By Gean Botha
In the aftermath of the national Covid-19 lockdown in 2020, businesses were hungry for economic recovery. However, South Africa’s fourth industry – manufacturing – is struggling to get back on its feet. While industry statistics over the past year indicate improvement since May 2020, monthly growth over the past six months has only shown two positive increases (0.7% in December 2020 and 3, 2% in March 2021).
The manufacturing sector suffered many setbacks during this period, such as the recent looting in KwaZulu-Natal and Gauteng. Rebuilding this industry will be difficult. This is where Business Process Outsourcing (BPO) can make a difference, providing the flexibility and agility businesses need to drive industry growth and stability.
The importance of manufacturing
South Africa’s manufacturing industry contributes 14 percent of gross domestic product (GDP), with the food and beverage division accounting for 25 percent of total manufacturing activity. Like most other industries, manufacturing has been severely affected by the Covid-19 restrictions, which have had a ripple effect on all related industries such as distribution, logistics, transportation and warehousing, everything severely hampering import and export activities.
Reviving the manufacturing industry is a crucial step in securing South Africa’s economic recovery, as increased manufacturing capacity can reduce our dependence on imported products. The more we can manufacture and consume locally, the better for our own economy. Additionally, the skill level required makes it the ideal industry for increasing youth employment, another major challenge in South Africa where 46.3 percent of people aged 15-34 are unemployed.
Although currently underdeveloped, the manufacturing industry (in particular the agro-food and agro-industrial sector) has exceptional growth potential. This will strengthen our economy and attract foreign investment. How can companies in this industry accelerate their recovery and the development of their manufacturing capacity?
By capitalizing on the benefits offered by BPO, manufacturing companies can outsource their non-core functions to reduce costs, while gaining flexibility and increasing production through increased productivity. For example, outsourcing product distribution will allow manufacturing plants to focus on their core function, while productivity will be improved by having more “hands on deck” to fulfill orders efficiently.
South Africa’s unique challenges
Although we have always been at the forefront of manufacturing in terms of craftsmanship, skill and ingenuity, the manufacturing industry is hampered by high labor costs, strong unions, uncertain working conditions and red tape. Compared to other countries, the cost of permanent employment of workers is too high which is why some companies choose to divest from South Africa or not to invest with us at all. This high labor cost means that it becomes cheaper for South African companies to import certain goods than to produce locally. There is a direct correlation between high wages, output and bottom line.
Employed permanently, labor is a fixed cost. If there is a labor disruption, the production of the business decreases, which affects the ability to manage the costs of the business, such as wages. The South African steel industry is in distress as the cost of labor here makes it cheaper to import steel from China, prompting the industry to seek government intervention in the form an import tax.
Overcome risk through outsourcing
Meeting the challenges and risks of working in the manufacturing industry is a huge stress for companies. Using BPO is a strategic decision that shifts the workforce risk from the manufacturing company to a trusted outsourcing partner. It means looking at the actual processes of manufacturing and distributing products and identifying BPO opportunities.
In this industry, variability is the key to survival, whether as a start-up or for a company looking to become more agile in the manufacturing space. Shifting from previously fixed labor cost to variable cost (based on output) is an effective way to increase operational efficiency with predictable costs, leaving only rental and equipment as the main fixed costs of the business. Not only does this change the cost of labor, but it also eliminates labor risks and compliance issues for the business itself.
By outsourcing non-core components of the manufacturing value chain, companies can provide the necessary capacity and resources to focus on product innovation and service growth to develop international competitiveness. Here, a trusted outsourced supplier partners with industry companies to become a key enabler.
By providing variability based on mutual trust and collaboration, the BPO partner proactively increases efficiency by identifying challenges in manufacturing processes and rapidly developing solutions. Outsourcing solutions will align with the strategic imperatives of unleashing the agility and flexibility needed to respond quickly to changing market demands.
Gean Botha is the Managing Director of Programmed Process Outsourcing.
* The opinions expressed here are not necessarily those of the IOL or the title site.