Transnet Supplier Development Plan

Transnet Supplier Development Plan

Compiled in terms of the DPE Competitive Supplier Development

Programme

February 2008

Supplier Development Plan

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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 developmen t

• 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 developmen t

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 Development (including CSDP) is a part1.

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 Control s)

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 t o 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-f ocused 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:


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Institute Membership

Bo

ttom

up

pro

fess

iona

lisa

tion

Top

dow

n ra

pid

dev

elo

pmen

t

Organisation Competency Models(based on standardised job specs)

Action Learning Programme(fast tracked accredited qualifications)

Procurement Courses(linked to accredited qualifications)

Integrated Capacity and Capability Procurement Prog ramme

Procurement Mini “MBA” /“Bootcamp”

Institutes of Southern Africa Procurement AcademyInstitutes of Southern Africa Procurement Academywith with CIPS InsideCIPS Inside

Professional Standards

Institutes initiative

SOEs specific intervention

Figure 5: The ICCPP process

• FAST TRACK STEP 1: Mini Procurement “MBA” or “Boot Cam p” 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.

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

OPEX – business objectives: cost optimisation depend ing on supplier relationship strategy

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

PROJECT CAPEXSOEs’

LONG TERM ASSET BASE

CAPEXextending / upgrading the SOEs’

production capacity(equipment related)

(C)OPEXTo maintain the SOEs’ extended /

upgraded production capacity

(C)OPEXTo maintain the SOEs’

Current production capacity

Capital Operational Expenses

Top twenty requirements(T)OPEX

There are a range of areas where the SOEs will have large predic table spend requirements – these are the focus areas for supplie r development

OPEXSpend on goods and

services

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:

Materials Quantities Unit Total Marine Projects Oreline Projects

Special 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 Opportunitie s

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.


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• 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:

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.

GFB – General Freight Business RTG – Rubber Tyred Gantries


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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 - not likely to export or

- already have export capability

• Enterprise Development

• Empowerment (preferential procurement)

• Barriers to entry

• Technological impact

• Centres of Excellence (COEs) export quickly

• Requires government intervention (in order to persuade the private sector to build new capability)

• High barriers to entry (such as high capex and/or R&D costs)

• 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.


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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 in dustry sub-sector .


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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 "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 Compe titiveness 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 this report (refer to Figure 14 below) South Africa ranked 44th (out of 131 countries) in 2007 – 2008 against its 36th 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:


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• 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 fo r 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 "Competitiveness Roadmap 2007 to 2050" (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 "mental map" 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


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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 Competitiv eness The Africa Competitiveness Report 2007 , published by the WEF, World Bank and African Development Bank, places South Africa as the 2nd 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.


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2007 Africa Competitiveness Report Top Ten

Rank 1 2 3 4 5 6 7 8 9 10

Country Tunisia South Africa Mauritius Egypt Morocco Libya Algeria Botswana Namibia Kenya

Score 4.72 4.42 4.22 4.09 4.02 4.00 3.98 3.83 3.76 3.61

Figure 16: African Regional Competitiveness Ranking

b) Micro perspective

Industry competitiveness of the South African suppl y base

In conjunction with Wits University and McKinsey, Transnet is undertaking a study of the key spend areas for Rolling Stock and Port Equipment to understand:

• Strengths and weaknesses of supplier cluster and industry from Transnet’s perspective, initially focusing on those key industry sub-sectors that will be pivotal sources of supply to Transnet’s “mega projects5”, while not requiring significant public-sector investment. This will ensure that the developmental pace is sufficient to meet demand.

• Analysis of imports and the desire of international companies to invest in South Africa (either directly through joint ventures with local suppliers or through foreign direct investment opportunities). Each opportunity must prove global competitiveness (whether a purely local or a foreign investment initiative) as the key criteria, before a business case will be developed.

• It is critical that the opportunity is locally sustainable over the long term, as Transnet does not want to create a situation where once the commodity is no longer required (the capex expenditure is complete), the foreign supplier leaves the country and no longer provides investment support to the local manufacturer. (One opportunity explored and rejected was an offer from a Chinese pipe manufacturer to invest in building a large-pipe manufacturing facility for the Pipeline project. However, there was no long-term plan once the pipeline was completed).

Simultaneously, Transnet will use internal resources and expertise to understand how the organisation’s strategic requirements will be met through external expenditure and where opportunities exist that will not put expansion at risk or increase costs. We have embarked on understanding scarcity of supply, off-shore sourcing, the ability of the local market to supply and the investment needed to make this happen. Background There are just fewer than 600 firms in the South African “other transport equipment” sector, with a total output of R5.9 billion. The high number of firms is largely explained by the aggregation of the sector to include railway equipment, shipbuilding and boat manufacturing, aircraft and related equipment, motor cycles and other types of vehicles.6

5 Capital projects over R300 million 6 CSID Research Reports, 2006 /07


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South Africa has mineral-based, well-developed resource extraction and primary manufacturing industries (such as steel manufacturing), and competitive energy and skills. In order to increase South Africa’s global competitiveness, these comparative advantages should be leveraged into higher value manufacturing products. In general, over the past twenty years South Africa’s secondary manufacturing sectors (such as the foundry industry) and finished manufacturing sectors (such as the capital goods industry) under-performed, due to a number of reasons, including:

• the removal of protection and increased imports;

• high costs of inputs, even where South Africa has a comparative advantage; and

• an insecure and declining local demand base.

Certain industries however had a stable demand base and long-term customer relationships during the same period, with a resulting growth in capital goods exports, for example in the mining and paper industries. In these industries buyers established strategic collaborative relationships with key suppliers, including:

• Systematic communication of opportunities, constraints and plans;

• Working in clusters to find solutions to key problems, enabling research and development investment by suppliers and on site testing of innovations; as well as

• Joint designing of standards and specifications.

The development of high-value manufacturing, such as capital equipment, is therefore clearly dependent on competitive inputs from its lower-tier sectors. Continued improvements in technological capabilities and cost-competitiveness are crucial for lower-tier sectors to compete globally. However, competitiveness is frequently hampered by a lack of technology support structures and a lack of conformance to internationally-accepted standards. SA supply base for Transnet’s Primary Focus Areas: Rolling Stock and Port Equipment As detailed in Part 8, during Phase 1 Transnet will be focusing on two primary areas, namely Rolling Stock and Port Equipment. We will focus on these areas because: • Successful implementation of the CSDP will depend on a localised supply chain. Currently,

new-equipment purchases provide us with the opportunity to manage the transition from 100% imports to a contractual local content;

• We are currently in the tender process for this equipment and it is at this stage that Transnet can fully exercise its influencing “power”;

• We have limited resources and we must focus these resources to obtain optimal results; and

• This programme is new to us and to our stakeholders. We must focus on key areas of return to provide a proof of concept.

Rolling Stock

By far, the biggest player in the sector is Transnet Rail Engineering (TRE), which is responsible for the manufacture and repair of local rolling stock. TRE has factories across South Africa and is involved in many aspects of manufacturing of assemblies and components as well as the maintenance of Rolling Stock. It is also a manufacturer of wagons (tier-1 supplier to Transnet


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Freight Rail). Tier-1 suppliers are direct suppliers of fit-for-purpose equipment (systems and sub-systems). Other tier-1 suppliers are: GE, GM, Alstom, EMD, Mitsui and Siemens. Transnet strategic tier-2 suppliers (manufactures of assemblies and sub-assemblies or key maintenance / testing services) include: Union Carriage & Wagons Partnership, Siemens, DCD-Dorbyl (subsidiaries Rolling Stock Division, Metpro and Ringrollers), Scaw Metals and Surtees. Apart from Metpro, which is located in Rosslyn, all the companies mentioned above are located on Gauteng’s East Rand7.

In general, firms in the railway equipment sector tend to specialise in products that are not in direct competition with other local producers. This stems partly from the vast array of components that the sector needs. In addition, a long-term co-dependency also exists between major players and their suppliers. TRE, for instance, sub-contracts a significant amount of the work to other firms despite having in-house capabilities.

Port Equipment The local Marine Handling Equipment and Machinery sector is moderately competitive globally with long lead times for equipment. Ship-to-shore (STS) cranes, straddle carriers and rubber-tyred gantries (RTG”s) make up the bulk of Transnet Port Terminals (TPT) requirements for port equipment. During recent Strategic Sourcing interventions Transnet researched the global supplier universe (conducted before approaching the market for competitive bids / tenders) for STS cranes and straddle carriers (RTGs are manufactured by the same suppliers as straddle carriers). An example of such market research into Port Equipment is shown in Figure 17 below. The South African Marine Handling Equipment and Machinery sector is moderately competitive globally, such as the example of local company IMPSA shows in the case of costing on STS cranes, where it came in third in terms of price.

7 CSID Research Reports 2006/7


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Figure 17: Market Research on OEMs of Ship to Shore Cranes

As part of a Strategic Sourcing intervention Transnet SM compiles a key value driver (KVD) tree for the commodity under review. The KVD tree for STS cranes in Figure 18 shows the three key cost drivers for STS cranes over their life cycle, namely the purchase price (58%), maintenance costs (16%) and mid-life refurbishment (10%). The example again shows IMPSA’s costs relative to an international competitor.


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TCO GROUPING IMPSA Rxm LIEBHERR Rxm AVERAGE Rxm % SplitEnergy 6.73 6.73 6.73 6.0%Maintenance cost 17.61 18.59 18.10 16.1%Maintenance cost - Electrical Spares 0.63 0.63 0.63 0.6%Maintenance cost - Mechanical Spares 7.09 8.77 7.93 7.1%Purchase costs 70.00 61.00 65.50 58.3%Mid-Life Refurbishment 11.34 11.34 11.34 10.1%Warehousing/Inventory Cost 1.20 1.20 1.20 1.1%Disposal cost 1.00 1.00 1.00 0.9%Grand Total 115.59 109.25 112.42

Maintenance cost CraneImportant Cost Components IMPSA Rxm LIEBHERR Rxm AVERAGE Rxm % Split

Painting of cranes 14.286 14.286 14.286 78.9%Planned maintenance 3.325 4.300 3.813 21.1%Grand Total 17.611 18.586 18.098

CostMid-Life Refurbishment Rxm % Split

Replace trolley brakes 2.00 17.6%Replacement of hoist motors dc 2.00 17.6%Upgrading PLC and Drives 2.00 17.6%Replacement of hoist gearbox 1.50 13.2%Replacement of trolley motors dc 0.78 6.9%Replacement of hoist motors ac 0.64 5.6%Overhaul trim list skew system 0.50 4.4%Other 1.92 16.9%Grand Total 11.34 Procurement

CostsIn-UseCosts

DisposalCosts

LIFECYCLE COSTING MODEL

ProcurementCosts

In-UseCosts

DisposalCosts

LIFECYCLE COSTING MODEL

CRANES

TYPICAL

Figure 18: KVD tree for Ship to Shore Cranes


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8. Priority Interventions and Associated Sectors

Figure 19 outlines the phased approach that Transnet will be adopting in its CSDP implementation, detailing the priority areas and associated sectors which Transnet has identified for rollout in the various phases, listed below.

