By Gean Botha, MD at Programmed Process Outsourcing (PPO)
In the aftermath of 2020’s national Covid-19 lockdown, businesses were eager for economic recovery. However, South Africa’s fourth largest industry - manufacturing - is struggling to get back on its feet. While industry stats over the past year indicate an improvement since May 2020, month-on-month growth in the last six months has shown only two positive upticks (0,7% in December 2020 and 3,2% in March 2021). The manufacturing sector has suffered many setbacks during this time such as the recent looting in KwaZulu-Natal and Gauteng. Rebuilding this industry will be challenging. This is where Business Process Outsourcing (BPO) can make a difference, providing the flexibility and agility that businesses need to foster growth and industry stability.
The importance of manufacturing
South Africa’s manufacturing industry contributes 14% to gross domestic product (GDP) with the food and beverages division accounting for 25% of total manufacturing activity. Like most other industries, manufacturing has been severely impacted by Covid-19 restrictions, which has had a knock-on effect through all related industries such as distribution, logistics, transportation and warehousing, while also severely hampering import and export activities. Reviving the manufacturing industry is a critical step toward securing South Africa’s economic recovery, as an increased manufacturing capacity can reduce our reliance on imported goods. The more we can manufacture and consume locally, the better for our own economy. Additionally, the level of skills required make this the ideal industry for increased youth employment, another major challenge in South Africa where 46,3% of people aged 15 – 34 years are without jobs.
Potential for growth
While currently underdeveloped, the manufacturing industry (particularly the food and agri-manufacturing sector) has exceptional potential for growth. This will strengthen our economy and attract foreign investment. How can businesses in this industry fast track their recovery and the development of their manufacturing capacity? By capitalising on the benefits offered by BPO, manufacturing enterprises can externalise their non-core functions in order to reduce costs, while gaining flexibility and increasing output through enhanced productivity. For example, outsourcing the distribution of products will enable manufacturing plants to focus on their core function, while productivity will be enhanced by having more ‘hands on deck’ to get orders fulfilled efficiently.
South Africa’s unique challenges
Although we’ve always been at the forefront of manufacturing in terms of know-how, skills and ingenuity, the manufacturing industry is hindered by high labour costs, strong unions, uncertain labour conditions and red tape. Compared to other countries, the cost of permanently employing workers is too high, which is why certain companies choose to disinvest from South Africa or not to invest with us at all. This high wage cost means that it becomes cheaper for South African businesses to import certain goods than it is to produce locally. There is a direct correlation between high wages, output and the bottom line. Employed permanently, labour is a fixed cost. If there is a labour disruption, the business output is decreased which affects the ability to manage business costs, such as wages. The South African steel industry is currently in distress as the cost of labour here makes it cheaper to import steel from China, which prompted the industry to request government intervention in the form of an import tax.
Overcoming risk through externalisation
Addressing labour challenges and risks in the manufacturing industry is a huge stress for enterprises. Utilising BPO is a strategic move that shifts the labour risk from the manufacturing business to a trusted outsourcing partner. This means looking at the actual processes in the manufacturing and distribution of the products and identifying opportunities for BPO. In this industry, variability is key to survival, either as a startup, or for an enterprise seeking to become more agile in the manufacturing space. Shifting the previously fixed cost of labour to a variable cost (one that’s based on output) is a solid way to increase operational efficiency with predictable costs, which leaves only rental and equipment as the major fixed business costs. Not only does this shift the cost of labour, it also removes labour-related risks and compliance issues from the business itself.
By outsourcing non-core components of the manufacturing value chain, businesses can make available the capacity and resources to focus on product innovation and service growth to develop international competitiveness. Here, a trusted outsourced provider partners with businesses in the industry to become a key enabler. By providing variability that is based on mutual trust and collaboration, the BPO partner proactively increases efficiencies by identifying challenges in manufacturing processes and rapidly developing solutions. The outsourcing solutions will align with strategic imperatives of unlocking the agility and flexibility to respond rapidly to changing market demands.