BEE Partner, South Africa Economy Watch

The Practical Application of Preferential Procurement

The practical application of preferential procurement is better discussed in conjunction with the practical application of enterprise development. The two elements should work together. Where a business chooses to contribute to and therefore be measured on the preferential procurement element, it should also choose the enterprise development element. By choosing the elements together it can capitalise on the enhanced recognition offered to purchasing from enterprise development beneficiaries and, more importantly, try to create a stronger BEE strategy.

In practice it will be impossible for all companies to be BEE-rated within the first few years. It is in each business’s interests to drive its suppliers to obtain ratings as soon as possible.

The focus should be on primary suppliers. Using the 80:20 rule, 20% of suppliers often account for 80% of total procurement value. Pressurise the 20% that will generate the highest preferential procurement points for the business. By verifying primary suppliers, a better idea of the challenge ahead is available. Where the suppliers are not willing to contribute to BEE, then businesses need to decide whether to continue with the current suppliers or whether there is a need to source new suppliers with a more favourable BEE status.

Reverting to Porter’s model, procurement should be focused on Black businesses in core activities of the company’s value chain. Although they play an important role in business and local economics, a cleaning company is not going to become a macro-economic driver for South Africa. Procurement from Black- owned value-added producers such as engineers or manufacturers is more likely to drive macro-economic growth over time, which is what we need.

Porter’s model emphasises the value-added activities of inbound logistics, operations, outbound logistics, sales and marketing and after- sales service. Procurement efforts focused on these priority areas will drive enterprise development in line with government’s ambitions.

Looking at implementation, if the BEE officer of a company sits down with the procurement officer and analyses the preferred suppliers for each of the value-added activities, what would be the outcome? If the results show insufficient support of BEE companies, the procurement officer should investigate new suppliers who meet BEE requirements in these priority areas. Alternatively, the company should encourage white suppliers to transform to meet the requirements.

A common response to this suggestion is that Black suppliers of this nature are difficult to find. If the answer to the question, “Why am I not using Black suppliers for this activity?” is simply, “because we cannot find any”, is it perhaps because the company has not looked hard enough? If there are genuinely no Black suppliers at all, there is an opportunity for creating Black entities in that area of the value chain using enterprise development initiatives.

There is a perception, among Black and white alike, that Black businesses only supply poor-quality products. If the quality is indeed bad, an opportunity may exist for enterprise development.

Perhaps the measured entity will not buy the poor-quality product. However, it can use its enterprise development spend to increase the Black company’s quality control and then procure from that company once the quality of the product is satisfactory.

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