The Benefits of Supplier Diversity
Diversity, equity and inclusion are important topics in today’s workplace. Companies large and small are focused on actively creating equitable environments for their employees by establishing strong Diversity and Inclusion policies and programs. The benefits of workplace DE&I are undeniable, but did you know that diverse and inclusive procurement practices also have a significant impact on business?
Having a diversified supply chain is a smart and strategic approach to sourcing and procurement and it offers unique business advantages. So much so, that many of the world’s largest companies, such as Google, Walmart, Accenture, and many leading pharma companies, have integrated rich diversity programs into their procurement best practices and they have reaped the benefits that come along with employing diverse suppliers.
If you have ever had the pleasure of attending a Compas Capabilities presentation, you have probably heard us highlight that we are a “Diverse Supplier.” What qualifies a supplier as diverse? In what ways can employing diverse suppliers benefit my business? These are very common questions among Pharma clients and Agency representatives alike and they will be addressed in this POV.
What is supplier diversity?
Supplier diversity is the practice of sourcing goods and services through small to medium sized minority-owned businesses. Most commonly, these diverse classifications include minority-owned (MBEs), women-owned (WBEs), LGBTQ-owned, veteran-owned (VOSBs), or disability-owned (DOBEs) enterprises.
What qualifies a supplier as diverse?
Ownership by minority individuals means that the business is at least 51% owned by such individuals or, in the case of a publicly owned business, at least 51% of the stock is owned by one or more of such individuals. Diverse suppliers must meet strict guidelines to obtain certification.
Benefits of having a supplier diversity program/working with Diverse Suppliers
It is important to dismiss the common misconception that supplier diversity initiatives are simply a “check the box” practice. It is true that working with diverse suppliers can offer businesses tax benefits while enhancing a business’s positive image. However, supplier diversity is not a symbolic gesture or tokenism. It is about encouraging growth, generating economic opportunities, and stimulating innovation.
Working with an array of diverse suppliers demonstrates a company’s commitment to economic growth and its support of historically underrepresented or underserved communities. The U.S. Small Business Administration estimates that there were 8M minority owned businesses in the United States as of 2018. According to recent NMSDC facts and figures, certified MBEs generated more than $400B in economic output that resulted in the creation or preservation of 2.2M jobs while also contributing $49B in revenue to local, state, and federal tax authorities. Many of the world’s largest companies are fostering this type of growth by setting annual spend goals with diverse suppliers. In some instances, these companies are even influencing their first-tier suppliers to invest in diverse 2nd-tier suppliers as well, creating an even broader impact.
Beyond the benefits of being socially responsible and stimulating economic growth, developing an inclusive and diverse supply chain can unlock creativity, innovation, and agility while also representing changing demographics. Diverse suppliers bring to the table unique experiences, solutions, and thought leadership that can strengthen businesses in the vast and ever-changing multicultural marketplace. Additionally, such suppliers are typically nimbler in terms of creativity and innovation. These small to medium sized companies can often offer more flexibility, faster turnarounds, and true collaboration when compared to larger suppliers.
- We asked a Strategic Sourcing representative who has worked for 3 of our leading Pharma clients about his experience working with diverse suppliers, “When our supply base reflects the customers and patient population that we actually serve, it allows us and clients to create better products for better health in those patient populations. It benefits the communities that we are serving by looking for suppliers in those areas as well.”
- We also asked what type of feedback he has received from internal stakeholders who have worked with Diverse Suppliers. “They (diverse suppliers) have given some out of the box thinking and some innovative ideas that they typically didn’t see with some larger agencies. To the brand team, what they start to notice is diversity of thought. Everyone’s background and things that happen to them in life shape their thought processes. This innovative thinking and diversity of thought challenges the status quo.”
Often there are concerns regarding the cost of utilizing small or medium sized diverse suppliers. However, research has shown that inclusive procurement strategies widen the supplier pool and promote competition which actually drives costs down. There is typically a positive ROI, as well as other tangible benefits like expansion into new markets and access to additional additional revenue opportunities.