Figure 19: CSDP Phased Approach

Phase 0: Feasibility and Development Stage: Pilot Interventions Phase 1: Rolling Stock and Port Equipment

(including working with DTI and Transnet suppliers with NIPP obligations)

Phase 2: Infrastructure and Pipeline Phase 3: Opex and other opportunities Other: Emerging Opportunities

Based on the spend analysis that Transnet conducted (refer to Part 5) and the opportunity areas identified to be best suited to CSDP interventions, together with the Supplier Industry Analysis conducted (refer to Part 7), Transnet’s SDP will start off with an initial focus on those suppliers within the manufacturing sector and the related support industries of Rolling Stock (R9 billion over five years) and Port Equipment (R6 billion over five years). For Transnet this translates into focusing on:

• Capital Equipment spare parts OEM manufacturing;

• Components and Assemblies; and

• Specialised Equipment Maintenance Skills (such as crane repair, port equipment maintenance; locomotive assembly/maintenance, thermite welding, bearing repair etc).


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During Phase 0 Transnet identified and investigated numerous CSDP opportunities. For Phase 1 two Priority areas have been identified with several capex and large Capitalised Operational Expenditure (copex) purchases pending. Transnet will have to ensure that the organisation does not by-pass any significant emerging opportunities through a too-narrow prioritisation of opportunities. In the first year Transnet SM intends to concentrate its efforts on two or three key supplier development opportunities. This will allow us to perfect the process, fine tune governance and controls, provide Operating Division training and to ensure that localisation benefits are contracted with selected OEMs and benefit realisation tracked through OEM contract management. In starting off the CSDP programme, Transnet will be implementing in multiple phases. The Phase 0 pilot initiatives led to an overall programme approach and the identification of the two priority areas for the first phase of implementation. In a similar way it is foreseen that Phase 1 lessons learnt in the targeted environment could be built upon during Phase 2, to assist in better evaluation and implementation of other CSDP opportunities on the horizon. Transnet believes that in following this approach we will ensure that we shall:

• have adequate resources to prove the CSDP concept through aligning with major capex purchases as part of the competitive bidding process;

• monitor the delivery of targeted CSDP initiatives as part of the capex contract management process;

• shape our future supplier relationships and supply chains for manufactured equipment;

• be able to apply a similar procedure when we are able to address short-fallings or unravel NIPP obligations in recent purchases of such manufactured equipment.

The following Figure 20 – Transnet Supplier Base and CSDP - is instrumental in demonstrating the overall approach as it relates to Transnet’s focus areas, negotiation power during the deployment of its “going to market” phase of Strategic Sourcing and activities in terms of Supplier Development.


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*SURTEES IS A WAGON MANUFACTURER IN MINING INDUSTRY**ED – Enterprise Development / PP – Preferential Procurement

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Transnet’s CSDP phase one Strategic Approach will be to focus on Tier 1 suppliers and to assist them in engaging Tier 2 suppliers

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Figure 20 shows how Transnet SM will be using its direct sphere of control to contract with OEMs as tier-18 suppliers. By including CSDP requirements into tender documents for prioritised focus areas, SM will be stretching its sphere of influence to reach tier-2 suppliers (being OEMs’ tier-1 suppliers). Examples of CSDP related requirements, which Transnet SM could utilise in tenders to influence OEMs to put together innovative proposals on ways to increase the localisation of their supply chains, could include, amongst others:

• Aligning OEMs with appropriate tier-2 suppliers;

• Defining the degree of localisation and the role Transnet Rail Engineering (TRE) places in the manufacturing / assembly / maintenance of the equipment;

• Recommending that tier-2 local suppliers participate in supplier benchmarking, as part of their commitment to continuous improvement, thereby increasing OEM buyers’ visibility of local suppliers’ capabilities, thereby enabling OEMs to broaden their supply base on a more scientific basis, while increasing their security of local supply; and

• Requiring that chosen tier-2 and tier-3 local suppliers should be contributors to Broad-based Black Economic Empowerment (BBBEE) by pre-defining acceptable BBBEE contribution levels in terms of DTI's Codes of Good Practices.

Figure 20 therefore indicates Transnet’s CSDP obligations, being effected by means of the direct contractual relationship with its overseas and / or local OEMs (Transnet tier-1 suppliers), who will be accepting contractual localisation obligations to extend their supply chains to suppliers in South Africa. The OEMs so contracted will thus retain the control and management over their supply chains, both

8 Tier-1 suppliers are those suppliers who provide the product or service which Transnet is directly procuring (locomotives, cranes, etc). Tier-2 suppliers provide assemblies and sub assemblies or major skills for the Tier-1 suppliers. Tier-3 suppliers provide the components or general labour for the above tiers.


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internationally as well as locally. The OEMs’ newly introduced local tier-1 suppliers become Transnet’s tier-2 suppliers in the future, while OEMs’ local tier-2 suppliers are Transnet’s tier-3 suppliers. Figure 20 furthermore points out the three types of Supplier Development activities that Transnet will be engaging in (also refer to Part 3) in terms of these supplier relationship activities, namely:

• CSDP with OEMs as Transnet’s tier-1 suppliers;

• Enterprise Development (ED) in support of OEMs’ tier-1 and tier-2 local suppliers, engaged in manufacturing subassemblies and components for OEMs respectively (being Transnet’s tier-2 and tier-3 suppliers); and

• Preferential Procurement (PP) in terms of other local suppliers. Finally Figure 20 indicates the types of SM activities that Transnet SM will perform in terms of managing supplier relationships at the various tier levels, namely:

• Transnet’s buyers will interact with its overseas a nd / or local OEMs (tier-1 suppliers) by:

- Means of the tender or RFx (Request for Information / Proposal / Quotation) process to contract with OEMs; as well as

- Lobbying with OEMs’ buyers to promote certified local suppliers as an attractive alternative source of supply in OEMs’ predominantly international supply chains. Transnet could thus assist its local tier-2 suppliers who have attained Centre of Competence certification, by contracting with OEMs to grant such local suppliers the rights to sell into OEMs’ international supply chain (i.e. become exporters), provided that those local suppliers can meet the OEM buyers’ cost and quality criteria for example.

- Advising OEMs on the role of TRE, either as the maintenance division of Transnet and/or as a preferred supplier, as the case may be; and

- Advising OEMs on available9 local partners to manufacture sub-assemblies.

• Transnet’s buyers will also engage with OEMs in set ting up Transnet’s third-tier local suppliers by:

- Advising OEMs on the role of TRE as a preferred manufacturer of component(s), if applicable; and/or

- Advising OEMs on available local partners to manufacture (other) components; and/or

- Identifying Enterprise Development opportunities for such tier-3 suppliers.

Phase 0 – Feasibility and Development Stage: Pilot Interve ntions

Transnet SM decided to follow an emergent strategic approach in developing its SDP, that is to “learn by doing”. Seeveral pilot opportunities were identified and subjected to the following process: • Pre-Feasibility (idea stage – relevant to unsolicited bids)

• Feasibility (in discussion with potential suppliers):

• Business Case (actual opportunity benefits are determined).

The status of Transnet’s pilot initiatives are listed below:

9 Every effort will be taken to ensure that OEMs do not engage with suppliers who have been disqualified by Transnet.


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Intervention Type

Phase Commodity/ Company

Comments

Increased Export Capacity / Local Expansion

Pre-feasibility Train Toilets The company contacted the office of the Consulate-General of the Republic of South Africa to determine if there is an opportunity to invest in South Africa. This may be beneficial in the light of the new locomotives being assembled in South Africa.

Local Expansion

Pre-feasibility Sleepers Transnet Freight Rail (TFR) is currently discussing opportunities with two international manufacturers, to establish facilities in competition with the local sole supplier. Another supplier in the market may be a catalyst for competitive pricing.

Local Expansion

Pre-feasibility Pipeline On the power of the Transnet business, our current supplier (pending award) will expand local facilities not only to supply Transnet but also for exports

Local Expansion

Pre-feasibility Scrapped rails The company contacted SSM to determine if there is an opportunity to buy scrap rails at less than market price, which would enable them to compete with the Chinese in the global market of striking tools, shovels and spades.

OEM Manufacturing

Pre-feasibility Electric locomotives and train components

We need to revisit the current electric locomotives, to determine whether local content can be expanded. This may be an opportunity to implement a NIPP Direct proposal to DTI.

Having a local manufacturer of components and sub assemblies would reduce order lead times, safety stock and freight costs.

OEM Manufacturing / Skills Transfer

Pre-feasibility Bulk Handling Equipment (marine)

Our current supplier has large NIPP commitments, but no approved plans to deliver. We have an agreement with the DTI to develop a plan on how to meet these NIPP obligations in combination with their new CSDP requirements.

OEM Manufacturing

Pre-feasibility Bearing Manufacture and Repair

Currently, these companies repair our large component bearings. We need to determine their appetite for further partnering with local companies for this activity, as well as opening local plants. Localised repair and production would reduce lead times and cost.

OEM Manufacturing

Business Case Brake Shoes The manufacturer has partnered with a local manufacturer to open a factory (currently in production). The facility was built on speculation that they had a chance at being awarded the


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Intervention Type

Phase Commodity/ Company

Comments

next tender. Should they win the award, we will measure NVA (National Value Add) in this industry.

OEM Manufacturing / Skills Transfer

Feasibility (pending signature of the contract)

Locomotives

We are currently in negotiations for the provision of 212 diesel locomotives, We have agreed in principle to a 40% localisation of manufacture and assembly of the locomotives.

