systematization of support in policy making on the development of local suppliers among large...

8/6/2019 Systematization of support in policy making on the development of local suppliers among large purchases

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P D P C i a l a r c l

lrl..:c:: :!1ONDOEMPlEO ~IFC;.iV\

LruANDESDE CAJAMAR..CA

CorporacionFinancieraInternacionalG"pOd6",CUMood>I

swisscontact C i m d e ~ y P r o d l l : C i O O d eCA J AMARCA


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P IP r o je c t C o m p e t i t i v e D e v e lo p m e n t o f

L o c a l S u p p lie rs in C o jo m o r c o

" S y s t e m a t iz a t io n o f s u p p o r t inp o l i c y m a k in g o n t h ed e v e lo p m e n t o f lo c a l s u p p lie r s

a m o n g la r g e p u r c h a s e s "

C o jo m o r c o , O c to b e r 2 0 0 7


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IndexPROLOGUE... 5ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9INTRODUCTION....... 11METHODOLOGY FOR SUPPORTING THE FORMULATION OFSUPPLIER DEVELOPMENT PLANS AND POLICIES . . . . . . . 131.1. DISCOVERY......................................... 15

THE PRESENTATION MEETING. . 16PATIENCEAND PERSEVERANCE INCONSOLIDATING COMMITMENT BYLARGE PURCHASES. 19LETTERS OF INTENT . 20AGREEMENTS BETWEEN INSTITUTIONS, BEYOND THE LETTERSOFINTENT 23DISCOVERY. 24

1.2. FROM DISCOVERY TO DREAM. . . . . . . . . . . . . . . . . . . . . . . . . . 271.3. DESIGN............................................ 311.4. DESTINATION....................................... 34POLICY DOCUMENTS, DISSEMINATION AND FOLLOW-UP. . . . . . . . 412.1. TYPES AND CONTENTS OF POLICY DOCUMENTS. . . . . . . . . . 41

LETTEROF INTENT . 41POLICY GUIDELINE. 43

2.2. DISSEMINATION OFTHE POLICY. . . . . . .. . . . . . .. . . . . . .. . . 45INTERNAL MECHANISMS . 45EXTERNAL MECHANISMS. 46

2.3. FOLLOW-UPOFTHE POLlCY...... 49


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SUBJECTS RELEVANT TO LARGE PURCHASES IN THE FORMULATIONAND IMPLEMENTATION OF SUPPLIER DEVELOPMENT POLICIES. . 533.1. SUSTAINABLE COSTS OF SUPERVISION 533.2. BALANCE BETWEEN SUPERVISION AND NEW MARKETS. . . . 543.3. MINIMUM WORKING CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . 553.4. IDENTIFICATION OF THE STARTING POINT FOR LOCAL

SUPPLIERS. . .. . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . . .. . . 573.5. THE INPUT-OUTPUT MATRIX. . . . . . . . . . . . . . . . . . . . . . . . . . . 58IMPACT OF THE POLICIES ON LOCAL SUPPLIERS. . . . . . . . . . . . . . . 614.1. ANNUAL SURVEY OF COMPANY PERFORMANCE. . . . . . . . . . 62

IMPACTON NETSALES . 63IMPACTONTOTALASSETS. 65IMPACTONCOMPANIES'NETEQUITY. 67IMPACTON EMPLOYMENT. 68

4.2 CONCLUSIONS FROM THE SUPPLIERS FOCUS GROUP. . . . . 69LESSONS LEARNED DURING THE WORK WITH LARGE PURCHASES. . . . 71BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77WEBSITES CONSULTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81


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Prologuer.. reater investment and increased exports are producing a growth in~ local demand for goods and services in different regions of Peru; this

demand may be met by qualifying and extending competitive localsupply in a sustainable manner."Systematization of support in policy making on the development of localsuppliers among large purchases" is a document prepared by the "CompetitiveDevelopment of Local Suppliers in Cajamarca" project, a pioneering initiativebegun in 2002. It is a joint effort by different institutions financed byFONDOEMPLEO, the International Finance Corporation and Asociacion LosAndes de Cajamarca, with the Commerce and Production Chamber ofCajamarca as strategic partner; it is being implemented by Swisscontact -Recursos SAC.Mining is driving the development of the Peruvian economy and is one of theindustries responsible for the 7% growth in Peru's GDP in 2006 and in the lastdecade. It is estimated that 11 of the world's 20 largest mining companies areworking in Peru, which is possibly the country with the greatest mining potential,comparable only to Russia'. 21,900 million dollars was invested in the sectorbetween 1992 and 2006. 90% of this investment is decentralized away fromLima and a large proportion was invested in the Peruvian hiqhlands". In 2006mining companies paid 45% of Peruvian government income tax revenue.However, there are also other sectors, smaller than the mining sector, whosegrowth has been important to the country's regions. For example there is theagricultural exporting sector, which in 2006 was responsible for exports valuedat around US$ 1800 million, mostly concentrated in regions such as Ica, LaLibertad and Arequipa. Although this was only 7.5% of Peru's total exports, it

1 Pedro Alcantara. executive secretary of the Argentine Mining Geology Service at Proexplo 2007. talking tothe BBC in London. Quoted by Mundo Minero. September 2007.2 Isaac Cruz. President of the National Mining Society. 2007.


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was an increase of 25% compared with the previous year and 177% comparedwith 2000.Furthermore, many regions of the country have large companies which, thoughnot necessarily part of a nationally important sector, are highly competitive andsignificant in their local areas because of the trade they generate or couldgenerate. Sectors such as brewing, dairy produce and certain items of thetextile business are some of these.As we know, the widening and sustainability of the domestic market through thedevelopment of local suppliers requires an approach that concentrates onintermediate multi-sector consumption. For example, in the input-output chartof Peru for 19943, as far as mineral extraction was concerned, there were threesectors which accounted for 45.5% of total intermediate consumption:transport and communications 19.5%; services rendered to companies 18.5%and electricity and water 7.5%. Nevertheless, the development of these sectorsencompasses different activities; their consolidation benefits the economy as awhole and not just the mining sector. In addition there are more than 30 othersectors or subsectors making up intermediate consumption in the mineralsindustry.It was precisely an understanding of this dynamic that drove the "CompetitiveDevelopment of Local Suppliers in Cajamarca" project to devise a strategyaimed at intensifying transactions between some of the large or medium-sizedcompanies in the region and local small and medium-sized enterprises(SMEs).The systematization shown below was the method developed for that purpose.It contains various elements for extending local procurement policies, that wereapplied to large companies (and their suppliers) in three sectors: mining,transport and milk production.

