Transnet Supplier Development Plan

Transnet Supplier Development Plan

Compiled in terms of the DPE Competitive Supplier Development
Programme

February 2008

Supplier Development Plan

Table of Contents

APPENDICES ...............................................................................................................3
1. Definitions.............................................................................................................4
2. Executive Summary .............................................................................................5
Figure 1: CSDP Planning framework provided by DPE.................................................5
3. Background: Moving from NIPP to CSDP ..........................................................7
Process of developing Transnet’s first SDP ................................................................. 8
Figure 2: CSDP in Context ........................................................................................15
Governance and Policy (putting in the right Controls) ................................................ 16
4. CSDP Programme’s five-year Objectives.........................................................18
Objective 1: CSDP Delivery ....................................................................................... 18
Objective 2: Increasing SDP scope and detail ........................................................... 18
Objective 3: Supply Management skills improvement ................................................ 18
Objective 4: Supply Management capacity improvement ........................................... 18
Figure 3: SSM Critical Path.......................................................................................20
Figure 4: The Capability Maturity Curve ....................................................................21
Figure 5: The ICCPP process ....................................................................................23
5. Spend Analysis (detailed 5 years).....................................................................24
Figure 6: Spend Break down.....................................................................................24
Capex Breakdown ..................................................................................................... 25
Figure 7: Estimated Capex Commodity Spend Breakdown .........................................26
6. CSDP Approach and Opportunity Identification..............................................27
a) Developing the Approach...................................................................................... 27
Figure 8: CSDP Approach – Determining Opportunities.............................................28
b) Identify the Opportunities...................................................................................... 30
Figure 9: The Types of Opportunities .........................................................................30
Figure 10: Determining Degrees of Complexity .........................................................31
Figure 11: Initiative Ranking.......................................................................................32
Figure 12: Transnet Spend 2008 - 2012 ....................................................................33
7. Supplier Industry Analysis ................................................................................34
a) Macro perspective ................................................................................................ 34
Figure 14: Global Competitiveness Index ...................................................................34
Figure 15: SA’s list of most problematic factors for doing business .............................35
Figure 16: African Regional Competitiveness Ranking ...............................................37

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b) Micro perspective.................................................................................................. 37
Figure 17: Market Research on OEMs of Ship to Shore Cranes .................................40
Figure 18: KVD tree for Ship to Shore Cranes ...........................................................41
8. Priority Interventions and Associated Sectors ................................................42
Figure 19: CSDP Phased Approach ...........................................................................42
Phase 0 – Feasibility and Development Stage: Pilot Interventions............................. 45
Figure 21: CSDP Phase 0 Initiatives ..........................................................................47
Phase 1 – Priority Areas: Rolling Stock and Port Equipment...................................... 48
9. Key Performance Indicators..............................................................................50
Figure 22: CSDP Continuous Improvement Map ........................................................50
10. High-level implementation plan.........................................................................53
a) Internal Mobilisation plan ...................................................................................... 53
Figure 23: High Level Plan.......................................................................................53
Figure 24: The Supplier Development Value Chain ...................................................54
b) Change Management Programme (CMP).............................................................. 55
Figure 25: Internal Stakeholder Management ............................................................56
Figure 26: Continued Industry Collaboration post SDP development ........................57
11. CONCLUSION .....................................................................................................60

APPENDICES

A) Spend group specifics

B) Comparison of NIPP to CSDP

C) AS IS – TO BE tables for:

• Transnet organisational changes; and
• Supplier behavioral changes

D) NIPP Obligations

E) Guiding Principles in developing Transnet’s CSDP

F) Steps in the approach to CSDP opportunity identification

G) National Competitiveness Balance Sheet: South Africa

H) Competitiveness Roadmap 2007 to 2050

I) Frequently Asked Questions

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1. Definitions

ASGI-SA refers to Accelerated Shared Growth Initiative – South Africa, a national shared
growth initiative to halve poverty and unemployment by 2014.
BBBEE refers to Broad-Based Black Economic Empowerment
Capex refers to Capital Expenditure
Copex refers to Operational Expenditure which is capitalised
CSR refers to Corporate Social Responsibility which a program undertaken by
businesses to ensure that
MCIPS refers to Master of Chartered Institute of Purchasing and Supply (CIPS), a
recognised degree in SM
NVA refers to National Value Add which is a fundamental KPI of the programme
OEM refers to Original Equipment Manufacturers who own the intellectual property
rights and patents for the equipment which they sell and service
Opex refers to Operational Expenditure
SM refers to Supply Management, the function at Transnet which provides
procurement, inventory and logistic services
SOE refers to State Owned Enterprise which is a self-sustaining business that will
manage their own economic interests and ensure profitable returns and report to
the government shareholder department.
SPAID refers to Support Programme for Accelerated Infrastructure Development,
affiliated with the office of the president
SSM refers to Strategic Supply Management which is a corporate function providing a
centre of excellence service to SM leadership
UK refers to the United Kingdom
WEF refers to World Economic Forum

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2. Executive Summary
The Department of Public Enterprises (DPE) established a Competitive Supplier Development
Programme (CSDP) , which involves “procuring in such a way as to increase the competitiveness,
capacity and capability of the local supply base, where there are comparative advantages and potential
competitive advantages of local supply” (DPE draft Practice Note on CSDP, December 2007).

The ultimate goals of the CSDP are:

• to contribute to the ASGI-SA aims of increasing economic growth, employment creation, skills
development and BBBEE;
• to develop local industries to supply participating SOEs with high-quality, globally-competitive
goods and services;
• to improve the quality, efficiency and cost-effectiveness of the services provided by the SOEs, as
a result of their obtaining more-competitive goods and services from local suppliers; and
• to improve the competitiveness of the SOEs as a result of procurement savings from engaging
innovative, responsive and more competitive suppliers.

When Transnet elected to participate in the programme, the DPE provided it with a CSDP planning
framework which supports internal organisational aspects. The framework also has an external change
management focus, based on extensive consultation with the supply industry and sector.

Figure 1: CSDP Planning framework provided by DPE

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Internal process steps in Transnet’s SDP development

• An internal spend analysis (refer to Part 5) was conducted with a planning horizon of five years.
This analysis was followed by the identification of core spend commodities that might
appropriately be targets for CSDP-related supplier development interventions.
• Several suitable pilot initiatives were identified and the lessons derived from investigations of
these localisation opportunities were documented. This was then used to create a prototype for
the development of Transnet’s CSDP approach (refer to Part 6) of a multi-phased rollout. Rolling
Stock and Port Equipment were identified as the Phase 1 priority areas.
• An analysis (refer to Part 7) was carried out of the rolling-stock and port-equipment supply
industries.
• This formed the basis for identifying Transnet’s priority interventions linked to associated sectors
(refer to Part 8) and was included in a high-level implementation plan (refer to Part 10).
• Finally, Transnet’s five-year CSDP programme objectives (refer to Part 4) were measured against
the relevant Key Performance Indicators (KPIs) as contained in Part 9.

External process steps in Transnet’s SDP development

The priority interventions contained in Part 8 of this SDP document were presented at a second round
of discussions with industry, represented by a number of industry associations and interested
government stakeholders, including DTI, Department of Science & Technology (DST) and the Industrial
Development Corporation (IDC), in February, 2008.

The first consultative session took place in November 2007. Feedback from the second consultation
session was used in compiling this final SDP.

Transnet’s finalised first SDP was submitted to the Minister of DPE by the end of February 2008 for
approval, after which it will be implemented.

Transnet’s long-term aim in applying the CSDP will be to localise the supply chain of imported
manufactured goods or imported services to a reasonable level, while promoting local industries and
South Africa as an off-shore site of choice for OEMs and multi-nationals’ procurement personnel.

A local supply chain of previously-imported manufactured goods or services may not necessarily result
in direct cost reduction, but it should result in lower transport costs, shortened lead times and better
control of quality. It will also have a direct impact on job creation, economic development and
heightened awareness of South African manufacturing capability.

