8 minute read
Winning with the right procurement localisation
South Africa’s economy is under intense pressure and the outlook appears to be eroding. Operating amid an economic slump, mining could improve the country’s financial outlook while also helping to achieve its social objectives with a focus on shared value.
BY KEARNEY CONSULTING*
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South Africa has undertaken a bold programme to entice investors with the promise of building an economy underpinned by inclusive growth, competitiveness and transformation. With vital strategic importance, the government has challenged the mining and mining-related industries to play a central role in helping the country achieve its social and economic objectives.
Because policy and regulatory changes such as the Mining Charter III compel the industry’s players to prioritise the national agenda, forward-thinking mining companies will commit to a transformation with inclusive growth (see figure 1). To preserve the social license to operate by balancing approval from local communities and the management of legislative pressures, South Africa’s mining companies often invest in social
AT Kearney Analysis
Note: Sectors have been ranked based on industries that have high impact and ease of influence scores relative to other sectors. Impact and attractiveness points to the relative contribution by the industry in terms of GDP and the multiplier effect it has within the economy. Ease of influence is based on structural advantage and the ability to have impact quickly.
impact initiatives at national and site levels, including charitable giving or risk mitigation programmes.
Although these initiatives can create social benefits, they generate minimal levels of sustainable socioeconomic value. Local supplier bases become saturated and organisations waste significant amounts of money on programmes that eventually fail. As a result, the industry is missing out on potential advantages, including from local procurement.
Capturing and sustaining a competitive advantage will require embracing a shared value agenda – one that benefits not only the mines but also the communities in which they operate. What’s needed is a strategy that addresses the national priorities of inclusive growth and transformation. Procurement can be the driver and enabler for this transformation. to capture benefits from these changes and build a sustainable competitive advantage. For mining companies, this translates into emphasising strategic areas that align with the societal context and developing viable, local supplier bases.
Developing economies face a variety of country-specific challenges in their supply chains, restricting the achievement of procurement objectives. For example, the supply chain has a shortage of local suppliers and insufficient core capabilities and resources. These characteristics have instigated change in the operating environment, including new legal requirements, as outlined in South Africa’s Mining Charter III, as well as social requirements to operate within a community.
The procurement function can react to these changes and ensures operational efficiency by shifting the fundamental approach to supplier management. By developing an under- standing of local issues and collaborating to develop mechanisms that address these issues, procurement teams can develop practices that facilitate the creation of shared value.
In a developing economy, procurement plays an instrumental role in developing existing suppliers and establishing new ones. To generate shared value, the procurement team must be committed to resolving core social issues with tailored solutions that deliver a substantial, sustainable impact. Context-specific initiatives as well as a localised approach are essential to delivering shared value and achieving procurement objectives alongside sustainable social development in the community.
Done right, localisation can be a win-win: making a significant socioeconomic impact throughout the community while creating numerous benefits for the organisation, including shorter lead times, higher-quality products and services, lower costs and even attracting investors and improving related industries.
Three steps to procurement excellence.
ASSESS LOCALISATION PRIORITIES
The 2019 Kearney Foreign Direct Investment Confidence Index reveals that several factors influence decisions about where to invest. Among the top 10 factors are R&D and innovation capabilities, security and crime, transparency and efficiency of local government regulations, the strength of investor and property rights, government tax incentives and investment promotion as well as the efficiency of legal and regulatory processes. These factors highlight the vital role the government can play in creating an environment that supports investor confidence.
In South Africa, where social issues are becoming more prevalent, organisations must strategically position themselves
AT Kearney Analysis
AT Kearney Analysis
Four archetypes of suppliers.
ADAPT TO UNIQUE LOCAL NEEDS
After assessing the localisation priorities, the procurement function must be able to identify and map the right suppliers across the category strategies. Four archetypes of suppliers reveal that substrategies that consider local characteristics are required when defining a localisation programme.
In South Africa, this means considering Broad-Based Black Economic Empowerment (B-BBEE) policy as well as the sectorlevel requirements in the Mining Charter.
A sustainable localisation strategy requires a portfolio of local suppliers with all four archetypes. Each region has a unique subset of suppliers classified along the four archetypes; some regions have all four, while others have suppliers that are mostly in one archetype.
It is important to bear in mind some principles for customisation. First, when dealing with unions, focus on protecting people, not jobs. In other words, prepare people for current and future jobs (if current ones are doomed to disappear). Job projection per se is not sustainable as the company will bear unnecessary costs.
Second, combine short-term and long-term perspectives. Focus on sharing gains, not giving handouts, which have an ephemeral impact. With the ubiquitous presence of social media, individuals can quickly coordinate flash strikes or supply chain disruptions. Without decisive actions, mining companies will be facing an increasing pressure to meet ad-hoc demands from well-coordinated pressure groups. In the long run, plan to ensure local economic viability even after site closure.
The next step is to align the procurement organisation for successful execution.
ALIGN WITH GLOBAL BEST PRACTICES
In leading organisations, procurement is aligned with gaining a competitive advantage by leveraging the market value that already exists within the supply chain. This results in achieving procurement’s primary focus: improving the organisation’s overall profitability with sustainable cost reduction and substantial revenue growth. In South Africa, companies must address shortcomings in the supply chain, leverage their procurement function to grow shared value and prioritise engagement with local issues. This will require enhancing procurement’s capabilities to drive localisation.
Many companies report on financial, social and environmental results without analysing the connections between business performance and social impact. Often there is no comprehensive assessment of the organisation’s performance and distributed cash is often tracked but with no outcomes achieved – inhibiting the full potential for growth and multifaceted strategies.
The first step is to assess the strengths of the procurement function compared with best practices for executing a localisation strategy. This will require benchmarking the function against global standards.
Forward-thinking companies assess the social impact of their localisation strategies by defining the key performance indicators, measuring the interaction of business and social results. This is a twofold process. First, understand the full financial impact of interventions, including both benefits and costs, to expose materiality and justify shared value activities. Second, use a model to determine the social impact on the community.
Delivering value through procurement processes requires three elements: team, category and supplier management excellence. The leaders typically achieve superior returns from supply management with a clear focus on these elements, delivering a broad range of strategic value, including innovation, risk management and talent development.
High-performing procurement teams play a proactive role in contributing to executive strategy and demonstrate leadership in containing costs and creating value. This requires that most of the team effort is focused on strategic activities and is supported by standardised, automated processes. In addition, analytics is essential to generating timely insights, which can be fed back into the strategy. Leading organisations use analytical tools to gain access to up-to-date spend data, track a wide range of procurement key performance indicators and conduct an endto-end value chain analysis. This will accelerate time to insight so that the right shared value decisions are made.
Driving category excellence requires not only a clear focus on costs, but also the identification of vital business insights. This is achieved with high visibility into category and supplier spend and the ability to source and influence more than 70% of the spend. Prerequisites for this are robust sourcing processes and clear category strategies for key spend areas.
Achieving supplier management excellence requires a welldefined supplier relationship process that yields high rates of compliance and value. Well-managed supplier relationships contribute to a competitive advantage by offering innovation and risk management through a robust collaborative process.
Once the AAA road map is defined, the next step is to steer the company in the right direction.
THE FOURTH A: ACTION
Localisation programmes are inherently complex, requiring real organisational transformation. The chief executive officer’s active participation along with the commitment of senior management is essential to success.
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