3 The last year in which measurements were made of 45 sectors producing goods and services.


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In addition to the development of specific mechanisms and instruments,strategic aspects are fundamental. Experience has shown that at least twoelements must be present for an explicit policy of local procurement to beviable: firstly a clear commitment by larger companies to the economicdevelopment of their areas; and furthermore the view that the local marketoffers purchases advantageous conditions and the ability to maintain its levelof competitiveness. In otherwords, if local procurement leads to losses, this is abad policy.Therefore the implementation of this strategy assumes that local suppliers existor can be created to meet the purchase's needs at the required quality, quantityand opportunity. The existence of a programmeme that helps to develop thiscapacity is a key element.But large purchases should also be willing to adjust their policies to take greateraccount of local suppliers and support local development. A review of thesepolicies and purchasing mechanisms in accordance with this model does notimply questioning or disqualifying the existing model, but analyzing whetherany of the rules constitute barriers to the incorporation of local suppliers, whichare generally smaller-scale companies, and sticking to the more successfulpractices. The fact that a company accepts this review and possibleadjustments is proof of commitment. The presence of an external programmeto accompany the process is also an important catalyst.In summary, the proposed model implies a positive result for purchases, sellersand local development. The encounter between competitive suppliers andlarge and medium-sized purchases is also an opportunity to encourageinnovation, technology transfer development given that the goods and servicesoffered must pass through different quality controls and the businessmanagement of each company. Commitment to "joint development" ensureslocal development.This proposal will be extremely useful to different agents. Firstly, the project'starget audience: local businesses encouraging local businesscompetitiveness and businesses with innovative projects to improve


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Acknowledgements

D his publication, which originated as a working paper, has beendeveloped by contributions from many people since the first draft, andso acknowledgements are due to each one of them.Firstly the institutions that have provided financing: FONDOEMPLEO,International Finance Corporation and Asociacion Los Andes de Cajamarca,for their confidence in Recursos SAC and Swisscontact carrying out the LocalSuppliers Development Project, as well as the Commerce and ProductionChamber of Cajamarca for its support.The large purchases operating in Cajamarca, regardless of the progress theyhave made, the learning experience has been most rewarding for allparticipants.The different members of the network of institutions created around PDPCajamarca for their important contributions. Ramon Ponce and CeciliaRivera, responsible for the project strategy; Bradford Roberts and VioletaVigo, who came up with the original idea of systematizing; Jorge Luis Puerta,my predecessor as project director; Lily Villar, Eduardo Vargas, JunetdArteaga, Alex Alva, Jhon Tito, Milagros Castaneda, Wilson Calua, MairaVergara, Paul Jimenez and Mariela del Carpio, who are marvellous to workwith; Eduardo Burga and Alfredo Stecher for their important contributions;Frank Moritz, Luis Cornejo, Guillermo Herrera, Juan Tamayo, Carlos Combe,Miguel Tagle, Edgard Inga, Roberto Vega, Jose Manuel Vargas, Jose Vigo,Lelio Saenz, Wilson Pesantes and Lisi Vasquez, representatives of the largepurchases, with whom we have had many dealings.Special acknowledgement is due to the business sector, represented by Dr.Miguel Ledesma Inostroza, President of the Commerce and ProductionChamber of Cajamarca and Horacio Galvez Villanueva, Past President; as


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well as Luis Cespedes Ortiz, General Manager and Bernado Reyna, formergeneral manager.The businessmen and women who have contributed to the document:Emperatriz Campos, Gonzalo Urteaga, Eduardo Urteaga, Juan CarlosMondrag6n, Carlos Trigoso, Jesus Salazar, Maria del Pilar La Torre, LorenaSandoval, Segundo Sandoval, Horacio Urteaga, Carlos Urteaga, HectorAraujo, Javier Chuquiruna, Eligio Chavez, Segundo Vargas, AlejandroSanchez Guzman, Alejandro Sanchez Marin, Walter Bar6n and AlbertoEstacio.Finally, those responsible for monitoring PDP Cajamarca, who have beenclosely involved with the experience and members of the team: Cecilia Araujo,for her contributions during the first year, Leonor Rodriguez, Cesar Casas,Eleazar Miguel and Flavio Flores. Not to mention the communicationssupport provided by Eliana Rojas and Alvaro Arce.


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Introduction

T he "Competitive Development of Local Suppliers in Cajamarca"project - known by its initials PDP Cajamarca - is based on theconviction that investment and the presence of large moderncompanies in areas where there has been little economic and social

progress, can mean greater opportunities for local sustainable development,in terms of wider markets, stable employment and wealth generation, if allactors build a policy which creates confidence, innovation and technology andsocial transfer to enable the different public and private agents to act in asustainable manner.The PDP Cajamarca is a project that attempts to continue earlier experiencesof strengthening the business base begun in 20025, capitalize the lessonslearned from those experiences through the systemic treatment of thesubjects mentioned and with a view to linking other large purchases to localsuppliers in both urban and rural areas, in a process that will create greaterdynamism in the local market.For the above reasons the aims of PDP Cajamarca are not just to improve theproductivity and quality of local suppliers and to diversify markets in order toreduce dependence on large purchases, they also include the implementationof good practices such as transparent commercial relationships andprocedures between large companies and their suppliers and theimplementation of strategies for their development.In this context, during the first 18 months of the PDP Cajamarca project,commitments were obtained from five local companies: Aramark Peru SAC inthe services sector, which provides meals for direct and indirect personnel,

5 Earlier experiences relate to the "Strengthening of Local Suppliers", "Access to the Financial System ofSMEs " and "Strengthening Community Enterprises" projects, as well as the activities proposed by the SMELinkage Programme. These experiences took place inthe period 2002 -2005.


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Gloria SA and Nestle Peru SA in the dairy products industry, Transportes LineaSA, which provides transport services for people and cargo; MineraYanacocha SRL, a mining company; and Cajamarca Provincial Council,working on different aspects of the policy towards suppliers.The critical path for assisting large purchases to develop supplier policies andplans, arising from the logical framework of the PDP Cajamarca, establishedthe following guidelines: The formation of working groups in companies and institutions that are

large purchases. The drafting of strategic guidelines for the development of suppliers. Formulation of development policies for local suppliers. The creation of strategies to raise local suppliers' awareness of the

development policies.

Consequently, the aim of this document is to systematize the process ofassisting large purchases to draft development policies for local suppliers,providing a methodological guide to the work, creating examples ofapplication and identifying the lessons learned during the process.In order to achieve this aim, the document has been structured in the followingmanner: Methodology for supporting the formulation of supplier development

plans and policies. Policy, publication and monitoring documents. Subjects relevant to large purchases in formulating and implementing

supplier development policies. The impact of the policies on local suppliers. Lessons learned while supporting large purchases.


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Methodology for supporting theformulation of suppliers' development

plans and policies

T he working methodology used to support the formulation of suppliers'development plans and policies starts from an acceptance of twofundamental aspects: The existence of a set of processes and rules governing the relationship

between large companies and their suppliers. Some work well, othersnot so well and yet others generate resistance and disagreement.

A large part of the existing procedures and rules are obligatory for largecompanies as they are imposed from higher up in the corporatestructure, beyond the merely local, therefore any change implies a longchain of instances to obtain approval.

Thus the methodology applied was aimed at identifying the potentials of theprocesses and rules that represent good practice for the large company -local supplier relationship, which can be replicated at different levels andwhich, at the same time, form the foundation for creating managementabilities within large companies and encouraging the development of localsuppliers.The conceptual framework for the methodology used was based on thetheory of appreciative inquiry, which is based on a positive valuation of theinterlocutors, operating processes and rules aiming, via the interlocutors inworking groups with large companies, at discovering the best. This in turnserves as the starting point for deciphering possible scenarios for improvedrelationships and mechanisms for promoting and implementing joint actionand plans to encourage local suppliers to achieve higher levels of


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"Systematization of support in policy making on the development oflocal suppliers among large purchases"

development. Graph N 1 gives a methodological outline of AppreciativeInquiry proposed byDavid L,Cooperrider and DianaWhitnel,

"How to empower,learn and adjust?

Support

Graph No.1Appreciative inquiry clcle'

POSITIVE CHOICETOPICS

6 Cooperrider, David L. and Whitney, Diane, "A positive revolution in change: Appreciative inquiry" inAppreciative Inquiry: Rethinking human organization toward a positive theory of change, D.L. Cooperrider,PF. Sorensen .Jr. DWhitney, TF. Yaeger Editors, 2000,7 Translated from David L. Cooperrider and Diana Whitney, Op. Cit.


