In our current climate, it’s undeniable that social issues strongly influence whether businesses grow and succeed or are left behind. A staggering 64% of millennials say that they will not work for a company whose corporate social responsibility is low (Prilepok et al, 2022). In general, environmental, social, and corporate governance (ESG) is becoming a competitive advantage and a business imperative. For example, between 2016 and 2018, 33% of assets under management totaling $30+ trillion were invested in an ESG conscious capacity (Prilepok et al, 2022).
But what exactly is meant by supplier diversity and how is it related to ESG?
What is ‘supplier diversity’?
A diverse supplier is any business that is at least 51% owned or operated by people who are part of an underrepresented group (Barrington et al, 2020). Among other underrepresented groups, these include minority-owned enterprises (MBEs) and woman-owned enterprises (WBEs). Collectively, these groups are known as (MWBEs). Over time, however, this definition has also expanded to include businesses run by other minority groups, such as members of the LGBTQ+ community or people with disabilities.
Not to be confused with ‘supplier diversification’…
Supplier diversity should not be confused with the semantically similar term ‘supplier diversification’. ‘Supplier diversification’ is related to companies’ efforts to source from suppliers who offer “various unique traits, as a way to protect their company from the threat of risks by making supply chains more resilient. In other words, ‘supplier diversification’ is a sourcing strategy that relies on selecting suppliers based on factors such as size, cost, flexibility, and location, among others.
Why is supplier diversity important?
Supplier diversity efforts are indicative of a company’s desire to maintain high moral and ethical standards. Indeed, evidence of a company’s investment in these programs can often improve its reputation as they represent a desire to join the fight against racial discrimination and create economic opportunities for disadvantaged communities. A recent survey by McKinsey also showed that MWBEs were 67% more likely to hire minority talent than the average for US companies, evidencing the positive feedback loop effect that supplier diversity programs have (Prilepok et al, 2022).
If you don’t find the ethical arguments for creating supplier diversity programs to be compelling, perhaps the commercial ones will prove more convincing…
An inclusive procurement strategy has the following positive ramifications:
- It widens the pool of potential suppliers
- It promotes competition among suppliers
Both of these effects can help cost-saving efforts and improve product quality. Indeed, by providing more sourcing options, inclusive procurement can also make supply chains more resilient even during times of crisis and uncertainty.
Supplier diversity can even positively influence hiring processes with 52% of surveyed employees stating they wished to work for a company that prioritizes supplier diversity and inclusion (Barrington et al, 2020). More widely, though, MWBEs are also known to have a positive effect on the economy as a whole. It has even been proven that they offer their corporate partners a staggerring 8.5% annual procurement cost savings (Prilepok, 2020). This economic advantage of supplier diversity is one often overlooked by procurement departments, often to their own detriment.
We sat down with Andrea Fimian, CEO at fips Consulting who brings with her more than 15 years of procurement expertise having worked in roles such as Supply Chain Management Consultant and Supplier Diversity Program Lead at IBM. Here’s what she had to say:
“Many companies invest money in diversity, equity, and inclusion (DE&I) efforts in the workforce, but not in procurement, where most of a company’s spending occurs. That doesn’t make sense to me, because the impact on DE&I activities is the same in the supply chain as it is in the workforce.”
Global Trends in Supplier Diversity
Whilst there are a number of socially conscious companies who have paved the way in addressing racial injustice through their supplier diversity programs, some companies have neglected this practice, or have implemented them merely as a token gesture or a PR stunt.
However, according to Supplier.io’s ‘Supplier Diversity Report’, 2022 has marked a “momentous shift” in the supplier diversity community. Critically, the report shows that companies are embracing supplier diversity for the ‘right’ reasons, rather than treating it as a mere compliance check-box exercise. In this report, it was found that:
- 45% of those surveyed had formally established supplier diversity programs
- 19% tracked diverse suppliers without a formal program
- 12% were in the early stages of establishing one
It seems clear: there’s an upwards trajectory in corporate commitment to supplier diversity and this change is here to stay!
The Current Situation in Germany
In Europe, the legislative frameworks set out by the European Union are generally conducive to supplier diversity. With over 15.3 million people who declare immigrant origin in Germany, it seems this topic is of utmost relevance to its procurement.
