups directly, or by third parties like Khula Enterprise Finance. Other sources can be tapped to unlock finance for suppliers too.

As procurement mandates are intended to contribute to the development of high quality, middle-tier black suppliers, service providers may be employed to structure their interventions in the context of logically progressing project cycles from buyers so that they can practically demonstrate to suppliers how to operate more effectively in the market.

Over successive project cycles, emerging suppliers assume more responsibility for project delivery until it’s evident that they can exit capacity development programmes and sustain themselves autonomously. Corporations should aim for an intuitive and easily assimilated approach, reinforced by demonstration.

The costs for these interventions can be offset by support from donor and social investor communities, including the organisation’s own EDI and CSI budgets. Buyers can support suppliers in their application for grant and subsidy support. Onsite development assistance consultants could advise suppliers as to the most appropriate grant and subsidy options available from all the major donors and social investors. These consultants can also help suppliers with grant identification, application packaging, compliance, as well as ensuring that the process is better managed.
Indeed, the most effective affirmative procurement strategies seek to catalyse, facilitate and leverage existing SME development support which is available in the market. Buying groups can catalyse suppliers’ access to new markets and more strategic trades. Service providers can be harnessed to package interventions. Guarantee facilities can give these interventions scope and application. Donor assistance can help to ensure historically disadvantaged suppliers have low cost access to technical assistance and capacity, and that the burden of managing delivery does not rest solely on the buyer’s shoulders.

The overarching theme here is to construct a proactive preferential procurement engagement model. It’s the adoption of a ‘hands off’ approach—instead of managing these services—that drives hidden and often times prohibitive costs to unacceptable levels.

Scalable processes, reducing costs

This model’s governance principles and embedded learning loop processes (point 4) can help to ensure that a buying group enjoys a governance-controlled, policy-driven, repeatable process. This is a defining element of more-effective, least-cost methods for engaging black suppliers.

The aim of holistic approaches like this one is to lower the identification and transaction costs associated with linking big business with emerging companies so that established businesses may engage this sector more profitably, once suppliers graduate from the programme. It’s about TCO. It’s about saving money and accessing new markets.
In summary, buying groups can indeed catalyse suppliers’ access to new markets and more strategic trades. Service providers can be harnessed to package interventions. Guarantee facilities can give these interventions scope and application. Donor assistance can help to ensure historically disadvantaged suppliers have low cost access to technical assistance and capacity. When combined with dynamic feedback and governance processes, corporations are in a position to engage black suppliers more effectively and enable their real achievement of charter objectives.

Comprehensive models like this one are charged with ensuring that transparency, coherence and where necessary co-ordination takes place between various stakeholders and historically disadvantaged suppliers. The above model builds on, or contributes towards the establishment of inclusive, risk and resource-sharing partnerships between all the players in its sub-sectors and markets of operations.

By David Monkman, CE of the Business Link Network (Blink)
Dr David Monkman can be reached on 072-332-0908

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