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Methodology for supporting the formulation of suppliers'development plans and policies

The methodology of Appreciative lnquiry" has scientific and theoreticalfoundations as it seeks socio-rational knowledge based on the identificationof "what best makes organizations work"; it is metaphysical in that it seeks tovalue the knowledge of the "miracles" of each organization based on a logicalvision that enable ideals of "what could happen" to be built; it is regulatory,because it seeks practical knowledge that facilitates dialogue andparticipation, generating a consensus about "what should be"; finally, it ispragmatic insofar as it promotes action based on knowledge, creatingsuitable conditions for participatory experiment in solutions that facilitate thesustainability of the processes of "empowerment, learning and acjustment."Taking Graph N 1 as a reference, the topic for positive choice proposed to thefive large purchases committed to PDP Cajamarca has the same commonaim: the "development of a network of local suppliers", around which thestages of the cycle will revolve:

1.1. DiscoveryThe principal task in the discovery stage is to reveal the set of positiveaspects that operate in the large company -local supplier relationship;for which the starting point for the work of support is the interest thatrepresentatives of large companies may have in the positive choicetopic: development of the network of local suppliers.

8 From its inception, Recursos SAC has used a positive organizational approach and method ofdevelopment, based on constructivism and explicitly expressed in its programme for trainingconsultants and its 'Gestiona' software, which seeks to specialize the work of the consultant inrecognizing and implementing the strengths and opportunities of companies and institutions In2004 itstarted to adapt the methodology of appreciative inquiry, designing products based upon thismethodology, such as "Personal Motivation and Effective Communications" and "OrganizationalDevelopment" .9 Cooperrider, David L. and Srivastva, Suresh, 'Appreciative inquiry in organizational life" inAppreciative Inquiry: Rethinking human organization toward a positive theory of change, D.L.Cooperrider, P.F.Sorensen Jr., DWhitney, TF. Yaeger Editors, 2000.


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The aspects considered were:The presentation meeting

In general all the large companies to which positive choice wasproposed showed a certain degree of interest, so the first task at thisstage is to stimulate this interest until it is sufficient to facilitate jointworking, for which it is important that the steps prior to the presentationmeeting be thought of as key aspects.The depth of the review of secondary information depends on the sizeof the large company that we are trying to interest in developing localsuppliers. For example: In the case of Minera Yanacocha SRL, asubsidiary of Newmont Mining Corporation, the review not onlyincluded documentation on the Peruvian subsidiary, but also thecorporate mandates operating throughout the world and certainoutstanding experiences from other operations; something similar tookplace with Nestle. In contrast, the reference information for a smaller-scale large purchase such as Transportes Linea, was based on thecompany's website and certain publications in other media.


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Steps prior to the presentation meetingThe first meeting with representatives of the large purchases is vital; clarity ofpurpose and adequate identification of points of interest are very importantaspects for obtaining a commitment

For that reason the following steps should be taken into account in preparing forthe presentation meeting:1. Review of secondary information held by large companies on the large

company-local supplier relationship:a. Start with the company's website, which generally contains up to date

information on programmes, projects and documentsb. Annual reports or social responsibility reportsc. Social responsibility policy and documents ifavailabled. Historical summaryofthe corporatione. Vision, mission, principles and corporate valuesf. Adherence to international agreements or documents

2. Systematization of information on the large company - local supplierrelationship, seeking to identify points of agreement on the subject of supplierdevelopment

3. Preparation of a presentation containing five powerful ideas:a. Clarify the positive choice topic onwhat "developing local suppliers" means

forthe purchase.b. Explain how to achieve the positive choice topic "development of local

suppliers"c. Underline the importance of starting with a commitment by the large

purchase, starting with a demand-based approach.d. Demonstrate the results that the large purchase has obtained to date,

based on systematization of the information compiled.e. Propose a scenario in which the large purchase can identify the benefits of

joint work in terms of measurable results based on the points ofagreeement identified for systematization.


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Furthermore, development of the five ideas that made up thepresentation was the critical point of this first part of the process, giventhat they outline the systematization and synthesis effort of the largepurchase as well as its ability to interpret interests and trends in thesubject. For reference, the interests identified a priori in the companiescommitted to PDP Cajamarca were as follows:

Aramark Peru SAC: Attention to suppliers of critical goods andservices; transmitting corporate standards on safety, health, theenvironment and community relations; as well as promotion of thesestandards.

Gloria SA: consolidation of the experience of developing the Group'ssuppliers, compliance with supply targets, development andpromotion of standards; and attention to critical processes thataffect the quantity and quality of the raw materials.

Nestle Peru SA: complementing and consolidating priorexperiences with the development of suppliers in Cajamarca,developing and promoting standards for a certain group of suppliersidentified as important; and facilitating the development servicesnecessary to strengthen the process with each group of suppliers.

Cajamarca Provincial Municipality identifying quality criteria forevaluating building contractors and strengthening the abilities ofsuppliers to complete building work and meet the standards laiddown by the State for contractors.

Minera Yanacocha SRL consolidating growth in local acquisitions,development and the application of criteria for evaluating theperformance of local suppliers; and reducing dependence by itssuppliers on acquisitions by MYSRL.

Transportes Linea SA: Systematization of experience in developing anetwork of local suppliers, standardizing subcontracting practices;and raising to a higher level the standards demanded of itssuppliers.


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Patience and perseverance in consolidating commitment by largepurchasesNo matter how good the preparation for the first meeting, unforeseenpoints usually arise that can work against the formalization of acommitment no matter how enthusiastic the large purchases may be.Some such cases are: From the beginning, Aramark Peru considered that internal

documentation and training in basic services provided directly by itsstaff would be sufficient to generate a solid network of suppliers. Forthat reason, that company's commitment was not consolidatedduring that first contact. Nevertheless, this early work created theconditions in which, after a year, it asked for technical help from PDPCajamarca to develop plans and policies to guide the largepurchase - supplier relationship as well as short and advancedservices to consolidate the first stage.

Where government is concerned (Cajamarca Provincial Municipalityand the Regional Government of Cajamarca), in spite of interestshown by officials responsible for state acquisitions, the political willand the fact of an election year work against any form of agreement.Another subject that generated resistance to reaching an agreementwas the rigorous nature of the State Acquisitions Act andmechanisms for exerting pressure through the Office of the GeneralComptroller of the Republic. Although Ferreyros SA at first sent a letter expressing interest as partof the file submitted for approval of PDP Cajamarca by the financingentities, no real points of interest were identified on the part of thatcompany that would lead to any form of agreement.

Furthermore, it is important to highlight that the commitment by MineraYanacocha SRL arose from a political decision to promote theStrengthening of Local Suppliers Project which was started in 2002.


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The results of this project motivated more officials to address subjectsrelating to the company's suppliers in a more proactive manner.Letters of intent

The presentation meeting is generally used to lay the foundations forformalisation of the working group to address the priorities concerninglocal suppliers which, as we have already described, vary as a functionof the interests of each large purchase; it is therefore appropriate todocument these agreements through an aide memoir for a ll thosepresent; but at the same time through a letter of intentwhich: defines the subjects that will be addressed by the internal working

group, identifies the representatives or counterparts for the development

of the agreed subjectsFigure N 1 shows two of the five letters of intent sent by companiescommitted to PDP Cajamarca.


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Figure N 1Letters of intent from large purchases to PDPCajamarca

GLORIASA.