However, it is essential that all stakeholders understand that, while an ultimate goal of a reasonably
localised supply chain is hugely beneficial to Transnet, localisation will not be done at the expense of
quality or of asset reliability and it will not be at premium cost. The “C” of CSDP stands for competitive
and, as such, is aimed at attracting local suppliers who demonstrate the characteristics that will attract
positive global attention and not at those who participate in collusion or monopolistic practices.

NOTICE: Transnet must at all times balance the disclosure of information to supplier industries with
the requirements of the group’s commercial processes. Public disclosure to suppliers, industry
associations and government stakeholders must be grounded in sufficient facts to make the information
relevant to an industrial sector without disclosing specific purchase details prior to undertaking tender
activities. Any type of expansion is ALWAYS at the risk of the supplier within an industry sub-
sector and as such, Transnet will not assume responsibility for any activity that a supplier may
independently undertake based on this strategy or on public statements about CSDP.

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3. Background: Moving from NIPP to CSDP

Transnet’s capital expenditure (capex) over the next five years will be at an unprecedentedly high level.
This will require the focus of many diverse group resources to ensure that expenditure targets are
achieved successfully. It bears stating that meeting these capex targets is of critical importance to the
country. Failure to meet the capex targets may result in infrastructure constraints that hamper the
achievement of government’s overall growth initiatives and Transnet’s own service improvements.

However, local supplier industries have lost key capabilities and skills as a result of the drop in capital
expenditure in recent decades, and they have not adequately invested in plant and technology to meet
the latest expansion targets of SOEs and ASGI-SA. This lack of capacity has in part prompted the need
for change.

The CSDP replaces the National Industrial Participation Programme (NIPP), which is an import-offset
programme (for government agency expenditure) managed by the Department of Trade and Industry
(DTI). Under the NIPP programme all imports costing more than $10 million, require the supplier to
work with the DTI to invest the equivalent of 30% of the value of the purchase in a non-related industry.
Since inception of the programme ten years ago, the DTI has managed the obligations of seven
Transnet suppliers (see Appendix D for details of Transnet suppliers’ undischarged R1.189 billion NIPP
obligations).

Transnet GCE Maria Ramos formally notified the DPE that the group wishes to participate in the CSDP
with the result that Transnet’s suppliers of imported manufactured goods or services are no longer
required to participate in the NIPP for tenders issued after February 2007.

The overall goals of the CSDP are:
• to contribute to the ASGI-SA aims of increasing economic growth, employment creation, skills
development, and BBBEE;
• to develop local industries to supply the SOEs with high-quality, globally-competitive goods and
services;
• to improve the quality, efficiency and cost-effectiveness of the services provided by the SOEs, as
a result of their obtaining more-competitive goods and services from local suppliers; and
• to improve the profitability of the SOEs as a result of savings from sourcing from innovative,
responsive and more-competitive suppliers.

Each SOE participating in the CSDP must produce a Supplier Development Plan (SDP). The three
participating SOEs: Transnet; Eskom; and the Pebble Bed Modular Reactor (PBMR) are required to
submit their first SDPs for approval by the Minister of DPE between the end of February and June
2008, having first participated in extensive external consultation on these SDPs. The aim of the supply
industry and sector consultation is to share an ‘open window’ on participating SOEs’ opportunity areas
for local-supplier development. It is also intended as a forum to identify industry perspectives on matters
such as:
• comparative advantage;
• supplier development areas of interest to
- local industry: based on the local supply base’s core competences; and/or
- government: based on possible linkages to sectoral development plans for improving
sectors’ productivity and competitiveness.

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Process of developing Transnet’s first SDP

This document is Transnet’s first SDP and it was compiled in accordance with the timeframes and
framework set out in the DPE’s “Introduction to the CSDP” publication, as depicted in Figure 1 above.
Transnet’s development process involved internal organisational aspects (detailed below). It also has an
external change-management focus deriving from Transnet’s participation in the process of supply
industry and sector consultation as facilitated by DPE.

• Internal process steps in Transnet’s SDP development

- An internal spend analysis (refer to Part 5) was conducted with a planning horizon of five
years. The analysis was followed by the identification of core spend commodities that are
suitable targets for CSDP-related supplier-development interventions.

- Nine suitable pilot initiatives were identified and the lessons derived from the investigations
of these localisation opportunities were documented. This was then utilised to develop a
prototype for the development of Transnet’s CSDP approach (refer to Part 6) of a multi-
phased rollout, with rolling stock and port equipment as the Phase 1 priority areas.
An analysis (refer to Part 7) of rolling stock and port equipment supplier industries was
carried out and formed the basis for identifying Transnet’s priority interventions linked to
associated sectors (refer to Part 8), captured in a high-level implementation plan (refer to
Part 10).

• External process steps in Transnet’s SDP development

- The priority interventions contained in Part 8 of this Draft SDP document will be the subject
of a second round of discussions with industry, represented by a number of industry
associations and interested government stakeholders, including DTI, Department of Science
and Technology (DST) and the Industrial Development Corporation (IDC). The first
consultative session took place during November 2007. Feedback from the second
consultation session will be used in compiling the final document.

- Transnet’s finalised first SDP will be submitted to the Minister of DPE by the end of February
2008 for approval, after which the programme will be implemented.

The timely and effective roll-out of the capex programme is the catalyst that helps Transnet to positively
impact the South African economy by developing competitive national supplier industries. For this to
occur, Transnet developed its first SDP in such a way that it supports and ensures that the group’s
capex will be leveraged effectively so as to assist Transnet’s South African suppliers to increase their
capacity and capability to compete successfully both in local and in global markets. Transnet’s
overarching goal in participating in the CSDP is to localise the supply chain of its imported
manufactured goods or services at a reasonable level, while promoting local industries and South Africa
as an off-shore site of choice for OEM and multi-national procurement personnel.

Challenges to CSDP implementation

However, Transnet faces serious challenges in terms of the implementation of the CSDP. We are in
uncharted territory not previously attempted in South Africa.

Business Unit challenges:

• Lack of long-term forecasting on requirements, which causes instability of future demand to local
suppliers;
• Balancing aggressive timelines on the capex programme with a medium-term supplier-
development programme; and

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• Ownership of the supplier relationship (including engagement) is often not in the hands of Supply
Management.

Supply Management challenges:

• Lack of sufficiently-trained SM staff with the necessary skills and capacity;
• Lack of resources and time to develop fully the governance, policies and procedures needed to
have an effect on the currently available opportunities;
• Pressure by interested stakeholders to implement “all” of the deals “immediately”;
• The need to integrate the CSDP into a robust procurement process that balances the need to
provide adequate information to suppliers against the need to maintain the integrity of the tender
process; and
• Developing a guideline for evaluation of a supplier’s CSDP proposal to avoid subjective
adjudication that might lead to an error in choosing one development proposal over another and
that leads to an inappropriate tender award.

Supplier challenges:

• Tendency of the traditional supply base to take a narrow view of the relationship (collusion, sole
supply, entrenched with personnel outside of the Supply Management function, etc.);
• Immaturity of the local supply base, which has an entitlement mentality (the “right” to deal with
Transnet) without having the necessary technical expertise; and
• To change the belief that local suppliers should be chosen in preference to all other suppliers
regardless of cost (or being given confidential information during tenders to “match” prices), with
a view to becoming competitive.

While Transnet fully understands the need for and benefits of Supplier Development, caution is needed
when implementing this new approach.

As with any new process, if the basics are not in place to support the personnel undertaking the activity,
it will most probably fail. In this instance, all Supply Management basics are not yet in place (refer to
Capacity and Capability Building), but the timelines of the capex programme require the immediate and
concurrent rollout of CSDP. As such, this strategy is designed to ensure that Transnet can mitigate the
risks associated with these SM basics not yet being fully in place, while at the same time deploying
people with the more-advanced skills and judgment needed to implement the plan.

Therefore, it is important that, in participating in the CSDP, Transnet must ensure that:

• Deals are:
in the interests of Transnet’s final customers through consciously ensuring a positive overall
-
impact on the national economy; and
not solely based on the “number” of CSDP business cases per annum, but rather focused on
-
optimal value delivery on targeted capex acquisitions.