Figure 21: CSDP Phase 0 Initiatives

Lessons learnt from Phase 0 pilot opportunities

Transnet SM started off using the model as defined by the DPE to develop its SDP. Due to a lack of market-supply information and industry analysis on Transnet’s overall spend base, our first exposure to the programme began with numerous, unconnected initiatives. Focusing on these initial opportunities served a valuable purpose in putting together Transnet’s proposed CSDP approach as well as deciding on a multi-phased implementation. A number of unexpected, but critical, lessons emerged from investigating these opportunities:

• Source of opportunities: unsolicited versus competi tive bids

Most of the opportunities under investigation came to our attention through unsolicited proposals from suppliers interested in longer-term relationships. Others were linked to strategic sourcing initiatives. It became clear that these types of initiatives were problematic in that they were not governed by the competitive bidding/tendering process, which meant that extraordinary due diligence and analysis was necessary making it very time consuming.

In fact, following up on unsolicited CSDP proposals that were ill-aligned to Transnet’s capital expansion too often resulted in SM resources being deployed to investigate opportunities with a relatively low return in terms of NVA improvement based on relatively smaller spend commodities, than could have been achieved by merely focusing on the major capex areas. Most of the deals ended up actually benefiting the prospective new suppliers more than Transnet, in that it would have enabled these suppliers to become an exclusive local source of supply to Transnet. Thus although many procurement mechanisms can be employed to obtain CSDP localisation proposals, (including competitive bidding, strategic-supplier negotiations without going to open tender, unsolicited bids etc.), using the unsolicited bids above without using the well-known tendering process to proved problematic.

• Focus of opportunities: top 20 opex commodities ve rsus high-value capex

Initially, it was assumed that opportunities would be found in the top-20 value opex commodities, such as wheel centres. This is the traditional focus of Strategic Sourcing interventions. However, it was realised that focusing on CSDP during the sourcing process involved additional resources and often caused confusion in the market (strategic sourcing itself was already a new dynamic that strained relationships). Focusing on high-value capex equipment, provided more opportunities for improving costs and impacting future supply chains through localisation. In addition, the tender process gave the inexperienced SM teams the ability to select the most-competitive strategic OEM international partner based on technical know-how and commercial considerations, while also “crowding in” innovative thought on how best to localise the supply


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chain. Through ensuring that localisation is subjected to the same rigour of competition between OEM bidders, the risk related to CSDP initiatives can be contained.

• Internal CSDP opportunity: Transnet Rail Engineeri ng (TRE) as preferred tier-2 supplier

The third lesson came from the results of the industry analysis that indicated that Transnet Rail Engineering (TRE) has a dominant supplier position in the local market initially in Rolling Stock maintenance and manufacturing and possibly extending this into Port Equipment maintenance over the medium term. Discussions between TRE, TPT and TNPA (Transnet National Ports Authority) will be held shortly to discuss the ports’ maintenance requirements and TRE’s ability to meet these needs. It would be a critical error in judgment not to leverage Transnet’s current strength in maintenance and engineering. Transnet will need to place TRE at the centre of Transnet’s CSDP programme. However, for TRE to obtain preferred tier-2 supplier status, there are three pre-conditions that must be meant, namely that: - TRE has no intention of becoming a locomotive OEM (design and sale of fit-for-purpose

locomotives to the market), as this would create a conflict of interest in Transnet SM allowing TRE access to OEM proprietary information in its becoming part of the OEM’s local supply chain;

- TRE’s manufacturing would be based on target costing to ensure global cost competitiveness; and

- TRE commits to continuous improvement, as supported by independent supplier benchmarking and/or success of the Lean implementation programme.

The Pilot opportunities will now be realigned to the multi-phased focused CSDP approach.

Phase 1 – Priority Areas: Rolling Stock and Port Equipment

The practical three lessons from the Phase 0 prototyping (as detailed above) were combined with the theoretical approach described in Part 6, to increase the robustness of CSDP implementation in Phase 1. In order to optimise Transnet’s benefits in terms of increased National Value Add (NVA), while still dealing with limited resources in terms of capability, capacity and willingness, it will be necessary in Phase one of CSDP implementation that: • the source of localisation proposals should preferably be via a low-risk tender-based environment

in terms of the “going to market strategy”;

• the initial focus should be on recent and pending purchases of high-value capex equipment (rail and port), together with its related year-on-year future opex spend to maintain this equipment;

• TRE should factor optimally into the relationships being structured with overseas OEMs (Transnet’s tier-1 suppliers) by:

- being involved in all assembly projects to understand the future maintenance and spares requirements;

- becoming a tier-2 supplier itself, through manufacturing components and/or assembling sub-systems for the OEM, where this is commercially optimal; and

- being recognised as the party responsible for maintenance of the newly-acquired capital equipment and therefore having an acknowledged key role in managing the newly-localised supply chain.


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Phase 1 will target those areas where maximum immediate NVA is thought probable, by linking CSDP initiatives directly to the priority capex purchases for manufactured equipment for Rail and Port expansion projects. As such, the Phase 1 focus will primarily be on engaging with the tier-1 OEM Suppliers of recent and pending purchases for Rolling Stock and Port Equipment. Figure 20 indicates the key suppliers (tier one and two) and/or commodities in the primary focus areas of port equipment and rolling stock where CSDP opportunities may exist.


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9. Key Performance Indicators

Transnet believes that its first CSD plan, though not based on perfect historical spend data, was developed to optimise the organisation’s benefits in terms of increased NVA. Through adopting a many-phased, focused rollout approach, Transnet will be able to deal with its plans for skills upliftment, while putting in place a comprehensive change-management programme at the same time as launching Phase 1 of its CSDP rollout. Transnet’s Phase 1 implementation focus will be on recent and pending purchases of high value Rolling Stock and Port Equipment, jointly valued at R15 billion over the next five years. TRE will be factored into each deal being structured with an overseas and / or local OEM in an optimal manner by recognising TRE’s key role as “maintainer of choice” for Rolling Stock in the short term (with the possibility of extending this to Port Equipment) and thus in managing the newly-localised supply chain; and/or by TRE itself becoming a tier-2 and/or tier-3 supplier, through assembling sub-systems and/or manufacturing components, should this be commercially optimal.

Figure 22: CSDP Continuous Improvement Map

As detailed in Figure 22 above, as well as described in Part 10, Transnet’s SDP will be supported by an extensive Change Management Programme, of which one component is the on-going rollout of Transnet’s large-scale procurement capacity and capability programme. Part 4 contains Transnet’s four key critical success factors to continuously improving the organisation’s CSDP performance expressed as the overall CSDP programme’s five-year objectives. Transnet will be measured by how well it has fulfilled these four objectives by its progress in improving its direct CSDP initiative. It will also be measured by its progress in implementing the practices needed to support the CSDP.


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The CSDP programme KPIs that Transnet will focus on include:

• Direct measures of the success of the CSDP initiatives themselves; and

• Indirect measures to track improvement in business and SM practices.

Objective no 1: CSDP Delivery (KPI No 1): CSDP initiatives deliver localisation benefits in l ine with OEM-contracted requirements

• How is Transnet SM doing against its detailed CSDP implementation plan (measure of

anticipated change)?

- Status of each CSDP opportunity against plan

- Supplier Performance against contract

• Has Transnet’s spend profile changed and is the SDP still aligned to this spend and the market?

- Conduct an annual spend analysis (historical spend)

- Review key suppliers and commodities to ensure alignment

- Review resource base and ensure that we are generating value.

Objective no 2: Increasing SDP scope and detail (KPI no 2): Periodic updates of SDP reflect improvement of busi ness practices and SM practices

• Is Transnet’s five-year spend (capex and opex) determined and visible to SM and can a ten-year

estimated spend be determined?

• What progress is visible in updated SDPs in terms of improvement being made in terms of:

- Operating Division management using longer-term demand planning?

- Technical experts improving the use of standardisation practices in driving down the life-cycle costing of manufactured equipment? and

- Supply Management broadening its reach of Strategic Sourcing practices in (capex) commodities?

Objective no 3: SM capability improvement (KPI no 3): Transnet’s SM practices are maturing to improve sup port of Supplier Development initiatives

• How is Transnet SM doing against the Critical Path and Flight Plan (Continuous Improvement)?

• Are the KPIs of the strategic objectives being met (as documented in Transnet’s Strategic Directive)?

• Is Transnet SM meeting its change-programme objectives and are our skills sets improving?

- Compare “AS IS” status to expected performance

- Benchmark capabilities against baseline

- Review control framework calculations against expected progress


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Objective no 4: Supply Management skills upliftment (capacity) ( KP I No 4): Transnet’s SM staff applies procurement best practi ces in a professional manner

• How is Transnet SM doing against the ICCPP professionalisation planning?

• Are Transnet SM’s staff skills sets improving?

- Compare “AS IS” status to expected performance

- Benchmark competencies against baseline

• Are cycle times improving? Is this leading to more capacity for value-added activities?

• Has Transnet achieved its training targets for Supplier Development practitioners?


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10. High-level implementation plan

Transnet’s SDP was developed to be robust and practical, surrounded by an in-depth change-management programme, within the necessary governance and controls for staff to achieve success. As implementation is seen as critical, Transnet SSM clearly stated that it will not issue a theoretical plan without focusing on enabling Transnet to achieve its overall business objective of increasing its market share through increasing capacity by means of successfully rolling out of the capex programme on time and within budget. In addition to an internal-mobilisation plan, it is foreseen that Transnet’s CSDP initiatives will have to be supported with an in-depth Change-Management Programme (CMP) aimed both at internal organisational transformation and at external collaboration with the supply industry and other government stakeholders. Transnet believes that its comprehensive implementation focus on managing stakeholders will ensure that Transnet’s SDP is not merely issued to satisfy compliance requirements of the DPE. It will also focus on the true spirit of CSDP by making a contribution to NVA by localising Transnet’s manufactured-equipment supply chain to a realistic level.

a) Internal Mobilisation plan

Transnet’s detailed mobilisation plan (see example below Figure 23) will be finalised as soon as this SDP is approved by DPE. Two components that have already been determined are the changes required in terms of SM policy and procedures, as well as the need to establish an integrated communications plan. These two components are discussed below.

Figure 23: High Level Plan

Policy and Governance

Part of Transnet’s turnaround strategy, which has now been completed, was to ensure that we follow good corporate governance and that we embed a control mentality ethos in our staff and in our processes. This required Transnet SM, as part of the second Critical Path focus area (also refer to Part 4), to develop its policies, procedures and governance prior to implement any new programme fully. This needs to be done for CSDP as well as for subsequent programmes.