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Agreements between institutions, beyond the letters of intentOne of the aspects upon which PDP Cajamarca has always insisted isrelated to the incorporation of the State, as a large purchase, into thework of formulating development policies for local suppliers.Experience shows that political interest is fundamental for the followingsteps to be carried out. During 2006 it became clear that policy did notprioritize work with suppliers, and therefore progress was minimal.Nevertheless, as far as the Cajamarca Provincial Municipality wasconcerned, even though political support from the authorities wasobtained in January 2007, changing the regulatory structure and thebureaucratic status quo has been difficult, which restricted conditionsfor the work to be carried out.In order to address this resistance, with a view to creating newconditions, it was thought appropriate to incorporate new agents thatwould act as a counterweight, but at the same time make furtherdemands; given that the institutional letter of intent did not constitute amandate within local government. Thus the agreement betweeninstitutions represented an alternative leading to greater commitmentand pressure for compliance.

Despite the advantages of agreements between institutions inovercoming internal local government barriers, they require a certainamount of time to mature and, above all, to produce concreteagreements on what each institution is to contribute, as well as on theappointment of representatives, as in the formation of the workinggroup.It is important to recognize that the involvement of the CajamarcaProvincial Municipality with the project was principally the result of workdone by the Chamber of Commerce and Production of Cajamarca, the


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Confederation of Private Business Institutions - CONFIEP - and officialsfrom the International Finance Corporation -IFC.DiscoveryThe idea of discovery, developed during meetings of the working groupor through interviews, consists of proposing questions aimed atopening spaces in which to compare experiences that will speed upidentification of things that work well in order to create the conditions fora consensual dialogue leading to the next stage.Meetings of the working groups and interviews open the door toinformation that is not always available openly, but is contained in theinternal documentation and intranets of the large purchases, forexample: Information in large companies about the large company - local

supplier relationship, the value of purchases envisaged andcarried out, processes, procedures and history.

Reports from consultants, studies or improvement projectsconcerning local suppliers.

Those who preserve the unwritten history of the large purchase -suppliers relationship, with whom further interviews are proposed.

Good practices that worked as pilot schemes but were lost, forsome reason, overtime. Good practices that remain in use.

Expectations and resistance concerning local suppliers in areasthat make use of their services.

The work done earlier on building a history of each large purchaseimplies systematizing the most relevant findings so that they can besummarized and considered during meetings of the working group tofacilitate transition to the next phase.


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Graph N2Flow chart of the discovery phase

Nextstage

Table N 1 shows the results of the discovery stage for each of the largepurchases sponsoring PDP Cajamarca and Graph N 2 shows the sequenceof different activities in the discovery phase.


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the project and is also one of the sectors with the largest numberof companies 10 in Cajamarca.

Farm veterinary services, as a result of prioritization by Gloriaand Nestle del Peru, as this is a critical service for milk suppliers.

Environmental services, prioritized by Minera Yanacocha aspart of its mine closure plan as well as the new approach to thegroup of suppliers of these services.

Services for the transport sector, prioritized by TransportesLinea as key to the sustainability of quality and safety standards inthis sector an in its business.

Suppliers of goods, an extensive list that includes: timber, lime,containers, advertising materials, textiles and personal protectionequipment, certain types of food, the result of prioritization byMinera Yanacocha" and Aramark Peru."

Thereafter, together with the working groups of each large purchase,we produced strategic guidelines for promoting interest groups ofsuppliers. Table N 2 shows the results to date.It should be mentioned that the process of reviewing the strategicguidelines in multinational companies such as Minera Yanacocha andNestle Peru is very rapid because of the speed of their planningprocesses, which is the result of adjusting global strategies to localcircumstances.

10 PDP Cajamarca has identified 120 metal workmanship companies in the city of Cajamarca. The RegionalProduction Office has a database of 140 companies. This sector also has a high potential for the productionof spare parts and other goods. For comparison purposes. the Infantas Industrial Park in Los Olivos hadapproximately the same number of companies in 1990 and now the best of those companies are exportingtheir production.11 Minera Yanacocha is especially interested in strengthening and developing suppliers of goods as the solepossibility for growth to increase their access to contracts. The following conditions have been established:that the goods be produced in Cajarnarca, that the quality should be similar to that produced elsewhere andthat price levels should be similar to those of goods made elsewhere.


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For example, Minera Yanacocha identified three new groups ofsuppliers to be prioritized when the External Affairs Department wasincorporated into the working group. Companies that provide goods and services for institutional

events 12, with potential for consolidation at regional level. Companies known as rural contractors (until the change in policy),

previously prioritized in the construction and environmentalservices sectors that deserve special treatment, which implied asecond attempt at the policy drafting stage, resulting in a newpolicy.

Companies of former employees, created after the downsizingprogrammed for fiscal year 2007 onwards.

Furthermore, in the case of Nestle Peru, which initially prioritized thepromotion of suppliers of plant, transport and farm veterinary services;senior management proposed, in line with best international practices,that the treatment and investigation into suppliers of raw materialsshould be given priority, as a result of which the treatment of othergroups will be revised. However, after this change Nestle Perureconsidered its participation and this situation has not yet beenresolved.

12 Minera Yanacocha SRL holds approximately 360 events a year. which vary from meetings between twopeople through working meetings. seminars. book presentations. fairs and exhibitions among others.


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"C< IIC-O~< II"C~ ~ .~z c.!!~..Q"C~ 'st7Iu'5 1< II. .I ! !. .1 '1I


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1.3. DesignWhen the different positive strategic approaches have been described- proposed by large purchases based on a powerful aim: thatCajamarca should have well-developed suppliers that can meet theirrequirements and at the same time are less dependent upon largepurchases because they have a presence in other markets or supplynew clients, thus expanding the local market - then a better system canbe designed to support the large company -local supplier relationship.The basis for this design is the supplier development policy that eachlarge company is to apply, given that this is an instrument for regulatingmatters, guiding strategic approaches and, at the same time assignsresponsibilities for implementation and compliance.


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Aspects to take into account in supplier developmentpolicy making

The following is a guide to the aspects that should be taken into account whenformulating the supplier development policy as part of the support to largepurchases carried out by PDP Cajamarca.1. Review of current administrative procedures applicable to the large company-

local supplier relationship.2. Identification of critical points in the administrative procedures that could be

made more flexible, as well as those at which barriers should be erected; inboth cases inorderto improve the large company -local supplier relationship.

3. Use the review of current procedures and identification of critical points toestablish the new standards.

4. Determine the scope of the suppliers' policy.5. The scope of the policy is used to classify local suppliers and at the same time

coordinate with the different departments involved to identify the goods andservices that they can supply.

6. Define key terms that help to create a language within the company by whichto understand and interpret the new standard adequately

7. Assign levels of responsibility within the large company in order to guideapplication of the policy and at the same time, monitor implementation andcompliance.

8. Fine tune the strategy for addressing critical matters concerning localsuppliers to complement the strategic guidelines already developed in theearlier phase and, in some cases, modify them after a more thorough review

9. Determine the type of training for local suppliers in order to achieve thestandard required by the policy

10. Define mechanisms for disseminating the policy


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The process described in the box "Aspects to be taken into account insupplier development policy making" has been applied by MineraYanacocha and Transportes Linea, although in different ways, as part ofthe application of new approaches and forms of treatment of localsuppliers:

Minera Yanacocha SRL organized an internal working group, whichinitially involved the Materials and External Affairs Departments andtook the steps described above; proposals were discussed andapproved at Senio r managemen t meetinqs".The complexity and scope of application of the suppliers policy meantthat consultants were hired for certain specific aspects, to provide thebest quality information on which decisions could be taken; and sub-groups were formed for this purpose. In addition, representatives ofother departments involved with local suppliers were incorporated intothese sub-groups. By way of recapitulation, the following may be takeninto account: The review of internal procedures and identification of critical points

was first carried out by the working sub-group, whose conclusionswere validated by the outside consultants and the company's legaladvisors.

