Strategic Sourcing and Industrialisation insights with Prof Douglas Boateng
Strategic sourcing is increasingly being recognised as a means to facilitate socio-economic development, job creation, MSMEs growth and industrialisation in the developing world, with carefully constructed sourcing methodologies providing immediate to long-term bottom-line organisational, industry and societal benefits.
Strategic sourcing encourages a shift from a purely cost-cutting and price-sensitive mentality, to a clearly defined and managed approach to sourcing. It encourages a modus operandi that allows for an organised, systemic approach to defining requirements, product development and innovation, supplier selection and development, negotiations, integrated forecasting, planning and demand management. And, it forces a process custodian to unlock medium- to long-term value beyond organisational bottom line performance.
Some of my earlier research into sourcing and procurement practices within the African public sector revealed that within the spheres of government and state-owned enterprises, a well-conceived strategic sourcing programme can assist in achieving quantifiable savings and productivity improvements well in excess of 30% over a three- to five-year time frame.
Thus, there is a compelling argument for both public and private sector organisations to move away from purely transactional procurement and independent sourcing approaches towards enhanced collective and value-adding sourcing practices.
When it comes to acquisitive decisions, there is a tendency for both public and private sector organisations to base their cost benefit variables on short-term performance and profit requirements. This has unfortunately done more harm than good to a number of vertical specific industries in the emerging world.
Fortunately, paradigm shifts in sourcing are leading to procurement decisions being based more and more on long-term developmental-driven procurement practices that are beneficial to the organisation, industry and society as a whole.
Value-based procurement is an example of how developmental needs are impacting on sourcing practices. Value-based procurement is a process where acquisitive and partnership decisions are based on a multiplicity of factors linked to long-term benefits for an organisation, industry and society.
Unlike short-term driven value for money and price chiseling procurement, value-based procurement focuses more on long-term wealth creation benefits for shareholders and the associated impact on society. An example of value-based procurement in a developing economy context is illustrated below. The companies and their proposals are purely fictitious and are only included to demonstrate the application of value-based procurement.
There is a requirement from public sector institutions and associated structures to acquire, on an annual basis, US$90million worth of specialty chemicals from a locally-based company. As part of the industrialisation agenda, the government wants to use this specific procurement spend to attract international companies to set up a plant locally to supply the rapidly growing public and private sector needs. Government intends to encourage its associated institutions to directly source from the company. Two companies have expressed an interest and submitted the below for consideration:
DCBX Specialty Chemicals Ltd
- Plans to invest twelve million USD ($12m) with local partners in a specialty chemical packaging company to generate a profit before interest and taxes of up to $1.7m per annum after year three.
- Twenty-two (22%) of the shareholding is set aside for management and locals.
- Fifty percent of the anticipated jobs to be created are non-skilled jobs.
- Packaging materials will all be imported from the company’s operations based in a developed country.
- All technical and managerial positions (except the chairmanship and personnel directorship roles) in the local company shall be filled by expatriates to be paid by the company.
- Government has the option to buy up to 10% equity stake through one of its state-owned institutions.
- All training of local personnel will be done at the company’s headquarters overseas.
XBCD Industrial Holdings (a competitor company with the same value proposition)
- Plans to invest thirty million USD ($30m) with local partners in a specialty chemical packaging company in a developing economy to generate a minimum profit before interest and taxes of $750k per annum after year five.
- Thirteen percent (13%) of the shareholding is set aside for management and locals.
- Ninety-five percent (95%) of the jobs to be created will be technical jobs with ninety percent (90%) occupied by locals who will be trained by the parent company and gradually deployed in the various positions within a five year time frame.
- Government has the option to buy up to 5% equity stake through one of its state-owned institutions.
- Packaging materials to be used by the company shall be produced locally in year six.
- Part of the initial investment is to set up a local technical institute to train locals.
DCBX’s value proposition from an initial procurement and financial perspective looks more attractive than that of XBCD. The time frame for return on investment is shorter coupled with the fact local shareholders will start reaping the benefits much quicker. However, from a long-term developmental and value-based procurement perspective, benefits associated with XBCD’s value proposition far outweigh that of DCBX.
Considerations for value-based procurement in a developing economy context can take many shapes and forms. To avoid the short-term gain – long-term pain syndrome bedeviling most developing economies, care must be taken when negotiating such procurement agreements to ensure that long-term, real and quantifiable benefits can be accrued for both investors and society as a whole.
Another important way for developing economies to become more strategic in their approaches to sourcing is by harnessing the benefits of strategic collaborative sourcing. To achieve more value for money from strategic sourcing, developing nations and organisations should strategically seek collaborative sourcing opportunities at the widest possible level, both internally and externally.
Collaborative sourcing in this context means countries and organisations aggregating demand for commonly used products and agreeing with a supplier on the modus operandi relating to bill-to-despatch-to technicalities. Examples of products that could harness the power of strategic collaborative sourcing include, but are not limited to, pharmaceuticals, educational items/books/services, ICT related products, vaccines, agroceuticals logistics and healthcare related products.
Greater value for money due to aggregated demand and economies of scale, increased leverage with service providers, simplified cost structure, collaborative learning and value chain innovation, and sharing of the risk and rewards are just some of the proven benefits of strategic collaborative sourcing.
Developing governments and organisations can initiate or pilot collaborative sourcing in a number of ways. Firstly, governments can team up with existing organisations that already have innovative agreements in place with existing service providers. Secondly, by pooling requirements/or budgets with another value chain, partner organisations can benefit from a collaborative approach.
To date, the relative reluctance to strategically collaborate on the sourcing of some requirements has stemmed from a lack of proper research by the various stakeholders on collaboration requirements, differing product specifications, non-aligned timeframes, post-contract management, perceived loss of competitive advantage, complicated cost structures, potential loss of control by the various parties, and value chain roles and responsibilities.
Concerns related to suppliers being squeezed out – leading to reduced competition, reduction in value for money and product innovation have also been raised.
However, while care should be taken to ensure that collaborative sourcing does not impact on competitive sourcing practices, the creation of a collaborative sourcing culture among organisations and institutions can begin to eliminate short-term ‘silo’ thinking and allow developing economies to harness the power of the collective to facilitate long-term socio-economic development.
As the developing world continues to seek opportunities to enhance socio-economic development, job creation and poverty alleviation, both public and private sector organisations should begin to consider the impact that a more value-based and collective approach to sourcing can have for the long-term realisation of their developmental goals.
Douglas Boateng, Africa’s first ever appointed Professor Extraordinaire for supply and value chain management (SBL UNISA), is an International Professional certified Chartered Director and an adjunct academic. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world.
He has received independent recognitions and numerous lifetime achievement awards for his extraordinary contribution to the academic and industrial advancement of supply chain management from various international organisations including the Chartered Institute of Procurement and Supply, the Commonwealth Business Council and American multi-national Hewlett Packard (HP). For more information visit www.douglasboateng.com and www.panavest.com