The Hackett Group, a leading enterprise benchmarking and best practices implementation firm to global companies, has conducted several studies on Supplier Diversity over the years. For this POV we analyzed their research from 2006- 2017 and found some interesting and relevant insights. Their 2006 study, “Supplier Diversity Does Not Drive up Cost,” found that world-class procurement organizations which focus heavily on supplier diversity don’t sacrifice procurement savings to do so. In addition, these leading procurement organizations have slightly higher adoption rates of supplier diversity programs as typical companies, yet are able to generate 133% percent greater return on the cost of procurement operations than average performers, driving an additional $3.6 million to their company’s bottom line for every $1 million in procurement operations costs.
Over 10 years later, their 2017 research confirmed the benefits of working with diverse suppliers. Their study “Top Supplier Diversity Programs Broaden Value Proposition to Drive Increased Market Share, Other Revenue Opportunities” shows that top supplier diversity programs actually broaden value proposition to drive increased market share and other revenue opportunities. The Hackett Group research also shows that virtually all diversity suppliers meet or exceed expectations.
“There are certainly challenges that need to be overcome. It can be difficult to obtain the necessary support to invest in supplier diversity programs. Business leaders often worry that dedicating resources to this will impact procurement savings or even quality. But our research clearly shows that this is not true. Top performers are not seeing losses in efficiency, and quality often improves. Overall, the risks to focusing on supplier diversity are quite low, and the potential upside is significant. In fact, up to 10 percent of sales come with supplier diversity requirements, suggesting that the lack of such a program can even result in lost revenue.”– The Hackett Group Research Director, Laura Gibbons (2017)
A Growing Trend
More recent research from The Hackett Group’s 2021 Supplier Diversity Study showed that this trend continues to grow.
- 77% of organizations surveyed plan to increase spend with Black-owned businesses, the largest respondent group.
- 83% say they already have or plan to dedicate funds for supplier development activities It’s worth noting that for the 2021 survey.
- 23% of survey respondents were in the healthcare industry, the largest respondent group.
Given the level of success seen from top companies that have integrated Diversity Programs into their Sourcing and Procurement best practices, partnering with diverse suppliers is a proven strategy to expand into new markets, foster creativity, thought leadership and innovation, as well as invest in the multi-cultural, socially conscious reputation of a company. Research has found that employing diverse suppliers results in a positive ROI and offers many other tangible benefits that make it an extremely smart and strategic approach to Procurement which is often under-utilized.
We recommend that all our clients consider diversifying their supply chain and suggest taking the following steps in order to implement a diversity program within your company. Please note that this recommendation comes not only from our experience, but also from reports by some of the leading diversity programs in the US, including Intel, Supply & Demand Chain Executive Magazine and CVM Solutions:
1) Write up a justification for working with a diverse supplier. Include how this could benefit your company from creative and financial perspectives.
2) Identify diverse companies in your industry and begin the RFP process. You can find diverse suppliers by contacting or visiting the websites of the below organizations:
- NMSDC Minority Business
- NAVOBA Veteran Business
- SBA Small Business (SDB, 8A, HUB)
- WBENC Women Business
- NGLCC Lesbian Gay Business
- Diversity Alliance for Science
Partnering with such organizations or similar certifying organizations is quite important when beginning a supplier diversity initiative within your company. These organizations often offer sponsorship opportunities, networking events, and workshops that can help get a new supplier diversity program up and running.
3) Educate your all business units within your company on Supplier Diversity plans/objectives.
- Since most daily purchases are not made by Procurement, it is of utmost importance to inform any teams or individuals with purchasing power of your diversity goals. Guide the people who execute the buying by finding a simple way for them to identify diverse suppliers that will meet their business needs.
4) Report, Measure, and Analyze
- Ensure there is a process or system in place to capture and accurately classify supplier spend
- Set reporting functions and parameters that will allow you to identify and analyze trends in your company’s spending