The company made use of several departments after theconsulting exercise to identify the demand for goods and servicesthat could be met by local suppliers, and which additionallyinvolved the abilityto absorb both skilled and unskilled local labour.

151tshould be mentioned that during the first stage. which resulted in a first version of the Minera Yanacochasuppliers policy. the group was led by the Materials Department Manager; however. itwas suggested that theExternal Affairs Department be incorporated. as this was the department that had contact with most sensitivegroup of suppliers. Thus it was that. after the events of Combayo in August 2006. the working group wasmade up of representatives from both departments.


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That exercise provided accurate information on the limits affectingthe promotion of local suppliers; and, therefore, the need to adjustexpectations in line with real future scenarios.

Taking this into account, new demands were developed, based onthe casuistry of the company's contracting, as well as therequirements imposed by the Peruvian State on the contracting ofsuppliers. The development of the new standards and contractualrequirements also required a validation of the outside consultantsand law firm; firstly because of Peruvian legislation and respect forinternational agreements entered into by the company's parentcompany.

Furthermore, Transportes Linea SA, a much smaller company thanMinera Yanacocha, approached PDP Cajamarca to provide a technicalsecretariat service, facilitating the documentation necessary for thereview of administrative procedures and identification of critical points.This work facilitated discussion within the company and finally, a policywas promulgated by the General Management.It is important to mention that within the framework of the previousprocess, Transportes Linea made the Personnel Transport Division intoa corporate management department, given that growth in thecompany's operations was due to this division; thus contact was madewith the principal local suppliers in the different operating areas throughthis division.

1.4. DestinationThe approval of a policy leads any large company towards adestination, which is reached through publication, implementation andmonitoring of the policy. This implies a need to link the efforts of the


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people involved in the large company - local supplier relationship, thesuppliers themselves and other stakeholders around this subject.The destination phase is an invitation to action, based on the policy inquestion, by the different agents involved in order to implement the aimof developing suppliers into a local ctustet". that guarantees thesustained generation of added value beyond the presence of the largecompany,The above means that policy making implies empowering the differentsectors, both internal and external. This based on clear procedures andforms that are easy to f ill in , which in turn provide indicators to evaluatecompliance,

16 Local cluster generally refers to a number of companies in different sectors and subsectors, serving a givenfinal market. For example, the footwear, metallurgy, timber and furniture, tourism, cotton and textile clusters,among others, In this case it is the territory that defines the cluster, given that this specific area encompassesthe metal mining industry, the dairy products sector, services for companies and others and there are alsosectors and subsectors that offer and provide goods and services to different sectors and subsectors.


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Commerce and Production Chamber of Cajamarca: A key actorDuring the process of building the destination, both Minera Yanacocha andTransportes Linea, which have completed the work cycle; and Aramark, Gloria andCajamarca Provincial Municipality that have not yet reached this phase; identifiedthe Commerce and Production Chamber of Cajamarca as a key actor with whichthey could relate forthe following reasons:1. The system of chambers of commerce is the business institution that for years

has had the role of promoting business and facilitating understanding of therules of the market

2. In the rest of the world as in Peru, the system of chambers of commerce hasfacilitated proper treatment, such as the resolution of conflicts of interestthrough arbitration mechanisms which it is important to promote at local level.3. The chamber is a meeting point for large purchases and local suppliers andshould be seen as a focal point, facilitating information and promotingtransparency inthe commercial relations between its members.

4. Recognition through the chamber of commerce can create favorableconditions for investment through committee work that involves not just thelarge purchases, but also local suppliers.


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Thus the policy proposes a new approach to local suppliers, whichmeans more than just a change in the lanquaqe", rather it meansconcentrating principally on training, for which reason PDP Cajamarcahas incorporated additional BOSs to those determined in the originallogical framework for the project, in order to respond to theserequirements 18,Furthermore, monitoring of the policy and the expectations of localsuppliers thus generated, enable its success to be evaluated; and thecycle has to be restarted to adjust aspects not included in the approvedversion of the policy,

"In the case of Minera Yanacocha this implied removing from the vocabulary references to "ruralcontractors"or "strategic company" when it became clear that different treatments were being meted out to differentsuppliers which, in turn, was creating resistance and practical differences in treatment. For that reason, theterm suppliers was used for all, and this also facilitated the implementation of standards and newrequirements,18 PDPCajamarca incorporated the ILOBusiness Game and Improve YourBusiness methodologies, the firstbeing a basic awareness-raising service and the second specific technical aid to meet regulatory needs, Italso included group financial assistance to enable the companies to carry out financial control.


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Minera Yanacocha's monthly contractors meetingThe monthly contractors meeting was started by Minera Yanacocha in April 2005and involves all suppliers with valid contracts, who are invited to clarify or discusscontract matters in depth; as well as to reflect and to place new subjects on thecommercial agenda.Minera Yanacocha's records of this meeting show that an average of 120 to 135suppliers' representatives attend, which makes it one of the largest and mostfrequent business meetings inthe region, and probably in Peru.The general headings under which the subjects discussed are grouped are asfollows:1. Loss prevention and safety2. Emergency response to different situations3. Hiring procedures4. Occupational health5. Social responsibility6. Current legislation on mining operations and procedures7. Business certification8. Quality standards required in contracts9. Report on acquisitions10. Contracting policy and contact with local suppliers11. Voluntary workThe practice implemented by Minera Yanacocha has been followed by other largelocal purchases such as Transportes Linea, which also holds monthly meetings;and Gloria SA, which holds fortnightly coordination meetings with farm veterinaryservice suppliers.


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The situation described above happened to Minera Yanacocha, afterthe first version of the policy was issued in April 2006 and as a functionof external events the cycle was restarted in order to address specificaspects regarding the group of local suppliers referred to as "ruralcontractors'". Thus, after completing the cycle for the second time,implementation is currently being monitored for review purposes.Another instance of monitoring implementation of policies used byMinera Yanacocha", important because of the frequency with which itis used, consists of meetings with contractors to discuss aspectsrelated to policy, and which also acts as a communications channelleading to an understanding of the different standards.

"These were the efforts of the residents of ruralareas influenced. either directlyor indirectly. by a largeminingcompany. which were formally incorporated as companies in order to take advantage of employmentopportunities offered by the large company or as a result of imitating previous efforts.20 Aramark Peru. Gloria SA and Transportes Linea have also implemented coordination meetings withcontractors. which are considered the starting point for publishing and monitoring implementation of thesepolicies.


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Policy documents, dissemination andfollow-up

This section concentrates on three important aspects that complement

the process of policy making on suppliers' development: the typesand content of policy documents, their dissemination and follow-up.

2.1. Types and contents of policy documentsA large purchase is free to document a given policy as it sees fit,nevertheless, three types of documents are widely accepted for internaland external use because of the guidance they provide: the letter ofintent, the policy guideline and the annual evaluation of thecommitment.The following gives the concept of each document, as well as a list ofthe contents of each one, so that the standard that they establish wil lfacilitate the destination phase described above.Letter of intentThe letter of intent is a public document issued by the large company,which sets out the relevant subjects that have given rise to a givenpolicy, as well as aspects to guide its application that commit all levelsof the organization to compliance.