• SSM:
supports only those local suppliers who display the appropriate partnership attitude (defined
-
in Appendix C); and
utilises its resources effectively by (for example) dovetailing with current capital procurement
-
activities;
• SSM does not:

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create unrealistic entitlement expectations within the local supplier industry through
-
unsupported claims or lack of coherency on long-term expenditure or projects;
jeopardise the competitiveness, fairness and transparency of the bidding process*; and
-
violate the Public Finance Management Act (PFMA) and other applicable legislation and / or
-
governance practices in engaging with suppliers.

(*The dilemma is balancing two divergent needs: one for controlling the timing of the release of market
information to ensure a fair and equitable tender process, while at the same time providing timeous
information to ensure that local markets can respond to demand).

a) What needs to change

Within Transnet, the SM function, specifically procurement, has been given the primary
responsibility for managing the Supplier Relationship. Historically, however, SM has usually only
been involved in the evaluation, selection (if not already determined by the business end-users),
and award of business. In world-class organisations, SM is involved in: analysis, identification,
evaluation, selection, development, monitoring, dispute resolution and exit. The closure of this
gap is a prime concern of Transnet for ensuring good governance as well as successful
implementation of the CSDP.

The impact of this is that Transnet’s SM staff do not have the capacity or capability to deal with
medium to complex Supplier Development deals. While there are pockets of expertise within the
organisation, there has not been a concerted effort at developing or utilising these (and other
new) skills. This is in part due to the fact that:

• Supplier Development is an advanced skill in Supply Management and its positive impact has
only recently been understood by North American and European practitioners. The South African
market is usually 5 – 10 years behind in the ability to apply new skill sets;
• Transnet’s engineers and operations personnel still have excessive involvement in the
procurement process and, contrary to group policy, have often, made a commitment to the
supplier prior to award. This, in its turn, reduces Transnet’s leverage to get additional
concessions from the supplier to do more than simply provide the goods and services contracted
for;
• Often, SM is not informed of pending expenditure and is treated as a “rubber stamp” for contracts
and purchase orders. Transnet must change the focus of key personnel to ensure that SM is
viewed as the owner of the process and must be included in all purchases. However, until the SM
staff capability is sufficiently uplifted, this will require a major change effort within the organisation.
• In addition, Transnet does not have a consolidated view of total spend across all business units
which makes analysis difficult;
• The concept of “triple bottom line” and Corporate Social Responsibility (CSR) is not generally
appreciated in South Africa to the level that as it is in other global markets. This means that
Transnet has not understood how to leverage this requirement in our dealings with off-shore
suppliers; and
• Transnet SM staff members struggle to meet the day-to-day activities within the aggressive
timeframes and required governance that must be accommodated as part of Public Procurement
policies. Specialised deals and long-term benefits realisation are often the casualties of this need
for compliance.

To help overcome the challenges of the CSDP and other Supplier Development and Management
activities, a comprehensive set of change-management activities will be implemented internally and
outside Transnet, as detailed in Part 3.

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b) Case for Change – Benefits

The CSDP, with sufficient market information and skills to implement correctly, will have the following
benefits for Transnet:

• A measurable impact on National Value Add (from reduced imports and increased exports);
• A marked improvement in sources of supply (from improved cost, availability and quality
perspectives);
• An increased awareness of spend, suppliers as partners, applicable industries and localisation
opportunities;
• A reduced dependency on imports and exposure to foreign exchange fluctuations; and
• An improved capability and capacity among Transnet staff with an initial focus on SM staff. In the
short term this should enable the effective development and implementation of localisation
initiatives and should eventually set an example for other SM professionals, both in the public and
in the private sectors.

c) Transformation Required

Transnet has embarked on a significant turn-around in all aspects of its business, under four points:
efficiency and effectiveness; balance sheet restructuring, risk and governance; and human capital. This
transformation has required significant commitment and change among our staff. While implementing
an effective CSDP and other government growth initiatives touches many different group functions,
(SM, Maintenance and Planning, Capital Asset Management, and Operations), it is a fundamental
reality that the SM function needs to be Transnet’s focus, if we are to implement and manage CSDP
successfully.

Once this plan is approved, both by Transnet’s Exco and by the DPE, the following change activities will
be launched to ensure the successful implementation of the CSDP in line with Transnet SM’s critical
path (also refer to Capacity and Capability Upliftment):

Internal Change Management actions:

Structure, resources and skills:
• In collaboration with the operation divisions, determine and then motivate the structures and
resources needed to ensure implementation;
• Improve the capability of the procurement staff by ensuring that the current capability- and
capacity-building programme (made up of boot camps, workshops and e-Learning) is fully
subscribed and that performance is managed; and
• In addition to the current capability- and capacity-building programme, a short-term, supplier
development skills-focused training programme is created to improve the skills of the staff
selected to deliver the localisation initiatives linked to the capex programme.

Governance and risk management:
• Ensure that all governance, policies and procedures are completed, at least to a level that will
minimise risk to Transnet;
• Establish the rules of engagement for all stakeholders to minimise confusion, to reduce litigation
exposure and to ensure that Transnet is fully in control of the CSDP process;

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• Ensure that the organisation’s internal and external legal advisors (and through them the local
judiciary) are informed of the accepted procurement processes within SOEs, specifically as they
relate to CSDP;
• At all times balance supplier coherency with Transnet’s competitive advantage. Public disclosure
to suppliers, industry associations and government stakeholders must be grounded in sufficient
facts to make the information relevant to an industrial sector looking to expand. It must also be
based on the understanding that expansion is ALWAYS at the risk of the supplier within an
industry sub-sector. Transnet will not assume responsibility for the risks run by individual
suppliers, other than providing a contractual agreement (which is unique to the supplier).
• Continually interpret and apply the CSDP regulations to ensure that every reasonable attempt is
made to deliver fair, transparent and equitable transactions.

Development of best-practice SM:

• Transnet must continue on the path towards best practice SM as per the SM critical path,
especially as Supplier Development (of which CSDP is a sub section) is an advanced SM skill;
• Engage in SM best-practice benchmarking to ensure that the planned growth of SM expertise is
achieved and that gaps are identified and addressed timeously. This progression will not only
stabilize SM’s transactional service delivery to Operating Divisions, but will also provide a solid
base for the CSDP’s implementation.

Development of best practice Demand Management:

• Transnet’s engineers and VITs (Very Important Technologists) need to:
start instilling a programme of standardisation of capital equipment, thereby improving
-
management of costs over the life cycle of these assets; and
participate in cross-functional sourcing teams on a continuing basis, including being part of
-
any negotiation team engaging with strategic suppliers, thereby creating an united front
when interacting with suppliers; and
• Transnet’s corporate strategic planners need to develop a new long-term planning system, which
will vastly improve forecasting, thereby smoothing the patterns of demands on suppliers and
reducing excessive stockholding and ordering.

Building internal support for CSDP:

• Ensure that management, senior officials and SM staff understand and make the most of the
value of best-practice procurement by:
understanding that the power of procurement is contained not only in its ability to manage
-
spend but also in understanding the capabilities of suppliers as well as understanding the
market and industry and how to leverage supplier capabilities internally. It also lies in the
ability, to present South Africa’s industrial capability externally to the global SM fraternity as
an attractive source of supply; and
measuring the correct variables, namely:
-
a) total cost of ownership - a Strategic Sourcing measure; as well as
b) National Value Add (NVA) – a CSDP-specific measure.

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External Change-Management actions:

Stakeholder communication and interaction

• Develop a communications plan that will ensure all key stakeholders are informed of Transnet’s
CSDP on a continual basis;
• Engage in regular sessions with government support partners, such as DTI, Department of
Science and Technology (DST) and the Industrial Development Corporation (IDC) to discuss
progress, share experiences and identify and work together on areas of collaboration; and
• Ensure that the communications plan includes activities to address all key off-shore suppliers as
well as current and potential local suppliers, via local industry associations, publications and
journals, and news articles.

