Offsets, Local Content and Supplier Information Management (Part 2)

We wrote in Part 1 about offsets in the defence industry, and the commonality they have with wider issues around “local content” — using procurement and supply chain activities to show support for building capability and capacity in local economies and supply chains, often as a lever to win contracts, concessions (e.g., mining) or similar.

So bringing this back to practical considerations, what can we learn, and how can organisations position themselves successfully in this field? That’s important because the need for organisations to show how they are impacting and benefitting local, regional or national economies is only going to increase in our view. That’s particularly true for firms who wish to trade and work internationally, particularly in the developing world. And looking at the growth rates in Africa, South America and the emerging parts of Asia, these are markets in which more and more Western firms will want to operate.

We previously described how offsets in the defence world have been blighted by problems around corruption, fraud and lack of transparency. So for local content initiatives to work well, organisations need to develop and maintain excellent supplier information systems and processes.

If I want to show how my operations in Malawi or Indonesia are really benefitting the local economy, I’m going to need robust, credible data. I need to show who I’m buying from, have information about those organisations, and increasingly, we’d suggest, be able to go a tier or two down the supply chain to strengthen the argument. That last point is critical for some buyers who find that certain first-tier goods or services inevitably need to be purchased from other large corporations. So the onus will be on both buyer and that first-tier supplier to show that the money is flowing down ultimately into more local pockets.

There are other implications for procurement, such as the need for control over spend and internal compliance to the contracts or preferred suppliers that are put in place. I need to be able to channel spend in particular directions, not just theoretically through awarding contracts, but practically on the ground. Organisations will also have to set up structured processes to manage those trade-offs between headline value or price on the one hand, and being seen to support the local imperatives on the other. Of course, the danger of corruption is obvious as soon as suppler selection decisions move away from purely “best value for money” to other less tangible factors. So clear processes are needed to handle that risk.

But the core requirement for local content management is certainly strong supplier information capability — it would seem to be an essential pre-requisite for any such programme. And of course, operating in less developed environments means that such information won’t necessarily be as available as it is in the U.K. or U.S. There may not be a Dun & Bradstreet report on that local IT or catering services firm in Malawi, and every supplier won’t have a fancy website. So the development of better supplier information services in these markets is, in itself, an interesting challenge and maybe opportunity for firms in that sector.

Looking at the needs in more detail, the first requirement is to be able to find or identify suppliers. Simply coming up with a short or long list of potential local suppliers may, as we’ve just said, be a challenge in itself.

The next requirement is to verify the supplier in some sense. Clearly, this needs to be a risk-based process. The verification needed for a catering supplier is very different to that needed for a firm who are going to do maintenance on critical equipment, for instance. But in all cases, some basic level verification should be carried out. Is the firm genuinely local (if that is a critical point)? Are they legitimate and, as far as we can tell, honest? Do they have the right certifications, permits, approvals and core capability to do the work you’re awarding?

We then move from pure “information” into supplier selection and sourcing. Again, the link with robust supplier information is clear. Can they present evidence of a successful track record in their business area? Do they have the capability and capacity they claim? Increasingly, we believe technologies or solutions that work on a social network basis, or through community approaches will be relevant here — think about the SAP InfoNet model of drawing in supplier information and performance data from multiple sources, or the Achilles industry vertical community model.

Post contract award, supplier information will overlap with that performance measurement aspect of the relationship, and tracking of actual spend against contract so that any necessary reporting can be done to the relevant authorities in terms of the local content programme. And that ultimately takes us full circle into further development of suppliers, and back into further sourcing cycles.

Whilst supplier information is increasingly recognised as a central discipline for effective procurement in all situations, this area of local content management is going to put increased focus, we believe, on the subject.

And we fully expect further developments from a solution provider point of view, given the importance of information and the means to analyse and understand it.