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Figure No.2Example of a letter of intent on a local supplier policy

T_porln L1NiIII.!9.A, COftcllNlt. dllllJ InpaoulJitidldUICIIrd, ...,.,ktal1lllld_d. M !I~ .~ ! II I I ! m lP rlY I prvvRd!lln.. 1 I aC I I l .I : I i I ZUW 1inIq1'l!ll IIdIwacl.lmlnDlI!!nIMIIilmII!IILv 'dI! 'nu:ntra cil!jmml~' c:II!IdJ~ -IIml'l!!lnllr nWllllmI_iIa~jJllIiI;Illft!' .J "ha ~iCnll!i.En nlJ'!!'I.tn ~, 'L a Alltii 1IliR;~ 'j Ii:idD~ lIB trAllaladllo1lB ~~!;@nIH1jO~ t i o o . ! I li l . ~~ ~ 'I d!AiLm!IiIt , 1 1 9 !PI; I!~ ~" 'OMO'RH'rH W'I mUml : lIgl ' i11 " I I ' - !Ill!!;!! _illI: l ! ~lIid" dill_mo.g_ In.II:S Nl.tf::ilRA palirlll;A:I~'. iii l;i;j IOGiilidiildu < 1 0 0 , opii i\ i icaOii, lID ,_Iir.Adu 8blii IiiI'Rlnc!ld, iii n . ~ 1 'M ! 1 ! Z n dl ,1It.m _ I n ! ,1U!n i ii '. , . ]g 'I f lCI_rR~D !!II- - I ! ~ ~ ~" I ll 'f im il li ' I i. p lK t lG i iI!i ORDEN : p l ! J 1 i I s:A 'Im.~br un .. ~., ,p~ d .. SUpomli!.i6tn, ;pIIA 'lP""l'f!mr ~~ ... ~ '! II ' ~ ~ JP l!1 ~~ ~~ ~ F . I ! t r d ~ ! ! ! ~ r Q.~AmII l ! !nta l: .

'Fwru.nd .. SaIl"'MTf MannuccJD i l1 l


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Policy documents, dissemination and follow-up

The letter of intent should contain the following: Statement: Referring to the reasons for the company developing

the policy. Policy: Sets out the guiding principles of the company's policy on

the subject in question, in the form of statements andcommitments. Businesses. Profiles the businesses it is intended to carry out withqualified local suppliers that have won the right to supply thecompany.

Signature and position of the person responsible for approval: Thisshould be the company's general manager.

Date and person responsible for drafting: The name of theindividual responsible within the company for drawing up the policy.

Date and person responsible for revision: The name of theindividual responsible within the company for reviewing the policy.

Date and person responsible for approval: This is equally thecompetence of the general manager or president of the company,or both, if appropriate.

Figure N 2 gives an example of a letter of intent by which a largecompany makes its policy known to the public.

Letters of intent are usually published in the media when launched, aswell as in the company's offices. They are also mentioned in the annualreport, given that the issue of such a letter requires that an accountmust be given of the commitments included in it.Policy guidelineThe policy guideline is an internal document used by large companiesto inform the different levels of the organization of the standards itwishes to implement. In addition, it is a document for consultation by


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officials managing the relationship with local suppliers, so that thedecision-making criteria provided facilitate implementation.The recommended contents of a policy guideline are as follows: Basic principle: Identifies the company's core business and its

commitment to its clients and stakeholders. Purpose: defines the central goal it is hoped to reach with the issueand implementation of the policy.

Scope: Determines the area of application of the policy, given thatlarge companies work in different areas and with different types ofsuppliers, therefore it is appropriate to define the limits adequately.

Standard: Defines the priorities and guarantees to be created bythe issue and application of the policy inside the large company,which constitute a reference for defining the procedures to follow.

Definition of key terms: These are related to the procedures andstandards defined for the application of the policy.

Responsibilities: Identifies the levels of intervention within thecompany, as well as defining functional responsibilities for issuing,implementing, monitoring and reviewing the policy.

Strategy: In the first place, this defines the key matters that shouldbe addressed by the policy, then establishes and develops the linesof action bywhich the key matters identified are dealt with.

Publication: Establishes the mechanisms and responsibilities forpublishing the policy. Compliance with the policy: Annual review of the commitment

assumed. Annexes: These documents are an integral part of the policy, as

they extend the definitions or address complementary aspects. Thefollowing annexes have been drawn up:

Table of goods and services available locally.Definition and segmentation of local suppliers, using two


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criteria: by sales (or contract) value and by number ofemployees.Procedure for identifying and contracting local suppliers.Form for acknowledging receipt of the policy within thecompany.Form for group training meeting on aspects relating to thepolicy.

2.2. Dissemination ofthe policyOne of the key aspects for the institutions providing funds for the PDPCajamarca in supporting large companies to formulate supplierdevelopment policies is dissemination. At the same time, one of theconcerns of the large companies committed to the PDP Cajamarca iscentred on the best way to manage expectations that could be causedby inadequate dissemination, as this could cause greater socialpressure.Different dissemination mechanisms have been used to manage theseaspects, which we have classified as internal and external:Internal mechanismsTwo mechanisms were proposed for disseminating the policy insidethe company, the purpose of which is to raise the awareness of thoseinvolved in the relationship with local suppliers, to facilitateinterpretation of the different points included in the policy guideline: Policy memorandum: This is issued by the Senior management to

all departments and units of the company, reporting on the policyand with all policy documents attached.


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Group meetings to explain the policy: Carried out at two levels: Thefirst is a general meeting for all departments. The second is specificto departments and units responsible for implementation andfollow-up.

Refresher memorandum: This is issued by senior management,with a view to reinforcing general or specific aspects in order tocomply with the policy or to facilitate interpretation of certainaspects related to it. The frequency and subjects of thememorandum are determined by Senior management.

External mechanismsThe mechanisms for disseminating the policy outside the company areaimed at clarifying different aspects of the policy to stakeholders, butabove all, to local suppliers.The following is a list of external mechanisms that can be used for thispurpose: Letter of intent: Issued by the general management and published

in all the company's public offices as well as in the media ifappropriate. Also included in the company's annual reports.

Communiques distributed in the form of bulletins or published inthe offices of stakeholders or in the media. Workshops with stakeholders: These should be organized toreceive feedback on the new policy, with a view to systematizingopinions, identifying resistance, validating strategic guidelinesand, as far as possible, adjusting or limiting resistance.

Group meetings with suppliers: To be held by those responsible forcommercial and/or technical relations with suppliers and aimed atclarifying poorly understood aspects but, above all, to raiseawareness and encourage compliance with standards.


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Training for suppliers on the standards required in the policy:Carried out by departments or units defined by the company, or byoutsourcing or agreement with specialist entities.

Figure N 3 shows an example of a communique that was used todisseminate important aspects of Minera Yanacocha's new policy.