Supplier management and interaction

• As part of strategic-supplier contracts, CSDP participants will be subject to:
Annual benchmarking of performance measured against an initial baseline and the CSDP
-
agreement;
Periodic continuous improvement workshops to address improvement initiatives identified
-
through the benchmarking and other reporting mechanisms;
On an as-and-when-required basis, engage with government support partners, such as DTI,
-
DST and IDC to work on collaborative projects.

d) Transnet (AS IS – TO BE)

The greatest organisational challenge Transnet faces in implementing effective Supplier-
Development initiatives, is the lack of capability and capacity of SM staff, and the lack of trust this
fosters among Transnet’s senior managers.

This means that over and above developing this Plan and the procedures and governance needed to
implement CSDP opportunities, the upliftment of SM staff’s skills will remain a primary focus. The SM
function is characterised by:

• Fragmented Supply Chain
• Insufficient Supplier-Management Skills
• Lack of understanding of regulations – inconsistent application
• Lack of market research
• Little power or understanding of how to interpret and use power
• Focus on “doing it right” rather than “doing the right thing”
• Risk averse
• Transaction focused
• Poor Time Management
• Adversarial Relationships
• Apathy

See detailed table in Appendix C.

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e) Supplier (AS IS – TO BE)

Historically, Transnet has adopted a very-antagonistic relationship with its suppliers and have not
spent much time in formal relationship activities (while headway is being made in Transnet Capital
Projects, this is the exception, not the norm). Often, our internal stakeholders informally manage the
relationship which makes it difficult to dislodge entrenched suppliers from operations when a new
contract is awarded. In addition, our stakeholders will “gold plate” which means they create
specifications that only the preferred supplier can deliver even though those specifications are not
required and add unwanted cost to the process. Our end users will also design solutions that are not
compatible (often inferior) with the current market capability which means the supplier cannot provide
us with “off-the-shelf” solutions which, in turn, adds to base-price and after-sales service costs.
When the specification is challenged, the procurement staff are undermined or ignored. We have a
legacy of decades of this behavior, which means we have suppliers who understand our
requirements better than we do and who understand what is not really required and how much we
are overpaying.

Our supplier market is difficult to deal with:

• It is hard to determine ownership and financial inter-relationships;
• Many of our significant suppliers “enjoy” and exploit the benefits of sole supply (that we have
fostered over time);
• We do not have the time, latitude or sophistication to analyse long-term advantage from
partnering or guaranteeing demand longer than the single purchase. We often lose sight of the
impact to the supply chain for future spares and repair purchases. This costs us in terms of
lead time, administration costs and resources involved in activities that do not add value; and
• We do not have the time to analyse the market for performance, new entrants, current
benchmark prices, current trends, etc.

See detailed table in the Appendix C.

f) Supplier Relationship Management

One of the activities performed by any effective Supply Management function is Supplier
Relationship Management (SRM). Organisations participating in SRM achieve a reduction in total
cost of ownership, improved service, more flexibility and innovative solutions, which translates
into improved customer service. This is achieved through incorporating key suppliers as an
integral and vital part of our customer service approach. This leads to the:

• development of collaborative solutions;
• elimination of unnecessary costs through over-specification and lack of standardisation; and
• incorporation of supplier- and market-innovation into the organisation.

We are constantly facing difficulties in maintaining source of supply, containing costs and
understanding market dynamics. Because of this and the introduction of the new programme,
Transnet is currently in the process of developing its SRM strategy, of which Supplier
1
Development (including CSDP) is a part .

1
It is important to note that while CSDP is an important initiative and will potentially have an impact on the South African
economy, it is a relatively small portion of Transnet’s overall supply management value chain.

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Figure 2: CSDP in Context

Supplier Development within Transnet is made up of the following four elements:

• Preferential Procurement: focuses on maximizing expenditure with those suppliers who have the
most-optimal combination of technological capability, price and BBBEE status (accreditation), thus
empowering less-advantaged suppliers.

While preferential procurement is intended to redistribute wealth within the market, it often comes
at a premium. The key to effective preferential procurement is to focus on long-term demand and
relationships. This will ensure that the supplier can provide the goods or services at a market-
related price.

• Enterprise Development: focuses on investing resources (including funds) into small, micro and
new suppliers who currently (or can through development) provide goods and services to
Transnet.

Enterprise development is closely related to other empowerment initiatives. By building or
expanding black-empowered enterprises, a sponsor company can develop its own supply base or
future equity partners. Enterprise development is intended to convince larger companies of the
need to invest resources or transfer skills from themselves to small, black-run companies. By
engaging in enterprise development there is the creation of sustainability in the company to first
meet its obligations in terms of current contracts and then solicit other business from the market.

• Competitive Supplier Development Programme (CSDP): involves the localisation of our supply
chain by encouraging foreign direct investment from our international suppliers into local
businesses (or empowerment partners) so as to assist in expanding their capability and capacity
to provide goods and services not only to Transnet but as well as to export markets.

• Public-Private Partnerships (PPP): involves the investment by private entities into Transnet capital
assets usually either to improve current service to the private entity or in return for future long-
term service contracts for maintaining / operating the capital asset.

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A PPP is a contract between a public sector institution/municipality and a private party, in which
the private party assumes substantial financial, technical and operational risk in the design,
financing, building and operation of a project. Two types of PPPs are specifically defined:

- Where the private party performs an institutional/municipal function
- Where the private party acquires the use of state/municipal property for its own commercial
purposes. 2

Supplier Development offers Transnet significant benefits, and this plan will assist us in achieving
these benefits in a sustainable way while following good governance.

g) Risks in Developing the SDP

When developing any new strategy or programme within Transnet, it is critical that a great deal of
effort is devoted to ensuring successful delivery while simultaneously adhering to good
governance.

Transnet should not enter into complex, long-term relationships with suppliers without fully
understanding its requirements, the expected results, the governance required to satisfy
legislative obligations and responsibilities (such as PFMA) and the resources required to make a
commitment to a specific programme.

The following outlines some of the considerations that Transnet will be taking into account, while
developing and implementing this plan.

Governance and Policy (putting in the right Controls)

As a public entity, Transnet has an added responsibility to ensure that its procurement process is “fair,
transparent, competitive and cost effective” as required by the Constitution in order to obtain value-for-
money outcomes. This means that any strategy and process that Transnet SM creates, has to keep
this responsibility at the core of all that we do. The CSDP is no exception.

Transnet has several challenges:

• How to communicate our planned expenditure volume over the coming five years without
compromising our tender processes or negotiating advantages?
• When we are evaluating tenderers and all things being equal, how do we evaluate the “best”
localisation proposal or supplier-development opportunity and justify an award on this basis?
• When given an unsolicited idea that has enormous potential, how will we use our current policies
to award the contract to the supplier, without going through a competitive process such as a
public tender?
• What happens if policy is not followed correctly or is inexpertly applied and the decision we take
actually adversely affects the economy and / or our supply chain? What kind of legal exposure
will Transnet have?
• This is new to South Africa and Transnet; do we have the expertise and the time to develop and
implement effective financial and operating controls?

2
Public Private Partnership Manual, National Treasury

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Communications (providing the right “signal)

This programme is based on the fundamental premise that the SOEs can create a cohesive picture of
future spend, that will be the catalyst for suppliers’ investment in their own capacity and capability to
meet SOEs’ future requirements.

There are several concerns about how we go about communicating this to the market:
• Will the use of industry associations (as apposed to talking to individual suppliers) be the most
appropriate mechanism for two-way communication between an SOE and potential sources of
supply on SOEs’ future spend, in return for industry information regarding innovation?
• Who from Transnet Procurement should and who should not have these discussions with
potential sources of supply (so as to ensure segregation of duties once tenders are issued)?
• What frequency is adequate to send the message to industries?
• How detailed do we need to be to get the message across, without being too specific?
• What happens if the message is perceived to be a commitment, which suppliers act on? What
happens if a supplier incurs a loss, which renders him unable to supply in terms of his current
obligations?
• What happens if a supplier claims that he was unfairly treated by not receiving the same
information as his competitor, based on such communication with industries?
• Other than through tender, how do we effectively communicate to international markets?