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In theory, senior Transnet staff understand the benefits of participating in a CSDP programme. Culturally, however, many are extremely reluctant to engage in any activity that is not supported by policy as detailed in the organisation’s DPP (Detailed Procurement Procedure). Since CSDP is an unfamiliar procedure, staff is not sure of how to proceed. As such they will not participate before the “rules of engagement” are completely detailed in the DPP.

Figure 24: The Supplier Development Value Chain

While formulating this first SDP, Transnet SM also started developing the appropriate control mechanisms to manage CSDP. They include:

• Updating the DPP with the appropriate policies to govern the process;

• Designing appropriate procedures (based on the value chain shown above in Figure 24) to manage the process;

• The use of robust templates, complete with instructions on how to complete these templates;

• The creation of a control framework to ensure that we have consistent means of managing and auditing the process; and

• Developing a set of KPIs and measures (including means to calculate) that are applicable in the delivery of an opportunity.

Developing the Integrated Communication Plan

For the CSDP programme to be successful, Transnet must ensure that it has a well-considered, comprehensive plan to manage its communications, public notifications and CSDP tender opportunities. The communications plan will address:

• Types and frequency of meetings with our stakeholders – internally and externally (also refer to Part 10);

• The framework for the messages and/or information that must be communicated, the intended audiences and expected delivery times;

• Those purchases that are likely to contain a CSDP or Enterprise Development opportunity and that will ensure that the appropriate category manager or buyer is notified; and


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• The frequency and subject of oversight meetings with suppliers who have a current CSDP contractual obligation.

Stakeholder communication and interaction

The plan will ensure that all key stakeholders are informed of Transnet’s CSDP on a regular basis. It is proposed that Transnet should engage in regular sessions with government’s support partners, such as DTI, DST and the IDC to discuss progress, to share experiences and to identify and to work together on areas of collaboration. Supplier and industry association communication and interaction

The plan will ensure that all key tier one suppliers (overseas and/or local OEMs), as well as current and potential local tier two or three suppliers , via local industry associations , are informed of:

• Transnet’s procurement process, including CSDP and the selection criteria of the commercial and supplier-development processes;

• Transnet’s CSDP progress on a continual basis.

Information on Transnet’s procurement process, including CSDP criteria, is important, as many local suppliers have an entitlement mentality, believing that participating in the tender process or merely being in the distribution corridors within the Transnet supply chain warrants business. When dealing with off-shore suppliers , the CSDP message could be linked to the concept of Corporate Social Responsibility (CSR) and Sustainability Management in explaining Transnet’s requirements. This can help to leverage localisation requirements effectively. Overseas OEMs and local suppliers alike must be informed that all Transnet CSDP deals will be:

• proceeded by thorough supplier due-diligence studies. This will include a supplier universe, a specific analysis of the supplier(s) in question and a review of those suppliers seemingly in control of the sub sector. This analysis will also include the review of Transnet’s current supplier relationships;

• subject to supplier benchmarking so as to establish a baseline of performance against industry peers and to monitor performance against agreed targets.

b) Change Management Programme (CMP)

The envisaged CMP will address Transnet as an organisation (internal focus) and look towards collaboration with CSDP stakeholders (external focus). Stakeholders need to be managed on both fronts as well. Transnet cannot achieve the benefits of CSDP in a vacuum. It is essential that key stakeholders, internal and external, should be engaged from the onset to:

• ensure alignment;

• avoid duplication of effort;

• optimise the benefits of the CSDP initiatives; and

• ensure that the shared experiences of the process are recorded and built into new initiatives on a continuing basis.

This will reinforce so-called “double-loop learning” and strengthen future CSDP initiatives for all stakeholders.


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Internal change management Internal organisational transformation will be address as follows (detailed in Part 4):

• Short-term focus

- Building internal support for CSDP; - Putting in place CSDP structures and resources;

- Continuing SM skills upliftment; - Strengthening SM governance regarding CSDP; and

- Building best-practice risk management into the CSDP process.

• On-going continuous improvement focus

- Developing best-practice Supply Management, including benchmarking of Transnet’s SM capabilities; and

- Developing best practice Demand Management, including improving long-term forecasting and focusing on (equipment) standardisation.

Stakeholders who need to be managed inside the organisation include;

A. INTERNAL STAKEHOLDER WHAT TRANSNET NEEDS

TRANSNET EXCO • Support for supplier development in general and CSDP specifically

BU EXCO • Support for supplier development in general and CSDP specifically

• Timeous execution of approved business cases

• Follow governance and procedure

BU CPOs • Identification and communication of opportunities

• Timeous execution of approved business cases

• Follow governance and procedure

• Ensure appropriate staff attend training and are continually trained in Supplier Management / Development

• Ensure that the structure supports continuous Supplier Development and Management

• Provide spend information quarterly Figure 25: Internal Stakeholder Management

External change management: government support to l ocal supply base

As part of the initial development of participating SOEs’ SDPs, SPAID at the request of the DPE facilitated the process of consultation between:

• Participating SOEs, namely Transnet, Eskom and PBMR;

• the Supply Industry via various Industry Associations; and

• the Government Sector (incl DTI, DST, IDC etc)

to identify industry perspectives in terms of comparative advantage, areas of excitement and areas of productivity improvement.


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As depicted in the diagram below (Figure 26), Transnet believes that the implementation phase of SDPs should include continued collaborative industry interaction . As implementation gets underway, it would be advisable to build on the relationships established during the development of SDPs. Under DPE’s guidance the interactions could be hosted as a collaborative forum so as to share progress and compare experiences on such matters as (supplier) benchmarking, enterprise development, industry development, development financing and technology upgrading. From an SOE perspective, Transnet believes such collaboration will assist in building better practices in subsequent CSDP implementation phases, while assisting in creating a more-cohesive picture of future prioritised capex requirements with local industry.

Transnet believes that continued industry collaboration will signal the organisation’s commitment and showcase its (improving) ability to procure coherently and efficiently, while managing effective win-win relationships with suppliers on all tiers. Should all participating SOEs start using this signalling mechanism, we have a better chance of creating a conducive investment and capability-development environment in national industries, which should in the medium to longer term allow a progressive lowering of the costs of doing business for participating SOEs.

Figure 26: Continued Industry Collaboration post SDP development


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Transnet’s needs in relation to its external stakeholders interested and/or involved in CSDP, is detailed in the table below,

B. EXTERNAL STAKEHOLDER WHAT TRANSNET NEEDS

DPE • Gain support for CSDP among other government agencies, such as DTI, DST and IDC

• Communicate successes of CSDP initiatives publicly – this is important to participating OEMs

• Provide assistance to participating SOEs as required, such as:

- Resources, for example: benchmarking through UNIDO, research through Wits University

- Funding advise,

• Create an SOE Forum to share experiences and ideas on: - CSDP initiatives;

- internal change-management activities (also refer to Part 10); and

- external change-management activities (also refer to Part 10)

• Continue the Supplier Benchmarking Forum between participating SOEs, interested government stakeholders and UNIDO (as the benchmarking service provider). Post the development of SDPs to: - share benchmarking experiences a continuous basis

so as to improve the methodology;

- improve engagement models to reach more potential subscribers to the benchmarking service, both in the international realm (overseas OEMs’ sellers & buyers), as well as potential local SOE tieri2 and tier-3 suppliers;

- share relevance of the to-be-established database of benchmarked local tier-2 and/or tier-3 local suppliers as a means for tendering OEMs to propose participants for localising their supply chains;

- share experiences on continuous improvement actions taken by benchmarked local tier-2 and/or tier-3 local suppliers through the contractual feedback to be provided by OEMs on the implementation of their localisation plans;

- share experiences of benchmarked local tier-2 and/or tier-3 local suppliers who sell to OEMs’ international supply chains.

• Create a forum for general collaboration on CSDP between participating SOEs and government stakeholders (such as DTI, DST, IDC, CSIR etc) and post the development of Supplier Development Plans to share experiences on a continuing basis

• Facilitate collaboration between participating SOEs and Industry Associations post the development of SDPs to


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B. EXTERNAL STAKEHOLDER WHAT TRANSNET NEEDS share experiences and future opportunities on a regular basis

DTI • Joint assistance (development of a procedure) in “unwinding” our suppliers from their NIPP obligations aligned to their CSDP obligations

• Assistance for OEMs with registration and legal issues in setting up operations in South Africa

• Assistance for OEMs with customs and duties for SOEs’ mega project imports

• Identification of potential suppliers and industries, based on DTI’s industry knowledge

• Assistance in leading and supporting trade delegations to OEM procurement personnel

• Acceptance of this plan

DST & CSIR • Assistance for suppliers requiring Research and Development on new technologies, or in teaming up with OEMs’ technologies

IDC • Provide (development) funding options, as required by either OEMs and/or local tier-2 and/or tier-3 suppliers

• Provide advise and/or assistance to Transnet SM on:

- business case development for CSDP opportunities; - due diligence of local suppliers requesting

admittance to CSDP on a business case-by-case basis

• Provide access to IDC market research on industry information and statistics

RESEARCH BODIES (WITS UNIVERSITY, CSIR etc )

• Provide information as required

SPAID • Hosting of collaboration initiatives in developing SDPs

• Review and acceptance of this Plan

INDUSTRY ASSOCIATIONS • Liaise with Supplier Development Managers with respect to market dynamics and dissemination of information (communication)

• Sector information

• Review and acceptance of this Plan Figure 27: External Stakeholder Management


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11. CONCLUSION

Transnet’s long-term aim with CSDP is to localise its 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’s and multi-nationals’ procurement personnel. This will depend on Transnet’s ability to create a cohesive picture of future spend, to be the catalyst for local suppliers’ investment in their own capacity and in their capability to meet Transnet’s future requirements. To achieve this ambitious aim, over the next five years Transnet will need to implement CSDP in a phased manner, starting off by engaging with opportunities in two priority-focus areas, namely Rolling Stock and Port Equipment, while preparing SM staff to exploit emerging localisation opportunities. The CSDP rollout will be supported by a holistic Change Management Programme, which will include a strong focus on stakeholder management and communication. Transnet’s CSDP will be implementing in various phases. The Phase 0 pilot initiatives led to an overall programme approach and to the identification Rolling Stock and Port Equipment as of the two priority areas for the first phase of implementation. Phase 1 lessons learnt in the targeted environment will be built into Phase 2, which will focus on Infrastructure and Pipelines. Emerging CSDP opportunities on the horizon will be dealt with on an ad hoc basis. While Transnet realises that a localised supply chain of previously-imported manufactured goods or imported services may not necessarily result in direct cost reduction, it will result in shorter lead times, lower transport costs and better control of quality on components and sub-assemblies. On a macro level it will create employment and serve to increase the country’s export base for manufactured equipment and components. Transnet believes that in following its proposed approach we will be reducing risk and ensuring that:

• we have adequate resources to prove the CSDP concept through dovetailing with major capex purchases, as part of their competitive bidding process;

• delivery of these targeted CSDP initiatives is monitored as part of the capex contract management process; while

• Transnet can shape the future of its supplier relationships for targeted high-value capex equipment (OEMs on tier-1 with its increased localised supply chains for tier-2 and tier-3 suppliers); to be closely followed by

• Unraveling the past by reviewing recent purchases of such manufactured equipment, so as to avoid possibly sub-optimal localisation outcomes.