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Figure N 3Example of the communique asamechanism for external dissemination

COM IUN l CADOYANACOCH_AANUNC IA NIl I I IEVOSlSTEMA PARAOONTRATA,CION ESDE EM "R E S ,A S L OC A L E SA paorilr de e&e a~ Y a""coo :h ~, t SO li ch 1 u ~ ~U!!VO ! i s tErni I dI;, CO ~ pet.. !!II'J'resaslOOi ~.enfIOI)JBlI'O'~ ~f!itil!lal U J ;iiI~III'I~ Ml~ i'eSII(J~ ~ ra ~liIit!l;Ir@rI u1'1 ~rDO!:!lO de ~n em ral '1 ! lm:hl l ;

1'.!e;~lIIrti ~~~ ~!>5% ee l'r.l~~~.'fmI!! Vi[lM! 0 11 IIOIIlIlil m l J 1 i C l ~ 1 d @ Rn:IDr.I!lEIIIJ,~rir_~"'~.;;lQnI!rbr COli iId:hoIs ~ "" ded,. b ! r l @ l " .,~1'i;I r equlp:r; I "'Opi o: s. dE l . . 1 1bi ;l ' ' t J I I ! 'I ' f f i IWln.~ , ~ I n W :J a r ! . U I ! I I 1 ;$ 'C!!I~ ~'~ en c I f C I I l l t i O O QI; ~~C!:NImII:II!d J Id~dk:",rnb... < I I ! I l : : ! 1 1 ( 1 " "mn ..... ~""', 'I"'" , ; ,m,. n " " " n po:! I tI D """,fomt;y~""''' ' 'I ' ' 'Qlor ' i l i ! f~ I ' I~ lk< 1 0 "'"'I'rl'I'i I o c i ! " . ,ElaIIerio'pir.illi;I ~~di! ~ .-.ll~"".....-clal ... ""rtl. ~~ i i i , fo:h1, ""'~~'" doll~ s iii" 1" ' ' ' ' ' ' ' ' ' ' " r"~' ~~"""' .,...,.,.'m o o ~ 11 i1 li ~ ~ ~i_i6 I P J e Iliimlrter.la, mlf '4 ll ll ll ir C l SC ld ii l.

lil mp.-!pl rump!>"en. l~ rcqJl'Olo!l...m. mm


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2.3. Follow-up ofthe policyFollow-up of the policy is a key subject, as it guarantees that the aimsrelating to the large company - local supplier relationship will beachieved. This therefore depends on an adequate definition ofresponsibilities, the system of indicators, the forms and reportingfrequency and the operative nature of the internal working groups incarrying out the relevant adjustments.As far as the delegation of responsibilities is concerned, the twocompanies that have already drawn up a policy chose the departmentshandling the contractual relationships" with a supplier, which facilitatesimplementation of the standards required through commercialcontracts with the suppliers. In addition, Minera Yanacocha alsoinvolves the External Affairs Department which is responsible forexternal dissemination among the stakeholders and the Asociaci6nLos Andes de Cajamarca to develop business skills programmes thatwill help suppliers meet the goals proposed in the policy.Furthermore, definition of responsible departments clarifies theboundaries of the different levels of coordination required to implementthe policy. Information is important for the instances within thecompany, such as users of goods and services provided by localcompanies and those responsible for handling the company's externalrelationships.PDP Cajamarca has seen a number of policy implementationindicators that function adequately:

21 In the case of Minera Yanacocha. this is the Materials Department; and for Transportes Linea. the PersonnelTransport Division and the Administration and Logistics Departments.


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The annual value of acquisitions from local suppliers of goods andservices, compared with previous periods.

Database of local suppliers that have supplied the large company,consolidated and updated annually, compared with previousperiods.

A list of goods and services provided by local suppliers, comparedwith previous periods. Database of potential suppliers drawn up annually by the largecompany.

The incorporation of new items into the list of goods and servicessupplied by local suppliers.

The number of local suppliers that have undergone the contractors'supervision procedure.

Classification of non-compliance with the contractors' supervisionprocedure.

The number of local suppliers making use of training to improvetheir management and reach the standard required by thecompany.

The number of companies certified. Performance evaluation of each local supplier, which shows its

record in terms of amounts, contract terms, compliance andintangibles achieved and in progress.

With a system of indicators in place the implementation or updating offorms is a simpler task. Reports are generally produced monthly, withquarterly and annual summaries.One of the limitations identified in the assistance process isencouraging the working groups to specifically evaluate compliancewith the policy, given that this require data to be generated over anadequate period of time, as the impacts can only be appreciated in themedium term.


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Furthermore, although the indicators described above will evaluate theimpact of the policy, PDP Cajamarca considers it important to generateother indicators to provide an early warning system and enable thoseresponsible for monitoring implementation of the policy to identifyresistance early, such that adjustments will be preventive and notreactive, as happened with Minera Yanacocha given the events atCombayo.In this sense a set of activities was proposed that would facilitateinformation for the early warning system, such as: Interviews to gather opinions on implementation of the policy, with

representatives of business. Focus groups to collect the opinions of certain suppliers sensitive

to policy implementation. Meetings to provide feedback on projects that form part of thechannels of communication with clients. Information from the departments that process and deal with

suppliers' complaints.Finally, the working groups have outlined the importance of having asystem to manage conflicts related to compliance with the requiredstandards, as well as disputes arising from the implementation of thepolicy, which ensures all parties that the rules of the game will beupheld.The working groups of the large companies agree that the arbitrationinstruments provided by the chambers of commerce guaranteeimpartiality and the application of market rules, based principally ongood practice both globally and locally; for that reason priority hasbeen given to creating an arbitration centre by the Commerce andProduction Chamber of Cajamarca.


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Subjects relevant to largepurchases in the formulation and

implementation of supplierdevelopment policies

T he following is a discussion of matters relevant to large companies inthe process of formulating and implementing supplier developmentpolicies that have not been specifically discussed, given that somelimit the impact and others facilitate the desired results.

3.1. Sustainable costs of supervisionImplementation of supplier development policies implies that largecompanies should develop supervision procedures as a mean ofverifying compliance with the required standards, in order to avoidconflicts with local suppliers that generate further costs.PDP Cajamarca has chosen to support this process through trainingfor local suppliers that had been prioritized by large companies. It isaccepted that this effort will involve more than one institution, whichalso implies incurring additional costs that increase the amount of timededicated by consultants to the companies, given that: For each incorporation not included in the initial offer of services

defined in the logical framework of the PDP Cajamarca,instruments must be developed to train the companies in suchaspects.

It is very important that suppliers demonstrate their concern for anability to reduce the cost of supervision, which they submit or seekto obtain the best economic supervision for the purchase and


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develop competitive advantages in the cost of supervision for thepurchase.

An alternative for reducing the cost of supervision is to formassociations, this means grouping supply by quality standards, thedelivery of batches to satisfy the immediate needs of thepurchases, development of software to control consumption byprocessors or at the final point of sale. Carrying out one or more examinations in the plant in order toensure the transfer and adaptation of the procedures anddocumentation necessary to comply with the standards.

Increase the time initially contemplated for the service.Therefore, both the large companies and PDP Cajamarca have takenon an educational role aimed at creating a favourable climate forcompliance, in which a positive impact will be obvious. Nevertheless, itis important to reflect upon the speed and quantity of changes that maybe caused by policy revisions, as it is as difficult to process these withlocal suppliers as it is for those responsible for implementing the policy.

3.2. Balance between supervision and new marketsSimilarly, the balance between supervision of compliance and thecreation of new markets is something that has not yet been resolved byPDP Cajamarca. Experience shows that guaranteeing 100%compliance over time requires continual verification of the companiesand, in addition, more time is required for planning, researching andfacilitating access to the market in order to reduce dependence onlarge companies, and this time was not included in the calculations.The different cases of permanent contracts indicate that it is noaccident that companies that have achieved them are those that, by thenature of the contractual relationship with the large companies, have


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Subjects relevant to large purchases in the formulation andimplementation of supplier development policies

more time to think about the market.Thus PDP Cajamarca considers that encouraging companycertification at different levels from the large companies, is amechanism for reducing the cost of supervision, given that this cost isassumed by the suppliers themselves through accredited certifyingcompanies. At the same time, obtaining certification gives companiesa key to new markets.This subject still requires additional work by the large companies, inthat business certification implies a reduction in supervision costs, andtherefore the process of selecting suppliers should include differentpoint scores for companies based on the levels of certification theyhave achieved.