How will we manage the programme (providing space to experiment, i.e. “learning by
doing”)

Transnet currently does not have the capacity or capability to identify, analyse and implement these
types of supplier development initiatives. The current reality is that during the period between our no
longer being subject to a NIPP obligation and the full implementation of the CSDP, we are engaged in
some large purchases that can present extremely good opportunities for localisation.
• How will we deal with the interim deals until the SDP has been approved and implementation
officially started?
• How will we bring our people “up to speed” in the short period that we have available?
• How will we find the right people and the budget needed to implement our strategy once the SDP
is approved?
• What do we need to create from scratch and what Supplier Development programmes are
currently available in the country?

Addressing the aforementioned risks will assist Transnet in avoiding situations that might lead to sub-
optimal deals and to eventual value destruction, for example failure to complete a comprehensive
understanding of the market could lead to developing a relationship with an inappropriate long-term
supplier. Transnet’s CSDP approach (refer to Part 6) and the high-level implementation plan (refer to
Part 10) were developed to addresses these issues and concerns.

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4. CSDP Programme’s five-year Objectives

Transnet Supply Management’s long-term strategy in terms of CSDP is to localise the supply chain of
imported manufactured goods or services to a reasonable level, while promoting local industries and
South Africa as an off-shore site of choice for OEM and multi-national procurement personnel

Transnet SSM framed the four key success factors (CSF) that are critical to improving the organisation’s
CSDP performance as part of the overall CSDP programme’s five-year objectives. These programme
objectives are linked to the CSDP programme’s Key Performance Indicators (KPIs) contained in Part 9.
The four CSFs are:

Objective 1: Delivery of the CSDP
Objective 2: Increasing Scope and Detail
Objective 3: Capability Improvement
Objective 4: Capacity Improvement

Transnet’s five year CSDP programme objectives are:

Objective 1: CSDP Delivery
The plan must be formalised and implemented through the development of:
• An oversight committee responsible for approvals;
• a project team that is responsible for the overall delivery, update and amendment of the plan;
• a proper project plan to identify required resources and deliverables;
• governance, procedures and policies;
• tangible business cases of CSDP initiatives that will direct the delivery of localisation benefits in
line with OEMs’ contractual requirements; and improved contract-management practices.

Objective 2: Increasing SDP scope and detail
• SDPs will be updated periodically, with a concurrent incremental development of their scope and
detail, as Transnet’s business practices improve in terms of:
Operating Division management starting to use longer-term demand planning (currently
-
five-year view provided on spend analysis);
Technical experts adopting and managing standardisation practices to drive down the life-
-
cycle costing of manufactured equipment; and
Supply Management broadening its reach of Strategic Sourcing practices in (capex)
-
commodities.3

Objective 3: Supply Management skills improvement
Transnet SM professionalises its staff in line with the Integrated Capability and Capacity
Procurement Programme (ICCPP) – (see detail of current activities in Part 4).

Objective 4: Supply Management capacity improvement
Transnet SM improves its capacity in line with the SM Critical Path (see detail of current activities in
Part 4).

3
DPE CSDP Practice Note, 2007

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In fulfilling these four programme objectives, Transnet will be in a position to ensure continuous
improvement of its direct performance in implementing CSDP localisation initiatives as well as
strengthening the supporting practices required to ensure the success of the overall CSDP.

a) SM improvement and the Critical Path

The current Transnet procurement capability (and capacity) constraint is a result, in part, of the
thirty-year decline in capital expenditure by government and SOEs. During this period, the public
sector’s capacity to procure capital goods was significantly impaired as relevant skills were lost
and capital-procurement offices within government were closed. Consequently, in the current
environment existing public-sector capacity and capabilities are fully stretched and are
inadequate. Add to this situation new regulatory changes such as the Construction Industry
Development Board (CIDB) and new contracting methodologies, the Public Finance Management
Act (PFMA) requirements and the severe skills shortages in South Africa for Procurement and
Supply Management (PSM) and you have a skill base that is less than capable of handling
Supplier Relationship Management in general, let alone CSDP. Despite the current recruitment
drive to fill critical vacancies in SM, Transnet still does not factor as an Employer of Choice in the
market.

Transnet has undertaken several initiatives to rectify this situation at the cost of considerable
investment and resource allocation. The results, to date, indicate that change has occurred, but
our level of maturity (in comparison to other organisations) still remains low.

In October 2005 (subject to yearly review), Transnet SM identified its Critical Path to
improvement. The Critical Path is based on a scientific approach that demonstrates the skills
capabilities required at any given maturity level within the PSM function and shows the steps that
are required to “mature”. At the heart of the approach is the understanding that you may never
reach the next maturity level, unless the skills set and capability of the current level are
satisfactorily achieved. There is no defined timeline on how long it takes to get from one level to
the next, but an organization MUST develop the appropriate skills level, before it can fully master
the activities of the next level.

The following diagram (Figure 3) illustrates the “critical path” that Transnet supply management
has embarked on to become:

“an integrated, value added professional partner to our stakeholders,
providing a reliable, cost-effective and customer-focused service.”4

4
Transnet Supply Management vision statement, October 2005

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Figure 3: SSM Critical Path

The Critical Path

In order to focus our limited resources on generating the maximum value for Transnet, SM entered into
a process of identifying the key interventions (as shown above) required to transform the function to
meet our service-delivery promises to our stakeholders.

• Our first focus has been on the improvement of our fundamental transactional capabilities and
on improving our people skills and confidence. Phase one was implemented in November 2007
and has not yet been completed.
• Our second focus has been on “fixing” SAP implementations, standardising content and
developing control frameworks for key processes. The design phase is completed, but the
implementation is still in progress.
• Our third focus has been on compliance and risk management which ensures that all of the
process controls are in place and are effective.
As can be seen in Figure 3 above, Supplier Relationship Management (SRM), theoretically will only
start once the other objectives have been completed. We had not expected to start on this portion of
the Critical Path until late 2008 (South African procurement practitioners in general, do not practice
SRM effectively). Meeting the requirements of CSDP means that we must fast-track change initiatives
for this level of capability sooner than initially envisaged.

It is therefore obvious that, in parallel to the development of the SDP, it is critical that Transnet SSM
achieves its current Critical Path objectives in a shorter time. As can be seen from Figure 4 below,
Transnet (see Part 4) will have to propel the organisation from a level of little or selected supplier
management capabilities to a level of maturity that incorporates SRM into our day-to-day functions.

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A fully-operational SRM approach would ensure that:

• All future spend is evaluated for the appropriate supplier development opportunities and this is
communicated to the category managers and buyers;
• All CSDP opportunities would be articulated, captured in appropriate documentation and
circulated for approval. The proper process would be adhered to so as to bring a business case
to fruition;
• Priority Supplier Industries would be monitored by category teams to ensure that there are no
major changes to the suppliers within the industry and that benchmarks are kept to ensure we
receive value for money;
• Supplier performance would be monitored and changes (to the supplier or to Transnet) effected, if
performance is not satisfactory.

Figure 4 below indicates the relative amount of change required in the organisation as a whole, before
SRM will be truly effective. As with any organisation, we currently have exceptional instances of SRM
capabilities and must take every opportunity to leverage this skill. But, on average, we do not practice
nor do we have the capacity to practice this skill.

As discussed in Part 3 and Part 10, not only does Transnet have to increase its efforts in education and
training of SM and other function staff, we also need to embark on a program of organisational Change
Management endorsed by Transnet’s senior management, to ensure their future and continued support
for CSDP.

Figure 4: The Capability Maturity Curve

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b) SM skills upliftment and the ICCPP

In Part 3, concerns regarding the level of professional SM skills were raised. This section
outlines some of the key interventions that Transnet SM is undertaking and will continue to
undertake in this critical arena.

