A presentation by Wybrand Ganzevoort, Managing Director, Collective Value Creation, South Africa. Delivered during the 38th annual SAPICS event for supply chain professionals in Sun City, South Africa. The session will provide delegates with a background to Supplier Development in relation to their Supply Chain and the 2013 Codes of Good Practice. We then delve into the various Strategies around Supplier Development. These strategies include Supplier Diversity, Entrepreneurial Development, Operational Supplier Development and Growth and Supply Chain Innovation. The session will motivate Supply Chain practitioners in South Africa to think strategically regarding Supplier Development. The session will examine some examples of how organisations are strategically engaged around Supplier Development by integrating Supplier Development into their approach to Strategic Sourcing. Lastly we will look at some of the internal and external risks to Supplier Development and how to manage those risks.

1. Towards a Strategic Decision Making Framework for Enterprise and Supplier Development in South
Africa
by Wybrand Ganzevoort
History of BBBEE & Preferential Procurement
Supplier Diversity as we know it today has its roots in the Civil Rights movement in the United States
and started coming into effect during the 70’s to 80’s when President Nixon directed plans for a
national Minority Business Enterprise contracting program (Diversity Business Blog, 2010). South
Africa included Preferential Procurement in our constitution in 1996 by stipulating that government
entities can preference certain categories of people who have been disadvantaged in the past. The
Preferential Procurement Framework Act came into effect in 2000 allowing government entities to
make purchasing decisions based on prescribed criteria (Barclay, 2012). The 2003 BBBEE Codes of
Good Practice encouraged both public and private entities to implement preferential procurement
with the 2007 BBBEE Codes including the element of Enterprise and Supplier Development.
South Africa along with America and Australia have pioneered national regulation around diversity
and preferential procurement, yet from a South African private industry perspective relatively little
has been done to establish a strategic decision making framework by which to manage the business
case for Preferential Procurement and Enterprise and Supplier Development (ESD).
Research findings on Diversity
The research findings around diversity have been varied. A report by McKinsey has shown that
companies that have higher employee diversity, and more especially diversity in their executive
team, have on average a higher Return on Investment (Vivian, Dennis, & Sara , 2015) than other
companies. Findings from the United States on how Supplier Diversity benefits the bottom line have
been overwhelmingly in favour of Supplier Diversity (Saunders, 2014). Various case studies have
also shown how diversity can be used to acquire higher levels of market share as well as how
diversity assists the organisation in upselling and cross selling.
Some researchers though have been sceptical about the correlation between diversity and
innovation arguing that if diversity has such a high correlation with innovation then Silicone Valley
should be one of the most diverse industries in the world. Instead Silicone Valley is one of the
industries that is the least diverse in the world and is one of the most innovative clusters in the
world. The same research has however indicated that well managed diversity creates much more
favourable conditions for employee morale which leads to higher levels of productivity (Pittinsky,
2016).
With the general public and communities becoming much more informed, companies have also
started noting the risk of not diversifying. Many corporate reports are now not only displaying
figures regarding the diversity of the internal employee base, but are also requesting information
regarding local procurement and supplier diversity.
These research findings provide rich content for how we as procurement practitioners consider the
impact that diversity, and the amended BBBEE codes, has on the business case for each organisation.

2. The strategic context of Enterprise and Supplier Development
Before we discuss the strategic benefit relating to Enterprise and Supplier Development, it is wise to
consider some of the motivation behind Supplier Diversity efforts in the past.
Companies have been driving the social good agenda around social inclusion, enterprise
development and diversity long before they realised that there was a business case for it. Thomas &
Ely (1996) have indicated to the “Discrimination and Fairness paradigm” as a paradigm that believes
in rectifying the inequalities of the past. They have argued that rectifying these inequalities is
important, but could lead to highly bureaucratic outcomes which focuses on the numbers, but not
necessarily the value of inclusion or diversity. It could be argued that most of the South African
dialogue relating to diversity and inclusion takes place from within this paradigm.
Later on, the “Access-and-Legitimacy Paradigm” became more entrenched when organisations
realised the benefit diversity management has in relating to diverse communities. In this approach,
for instance, the understanding is that a black female owned company would have a greater
understanding of the needs of the black female community and therefore have an advantage when
selling goods in these communities.
Recent thinking around social impact and sustainability has argued that in order for social value
creation to become sustainable the value needs to be shared (Porter & Kramer, 2011) between the
private company and the community. Shared Value Creation has therefore brought a fresh
perspective to how organisations consider social impact. The example of Nestle (Porter & Kramer,
2011) has been used to demonstrate how a more stable coffee bean supply for Nestle was created
through the development of local farmers thereby directly benefitting Nestle. More recently it has
been argued that by investing and developing diversity in and of itself there is direct benefit to the
organisation through an increase in social wellness and productivity (Pittinsky, 2016).
Figure 1 Through Shared Value Social Impact is viewed as being part of the organisations value chain.

