Max Smeiman and Garth Strachan make the case for a rethink of how domestic technical value chains are designed, built and run and how industrial policy is designed and implemented

The Covid-19 pandemic has heaped more pain on South Africa’s industrial manufacturing base, which had already shown signs of deep-seated stress. Low levels of capital investment and innovation and technology adoption, high cost structures driven mainly by massive increases in administered prices and declining domestic demand – steadily eroded by import penetration – have placed key domestic manufacturing sectors in an increasingly perilous situation. Industrial policy interventions in general and specifically those designed to optimise localisation have generated limited outcomes, bedevilled by corruption in State-owned enterprises; the unintended consequences of black economic-empowerment policy (which favours imports) and the failure of the private sector to recognise and support domestic strategic sourcing and supplier development in key industrial value chains.

Clearly, fresh approaches are urgently required to slow and reverse the prevailing trend – approaches which can focus on what pragmatic interventions are available to support globally competitive domestic firms, capable of providing South Africa’s mines and large agricultural and industrial companies with a competitive cost advantage at the global frontier of innovation, quality, delivery and price. In our view, this requires a rethink of how domestic technical value chains (TVC’s) are designed, built and run and how industrial policy is designed and implemented to unlock and stimulate innovation and competitive behaviour.

This article, the first of a series of five under the theme Industrialisation 4.0, seeks to illustrate one pragmatic intervention, which is a necessary requirement if some form of industrial recovery is to be achieved.

Mining Industrialisation Study

A 2018 Mining Industrialisation Study commissioned by the then Department of Trade and Industry highlighted numerous inefficiencies within the domestic TVC. These range from the nonadoption of core standards, inadequate business process alignment, planning and visibility of demand and substandard adoption of enterprise systems and technologies. These inefficiencies explain, for example, the high prevalence of ‘free-text and emergency’ procurement, indicative of a reactive value chain with limited collaboration among buyers, sellers and engineering users. One conclusion of the study was that the resultant waste was an estimated R15-billion a year within the gold and platinum industry alone.

A competitive technical industrial sector requires the adoption of globally accepted value chain processes, technologies and standards. The study highlighted core value chain best practices successfully adopted in the consumer-packaged goods and retail (CPG&R) industry, with significant efficiency gains and cost reductions – practices glaringly absent from the TVC. A paradoxical disregard for this basic advantage of the digital revolution simply perpetuates domestic value chain inefficiency and substantially diminishes the ability of local companies to compete in global value chains.

TVC Digitalisation

Since the late 1990s, enterprise resource planning implementation has been financial management centric, with limited adoption of advanced value chain optimisation and transaction integration beyond the factory gate. Digitalisation in South Africa is generally limited to the creation of PDF purchase orders delivered by means of unsecured email.

With limited adoption of commercial messaging standards, collaborative planning and forecasting and replenishment processes, domestic industrial firms have limited visibility of what their largest industrial customers will buy. Even within the local CPG&R industry, most electronic data interchange (EDI) transactions focus on purchase order and price management, with limited exchange of logistics, demand planning and manufacturing or inventory data.

If the status quo is to be reversed, the following standards, processes and proven value chain methodologies are a prerequisite for building TVC maturity:

Item identification requires the adoption of uniform categorisation standards: the World Trade Organisation UNSPSC or the Global Trade Item Number (GTIN) or the GS1 barcode. For technical materials, the adoption of identification standards from the Open Technical Dictionary, which is integral to ISO 8000 for Data Quality and Enterprise Master Data, is critical.

• Business process alignment requires the adoption of a common value chain language beyond the factory gate. The Efficient Consumer Response platform was adopted by the CPG&R industry, with significant benefits in the early 1990s. This was followed by the Supply Chain Operations Reference Model (SCOR from APICS), Collaborative Planning, Forecasting and Replenishment (CPFR from VICS GS1), and the American Productivity and Quality Centre (APQC) business models.

• Systems engineering platforms, such as Incose, are critical for capital-intensive technical industries to optimise the life-cycle cost of plant and equipment processes. This platform, widely used in aerospace and defence, has limited adoption in South Africa.

• Commercial messaging covers all commercial and technical communication between the systems of value chain partners using a mark-up language like XML. Electronic Data Interchange (EDI used by the CPGR&R industry) and RosettaNet Business to Manufacturing Mark-up Language (B2MML as part of IEC/ISA-95 or IEC/ISO 62264).

Unless these standards and practices are adopted, South African companies will most likely become increasingly isolated from global value chains and remain entirely reliant on local demand, at a premium that cannot be sustained by marginal procuring entities. Adoption will be impossible without cross-industry collaboration and consensus. In the absence of this, the much-vaunted benefits and real threats of the Fourth Industrial Revolution will be consigned to the hype that characterises much of the commentary on this subject in South Africa today.

Public-Sector Digitalisation

The Mining Charter requires mining rights holders to transform their procurement to local suppliers with stringent statutory reporting obligations. Mining companies spend significant effort in compliance reporting, but, owing to the nature of unverified third-party data and ‘after the fact’ reporting, the true value of this data and government’s ability to coherently influence this important segment of industrial policy is greatly diminished.

The digital integration of government’s own systems; the Companies and Intellectual Property Commission, South African National Accreditation System, South African Revenue Service and South African Bureau of Standards digital platforms can significantly enhance compliance at buy-time and support the intended outcomes of these policies without the onerous regulatory burden that characterises the existing regulations.

Urgent collaborative consideration must be given to the digitalisation of South Africa’s TVCs. The existing transaction-based transformation and localisation mindset and policies have yielded suboptimal outcomes, especially in sectors where South Africa should have a global comparative advantage, such as in mining. Ideally, the existing approach should be replaced with collaborative policy interventions that enable performance-based transformation and localisation.

Without the adoption of a digital platform, other important industrial policy interventions – financing, trade measures, preferential procurement and so forth – will run the risk of ongoing limited impact. Government and industry need to agree on and implement the important fundamental steps required to develop a globally competitive technical industry, to secure the objectives set out in the National Development Plan.