During December 2006, Transnet with the DPE and two professional Institutes -- the Institute of
Purchasing and Supply of South Africa (IPSA) and the United Kingdom-based Chartered Institute
of Purchasing and Supply (CIPS) – developed a skill-upliftment programme for SOEs. The
proposed solution, named The Integrated Capability and Capacity Procurement Programme
(ICCPP) was designed to supply a range of interventions to address the level of professional
skills in PSM in targeted SOEs in Southern Africa, bringing together an integrated delivery
programme to introduce PSM professional qualifications.

Overall, the ICCPP addresses capacity and capability building at three levels, namely:

• Individual level
- training programmes and skills development
- knowledge transfer/learning through experience
- professional development
• Organisational level
- stakeholder sensitisation
- process enhancement
- reduction of the total cost of ownership of goods and services
• Institutional level
legal framework
-
professional institute.
-

Figure 5 below illustrates the ICCPP programme’s intervention approach:

• “Bottom-up professionalisation” will be achieved through the design, set up,
customization and operation of the Institutes of Southern Africa Procurement Academy
with CIPS Inside. The Academy’s base framework is the UK national occupational
standards for Supply Chain Management (SCM), which are delivered electronically to
learners. The system was recently commissioned and Transnet has started the process of
enrolling learners.
• “Top-down rapid intervention” was designed to ensure quick but systematic development
of formal procurement skills for the 5% of Transnet’s SM practitioners responsible for 90% of
high-risk, high-value projects. It is based on the following delivery models:

Page 22 of 91


Integrated Capacity and Capability Procurement Programme
Top down rapid
development

SOEs specific
intervention
Procurement
Mini “MBA” /
“Bootcamp”

Institutes of Southern Africa Procurement Academy
with CIPS Inside

Action Learning Programme
(fast tracked accredited qualifications)
professionalisation

Procurement Courses
Bottom up

(linked to accredited qualifications)

Organisation Competency Models
(based on standardised job specs)

Institute Membership Professional Standards

Institutes initiative

Figure 5: The ICCPP process

• FAST TRACK STEP 1: Mini Procurement “MBA” or “Boot Camp”
An intense eight-day event, the “mini Procurement MBA” or “Boot Camp,” kicks off the fast-
tracking process for the top 5% practitioners. This serves as the access point to become eligible
for the next phase.

• FAST TRACK STEP 2: “Learning in Action” programme
An accelerated 15 – 18 month “Learning in Action” programme, resulting in full MCIPS
professional certification at Honours degree level – certification is normally a 36-month process.
This work-based programme is based on specific organisational objectives and the identified skill
gaps of participants.

The introduction of the CSDP required Transnet SM to expand further the Fast Track Step One from
Boot Camps focused on Strategic Sourcing and Capital Expenditure Sourcing, to include training on
Supplier Development. We will also be creating an extensive training course for Supplier Development
Managers, with delivery set to take place during second half of 2008/09.

We currently do not have an integrated Supply Management structure across Transnet and we have a
vacancy rate of at least 15% across the organisation. Many of our 400+ procurement staff have been
with Transnet for more than 15 years and we also have a small group of new hires with a different view
on Supply Management.

This has led to a situation of varied skill sets and ability to deliver. In general, however, Transnet SM
does not have spare capacity that can easily be “retrained” or expanded into SRM activities.

This will force us, in the short term, to focus on only a few key initiatives to gain insight into the potential
value, effort and risk that will be involved in the activity. In parallel, as previously mentioned, Transnet
SM will develop or procure a specialised programme in Supplier Development.

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5. Spend Analysis (detailed 5 years)
The ability to procure coherently and efficiently, while managing effective win-win relationships with
suppliers, is a powerful way of creating a conducive investment and capability-development
environment in national industries. This will allow a progressive lowering of the costs of doing business
for participating SOEs.

However, as SM we must have a clear understanding of Transnet spend, the supplier base and supply
chain to determine future opportunities in terms of localisation and Supplier Development.

At the outset, it is important to understand how spend is segregated in general. Figure 6 below shows
this breakdown.

There are a range of areas where the SOEs will have large predictable spend
requirements – these are the focus areas for supplier development

Operational Expenses Capital

OPEX
Spend on goods and
CAPEX
services PROJECT CAPEX
extending / upgrading the SOEs’
SOEs’
production capacity
LONG TERM ASSET BASE (equipment related)

Top twenty requirements
(T)OPEX
(C)OPEX
(C)OPEX
To maintain the SOEs’ To maintain the SOEs’ extended /
Current production capacity upgraded production capacity

PROJECT CAPEX – Project management objectives: project in on budget, on time, to spec

CAPEX + COPEX + TOPEX – Strategic sourcing: Optimising total lifetime cost or long term efficiency

OPEX – business objectives: cost optimisation depending on supplier relationship strategy

Figure 6: Spend Break down

For Transnet (at a high level), the breakdown is as follows:

• Operational Expenditure (Opex): roughly R14 billion per year of which some 70% goes to our
top-20 suppliers. Our supplier base is roughly 16,000 suppliers across Transnet.
• Capital expenditure (Capex): we currently plan an expenditure of R80 billion on capital projects,
over the next five years, aimed at capacity expansion and upgrading current facilities. The split is
60% mega projects (defined below) and 40% on business unit related projects. All projects over
R300 million are managed internally through Transnet Capital Projects.

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Capex Breakdown

The major projects (and equipment purchases) are listed below.

• Rolling Stock: Fleet upgrade plan includes:
Upgrade of 100 GM diesel locomotives
-
Upgrade of 100 GE Electric Locomotives
-
400 new locomotives
-
7000 new wagons
-
Replacement of On-Trac machines
-

• Infrastructure:
Coal Line expansion
-
Ore Line expansion
-
Eskom – Majuba coal supply
-
Coega Line
-
Substation upgrades
-

• Port Equipment:
Straddle carriers
-
Rubber-tyred Gantries (RTGs) and cranes
-
Ship-to-Shore (STS) Cranes
-
Reclaim / reach / mobile stackers
-
Rail siding cranes
-
Haulers and trailers
-
Forklifts
-
Tug Boats
-
Dredgers
-

• Pipeline:
- New Multi-Purpose Pipeline (NMPP) from Durban to Johannesburg

• General Construction:
- Construction of the Port of Ngqura
- Harbour improvements in Durban and Cape Town (including widening and deepening, quay
refurbishment, increased terminal capacity)
- Car port in Durban
- Improved Durban Container Terminal (DCT) trucking access and throughput
- Richards Bay Dry Dock Terminal Upgrade
- Saldanha Bay upgrades

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Figure 7 provides a detailed analysis (as at October 2007) of Transnet’s Capex Commodity Spend
Breakdown:

Oreline Special
Materials Quantities Unit Total Marine Projects Projects Projects

Concrete m3 502,174 471,825 15,080 15,080

Steel Reinforcing Ton 96,328 12,890 81,900 1,506

Rock m3 10,189,640 10,053,640 135,000 500

Brick Walls m2 62,998 50,149 12,100 -

Structural Steel Ton 70,798 34,886 30,494 5,282

Dredging m3 8,966,517 1,366,517 6,600,000 1,000,000

Earth Moving m3 4,930,782 4,151,362 710,000 1,420

Rock/Concrete Removal m3 27,190 6,560 20,000 10

Pre-cast Sleepers No 582,510 44,790 428,000 69,720

NMPP Pipe* Ton 23,681 14,181 9,500 -

Ballast m3 515,743 60,000 326,743 69,000

Bitumen Ton 63,855 62,732 240 768

Form Work m2 52,711 49,861 - 2,500

Steel – Rail Wagons Ton 62,367 18,367 - 44,000

Steel – Rails Ton 27,610 620 21,600 5,390

Steel – Plate (Tanks) Ton 1,453 855 598 -

Concrete Piping m 23,943 15,543 3,600 1,600

- -

Locomotives (Line & Shunting) No 178 29 80 69

Wagons No 8,505 569 5,336 2,600

STS (Ship to Shore) Cranes No 6 6 - -

RTG’s No 30 30 - -

Reach Stackers (containers) No 6 6 - -

Stacker / Reclaimer (Ore) No 8 - 2 6

Tugs No 4 3 1 -

Iron Ore Stockyard Conveyor System No 13 - - 13
Figure 7: Estimated Capex Commodity Spend Breakdown

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6. CSDP Approach and Opportunity Identification

For CSDP to be successful, it is absolutely necessary that Transnet should create a robust and effective
approach to developing opportunities. This is to ensure that Transnet focuses its energies on the most
appropriate areas that will provide the most value from the limited resources that it has.