By doing this, Transnet will use the timely and effective roll-out of its capex programme to benefit the South African economy by developing competitive national supplier industries for targeted manufactured equipment.

59

APPENDIX A: Sub Sector Details

Capital Equipment ►

Focus Areas + tiers ▼

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Subsectors Identified for CSDP Discussions

tier one tier two tier three

Engines Alternator x - x x x x x - 38 Electricity distribution and control apparatus

Engines Battery System Main battery, backup system, regeneration

x - x x x x x - 40 Accumulators, primary cells and primary batteries

Engines Engine Block Steel, casting x - x x x x x - 29 Basic iron and steel products

Engines Fuel Injection injector valves x - x x x x x - 49 Parts and accessories

Engines Exhaust steel, welding x - x x x x x - 49 Parts and accessories

Engines Auxilliary diesel alternator x - x x x x x - 38 Electricity distribution and control apparatus

Engines Block Valves x - x x x x x - 29 Basic iron and steel products

Engines Cooling system x - x x x x x - 32 Other fabricated metal products

Steering Mechanism Steering Axle x - x x x x x - 32 Other fabricated metal products

Steering Mechanism Steering wheel x - x x x x x - 29 Basic iron and steel products

Braking System Air brakes - - - - - x - x 49 Parts and accessories

Braking System vacuum brakes - - - - - x - x 49 Parts and accessories

Braking System Parking brake x x x x x x x x 49 Parts and accessories

Braking System Disk Brake x - x - - - - x 49 Parts and accessories

Braking System Brake Blocks x - x - - x - x 32 Other fabricated metal products

Braking System Brake shoes and drums x x x x - - - - 32 Other fabricated metal products

Braking System Hoist brake x x x x x - x - 49 Parts and accessories


60

Appendix A (cont.)


Focus Areas + tiers ▼ Str

add

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Car

rier

s

Sh

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ho

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cran

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H

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(D, E

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Electrical System Cable x x x x x x x - 39 Insulated wire and cables

Electrical System Alternator x x x x x x x - 38 Electricity distribution and control apparatus

Electrical System Lighting Bulbs x x x x x x x - 41 Electric lamps and lighting equipment

Electrical System Lighting Switches x x x x x x x - 41 Electric lamps and lighting equipment

Electrical System Lighting Conductor x x x x x x x - 41 Electric lamps and lighting equipment

Electrical System Auxilliary generator x x x x x x x - 37 Electric motors, generators, transformers

Electrical System Power Units x x x x x x x - 38 Electricity distribution and control apparatus

Electrical System Electrical boxes x x x x x x x - 42 Other electrical equipment

Electrical System Auxilliary Switchboard x x x x x x x - 42 Other electrical equipment

Propulsion System Brass Impellors - - - - x - x - 30 Non-ferrous metal products

Lifting Mechanisms Cable Chain x x x x x - x - 29 Basic iron and steel products

Lifting Mechanisms Load sensor cells x x x x x - x - 38 Electricity distribution and control apparatus

Lifting Mechanisms Lifting boom Frame x x x x - - - - 31 Structural metal products

Lifting Mechanisms Lifting boom Suspension x x x x - - - - 31 Structural metal products

Lifting Mechanisms Lifting boom Hydraulics x x x x - - - - 34 Special purpose machinery

Lifting Mechanisms Rope sheaves x x x x x - x - 29 Basic iron and steel products

Lifting Mechanisms Cranes x x x x x - x - 33 General purpose machinery

Lifting Mechanisms Skew Transfer x x x x x - x - 50 Other transport equipment

Lifting Mechanisms Yoke x x x x x - x - 29 Basic iron and steel products


61

Appendix A (cont.)



Str

add

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arri

ers

Sh

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ore

cr

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Ru

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(D,

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Transmission System Draw gear x x x x x x x - 49 Parts and accessories

Transmission System Gearbox gears, plates x x x x x x x - 49 Parts and accessories

Transmission System Clutch x x x x x x x - 49 Parts and accessories

Transmission System Levers x x x x x x x - 49 Parts and accessories

Mechanical fluid transfer Valves x x x x x x x x 32 Other fabricated metal products

Mechanical fluid transfer Pumps x x x x x x x 33 General purpose machinery

Mechanical fluid transfer Compressors x x x x x x x - 33 General purpose machinery

Mechanical fluid transfer Cylinder x x x x x x x x 29 Basic iron and steel products

Mechanical fluid transfer Miscellaneous Marine equipment

- - - - x - x - 34 Special purpose machinery

Mechanical fluid transfer Piping x x x x x x x x 31 Structural metal products

Bogies Axles - x - - - x - x 31 Structural metal products

Bogies Wheels - x - - - x - x 31 Structural metal products

Bogies U-tube - x - - - x - - 29 Basic iron and steel products

Bogies Canonbox - x - - - x - - 29 Basic iron and steel products

Bogies Bearing - x - - - x - x 32 Other fabricated metal products

Bogies Traction Motor - x - - - x - - 37 Electric motors, generators, transformers

Bogies Pinion gear - x - - - x - - 49 Parts and accessories

Bogies Sideframe - x - - - x - x 31 Structural metal products

Bogies Springs - x - - - x - x 32 Other fabricated metal products


62

Appendix A (cont.)



Str

add

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arri

ers

Sh

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o sh

ore

cr

anes

Ru

bb

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yre

Gra

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Har

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Dre

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(D,

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Locking Mechanism Twist Locks x x x x - - - x 34 Special purpose machinery

Hydraulic System Hydraulic hoses x x x x x x x - 25 Petroleum, chemical products, rubber and plastic products

Hydraulic System Hydraulic Pumps x x x x x x x - 33 General purpose machinery

Structure Body Frame x x x x x x x x 31 Structural metal products

Structure Chassis Beams, frames, steel welding

x x x x x x x x 31 Structural metal products

Structure Steps and Ladders steel, welding x x x x x x x x 31 Structural metal products

Structure Underframe steel, welding x x x x x x x x 31 Structural metal products

Structure Windscreen x x x x x x x 26 Glass and glass products

Structure Suspension system steel, welding x x x x x x x x 31 Structural metal products

Structure Platforms steel, welding x x x x x x x x 31 Structural metal products

Structure Guard Rails steel, welding x x x x x x x x 31 Structural metal products

Structure Columns steel, welding x x x x - - - - 31 Structural metal products

Structure Sill Beams steel, welding x x x x x x x x 31 Structural metal products

Structure Side Beams steel, welding x x x x x x x x 31 Structural metal products


63

Appendix A (cont.)



Str

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arri

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cr

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Ru

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(D,

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Tu

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Control + Instrumentation System Micro computers

x x x x x x x - 45 Professional equipment

Control + Instrumentation System PLC Systems x x x x x x x - 45 Professional equipment

Control + Instrumentation System Field Instruments

x x x x x x x - 45 Professional equipment

Control + Instrumentation System Levers x x x x x x x - 29 Basic iron and steel products

Control + Instrumentation System Hydraulic control

x x x x x x x - 38 Electricity distribution and control apparatus

Facilities Toilets - - - - x x x - 27 Non-metallic mineral products

Facilities Mess rooms - - - - x x x - 35 Household appliances

Facilities Heating system - - - - x x x - 33 General purpose machinery

Filtration System x x x x x x x - 33 General purpose machinery

Ventilation System x x x x x x x - 33 General purpose machinery

Airconditioning System x x x x x x x - 35 Household appliances

Ignition Appliance x x x x x x x - 334 Total Manufacturing

Communications System x x x x x x x - 44 Radio, television and communication apparatus

64

APPENDIX B: Programme Comparison The following table outlines the key differences in the two programmes.

Dynamic NIPP CSDP Supplier Obligation

• Financial and credit based • 30% of the import value of a

deal • Develop an agreed plan

together with DTI and implement within seven years

• OEMs are contracted by

participating SOEs. • SOEs use the tender process to

optimally localise its supply chain.

• Contracts include actions which OEMs need to take to improve selected industry sector National Value Add (NVA)

. Industry Focus

The Industrial Sector Plan focuses on the following sectors: • Agriculture • Cultural industries (crafts) • Export sectors (Clothing and

Textiles; chemicals) • Tourism • Knowledge Intensive Industries

(ICTs ) Primarily – knowledge-intensive, value-adding growth with equity10

• Manufacturing / repair of parts

and assemblies used in capital equipment

• Maintenance skills and specialised testing

• Diagnostic skills

Transnet’s Infrastructure

Supplier investment in unrelated industries, as overseen by DTI

Focused on the localisation of the SOEs’ supply base by agreement, i.e.

- short term – assembly; - long term – OEM part

manufacture / maintenance

- Management

DTI and the OEM Supplier

Transnet & the OEM Supplier

at 200611

10 The DTI, Accelerating Growth and Development; The Contribution of an Integrated Manufacturing Strategy; 2002 11 Note: The development of the CSDP programme and this SDP began before the introduction of the DTI’s “NIPP Direct” programme. As such no comparison was made to this programme.


65

APPENDIX C: Transnet (AS IS – TO BE) The largest challenge Transnet as an organisation 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 senior management. 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.

AS IS TO BE

Fragmented Supply Chain: Our current operations are predominately fragmented and business unit oriented. There is no over arching approach to the delivery of the supply chain function and there is duplication across every activity and geography.

We have created a Supply Management critical path approach that addresses the steps required to achieve an integrated supply chain. Each step on the critical path is defined, the changes required have been identified and the delivery is prioritised.

This will enable us to have better visibility of our consolidated spend, supply base, potential development opportunities and our performance. Better visibility of all spend across the organisation is the key to supplier participation and the development of CSDP deals.

Level of Supplier Management Skills The majority of our staff have minimal formal skills in this area and have had limited ability to apply the skills that they have acquired.