3.3. Minimum working capital

One of the problems facing local suppliers seeking contracts with largecompanies is providing the working capital necessary for operatingsuch contracts.Large companies have made an important effort to reduce paymentperiods and factoring is also available from the large companies or inparallel, which help to improve capital turnover in the short term.Nevertheless, it is considered important to encourage research byeach large company as a function of the types of goods and services tobe provided, to determine the percentages of working capital requiredby the supply contract in question or, at least, to incorporate thesecriteria into the contracting procedures.There is a tendency to confuse working capital with the paid up capital


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of a company, because of the origin of the funds, so it is important tospecify the following: Working capital is part of the company's current assets, that is,

short term investment in a given business, which is used to facilitatethe funds necessary to meet current obligations until the chain ofpayments is regularized. In general, working capital is recovered atthe end of a contract; for which reason the value of currentinvestment varies with the contract value. From a technical point ofview, working capital is the result of subtracting current liabilitiesfrom current assets. When a company expands very quickly itsworking capital is greatly stretched, so that a parallel process ofexpanding equity and paid up capital is necessary.

Capital is part of the equity of a company, the funds that theshareholders contributed to form the company and which changesover time with the company's results (positive or negative). In otherwords, it is the company's own source of funds for financing itsbusiness.

The diversity of forms of capital means that a company with littlecapital can make use of leverage if its guarantees are liquid orquasi-liquid. For example, a company may have as its equity realestate having a commercial value of US$ 30,000 and a sale value ofUS$ 23,000 dollars. If it wishes to obtain an advance from the clientto perform a contract, this will be requested against a letter ofguarantee. When the supplier asks the bank or finance companyfor such a letter, the guarantee will only cover 65% of the sale value,that is, the advance will be for up to US$ 15,000. Another companywith less equity, for example 20,000 dollars, but in liquid form - cashin other words - may obtain a letter of guarantee of up to 60,000dollars. The guarantee of US$ 15,000 obtained by the company inthe first example could probably be obtained with 5,000 dollars incash. There are also highly competitive companies whose workingcapital- and even paid up capital- is insufficient for new operationsbut whose good practices are such that other companies or


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individuals provide it with the necessary guarantees. A companyand its development are expressions of new institutionalizing, andthis aspect should also be recognized.

Consequently, working capital as the use or application ofinvestment may be provided by the company itself from its paid upcapital, either directly in cash or as a guarantee for loans, and alsoby third parties. Thus, a large purchase is covered by demanding a letter ofguarantee and the amount of working capital and/or paid up capitalmay be set unilaterally; it is recommendable that the supplierprovides the purchase with the guarantees necessary in each case.

Given the above, and that unilateral interpretations of working capitaland paid up capital may create certain resistance from local suppliers,reviews of procedures in the policy formulation stage must include areview of the wider causal relationship, so as to define the workingcapital requirements that local suppliers should meet.

3.4. Identification ofthe starting point for local suppliersThe working groups of large companies find that local suppliersinvolved in the definition of strategic guidelines and in applying policies,have different levels of development, which should be taken intoaccount in applying the policy, in the communications channels andlanguage and also in creating skills using business developmentservices.PDP Cajamarca has identified three target groups as a result offeedback and practical implementation of the project and applies thefollowing differences in treatment: The first group, the effective demand, is made up of companies


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seeking to consolidate their market position that need to generatecompetitive advantages over time. The supply of services for thisgroup requires advanced treatment that will generate thoseadvantages, but at the same time will facilitate making use ofmarket opportunities. This group is the best able to integrate socialand technological innovation and, pooling its efforts in corporatesocial responsibility. The second group, latent demand, consists of companies thathave been through the process of awareness raising, or need basicguidelines on finance, management or production aspects; thusthe most suitable supply is made up of short development servicesaimed at facilitating these guidelines to produce quantifiableresults in the short term.

The third group, zero demand, consists of companies that have notbeen offered business development services and that may beresistant to them; it is therefore important to make them aware ofthe range of basic development services offered, which wouldenable them to obtain short term results and increase the likelihoodof them contracting such services.

3.5. The input-output matrix

The input-output matrix is an instrument that measures intermediateconsumption in a given sector or subsector of the economy of thecontributions of that sector to the sector under study; this tool is veryimportant for calculating gross domestic product, but also for studying,managing and evaluating a supplier development programme.As the technology used in each sector changes continually, it isnecessary to make this estimate continually. The operating techniquesof each sector are considered to be valid for ten years. In Peru the most


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recent input-output matrix is from 1994 and is now outdated.Important technical changes have taken place in the mining industry: The intensive use of construction industry techniques in leaching

processes, particularly earthmoving. Greater participation by the transport sector. New activities such as restoration of environmental liabilities. Environmental services arising from the decision that closing a

mine should involve new sources of water and reforesting.The correct application of the concept of production chains must notand should not ignore participation by different sectors and subsectorsof the economy in multiple processes of intermediate consumption,expressed in the input-output matrix for each sector. The transport,construction, metallurgy, business services sectors and commerce ingeneral must take part in this.Recursos SAC takes this thinking into account in determining the beststrategy for supplier development and it is probably important to carryout more accurate monitoring bearing in mind the changes that havetaken place in the relevant matrix.It is also important to cross reference the intermediate consumption ofthe large companies committed to PDP Cajamarca in order toencourage participation by certain sectors.


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Impact of the policies onlocal suppliers

In the introduction to this document, itwas suggested that compliance

with the goals of PDP Cajamarca related to improving productivity andquality of local suppliers, as well as market diversification to reducedependence on large purchases, are closely related to the

development of good practices and the building of new institutionalrelationships, Thus as well as the assistance with policy discussedthroughout this document, the means by which large purchases canencourage good practice and institutional behaviour have also beensystematized,

Given the above, this part will provide evidence on the impact that policiesdrawn up by large purchases have had on local suppliers - there are twosources for this evidence: first the project's records of sales, investment,equity increase and employment. Secondly, the conclusions of the focusgroup involving some of the companies supported by PDP Cajamarca lastMa/2,It is the duty of PDP Cajamarca to point out that although the indicators givenshow a favourable impact on local suppliers, it was never intended to suggestthat the project was responsible for all of these results; on the contrary, weknow that other conditions have been identified and these, combined with ourintervention, explain the impact.

22 In March 2007, the managing board of PDP Cajamarca, after submitting a preliminary version of thisdocument, suggested that a focus group be created from suppliers from the project, in order to evaluate theimpactofthe policies on the performance of these companies, On the 31st of May 2007 this focus group met,consisting of 15 representatives of suppliers and 2 representatives of the large purchases,


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4.1. Annual survey of companies' performanceOne of the mechanisms used by PDP Cajamarca to measure the finalimpact of the intervention in local suppliers is the annual survey ofcompanies involved. This survey is carried out after the end of therespective fiscal years, during the first month of each year.To date, PDP Cajamarca has carried out one annual survey of companyperformance, the technical details of which are as follows: Aims:

To obtain information on the results of companies assisted bythe "Competitive Development of Local Suppliers inCajamarca" - PDP Cajamarca project during 2005 and 2006.Development of an evolutionary line for companies assisted byPDP Cajamarca in order to produce aggregate results andcomparisons.

Source: Accounting information from companies provided withshort-term and advanced business development products:

Number of companies served: 71.Companies provided with short-term and advanced products:38.Percentage information compiled: 53.7% of all companiesassisted".

The baseline, with which the performance of the companies wascompared, was calculated in the following manner: The financial information that the companies provided for the

business diagnosis was used as a reference.

23 The information came only from companies provided with short-term and advanced products.


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Impact of the policies on local suppliers

The fiscal year in question ran from the 1st of January to the 31st ofDecember.

systematization of support in policy making on the development of local suppliers among large...

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