The aim of the CSDP is to identify localisation interventions that will leverage Transnet’s expenditure on
imported goods and services and that will address the market inadequacies so as to create an
environment conducive to investment in new and/or upgraded local manufacturing capacity. In order to
maximise the impact of the CSDP, these interventions need to be focused on:

• Those goods/services with the most potential for competitive local manufacture (with the ability to
export based on spare capacity);
• Those goods/services for which South African industries have current capability to produce (or
with some element of development expenditure / effort can produce); and/or
• Those goods/services in which foreign investors (such as overseas OEMs) are willing to support
South African supplier development.

a) Developing the Approach
Initially, Transnet will need to focus on those opportunities that emerge as part of the capex
programme’s capital equipment and long-term opex supply tenders. It will also need to review
previous and recent capital equipment purchases to unwind NIPP obligations and then develop
any CSDP initiatives that may arise due to such unwinding.

Figure 8 demonstrates the necessity of ensuring that in the first phase of implementing the
strategy, Transnet focuses its attention on the opportunities that will give the greatest benefit,
without needing to extend or intensively train the current resource base. Transnet needs to focus
on the localisation opportunities that have low to medium risk with medium impact to the market.

The main opportunities:

Targeted Skills: Transnet has a current need for approximately 1000 highly-skilled artisans to
meet day-to-day operational requirements. This skill set, can in some instances, be provided by
our CSDP partners.

Maintenance and Repair capabilities: In addition to the day-to-day operational skills, Transnet will
require additional skills to manage the capital investment programme, such as port equipment
maintenance, substation and signaling maintenance, pipeline maintenance, etc.

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Figure 8: CSDP Approach – Determining Opportunities

Component Manufacture / Upgrade: Transnet currently has many of these capabilities, but
primarily to serve its own requirements. In fact, Transnet Rail Engineering (TRE) has various
centres of competency, which have been vetted by a number of its strategic Original Equipment
Manufacturer (OEM) suppliers.

System / sub-system manufacture: While Transnet currently refurbishes its older fleet
(locomotives, tugs etc), the organisation does not engage in design and is not currently interested
in this as an opportunity. Other local suppliers may however see this as an attractive proposition.

Transnet’s CSDP approach is designed to make certain that we:

• Provide flexibility to accommodate innovations available in the market and in building the most
appropriate relationship(s):
- each supplier will have different requirements and abilities, which must be catered for;
- while the policy will ensure governance, our approach will optimise value from the supplier
relationship, without having to create an equity relationship or retain money on behalf of the
supplier. The relationship will be contractual; and
- the approach will use a total-cost-of-ownership model which looks at all of the relationship
cost variables including purchase costs, internal costs and life-cycle costs.

• Focus on a case-by-case evaluation and delivery:
each purchase that we make will not be subject to a CSDP localisation opportunity;
-
every purchase that has a possible CSDP element will not be pursued, due to resource
-
shortages and the need for control and good governance; and
Value for money impact versus effort will drive the decision on a case-by-case basis to
-
decide on which CSDP opportunities we should engage.

Page 28 of 91


• Have the necessary procedures and policies to apply dynamic capabilities to exploit emerging
opportunities:
Procedures will be developed based on the CSDP value chain and will cover all aspects
-
from identification, evaluation, approval and measuring;
The Detailed Procurement Procedure (DPP) will be updated with the relevant policies that
-
will provide the necessary controls and governance (also refer to Part 10);
The Controls will be reviewed with Internal Audit for approval; and
-
Appropriate templates will be developed, including opportunity identification, business case,
-
measurement reports and generic contracts.

• Deliver in an effective, sustainable manner:
All plans and business cases will be well defined, measurable and implementable;
-
Key staff will be tasked with the CSDP programme. A high-level oversight body will ensure
-
governance, suitability and validation of the business case;
An effective approach will ensure that the KPIs are reasonable, measurable, attainable and
-
applicable in all situations; and
A contractual relationship will ensure sustainability and a long-term commitment.
-

• Develop a supplier code of ethics;
Transnet will work with appropriate stakeholders (such as DPE, DTI, industry associations
-
etc) to develop a code of ethics that will serve to establish the expected relationship that
arises from a CSDP opportunity.

• Provide mechanisms for measurement and benchmarking.
Each business case will outline the expected KPIs for the opportunity. Primarily these will be:
-
1. National Value Add (NVA);
2. Transnet total cost of ownership (TCO) reduction;
3. export volumes; and
4. employment created.

See Appendix E: Guiding Principles in developing Transnet’s CSDP Approach

Steps in the Approach include:
1) Align spend - identify the opportunities
2) Conduct the sourcing event
3) Categorise and record the opportunity
4) Approve the opportunity in principle
5) Negotiate with the supplier
6) Develop the business case and obtain approval
7) Create and finalise the contract
8) Measure the supplier

Each step will be mapped and defined in a Transnet Policy and Procedure manual. For details, refer
to Appendix F.

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b) Identify the Opportunities

Transnet has to date identified several CSDP opportunities that needed to be analysed and
evaluated (refer to Part 8). This has proven to be a difficult task, because of the need to keep
pace with the tender process, the market and business needs, while trying to implement deals
systematically and effectively, without a proper procedure, governance model and approval
process.

From investigating several pilot localisation initiatives (refer to Part 8), it became clear that
Transnet will look at the following types of CSDP opportunities:

GFB – General Freight Business
RTG – Rubber Tyred Gantries

Figure 9: The Types of Opportunities

Local Expansion: this type of opportunity will occur when a supplier, based on the increased
Transnet spend, is able to expand current capability that not only meets the Transnet
requirement but that also allows it to take on other customers. It will mostly involve a foreign
company partnering and investing with a local (preferably level 5 BBBEE empowerment status or
better) entity.

In some instances an OEM will invest in a local industry to produce products that are for local
consumption only (not for export as it is not economically viable to do so). This type of
opportunity will be import avoidance and measured accordingly.

Increased Export Capacity: in this instance, a local manufacturer or foreign entity expands
capacity to provide Transnet requirements and overseas demand. This will usually be done at the
company’s own expense and risk. Our award allows the supplier to project demand, but also to
provide a stable economic view for foreign investment.

OEM Manufacturing: this opportunity is specifically aimed at promoting South African
businesses as offshore suppliers of choice for OEM companies. We would broker deals with
foreign suppliers to partner with local manufacturers who are capable of competitively
manufacturing their capital equipment spares under licence, thus ensuring local source of supply
for spare parts and an increased export base.

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A large portion of the goods we acquire are from international suppliers, which exposes Transnet
to foreign exchange (forex) variations, long lead times and lack of security of supply, due to the
organisation not being a “Customer of Choice” for large international OEMs. This type of
opportunity will allow Transnet to localise its supply chain, making the organisation less
dependent on imports. By manufacturing the parts under the OEM name (rather than local
reverse manufacturing), local business will have access to the global market and Transnet will
reduce its internal testing cycle (2 or more years).

It is expected that most of our CSDP localisation opportunities will be of this type.

Optimising NIPP obligations: seven of our suppliers, including Alstom, Kalmar, Mitsui and
Liebherr, have NIPP obligations with the DTI, based on past Transnet contracts for imported
manufactured goods. In conjunction with the DTI, Transnet will be developing a model for
unwinding and/or implementing solutions to meet these NIPP obligations and incorporate them
into subsequent CSDP programmes without duplicating any obligations.

Other: In the course of dealing with suppliers, we are often approached with a problem or an idea
that may not fit within our current model. Transnet may become involved if there is value in
pursuing the opportunity with little effort.