Numerous interventions have been initiated to assist in educating our staff:

• Yearly workshops: the majority of staff is gathered to review current status, strategy, trends and to discuss issues

• Bootcamps: intensive interventions focused around topics that are relevant to targeted staff

• eLearning: on line professional development training program

• Specialised interventions: delivery of specialized training programs (the first will be supplier development) aimed at immediate but professional staff skills upliftment.

The staff will eventually be benchmarked and assessed against global and South African standards.


66

AS IS TO BE

Lack of understanding of regulations – inconsistent application While the processes are governed by extensive policy (Detailed Procurement Policy – DPP), it is not consistently applied. Often, when it is applied it is taken far too literally to be effective.

We have started a process of DPP training across the country. However, we have not followed up with enforcement. We will continue to ensure the business is informed of any changes and proper / expected performance.

The next version of the DPP is due to be released this calendar year.

In addition, we will continually monitor performance against the Control Framework.

Lack of market research As a function we spend far less than 1% of our time analyzing the market.

Upliftment of skills and re-structuring will enable us to improve this capability. In the short term, we will ensure that we use appropriate external skills to assist us in this process.

Little power or understanding of how to interpret and use power The tender process has steered us to conceding to supplier recommendations and the market perception of best price rather than targeted price, quality and service (TCO).

See above

Only through market analysis capability and capacity will we be able to mitigate this concern.

Focus on doing it right rather than doing the right thing We are often more concerned with adherence to the rules rather than ensuring that the best supplier is chosen and the best possible deal is reached. Compliance often is the excuse for lack of change, focus on the transaction and ignorance of the market.

Skills upliftment and proper processes will assist us in changing this mentality.

Professional procurement practitioners will focus on total cost of ownership and making the “best deal”.

Risk averse We are so risk averse that in almost every deal that we make we will take every effort to accept the risk rather than mitigate it appropriately.

Training will change the focus of staff from risk adverse to risk aware. This means, the most appropriate mitigation action will be employed at all times while creating a deal.

Transaction focused We often measure ourselves on the number of transactions completed rather than the accumulated value generated.

Training for key personnel, will enable them to focus on longer term objectives rather than “buying”.


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AS IS TO BE

Poor Time Management Our approval process and planning processes are inefficient. This means that we often take too long for some portions of the process and are often under severe time constraints to deliver a solution. This means we often are not taking the appropriate measures to secure the best deal.

Transnet must continue to focus on simplification and standardization of its processes. This will include determining the appropriate cycle times and minimum deliver standards across the Supply Chain. It will also involve cross-functional workshops to understand the changes needed in the approval process (implementing the OGC gateway) and planning (maintenance / operations improvements).

Adversarial Relationships Transnet often views all suppliers as hostile and “out to rip us off”. This leads buyers to:

• Take a stance of false “power” asking for unreasonable concessions during the tender process (enforced by one sided penalty clauses) and then not following through

• Demand price and delivery cuts without understanding the market

• Playing two or more suppliers against one another to try to drive down costs (rotating awards, etc.)

Often, the suppliers do know more about our operations and will take advantage of our lack of knowledge, fragmented supply chain and capability limitations to secure better deals for themselves.

Skills upliftment is required to improve our relationship with our suppliers.

Transnet must learn more about the supplier market, to form better, less adversarial relationships.

Apathy Many of our staff have spent years in trying to make changes and improvements in their jobs and in the way that Transnet conducts business to no avail. Over time, they have resigned themselves to “the way it is” and they place little effort in doing more that the minimum required.

Transnet needs to invest time and effort in improving the morale of its staff. We have made plans to achieve this through our various interventions and improvement programmes.

When we address these issues, Transnet will be enabled to address supplier issues.


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Supplier (AS IS – TO BE) The following table illustrates the changes that we must spearhead in our supplier base:

AS IS TO BE

Sole Source Suppliers:

A large portion of our supply base has been the sole supply of our capex and opex12 requirements. This has been through:

• Historical purchase leads to further purchases

• Lack of alternate supply

• Single, local source of supply (usually through agencies)

• Gold Plating (artificially making our requirements specific to a single supplier)

• Internal stakeholder personal preferences

As well, brand orientation precludes us from standardization and substitution activities.

Transnet must focus on developing an effective source of supply (optimal total cost of ownership) by:

• Involving multiple suppliers, through market interventions, to ensure that we have an appropriate mix of supply;

• Focusing on resolving service issues or building a reciprocal relationship with those suppliers who have no competition in the market;

• Searching for alternate non-traditional sources if possible (reverse engineering possibilities; new industry solutions, etc), especially if the supplier is non-responsive or considers us a nuisance.

• Improve our internal capability to deliver globally competitive goods and services (Rail Engineering)

• Minimizing the negative affect of unnecessary internal testing cycles for new items.

SMMEs only 35% of GDP:

Currently, the government has not reached any of the targets for SMME (US contribution is over 70% of GDP).

CSDP will not address this issue (enterprise development).

• We must ensure that we segment our spend based on development opportunities appropriately and to insist that those suppliers entering into a CSDP arrangement with Transnet enter into appropriate tier2 and 3 relationships to rectify this issue.

12 Operational Expenditure: this is external purchases for goods and services on a day to day basis


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AS IS TO BE

Lack of global competitiveness in the OEM space:

A large portion of our equipment is provided by suppliers in limited competitive spaces.

Our approach is to negotiate localisation based on CSR principles and the OEM’s balance sheet objectives (which is one of our last “resorts). First, tenders will be evaluated on proposed localisation solutions and then contractual agreements will be reached to achieve these objectives.

We need to build an arena for trust and mutual respect (which is not the case currently)

Foreign dependency / hostage – victim mentality:

While our capex expenditure is large, the foreign import portion that would be applicable to CSDP is confined predominately to capital equipment and specialised service support. Of these tenders, most suppliers will be confined due to standardisation requirements, current long term contracts in place or lack of time to investigate alternate sources of supply.

Our current foreign suppliers are not interested in our purchase volume for spare parts and therefore supply on a sporadic basis (based on other priority customer demand, their cost, time, and cost of distribution). Our demand is inconsistent and fragmented which means we often send low value, large volume orders. This leads the supplier to “park” demand until a sufficient volume is accumulated for shipment.

Transnet needs to focus on relationship development and management with large OEM’s. The more professional the relationship, the more opportunity for reasoned dialogue and dispute resolution.

Improved demand management will improve our lead times. We need to align our demand with the suppliers’ mechanisms for fulfillment.


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AS IS TO BE

Not deal oriented

The tender process creates an attitude of “I win if I am best price” regardless of the market price.

In addition, the tender process, by nature, requires that more than 80% of the solution is defined by Transnet – whether we know the current market or not. This “crowds out supplier innovation”.

Because we follow a “three quote process” we don’t often research what is best overall.

Once we enter into a deal – it’s over. We leave no mechanisms in place to manage or rectify issues.

We must adopt a commitment to change that allows our personnel to adopt the appropriate skills and developing effective deals without losing focus on the basic fundamentals of public procurement.

Our staff will be updated with the Right Attitude / Commitment, then it will be expected of the suppliers. This will be comprised of:

• Mutual respect and benefit

• Mutual Support during good and bad times

• Minimum “red tape” and reduction in difficulty to deliver

• Benchmarking will set the standard for current purchase standards / supplier capability and future improvement

With strategic purchases, we will have a Continuous Improvement focus, where we will look to solve demand and supply side issues.

Not used to strategic sourcing and negotiation :

Our staff are currently being trained on the Transnet strategic sourcing methodology (D-cubed), and more intensive training will occur. All of our key buyers, will be able to conduct sourcing events.

We will need to educate the suppliers on the strategic sourcing process and how the suppliers that do not get the award can use the process as an improvement mechanism rather than a motivation to sue.


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AS IS TO BE

One sided deals

Often, Transnet will unenthusiastically (believe that there is a better deal but take no action to determine what it is) enter into a deal. This is often due to:

• Literal adherence to the rules of three quotes, best price tendering

• Lack of market awareness

• Learned behavior

• Lack of understanding of the power base (their own in relationship to the deal and in relationship to Transnet Management, the supplier’s, the impact of the deal on the supplier’s bottom-line, etc).

• Lack of Proper training

• Lack of time (poor planning)

Often, the supplier will “bully” the buyer into the deal through use of intimidation, superior expertise and knowledge, product availability, and other tactics.

All of the interventions that we have identified so far will help to reduce this tendency, but other requirements such as:

• Learning to build relationships based on sincerity and honesty

• Making more buyers accountable for the quality and the nature of the deals

• Encouraging the introduction of innovation and new technology within Transnet with a focus on TCO reduction and enhanced fit for purpose goods and services

• Encouraging open book pricing with our strategic partners

• Rewarding suppliers (where possible) with the appropriate attitude of cooperation and collaboration.


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APPENDIX D: NIPP Obligations

Transnet related IP Obligations

Transnet Suppliers

with NIPP obligations

Spend Commodity DTI discharge date Value of NIPP Obligation

1 Jan de Nul Dredging 2012 € 9.4800 m R 94.80 m 2 Kalmar 158 Straddle carriers not signed yet € 27.2500 m R 272.50 m 3 Liebherr 14 Cranes 2013 € 24.7600 m R 247.60 m 4 Mitsui (MARS) 110 Locos 2013 $50.4300 m R 353.01 m

5 Venus (Mitsui subsidiary) 32 Locos 2014 $27.7400 m R 194.18 m

6 Van Oord

Berth 306 construction @ Richards Bay 2013 $3.9850 m R 27.90 m

7 Alstom SA 9E Locos discharged R 25.3800 m

TOTAL NIPP OBLIGATIONS OF 7 TRANSNET DEALS: R 1,215.37 m

TRANSNET SUPPLIERS' UNDISCHARGED NIPP OBLIGATIONS R 1,189.99 m

1.1 Jan de Nul

Jan De Nul (Belgium) was awarded a contract (Contract No. NPA 395) for the “Dredging Works for the proposed Port of Ngqura” by the National Ports Authority. The obligation value is €9,48 million. The company has until 2012 to discharge this obligation.

1.2 Kalmar

Kalmar Industries Oy Ab (Finland) was awarded a contract for the supply of 158 (one hundred and fifty eight) straddle carriers as per contract number HQH232C, from 2001 to 2006 by the South African Port Operations (SAPO). The obligation value is €27,25 million. There has been no positive co-operation from Kalmar regarding how this obligation will be discharged and no agreement has been signed yet.