Recently, the EU drafted a guide titled “Buying Social: A Guide to Taking Account of Social Considerations in Public Procurement”. This guide includes case studies from Germany and details socially responsible public procurement (SRPP) activity that is possible within EU law, including making supply chains accessible to small and medium enterprises.
Whilst the concept of supplier diversity in procurement is still a relatively recent concept in Germany, the country itself as well as the overall DACH region are seeing progress, and the topic is on the radar for most procurement leaders, despite the many challenges along the way.
“A major challenge is the implementation of SD&I, including new policies, strategies, and training. Another challenge is changing the mindset and commitment of the entire organization in supporting SD&I efforts.” - Andrea Fimian, CEO at fips Consulting
How to make suppliers more diverse
1. Identify diverse suppliers
The first step in ensuring the diversity of your suppliers is to seek them out. In order to find them, you can elicit the help of advocacy organization websites and directories. For example, in Germany this includes the newly established European Supplier Diversity Project (ESDP) by MSDUK. It is also important to search through your existing network, as this may uncover new unexpected leads.
With a fully visible supplier base, the number of businesses in your network expands exponentially, and with it the opportunities for inclusive sourcing. MWBEs should also be sought out in emerging areas of growth, such as sustainable products and renewable technologies, as this is where partnering opportunities could deliver the greatest returns.
2. Build relationships
In order for partnerships with MWBEs to be successful, procurement teams need to commit to long-term relationships whereby both parties can learn from each other and foster mutually beneficial relationships.
This can encompass making team members available for kick-off and start-up meetings for those contracts that have been established. However, it is also beneficial to suppliers to implement debrief processes for bids that have been unsuccessful.
3. Develop an action plan
Developing a comprehensive action plan ensures your company has a strategy that facilitates partnerships with MWBEs and welcomes companies run by socioeconomically under-represented groups. A step to ensuring this is to implement diversity metrics directly into your procurement processes. Likewise, the implementation of a specific supplier diversity managerial role can aid in fostering the aforementioned relationships and promoting inclusive supply chain management.
“Supplier diversity takes time, and there is no quick fix - get top management support, budget for external support, staffing, and memberships, and promote your SD&I objectives internally and externally.” - Andrea Fimian, CEO at fips Consulting
4. Support diverse suppliers
First-time applicants often need more help with the onboarding process. In order to simplify this task for them, you should review internal processes which may act as barriers to MWBEs and stop them from being able to compete with larger suppliers. More often than not, these onboarding processes include stringent security requirements which can be costly and time-consuming. Therefore, procurement teams should ensure that diverse suppliers are given enough support, and crucially, early on in the process. Equally, technical assistance should be provided when it comes to their requests for proposals (RFPs) and the certification process.
5. Harness technology
Automating your procurement processes creates both internal and external accountability. Digitizing contracts and certifications also leads to substantial time savings when it comes to supplier identification and classification. In this way, apps such as Lhotse optimize procurement and aid in making your workflows all the more transparent. It can even help your company to discern exactly how effective your action plan and further measures are.
All in all, choosing diverse suppliers has significant advantages:
- It encourages competition between suppliers
- It creates innovation
- It ensures equal opportunities for people who are often discriminated against
It is crucial that, when implementing supplier diversity programs, procurement leaders ensure they are placed in a position to be successful in the future, as well as today. Creating a comprehensive action plan and supporting businesses through the processes of certification, security requirements, and RFPs is crucial to a program’s success. Whilst implementing digital technology is always key to procurement process optimization, it is particularly valuable in the process of diverse supplier identification, classification, and analysis.
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Barrington, A., Bateman, A., & Date, K. (2020, August 18). Why You Need a Supplier-Diversity Program. Harvard Business Review. https://hbr.org/2020/08/why-you-need-a-supplier-diversity-program
Prilepok, M., Stewart, S., III, Yearwood, K., & Zegeye, A. (2022, July 14). Expand diversity among your suppliers—and add value to your organization. McKinsey & Company. https://www.mckinsey.com/capabilities/operations/our-insights/expand-diversity-among-your-suppliers-and-add-value-to-your-organization
Supplier.io. State of Supplier Diversity Report. (2022). https://www.supplier.io/2022-state-of-supplier-diversity?hsCtaTracking=00146ee2-2b7d-4802-94d1-7febd169274a|95987b12-4def-4b71-b65a-079e88de7c4c