Industrial complexity of CSDP opportunities
In determining whether any of the expenditure categories identified in Part 5 are suitable for a CSDP
localisation supplier development opportunity, the ranking system detailed in Figure 10 below, gives one
an understanding of the complexity, suitability and resources required by OEMs to localise parts of their
supply chain.

Each localisation opportunity can be evaluated in terms of its ability to be a CSDP opportunity. Figure
10 provides examples, while definitions are contained in Figure 11 below. In applying the concepts
detailed in Figure 10 to Transnet’s spend analysis (refer to Part 5), the following conclusions can be
drawn, as to the most appropriate focus areas for CSDP opportunities for Transnet to investigate:

Figure 10: Determining Degrees of Complexity

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Shallow Intermediate Deep
• Local capability • Barriers to entry • Requires government
intervention (in order to
• Technological impact
- not likely to export or
persuade the private
• Centres of Excellence
- already have export
sector to build new
capability
(COEs) export quickly
capability)
• Enterprise Development
• High barriers to entry
• Empowerment
(such as high capex
(preferential
and/or R&D costs)
procurement)
• PPP
Figure 11: Initiative Ranking

• Shallow industrial complexity spend items (i.e. construction valued at R40 billion over five
years): The sources of supply are already based locally and this should best be supported
through supplier development actions, such as Enterprise Development and increasing the
Preferential Procurement drive.

• Intermediate industrial complexity spend items (i.e. assembly, equipment components, parts
manufacture and maintenance and repair): The sources of supply are international firms which
own the design, however there is local potential to manufacture to design. Part of Transnet’s
five-year spend on rolling stock and port equipment (and to a lesser extent infrastructure and
pipeline) falls into this category (see Figure 12 below), this being best suited to CSDP
opportunities.

Changing the source of supply to the local market on these items will be subject to certain
barriers to entry. Such barriers should be overcome by the private sector investing in capacity
and capability upgrades to become part of an OEM’s localised supply chain. A prerequisite to
such private-sector investments is that SOEs should execute their procurement in such a way as
to underwrite (indirectly) their tier-2 suppliers’ investments, by a clear long-term contractual
commitment with an overseas OEM, containing localisation obligations to local suppliers investing
in capacity and capability upgrades.

• Deep industrial complexity spend items (i.e. improving local manufacture of tug boats,
manufacture of diesel engines or establishing an OEM for locomotives): The localisation of deep
industrial complexity related commodities will require joint private- and public-sector long-term
investment to overcome the even higher barriers to entry. Transnet’s first SDP will not be looking
at such opportunities.

The following Figure 12 illustrates Transnet’s current planned capex expenditure by category. The figure
shows the intended focus areas for CSDP.

Page 32 of 91


Figure 12: Transnet Spend 2008 - 2012

Figure 13 (below) – Industry Sub-Sector Breakdown - is a summary of
Transnet’s potential tier-2 supplier opportunities, based on intermediate industrial complexity, by industry sub-sector.

Page 33 of 91


7. Supplier Industry Analysis
In the short term, Transnet will focus its attention on those industries that the previous analysis has
justified. However, prior to analysing Transnet’s Supplier Industry for Rolling Stock and Port Equipment,
South Africa’s national competitive position will be reviewed from international and regional
perspectives.

This macro view is deemed necessary to fully address the spirit of CSDP: grasping the quot;C”
(Competitiveness) in CSDP. The aim of this part of the SDP is to come to grips with the issues that
influence global competitiveness of enterprises (suppliers) today and into the future.

a) Macro perspective

The South African supply base’s International Competitiveness

The World Economic Forum’s Global Competitiveness Report 2007-2008, which measures 131
countries, determines rankings calculated from publicly-available data, while the Executive
Opinion Survey is based on a comprehensive annual survey of 11,000 business leaders,
conducted by the World Economic Forum together with its network of Partner Institutes (leading
research institutes and business organisations) in the countries covered by the report. In terms of
th
this report (refer to Figure 14 below) South Africa ranked 44 (out of 131 countries) in 2007 –
th
2008 against its 36 position (out of 122 countries) in 2006.

Figure 14: Global Competitiveness Index

Based on this Global Competitiveness Report an analysis is done per participating country, thus
drawing up:

Page 34 of 91


• a National Balance Sheet – refer to Appendix G; and
• a list of the most problematic factors for doing business in that country (refer to Figure 15 below).

Figure 15: SA’s list of most problematic factors for doing business

NOTE: Percent of responses: From a list of 14 factors, respondents were asked to select the five most
problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The
bars in the figure show the responses weighted according to their rankings.

IMD, one of the world’s leading business schools, located in Lausanne, Switzerland, is the author
of the quot;Competitiveness Roadmap 2007 to 2050quot; (see Appendix H) attempts to describe and
assess the main issues that will affect the world competitiveness landscape during the next four
decades. Issues are shown along two axes, degree of impact and time-scale, to provide a clear
quot;mental mapquot; of the environment in which nations and companies will operate. This is a
subjective assessment, which aims to bring some coherence to the multitude of issues that are
said to be having an impact – sooner or later – on the competitiveness landscape.

Roadmap issues with a potential impact on South Africa and the CSDP are:

• “New Attractiveness for Africa: Africa is becoming attractive again thanks to energy and
commodity investments. More than 700 Chinese companies operate in Africa. Emerging powers
benefit from the absence of a colonial past in the region”.

Potential CSDP impacts to consider:
- SOEs should use this increased attractiveness of the region to influence OEMs to localise
part of their supply chains in South Africa.
- SOEs when deciding on OEM partners, should also consider those in emerging economies,
such as China and India as a possible source of supply. Chinese STS crane manufacturer
ZPMC already holds a dominant position in the market for example (also refer to Part 7).

• “Productivity is harmonized worldwide: Productivity is harmonized around world operations as
companies become truly global and widely diffuse the same technology and processes among

Page 35 of 91


the markets where they locate their assets. The value chain is managed at the global level. The
nationality of companies matters less and less”.

Potential CSDP impact to consider:
SOEs should use this trend of OEMs becoming “world citizens” and the requirement to
-
improve the “triple-bottom-line” to make sure that local tier-2 and/or tier-3 suppliers become
part of these global supply chains and that the technology diffusion also takes place in South
Africa. In acquiring these skills, local suppliers could develop a base from which to build
more-advanced skills in the future.

• “China, India and Russia as Technological Powers: China, India and Russia regain their age-
old status as technological powers. Foreign companies no longer hesitate to transfer research
centres to these countries that have a long tradition of excellence in science and innovation”.

Potential CSDP impacts to consider:
SOEs should try to copy the above model, by stressing South Africa’s strength in science
-
and innovation, when trying to convince OEMs to localise their supply chains. Note from
Figure 14 above that South Africa’s competitive position is, for example, better than that of
India.
Through supporting the supplier benchmarking programme for local tier-2 and/or tier-3
-
suppliers, SOEs can contribute to the continuation of this tradition of excellence.

• “Manufacturing jobs shrink: During the past decade, the world’s production of manufactured
goods has grown by some 50% while manufacturing jobs have declined by 10%. Such a trend
also takes place in emerging powers such as China. Higher productivity world-wide – in part due
to the internationalization of technology and manufacturing processes – is the explanation”.

Potential CSDP impact to consider:
SOEs should understand that the localisation of their imported manufactured equipment may
-
not have as large a long-term impact on job creation as they might like to see (unless they
can compete with the economies of automation).
Continuous productivity improvement will be critical to the competitiveness of local tier-2
-
and/or tier-3 suppliers. Again SOEs could create a positive pull to encourage this by
supporting the supplier benchmarking programme.
It is false economic improvement to provide jobs at the expense of a decent wage simply to
-
be competitive.

The South African supply base’s Regional Competitiveness

The Africa Competitiveness Report 2007, published by the WEF, World Bank and African
nd
Development Bank, places South Africa as the 2 most competitive African country (refer to
Figure 16 below). This report states that African businesses can become far more competitive,
but African governments and their international partners will need to improve access to finance,
rebuild infrastructure and strengthen institutions.

Page 36 of 91

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