1.3 Liebherr Container Cranes

Liebherr (Ireland) was awarded contract for the supply of 14 (fourteen) ship-to-shore container cranes in terms of the Tender Reference Number HQH 23/05, by South African Port Operations (SAPO). The obligation value is €24,76 million. The company has until 2013 to fulfill this obligation.


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1.4 Mitsui African Railway Solutions (MARS)

MARS (South Africa), a subsidiary of Mitsui of Japan was awarded a contract by Spoornet for the development and supplying of 110 locomotives in terms of the Main Line Locomotives Investment Programme (MLLIP) tender number 102072105. The obligation value is US$50,43 million and this obligation is supposed to be discharged by 2013.

1.5 Venus Railway Solutions

Venus (South Africa), a subsidiary of Mitsui of Japan was awarded a contract by Spoornet for the development and supplying of 32 locomotives in terms of the Main Line Locomotives Investment Programme (MLLIP) tender number 102072105. The obligation value is US$27,73 million and this obligation is supposed to be discharged by 2014.

1.6 Van Oord

Van Oord (The Netherlands) was awarded a contract by National Port Authority for the construction of berth 306 at the Port of Richards Bay in terms of the contract RCB/ENG 00038/3/RBCT 306. The obligation value is US$3,985 million and it is supposed to be discharged by 2013.

1.7 Alstom SA ( South Africa )

Alstom was awarded a contract by Spoornet for the design and construction of the Spoornet’s 9 E locomotive in terms of contract number 200068/S00AT7. The obligation value amounting to ZAR25,38 million has already been discharged.


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APPENDIX E : Guiding Principles followed developing Transnet’s CSDP Approach

Design Requirement Deliverable

Flexible approach

• Stability: Transnet will make every effort to ensure that

they provide the market with a coherent view of our spend and our key focus areas

• Solution oriented: As Transnet changes and matures, they will go to market more often looking for solutions from suppliers to work more closely in developing relationships and the market, not just making purchases

• Relationship: any CSDP opportunity will be contractual and will focus on remedies and continuous improvement.

• Total cost of ownership model: all CSDP opportunities must focus on all impacts to costs: purchase costs, internal costs and life cycle costs. Any CSDP deal will measure how the deal will improve Transnet’s bottom line and the impact to the economy.

Case by case evaluation

• Manage the plan: While Transnet will have, as part of the process to develop and maintain a development plan, pre-determined some of the of potential opportunities, each subsequent proposal must be reviewed on first it’s own merit and then on how it fits into the overall plan.

• Value for effort will drive the decision as to whether to pursue a CSDP opportunity. Not all opportunities will generate NVA directly. Some deals will actually improve quality, reduce cycle times, improve the relationship with foreign OEM suppliers or improve our skill base.

• Contact: Transnet will determine and communicate the method in which suppliers can approach us with unsolicited bids.


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Procedures and policies

• The Plan: the plan is a “living document” which is

constantly validated, updated and changed when required.

• Prioritisation of needs and spend will occur on a yearly basis to ensure that we have sufficient resources to implement.

• Processes: must at a minimum provide the necessary guidelines for identification, evaluation, approval and measuring CSDP opportunities.

• The Detailed Procurement Procedure (DPP) must be updated with the relevant policies to ensure good governance and ensure compliance to the PFMA and other legislation.

• Templates: templates will be developed and distributed to Supplier Development Managers to assist in the creation of - opportunity identification, business case, measurement reports; contracts. This will ensure consistency and ability to compare the merits of each deal.

Deliver in an effective, sustainable manner

• Implementable: each deal must be measurable, add to the economy and provide Transnet with added value

• Over sight: once a deal has been agreed and contracted, a resource must be available to review the progress to the implementation plan.

• KPI’s / measurable: Each deal must be supported by robust measures and supplier / market benchmarks. This will ensure successful impact to Transnet and the market. Benchmarking will ensure that the supplier is involved in improvement processes as well.

• Long-term commitment: to be effective, the deal must be longer than the original purchase contract. This is to ensure that there is an adequate exchange of Intellectual Property (IP), skills and / or expertise.

• Commitment to change: throughout the deal, change must be encouraged for both the supplier and Transnet. Where Transnet is impeding the deal, actions need to be taken to rectify the situation.


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Supplier code of ethics

• Develop a Code: Transnet, in conjunction with other key stakeholders, will attempt to create a Code of Ethics that will help to manage relationships and provide a path for change.

Stakeholder Management

• Involvement: Transnet will ensure that all stakeholders are informed and consulted on a regular basis. We anticipate the following interventions:

- Ongoing discussions with industry associations through contact with Managing directors and public forums as required;

- Bi-monthly discussions with the relevant contacts at the DTI regarding industry sector plans;

- Regular meetings with DTI regarding NIPP obligations (as per supplier requirement); and

- Meetings on Plans, opportunities and supplier benchmarking as planned by the DPE.

• Industry Information: Transnet will participate in any government initiative such Power clusters / component hubs, etc. that focus on improving the performance of an industry sector or sub-sector.


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APPENDIX F: Steps in Transnet’s CSDP Approach

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

The following is a high level overview of the approach: 1) Align spend - identify the opportunities

Once our spend has been analysed for the upcoming year, we would determine if there are any CSDP (and other development opportunities), based on their potential value. We have identified four major types of opportunities (as shown below) that Transnet will focus on in its strategy. On the basis of the value of our spend commitment, one of the four types apply:

• Local Expansion;

• Increased Export Capacity;

• OEM Manufacturing; and

• Optimising NIPP Obligations. For further details, refer to the next section (Determine the Opportunities).

2) Conduct the sourcing event

From a governance and control perspective, we have determined that it will be more appropriate to focus on opportunities that arise through the tender process:

• The process satisfies all of our regulatory and social obligations as a public entity. It ensures that we provide a consistent mechanism for evaluation and award. As such, we will reduce our exposure to litigation and claims of preferential treatment;

• This is the point at which Transnet can exert the most influence in the relationship and can help to ensure that an optimal deal will be reached;

• At this point, we can effectively reach more potential suppliers who may provide more suitable solutions than traditional suppliers;


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Transnet will entertain unsolicited opportunities or joint development initiatives with current suppliers under the following conditions:

• If the opportunity will generate substantial benefits with minimum effort;

• The deal is unique and cannot easily be provided by the supplier’s competitors;

• If the supplier is a long-term or sole supplier and the deal will provide mutual benefit; or

• If a supplier began with a Transnet Enterprise development initiative and is now in the position to expand globally.

A committee of supplier development managers and other senior management will adjudicate any other type of initiative.

3) Categorise and record the opportunity

Once the tenders have been evaluated or the initiative has been approved in principle, the opportunity will be categorised and loaded into the opportunity template. This template will provide the:

• Background of the deal;

• The details of the relationship and investment to be made;

• The expected benefits (both financial and secondary);

• The TCO model for the commodity;

• The risks that need to be mitigated;

• The National Value Add (NVA) and other measures; and

• The signed Memorandum of Understanding (MOU). 4) Approve the opportunity in principle

Once the details of the opportunity have been captured and initial discussions have occurred with the supplier, the opportunity will be reviewed by the supplier development managers and the CPO forum to provide guidance and approval. If required, the opportunity will also be reviewed by the Acquisition Council to agree award, if the CSDP proposal was a determining factor in the award (i.e. technical capabilities, price and BBBEE status were all relatively equal and the supplier was awarded the tender based on their proposal).


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5) Negotiate with the supplier

Once approval has been obtained, negotiations (over and above the contract) will begin with the preferred bidder(s), as approved by the Acquisition Council. These negotiations entail developing:

• The details of the relationship;

• The services / parts to be supplied;

• The investment agreement;

• The future pricing / delivery agreement; and

• Terms and conditions 6) Develop the business case and obtain approval

Once the main details of the deal have been agreed, the business case is created and approval is sought by the appropriate governance body (Transnet is currently looking at the feasibility of using the Investment Committee). The business case is a Transnet standard that is currently used for all capex purchases. The business case is not so much concerned with Return on Investment (ROI) but rather on the overall TCO Model for Transnet. Once a business case is developed, it is circulated to the appropriate business unit Supplier Development Managers and CPOs for final comments. It is then sent for approval. Currently, the primary policy is that Transnet, in principle, will not enter into an equity arrangement with a supplier. However, it may be a requirement that any monies invested will have to generate a return equal to the current Transnet hurdle rate.13 Most deals will not involve the exchange of money either in Transnet holding funds or investing funds on the suppliers’ behalf or Transnet providing funds to the supplier. Value will be placed on all aspects of the transaction, including but not limited to: intellectual property, skills transfer, off shore training, expansion, enterprise development, reduction of price, reduction of lead time, etc.

7) Create and finalise the contract

Once the business case is approved, Transnet will enter into a contractual agreement with the supplier. Most deals should have an life span greater than the initial purchase contract for it to be a truly effective CSDP opportunity.

13 Currently set at approximately 8.5% to 9%


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8) Measure the supplier

The contract will include all of the processes and procedures for relationship management. It will include:

• The mechanism for measurement and the anticipated KPIs;

• The frequency of the measurement;

• The parties involved;

• The required continuous improvement activities; and

• The benchmark activities that will be entered into, the parties involved, and the frequency.


