Why supplier diversity is vital for your supply-chain survival

September 17, 2020

Diversity in your supply chain has recently become a leading indicator for your company’s ability to survive the disruption caused by the global COVID-19 pandemic and recover from the economic stresses which will continue well into the future.

Supplier diversity means your company is committed to working with and engaging with diverse groups—women- and minority-owned businesses, for instance—when building its supply chain. Either as part of their sustainability goals or ESG policies, many organizations choose to establish procurement policies that require the inclusion of diverse suppliers in the supply chain.

And such programs aren’t new. General Motors set up an early supplier diversity program in the 1960s after the Detroit race riots. Around the same time, IBM also set up its own diversity requirements, and soon public law encouraged government contractors to include minority-owned businesses in their supply chains.

Now six decades later, researchers believe that as the Black Lives Matter movement raises awareness of racial inequality in the U.S., only a handful of “socially conscious” major companies have played a long-term role in addressing racial injustice by promoting an inclusive approach to procurement. Too few companies have diversity initiatives—and many let them become token gestures, even as the spotlight shines brightly on systemic racism around the world.

But in an economy crippled by a global pandemic and supply chains racked by the resultant disruption, many procurement teams have been hard-pressed to keep their operations rolling with the suppliers they already have. The importance of supplier diversity for them has been simply the process of finding alternative suppliers—let alone suppliers that fit criteria beyond being able to fulfill current orders and downsize the risk of future order-flow disruption.

According to the Council for Supplier Diversity, inclusive procurement benefits society by providing economic opportunities for disadvantaged communities. Indeed, the  U.S. Small Business Administration estimated that in 2018 there were eight million minority-owned companies in the US. Meanwhile, the National Minority Supplier Diversity Council says minority-owned enterprises generate $400 billion in economic output, leading to the creation or preservation of 2.2 million jobs and $49 billion in annual tax revenue for local, state, and federal government.

Real business benefits 

For those CPOs looking for the bottom-line business benefits to supplier diversity, they are plentiful, according to HBR. Inclusive procurement widens the potential supplier pool and promotes competition in the supply base—improving product quality and cost reduction. Diverse sourcing options make supply chains more resilient and agile—precisely the goal most CPOs are currently trying to achieve.

Consumer product multinational Johnson & Johnson has long believed that working with small and diverse suppliers helps it tap into new ideas that add value to the businesses and provide innovative solutions to marketing, manufacturing, and R&D efforts. Over time, this has allowed the company to advance healthcare and reflect the diversity of the consumers that use its products.

Hurdles for building a supplier diversity program

Creating a supplier diversity program can be challenging. Yet the barriers are surmountable if companies genuinely desire inclusive procurement strategies, says education provider Next Level Purchasing Association.

Establishing supplier diversity goals

Purchasers and their stakeholders can worry that supplier diversity spend goals might conflict with the primary purpose of cost reduction, since there may be no guarantee that a diverse supplier will be competitive. Yet savings and supplier diversity goals do not need to conflict, since both goals motivate purchasing teams to find highly qualified suppliers and maximize bidding opportunities.

Sustaining supplier diversity momentum

Diverse suppliers are often new and small in size. And most businesses fail within their first five years. So some fear that increasing their supplier diversity might also mean taking on increased risk. Organizations can mitigate this risk by actively investing in the development of these new suppliers through training and helping to create partnerships with other suppliers.

Finding qualified suppliers

Many resources help purchasing professionals find diverse suppliers, including the National Minority Supplier Development Council and its local affiliates, the United States Small Business Administration, and local government offices.

Verifying the diversity of a supplier

Firms can verify that their diversity program investments go to genuinely diverse suppliers by setting up oversight mechanisms, using third-party firms to validate certifications, and utilizing the federal government’s small-business-subcontracting and acquisition regulations.

Experts warn it’s a mistake to think of supplier diversity as just a quota system or a nice-to-have program for helping particular social groups while adding minimal value to the supply chain. A commitment to meaningful supplier diversity can give any organization a measurable competitive advantage.

Expert procurement and supply-chain tips sent straight to your inbox.