According to the Singapore Business Federation, Singapore’s economic growth averaged 7.5 per cent per year in the past 50 years. In a paper published by Singapore Business Federation, small and medium-sized enterprises (SMEs) can further deliver Singapore economic success. Qualitative studies have shown that enterprises shall leverage strategic inflows and outflows source of knowledge to accelerate internal innovation, and markets expansion by a focus on core business competencies. The purpose of our paper suggests strategic sourcing strategy coupled with technology can help SMEs to focus on core business activities and leapfrog productivity tremendously.
In Singapore, SMEs are defined as enterprises with an annual sales turnover of under S$100m, or that employs less than 200 workers. SMEs form a significant portion of Singapore’s economy, about 99 per cent of all businesses, employing nearly seven out of ten employees.
The level of SME’s productivity is lagging behind the non-SMEs. Data from the Department of Statistics further show that labour productivity of SMEs is half of non-SMEs. While it is understandable that SMEs have limited market reach and human resources when compared to non-SME enterprises, the low labour productivity rates do not bode well in globalisation.
SMEs from other economies face similar challenges in manpower cost, as shown from a survey conducted by The Gallup Organization on over 16 thousand SMEs in Europe. The survey said the burden of administering regulatory and compliance tasks as exceptionally high for SMEs, up to 10 per cent of the overall working hours, and this time burden drops progressively as the size of the company increases. We should heed the conclusion that smaller SMEs are more adversely impacted by their lack of economies of scale, e.g. Singapore SMEs.
SMEs and Sourcing Model
Besides the burden of administrative tasks, it is a known fact that large companies and organisations leverage their size and scale to buy commodities and services from the supply markets at rates which are advantageous to them, and often at below market levels.
These organisations pull their demand together, tender their demand in the open market, and entice their suppliers to trade with them on preferential rates. The professional buyers employed by these organisations are experts in the supply markets and the execution of sourcing strategies. Leveraging economical of scale, the larger organisations gain much benefits in financial and non-financial terms, e.g. security of supplies.
From the SME statistics (Table 1), the majority of SMEs are ‘micro-SMEs’, defined as registered businesses with an annual turnover of less than $1m. MicroSMEs include businesses that are in their start-up or challenging phase. These microSMEs can consider below sourcing model to consolidate the economies of scale and return higher benefits and productivity to their businesses.
Shared Sourcing Model
What if a group of SMEs formed to address the lack of economies of scale? Through the group, the participating SMEs pool their demand. Pooling their demand and resources is existing mechanism in MNC’s procurement departments to obtain competitive rates from the open market. The sourcing approach for SMEs can be a light and temporary arrangement for leveraging on their economies of scale.
Once the buying specifications are agreed, the approach takes into account the standardisation of the market practices for goods or services. By pooling the demand of many together, suppliers treat the tender as a single mega tender, i.e. thus saving sales costs, as compared to many micro tenders.
Public procurement plays a crucial part in unlocking SMEs potential. In an article from World Bank Blogs, May 2016 on Government procurement – a path to SME growth?, it quotes the US Federal Government allocating 23 per cent of all federal contracts to American SMEs.
In a report published by OECD on ongoing public procurement reform agenda on Jan 21, 2015, China is highlighted has been conscious of the impact of public procurement on SMEs since the beginning of its government procurement reform. The Interim Measure 2011 on Facilitating the Development of SMEs in Government Procurement, adopted jointly by China Ministry of Finance and Ministry of Industry and Information Technology, shows that 30 per cent of government procurement budget shall be set aside to purchase goods and services from SMEs, and granted a price preference in a range of 6-10 per cent with exact margin to be determined by relevant procurement entity or its agent. MNC companies are encouraged to use local SMEs as subcontractors and form consortia with SMEs for mutual co-creation of innovation. What if the public sector works work together with SMEs for shared model? The leapfrog in productivity for Singapore is tremendously with joint sourcing and finance account payable system.
Private and Public users can consider aggregate purchase volume to shared provider for market tender. Shared providers manage external purchases are independent parties who are not in competition with any of the participants, equal to business where clients place their trust on our bankers in property purchases and Taobao for better pricing. This model has proven successful, and it is a matter of time for private and public users to accept and adopt the practices.
About the Author
Michael Koh is the Head of Strategic Sourcing Technology, Asia Pacific, Dimension Data. As a member of the NTT Group, we accelerate our clients’ ambitions through digital infrastructure, hybrid cloud, workspaces for tomorrow, and cyber-security. Prior to his role, Michael served as the Head of Procurement, Asia Pacific at Dimension Data, T-Systems, Germany’s ICT, A Deutsche Telekom Group Company and Schneider Electric ITB. Michael started his procurement career with Hewlett Packard, held quality management and supply chain roles with Motorola and Dell.