Increasing SME Participation in Supply Chains
Small and Medium Enterprises (SMEs) play a vital role in driving the UK's economic growth. While large companies tend to take the lion's share of private and public sector contracts, many client organisations are now looking to increase SME participation in their supply chains. In this article, we take a look at the ‘Why’ and ‘How’ to promote the involvement of SMEs in supply chain networks.
UK SMEs
The UK government classifies an organization as an SME if it has less than 250 employees, an annual turnover of less than €50 million, or a balance sheet total of less than €43 million [1]. In 2021, the more than 5.6 million organisations that fit the description accounted for approximately 50% of private sector turnover in the UK. A key contributor to this economic activity is construction, accounting for 16% of all SME businesses, the most of any sector [2].
Since 2010, the UK government has stepped up its efforts to encourage public bodies to award more work to SMEs. To encourage the involvement of small businesses in public sector development, the UK government has set a target that £1 in every £3 of its procurement spend should go to SMEs by the end of 2022 [3].
Source: Gov.uk [3]
Benefits of SMEs in the Supply Chain
Generators of wealth and jobs, especially in regional areas, SMEs accounted for approximately 60% of UK employment (~ 16 million jobs) in the private sector at the start of 2021 [2]. Beyond just socio-economic factors, SMEs can add unique value to customers when delivering contracts. This can be achieved in several ways, as outlined below:
Bespoke Service
The flatter hierarchies and reduced bureaucracy typically found in SMEs compared to larger organisations can enable better responsiveness to client needs. A highly bespoke service offered by the best small businesses will maximise direct communications with decision-makers and client operations or delivery teams.
Cost Competitiveness
Price-based competition often reigns amongst small businesses and can therefore drive SMEs to bid more competitive rates, enabled by lower overheads compared to larger firms. Increased involvement of SMEs in supply chains can potentially reduce costs for clients, particularly as client organisations hold more leverage over small businesses in negotiations to help control budget inflation on large infrastructure projects.
Innovation
SMEs are generally niche players, possessing subject matter expertise in their sector. Disruptive innovation theory holds that smaller companies achieve success by targeting markets that large players overlook. Thus crucial insights can be uncovered through collaboration with SMEs to guide strategic choices, particularly when new technologies arise.
Social Value
Challenger firms that target overlooked segments gain a foothold by delivering more suitable services and functions to their customers - frequently at a lower price. This understanding of local customers in their areas of operation can support client organisations in advancing social and environmental goals.
How to Maximise SME Participation?
In the procurement process, buyers (private or public sector) typically act as governors of the chain by setting the conditions of participation. Therefore, clients should seek to understand the barriers SMEs often encounter in accessing supply chains. To maximise SME participation in supply chains, client organisations can consider the following actions:
Transparency and Accessibility of Opportunities
Public and private sector organisations must seek to improve the visibility and transparency of opportunities. A starting point to address is the ease of registration on procurement platforms for smaller businesses. Building new relationships through strategic supplier engagement before the start of a procurement process is similarly important. By utilising events such as SME network forums, competition in bidding can be significantly increased.
Collaborative approach
As part of the sourcing strategy, adopting a collaborative approach can help clients to bring small businesses into the fold by understanding their needs. By actively leading an open dialogue with SMEs in early market engagement exercises, client organisations can capture feedback on project scope, proposed commercial agreement structure, and the associated timescales to deliver contracts.
Re-evaluate the early stages of tendering and procurement
Client organisations should review their pre-qualification questionnaire phase to see if there are any stringent requirements and evaluation criteria that can put SMEs at an early disadvantage. Based on the nature of projects, the client should review the necessity of having a complex PQQ stage which could deter SME participation given the significant time and resource investment required.
Increased visibility on commercial pipeline
The stability of future cash flows is vital for small and medium operators. It is important to provide forward visibility of future contracts to enable SMEs to forecast workloads and financial targets. Confidence in future business opportunities can help small players invest in talent retention and growth.
Track SME spend
Clients can monitor and report SME spend in their supply chain on project contracts regularly. By capturing analytics on SME participation, clients can make data-driven decisions to drive actions that support small businesses in their supply chain.
At Deecon, we believe that private and public sector organisations can benefit tremendously from the increased participation of SMEs in their procurement exercises to create a more competitive, diverse and agile supply chain.
Get in touch to find out how Deecon can help you gain greater insights into your supply chain and identify key areas of improvement in your procurement and sourcing strategies.