A negative perception exists that enterprise & supplier development (ESD) is a compliance cost. Business owners believe they are being forced to donate 3% of their net profit after tax (NPAT), and divert procurement spend, to companies that offer little ROI or are at worse incompetent.
What if ESD was not viewed as a cost, but a benefit to your business? Many global and local companies are beginning to view their suppliers as strategic partners rather than just compulsory transactional partners.
Procurement consists of three major functions – sourcing, contract management and supplier management. Historically, procurement departments have focused on sourcing and contract management because of the faster tangible results they produce.
However, with competitive markets, shrinking margins and exhausted saving opportunities, procurement departments are beginning to shift their focus to supplier management. As business needs change, strategic supplier management can deliver sustainable value and increased competitiveness if viewed in the correct context. Companies like Walmart use strategic supplier management to drive down supplier costs and deliver low prices to their customers. Woolworths can deliver their curated product offering to customers because of their dynamic approach to strategic supplier management.
Strategic supplier management involves strategic collaboration and partnership between the buyer and supplier to create value. The relationship should be mutually beneficial, with the buyer receiving value for procurement spend while the supplier is assisted with market access and growth opportunities.
The model businesses can use for strategic supplier management, one Letsema refers to as the 4S Strategic Supplier Management model, focuses on:
- Strategic alignment;
- Sourcing and classification of suppliers;
- Supplier engagement; and
- Supplier development;
The aim of the 4S model is to help businesses achieve procurement efficiencies, reduce costs, create value through agile supplier networks, and advance societal development via B-BBEE and ESD compliance.
Strategic alignment brings together supplier management with procurement, B-BBEE and corporate strategy. The supplier management strategy will be developed based on the B-BBEE preferential procurement targets and the business needs.
Sourcing and Classification of Suppliers
Supplier sourcing and classification focuses upon choosing the appropriate suppliers, and how they are assessed and classified for development.
Supplier engagement means going beyond contractual obligations by driving and facilitating effective collaboration between business and suppliers.
Lastly, Supplier Development’s intention is to utilise the 3% NPAT ESD allocation to develop the external, entrepreneurial ecosystem, and support selected and potential suppliers. Suppliers will enjoy increased access to:
- Funding for growth, which improves capacity and the product/service offering
- Business development for an improved value offering
A paradigm shift is required so ESD is perceived as a mechanism for effective strategic supplier management that delivers sustainable value and enhances business competitiveness.
To learn more how supplier development is a strategic asset, contact our Economic Development team here.