3. The prevailing South African paradigm
Given the above findings we still note that decisions that impact diversity, and more specifically
supplier diversity in South Africa, are frequently made based on the relationship between two
variables, namely cost and compliance. This prevailing paradigm has led to the optimisation
between cost for compliance being the point of departure for most diversity related procurement
and developmental related decisions. Some companies even going as far as to justify the Total Cost
of Ownership per Point, or per subcategory point, on their BBBEE scorecard.
To further complicate the decision making framework even further there is also the perspective that
the more money that is spent in social development and local procurement the higher the social
good impact that this has. Even though we now know that there is no correlation between money
spent and social impact the dialogue in most companies remain in reporting on money spent to
justify social citizenship requirements.
The trilogy of Preferential Procurement and Enterprise and Supplier Development
This emphasis on cost per point has probably led to most Enterprise Development initiatives having
relatively little impact and being removed from the company’s value chain. With the introduction of
Supplier Development and the change in the 2013 amended BBBEE codes, companies are now
needing to consider the direct impact that Enterprise and Supplier Development has on their
organisation.
In the past the transformation and diversity discussion has therefore been fairly removed from most
South African strategic sourcing and procurement deliberations, but with the amendment of the
BBBEE codes and the integration between Enterprise and Supplier Development and Preferential
Procurement, we are now undergoing a renewed dialogue.
Figure 2 Enterprise and Supplier Development is now aligned with Preferential Procurement
The departure point to this discussion is the alignment between Enterprise and Supplier
Development on the one side and Preferential Procurement on the other. The idea being that in
order to increase supply for specific commodities companies need to develop or transform
companies that supply these commodities.
Arguably this alignment could lead companies to create diverse local suppliers that show a higher
level of sustainable growth. This is due to the development work done on the one side and access to
market provided on the other. Therefore, both targeted procurement and targeted development
are required when considering preferential procurement and enterprise and supplier development.
The Strategic Intent of Enterprise and Supplier Development

4. In recent years the business cases that justify Preferential Procurement and Enterprise and Supplier
Development have become increasingly focused on the benefit to the organisation in the context of
the community in which it operates. It is now becoming prevalent that there is a strategic business
case to be made for implementing Preferential Procurement and Enterprise and Supplier
Development and Procurement Practitioners should take cognisance of aligning this business case
into their strategic sourcing decisions.
 The Risk Mitigation Strategy
Companies engaging in South Africa and other developing countries have a strong business case for
optimising development outcomes to reduce the risk from discontented communities (van den Berg,
2014). Considering the benefit that local community based procurement programmes and business
linkages programmes can play it makes sense for companies to consider the effect that procurement
can have in managing and mitigating this risk (Ospina, 2014). Mining companies have become quite
active in managing this risk and in understanding the local supply and demand situations as well as
the engagement with local communities.
In a case study Anadarko Petroleum Corporation started developing local entrepreneurs in
Mozambique as a first phase in the construction of a liquefied natural gas (LNG) park. By doing this
they determined the local supply gap along with what their future demand requirements will be,
before negotiating offtake agreements with the local government (Levey, 2014). This allowed the
company to understand the local market, access the local risk and organize for the future supply of
goods and services from the local market.
Companies seeking to grow local communities through local procurement have gone about using
business linkages systems to understand the gap in the market and to direct their development
efforts specifically towards closing these gaps. The BMA Local Buying Programme in Queensland has
been specifically targeting small businesses. A percentage that is spent through every transaction in
the programme has helped to fund the development of other small businesses for future supply
(BHP Billiton, 2014).
Companies that start to ‘cost’ the impact of conflict are able to much clearer understand the local
content needs and build a business case around this. It has been estimated that for large mining
companies the cost per week of lost production from community conflict can be in excess of roughly
US$ 20 million per week in Net Present Value terms (Davis & Franks, 2011).
 The Competitive Compliance Strategy
We have already discussed the emphasis on compliance, but compliance in the South African and
other global marketplaces is a very realistic objective in competing successfully. South Africa is one
of 7 other African countries where indigenisation policies have been implemented and South Africa’s
BBBEE legislation has been viewed as the most sophisticated(Nolan, 2015).
Even though compliance in and of itself does not strategically differentiate a company it could still
contribute to competitive advantage over other B2B competitors and needs to be taken into
consideration in and of itself. This is especially true in relation to BBBEE where the Empowerment
Level of the company is specifically requested during the tendering process. In order to compete in
tenders of this kind, companies need to justify not only how they are performing in relation to
overall Diversity targets, but more specifically in relation to Local Procurement and the related
development of SMME’s.

