Enterprise And Supplier Development (Esd): How To Build A Strategic Response To The Preferrential Procurement Challenge

Posted by Transcend
Thursday, 11 May 2017  |  Comments

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The amended broad-based black economic empowerment (B-BBE) codes, which came into effect on the 1st May 2015, brought about new requirements for companies to comply with to achieve their desired B-BBEE levels. Only now are we beginning to see the impact of the changes in the requirements having an impact in the scores that companies are getting, particularly on the procurement component of the enterprise and supplier development (ESD). A significant number of companies, are being discounted, largely due to failure to comply with the priority requirements on the procurement indicator.

ESD element is designated as a priority element on the new B-BBEE scorecard, and companies must achieve a minimum of 40% of the available targets/points on each of the three levers of the ESD element (Procurement, Supplier and Enterprise Development), to avoid dropping a level down in their final scoring. The priority element requirement therefore places a minimum score for companies to aim to achieve, and thus requires a strategic response. The traditional model for improving procurement points on the old scorecard was very shallow, in that in never looked beyond the current supplier base. Most companies embarked on tactical initiatives such as calling all suppliers and asking them to provide their B-BBEE certificates. The more suppliers you had who were B-BBEE compliant (at least level 8) the better chance you had for a good score. However, the new codes pose a different challenge all together.

Companies have seen their procurement points for three major reason:

  • The new codes are very stringent in general, and achieving a good score requires more work and commitment. As a result, all companies in general will drop levels from the old to the new B-BBEE scorecard. On average, we have seen companies drop by 3 levels. The natural outcome of that is the procurement scores will drop for everyone in the economy.
  • Notwithstanding the above, the new procurement scorecard has been configured such that it is not easy to earn high scores. Out of the available 25 points (excluding bonus points) on procurement, 20 of these are available for spending enough withblack owned (and black woman) suppliers as well as small businesses (businesses with less than R50m annual turnover).
  • Your average large corporate, in general, has 80% of their annual procurement spend with 20% of their suppliers. In other words, there is not enough spread of suppliers to be able to maximize the procurement scorecard – the greater portion of the spend is concentrated with a few large suppliers. Bearing in minds some of the concerns highlighted above, large suppliers will most likely drop levels on the new codes, and only up to 5 points is available for grabs on the new procurement scorecard for spend with large corporates who are B-BBEE complaint.

However, in dealing with the procurement challenges highlighted above, the simple tick box exercise of requesting the BEE certificates of suppliers will not be enough to take companies over the dreaded minimum 10 points on procurement. A concerted companywide response is required attempts to deal with, and understand the structural, and cultural issues that must be dealt with over the medium-to long term period.

Building a transformed supplier base is not an event, but a process that requires proper and careful planning, and total commitment from the board and management team, to go beyond compliance, but also look at structural issues within the business that may require a change in the way things have been done in the past. When properly done, it is a rewarding and worthwhile journey!

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