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APPENDIX G: National Competitiveness Balance Sheet : South Africa

Global Competitiveness Index: South Africa: Country/Economy Analysis

Rank (Out of 131 countries/economies)

Score (Out of 7)

Global Competitiveness Index 2007-2008

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4.42 Global Competitiveness Index 2006-2007 (out of 122) 36 4.54 Subindex A: Basic requirements 61 4.45 1st pillar: Institutions 39 4.55 2nd pillar: Infrastructure 43 4.22 3rd pillar: Macroeconomic stability 50 5.08 4th pillar: Health and primary education 117 3.96 Subindex B: Efficiency enhancers 36 4.44 5th pillar: Higher education and training 56 4.12 6th pillar: Goods market efficiency 32 4.73 7th pillar: Labor market efficiency 78 4.16 8th pillar: Financial market sophistication 25 5.19 9th pillar: Technological readiness 46 3.57 10th pillar: Market size 21 4.89 Subindex C: Innovation and sophistication factors 33 4.16 11th pillar: Business sophistication 36 4.61 12th pillar: Innovation 32 3.71

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National competitiveness balance sheet: SOUTH AFRIC A

NOTABLE COMPETITIVE ADVANTAGES Rank/131

1st pillar: Institutions

01.17 Efficacy of corporate boards 4

01.16 Strength of auditing and reporting standards 6

01.18 Protection of minority shareholders’ interests 13

01.09 Efficiency of legal framework 17

01.01 Property rights 22

01.05 Judicial independence 23

01.02 Intellectual property protection 24

01.07 Wastefulness of government spending 27

01.10 Transparency of government policymaking 30

01.15 Ethical behavior of firms 39

01.11 Business costs of terrorism 43

2nd pillar: Infrastructure

02.06 Available seat kilometers (hard data) 21

02.05 Quality of air transport infrastructure 22

02.02 Quality of roads 38

02.03 Quality of railroad infrastructure 41

02.01 Quality of overall infrastructure 43

3rd pillar: Macroeconomic stability

03.04 Interest rate spread (hard data) 43

NOTABLE COMPETITIVE DISADVANTAGES Rank/131

1st pillar: Institutions

01.12 Business costs of crime and violence 126

01.13 Organized crime 112

01.14 Reliability of police services 104

01.08 Burden of government regulation 101

01.06 Favoritism in decisions of government officials 53

01.03 Diversion of public funds 49

01.04 Public trust of politicians 48

2nd pillar: Infrastructure

02.08 Telephone lines (hard data) 87

02.07 Quality of electricity supply 83

02.04 Quality of port infrastructure 48

3rd pillar: Macroeconomic stability

03.02 National savings rate (hard data) 103

03.03 Inflation (hard data) 70

03.05 Government debt (hard data) 49

03.01 Government surplus/deficit (hard data) 48


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4th pillar: Health and primary education

04.11 Education expenditure (hard data) 32

5th pillar: Higher education and training

05.08 Extent of staff training 21

05.05 Quality of management schools 22

05.07 Local availability of specialized research and training services

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6th pillar: Goods market efficiency

06.08 Agricultural policy costs 14

06.03 Effectiveness of anti-monopoly policy 18

06.04 Extent and effect of taxation 26

06.15 Buyer sophistication 33

06.02 Extent of market dominance 36

06.09 Prevalence of trade barriers 38

06.05 Total tax rate (hard data) 39

4th pillar: Health and primary education

04.05 Business impact of HIV/AIDS 129

04.06 HIV prevalence (hard data) 126

04.04 Tuberculosis incidence (hard data) 125

04.03 Business impact of tuberculosis 124

04.08 Life expectancy (hard data) 120

04.01 Business impact of malaria 109

04.07 Infant mortality (hard data) 99

04.09 Quality of primary education 99

04.10 Primary enrollment (hard data) 93

04.02 Malaria incidence (hard data) 86

5th pillar: Higher education and training

05.04 Quality of math and science education 128

05.03 Quality of the educational system 104

05.02 Tertiary enrollment (hard data) 90

05.06 Internet access in schools 86

05.01 Secondary enrollment (hard data) 51

6th pillar: Goods market efficiency

06.12 Business impact of rules on FDI 79

06.07 Time required to start a business (hard data) 70

06.13 Burden of customs procedures 68

06.10 Trade-weighted tariff rate (hard data) 65

06.14 Degree of customer orientation 64


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7th pillar: Labor market efficiency

07.03 Non-wage labor costs (hard data) 11

07.08 Reliance on professional management 15

07.06 Firing costs (hard data) 38

8th pillar: Financial market sophistication

08.02 Financing through local equity market 4

08.08 Regulation of securities exchanges 5

08.06 Strength of investor protection (hard data) 9

08.01 Financial market sophistication 15

08.07 Soundness of banks 16

08.04 Venture capital availability 41

9th pillar: Technological readiness

09.04 FDI and technology transfer 24

09.02 Firm-level technology absorption 30

09.03 Laws relating to ICT 32

09.01 Availability of latest technologies 40

06.11 Prevalence of foreign ownership 56

06.06 Number of procedures required to start a business (hard data)

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06.01 Intensity of local competition 52

7th pillar: Labor market efficiency

07.05 Hiring and firing practices 129

07.02 Flexibility of wage determination 121

07.01 Cooperation in labor-employer relations 120

07.10 Female participation in labor force (hard data) 102

07.07 Pay and productivity 92

07.04 Rigidity of employment (hard data) 70

07.09 Brain drain 69

8th pillar: Financial market sophistication

08.05 Restriction on capital flows 111

08.09 Legal rights index (hard data) 47

08.03 Ease of access to loans 44

9th pillar: Technological readiness

09.08 Broadband Internet subscribers (hard data) 74


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10th pillar: Market size

10.01 Domestic market size index (hard data) 19

10.02 Foreign market size index (hard data) 28

11th pillar: Business sophistication

11.08 Extent of marketing 17

11.01 Local supplier quantity 26

11.02 Local supplier quality 29

11.09 Willingness to delegate authority 30

11.06 Control of international distribution 32

12th pillar: Innovation

12.04 University-industry research collaboration 24

12.03 Company spending on R&D 26

12.02 Quality of scientific research institutions 27

12.07 Utility patents (hard data) 39

12.01 Capacity for innovation 43

09.06 Internet users (hard data) 73

09.07 Personal computers (hard data) 62

09.05 Mobile telephone subscribers (hard data) 47

11th pillar: Business sophistication

11.05 Value chain breadth 79

11.04 Nature of competitive advantage 70

11.07 Production process sophistication 47

11.03 State of cluster development 45

12th pillar: Innovation

12.06 Availability of scientists and engineers 104

12.05 Government procurement of advanced technology products

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APPENDIX H: The Competitiveness Roadmap 2007 to 20 50

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APPENDIX I: Frequently Asked Questions The following, is a list of questions and comments forwarded to Transnet from our key stakeholders. Transnet responses are herewith included. Engaging First Tier Suppliers Comment 1 - Local OEMs will not be considered: Transnet will be upgrading and increasing its locomotive and port handling equipment over the next 5 – 10 years. These categories of capital equipment are only available from established Original Equipment Manufacturers (OEMs). Transnet will utilise a combination of open tenders and confined purchases to engage the market. Any South African OEM has the right to participate in an open tender and is evaluated in the same way as all of the other respondents. As previously stated at the forum, all evaluation is based on the Total Cost of Ownership which means that advantages like a local supply chain, BBBEE status, reduced freight costs, etc are considered. Comment 2 – Negotiation time is too late to involve 2nd and 3rd Tier Suppliers: Transnet’s approach is to localise the supply chain, not to determine the local partners that the OEMs may choose. The alignment of the OEM and local suppliers is determined after the contract is signed and will be based on several factors such as benchmarking, Restricted Lists, etc. Identifying, Benchmarking and Engaging Second and T hird Tier Suppliers Comment 3 – Engaging 2nd and 3rd tier suppliers: Once OEM suppliers are awarded the business, they will have a time limit to enter into an agreement on how they will meet their CSDP obligations. This will include discussing the mechanism by which they will engage the market and also to provide advice on the market capabilities. Comment 4 – How can 2nd and 3rd Tier Suppliers respond without sufficient notice: Since Transnet does not always know which supplier will be awarded the business, it will be impossible to notify the market of the contact people or the extent to which the deal will be localised or what will be the agreed deliverables. Comment 5 – There should be a database of suppliers: The intended supplier benchmarking programme will assist in developing the database and the continuous improvement plans for suppliers. The DPE will determine the management of the process long-term and the costing model. Comment 6 – Communication: A comprehensive communication programme needs to be developed to ensure that the local supply base (especially outside of the current participating industries and stakeholders) is informed of the CSDP and know the steps required to participate. Currently, Transnet is insuring that all tenders include reference to the programme and that key stakeholders are being informed of the programme. A full blown approach will be developed once the SDP has been accepted by the DPE. Comment 7 – Need to understand capacity and capability: The ability to set up regular communication with industry associations is a very valuable off-shoot of the CSDP. Transnet intends to engage with the associations to update market intelligence and to ensure that local suppliers are engaged and that we are aware of the capacity and capability of the market. Comment 8 – Signaling: Transnet will make every endeavor to inform the market of upcoming expenditure, however, the information will be as accurate as is possible without compromising our tender process (providing sensitive information that will impact the price).


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Price Premiums Comment 9 – Not acceptable to not pay premiums to local or BBBEE suppliers: Transnet is of the opinion that if a supplier requires the payment of a premium, then they are not competitive and may not be able to provide the service / goods required. However, this does not in anyway preclude us from understanding that in the right circumstance that both the supplier and Transnet may benefit from enterprise development. In addition to the CSDP, we will be developing our overall Supplier Management Framework which will assist us in determining our developmental focus. Type of Initiatives Comment 10 – There must be a focus on skills transfer as well: Transnet has indicated through the diagram below, that there are numerous opportunities with a supplier, including skills transfer. In fact, in our current national situation, skills transfer is essential. Whether that will lead to exporting the skills is not a focus for Transnet in the short to medium term.


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Transnet Procurement Policies Comment 11 – Targets for localisation must be established: Transnet has not identified pre-establish targets as this may diminish the suppliers’ innovative responses. Rather, Transnet will set effective evaluation criteria and rigid process controls. Comment 12 – Transnet procurement rules make engagement and communication difficult: Transnet is above all a public entity and while not bound by National Treasury rules, we must be cognisant of the constitutional imperative that guides our policy decisions. Or process must be fair, open, transparent, add value for money, and competitive. We therefore have fairly restrictive supplier relationship rules but must ensure that we are able to adapt to the market and changes in supply. Comment 13 – Capacity and Capability Building: Transnet realises that to achieve the expectations of the CSDP, our staff must have the ability to deliver. We have engaged in very aggressive programmes to uplift our skill set and capacity of our staff. Comment 14 – Communication with Suppliers: Our policy prohibits communication with suppliers prior to the release of a tender. This is to ensure transparent and fair relationships. This also poses a problem when it comes to gathering sufficient data about what the market has to offer. Transnet will be taking steps to ensure that we get the optimum information from the market prior to purchases. Intergovernmental Support Comment 15 – The Government agencies must come to the table to support the programme: There are many interventions and coordination programmes required by government to make this programme and its intended results come to fruition. There must be a coordinated effort to bring together the competencies and reach of each agency to ensure success. This will be a dialogue that needs to be led by the DPE. Conclusion

For the CSDP to be successful, communication and governmental support will be pivotal. Transnet is absolutely intent on participating with the DPE, DTI, and others to ensure that the correct interventions are used to engage the right suppliers to generate the most effective results.