5. Companies competing on procurement related social compliance targets either do so by 1) being
able to access specific global or national markets or 2) gaining a competitive edge within these
markets. Hewlett Packard is one company that indicated it’s need to demonstrate supplier diversity
related efforts for $ 10 Billion worth of business (Hewlett Packard, 2009). Some transformation
managers in South Africa have even gone about displaying the correlation between the progress on
their BBBEE scorecard with increased B2B sales to justify the efforts relating to procurement. In this
case the calculation has moved from cost per compliant BBBEE point to profit per compliant BBBEE
point.
 The Competitive Local Supplier Development Strategy
The shared value movement has recently focused a lot of attention on how local procurement could
be used to benefit organisations as well as society. A case study from Rio Tinto has demonstrated
how the mine uses micro loans to assist local suppliers to get access to SHEQ related goods and
services. By doing this the mine has developed local suppliers and decreased their unit costs for the
purchasing of items locally (Macleod, 2014).
Consider the cost discount opportunities that one large construction company received by allowing
their smaller suppliers to make use of the pricing discounts on their long term fuel contracts or the
benefits that a large multinational received when they started sharing their shared services
operation with their suppliers.
Anglo American follows a similar approach to Shared Value and Local Procurement. Anglo American
have defined a 10 Step Local Procurement Framework that has been integrated with Deming’s PDCA
cycle in order to test and refine the business case for local procurement (Anglo American, 2015).
The basic premises of most business cases regarding local procurement is that by increasing local
supply companies can save significant cost on transport and import duties.
A further business case can also now be made around the rand/dollar exchange rate, depending on
the increased competitiveness of local production. Rather than establish and develop new local
suppliers the emphasis here is on the decrease of cost and the increased supply stability of goods
and services from existing local suppliers.
Supplier Development has the aim to re-actively or strategically enhance the operational efficiency
of the supplier. A strong emphasis is placed here on Operational Management and Continuous
Improvement methodologies linked to quality improvement. Service Level Agreements start to
become an important instrument in the Supplier Development process which emphasizes areas such
as Mean Time to Deliver, Delivery in Full on Time, a decrease in cost and an increase in reliability and
quality (Ganzevoort, 2014).
The Competitive Supplier Development Programme was launched with the purpose of creating these
efficiencies and skills transfer to local companies in South Africa. The focus is on a long term supply
partnership between State Owned Enterprises and local companies over the product life-cycle
(Department of Public Enterprises, 2013).
 The Innovation Centric Supplier Development approach
It has been argued that one of the key times to incorporate diverse suppliers is when organisations
seek to develop or gain access to new markets. By leveraging the knowledge and understanding of
the diverse communities’ companies are able to gain a better understanding of what needs these
markets have and how to service the markets better.

6. While engaging in an enterprise development programme in one of South Africa’s township
communities an international energy firm was able to understand the buying behaviour of the local
communities. While the firm sought to sell its solar light solution to a large informal settlement
through one of their installation suppliers they realised the need of the local community to use the
light they sell to charge their cell phones through the USB port on the light. By understanding this
need they could move away from seeking to only sell the features of the light and rather focus on
how you could use the light for other purposes.
Through a similar programme an international cosmetic company realised that they were unable to
access the township communities in South Africa. By making use of a small black female owned
promotions company within the township they were able to much more effectively access the
market. This also immediately provided them with deeper perspectives on what the requirements
of the local customers were regarding their products. Companies that are open to collaborate with
local suppliers around the problems faced in the local markets are therefore able to much more
effectively innovate based on the customer needs.
Massmart makes use of their Supplier Development Fund to market South African wines
internationally. By choosing unique wines such as Bayede by King Goodwill Zwelithini and Seven
Sisters, Massmart, through their international network, are able to sell these wines to China and the
USA (Massmart, 2013)
An example of Supplier Development Innovation was implemented by the mining company BHP
Billiton in the Chilean World-Class Supplier Programme. The goal of the programme was to focus on
innovation within the operations of the sponsoring organisation. “Five areas – water, energy, HSEC
(health, safety, environment and community), human capital and operational efficiency – were
defined as priorities for the programme (BHP Billiton, 2012).” By doing so the company created
unique and viable world class suppliers with competitive market offerings. The programme has led
to US$ 121 million worth of cost savings to date (Business in the Community, 2013).
Supply Chain innovation require the sponsoring organisation to be highly mature regarding its
strategic sourcing practices, cross functional collaboration and supplier relationship management as
well as have a clear understanding of the entrepreneurial and market development needs.
The “learning and effectiveness paradigm” has been viewed as a paradigm that incorporates the
diverse perspectives of people from different cultures and backgrounds to define new processes,
tasks and markets. This perspective taps into diversity people bring to an organisation in order to
create new outcomes (Thomas & Ely, 1996). The learning orientation brought by this perspective
leads to the integration between cultures leading to the creation of dynamic capabilities rather than
using diversity to focus on a resource based orientation.
Towards a Strategic Decision Making Framework for South African Enterprise and Supplier
Development
This paper has looked at Preferential Procurement and Enterprise and Supplier Development in light
of the various different strategies that procurement practitioners can follow. It has argued that
Procurement Practitioners need to think through the benefits of their Preferential Procurement and
Enterprise and Supplier Development Investment based on the business case of each of the various
different strategic approaches.
The strategic approaches are not mutually exclusive and in many cases companies might pursue
more than one strategy. It does, however, seem that companies choose to follow a strategy that is

7. related to their maturity around collaboration and trust and their paradigm relating to supplier
diversity.
Figure 3 Hypothetical correlation between Level of Collaboration and Learning and Return on Investment
A strong case could therefore be made for a correlation between collaboration with local Black
Owned / Black Female Owned SMME’s and Return on the Preferential Procurement and Enterprise
and Supplier Development Investment of the company.
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