What is supplier diversity — and why is it important?
Supplier diversity is, quite simply, a commitment by your company to work with diverse groups in its supply chain. Improving supplier diversity can be achieved by proactively seeking out business relationships with all types of suppliers: large and small businesses, businesses owned by minorities, women, veterans, persons with disabilities, LGBTQ, or socio-economically disadvantaged groups.
Improving your supplier diversity requires taking concrete steps, such as instituting a formal supplier diversity program. While that may seem like a big task, efforts to work with diverse suppliers are good for business (and for society). Here’s why supplier diversity is important, and how to begin to improve supplier diversity for your business.
Business benefits of supplier diversity
We know that improving diversity is morally important — but the business benefits are nice, too. According to a Hackett Group 2017 study, "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."
For CPOs seeking to quantify the benefits of supplier diversity, there’s plenty of evidence to show why implementing a supplier diversity program can help your bottom line. Harvard Business Review reports that inclusive procurement promotes competition by widening the vendor pool, improving product quality and lowering prices. One study found that even when procurement teams only had slightly higher adoption rates of supplier diversity, they managed to generate 133% better returns on the cost of procurement, which drove an extra $3.6 million to their organization’s bottom line.
And, at a macro level, improving supplier diversity helps the overall economy. Inclusive procurement provides economic opportunities for disadvantaged communities. 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. When diverse suppliers win, we all win.
[Read more: Why now is the time to improve supplier diversity]
Building a resilient supply chain
No one could have predicted how the pandemic would create supply chain issues. But, as we start to wrap up the second year of living with lockdowns, shipping delays, and other business interruptions, businesses are starting to realize that their supplier networks may be more fragile than they previously realized.
Supplier diversity is one of the best ways to create a more resilient supply chain. Businesses that work with diverse suppliers are able to widen their potential supplier pool and promote competition in the supply base. This, in turn, improves supply chain resiliency and agility. Adding diversity to a supplier base helps businesses weather economic downturns, manage shortages, and bring new products to market more quickly.
We’ve also seen how supplier diversity can assist businesses to recover from the pandemic; diverse enterprises tend to be more innovative and can help companies serve emerging and untapped markets. Johnson and Johnson is one brand that has seen how working with small and diverse suppliers helps it tap into new ideas that provide innovative solutions to marketing, manufacturing, and R&D.
[Read more: 8 keys to a successful supplier diversity program]
How to start improving supplier diversity
Supplier diversity is more than a gesture: it takes committing to long-term change to see the benefits of more inclusive procurement. Here are some tips to help you get your supplier diversity program off the ground and make it successful.
Align your goals
Supplier diversity should be central to your wider strategic sourcing efforts. Likewise, any goals you have for your supplier diversity program should ladder up to your overarching procurement mission. For instance, if your goal is to reduce tail spend, think about how working with more diverse suppliers can help achieve that metric.
Ensure your goals, for both procurement and diversity, are achievable. Take into consideration your community’s demographic trends, procurement targets, and the organization’s overall corporate goals. This will not only help you find success but also get leadership buy-in, which is crucial. If the program isn’t seen as a top priority for management, then it’s unlikely the rest of the organization will get on board.
Look outside your network
To find diverse suppliers, you’ll need to broaden your outreach. Some of the best opportunities to find diverse suppliers are below your top tier. Utilize resources such as the Women’s Business Enterprise National Council, the National Minority Supplier Development Council, and the U.S. Hispanic Chamber of Commerce to find certified suppliers.
Make technology work for you
Technology can help you track your supplier diversity metrics and integrate diverse partners across the procurement process. Fairmarkit’s vendor recommendation engine brings tagged, diverse suppliers to the forefront, empowering your team to invite more of them to bid. Through our partnership with supplier.io, you can enrich your existing supplier database with diversity certification information.
Learn how Blue Cross and Blue Shield of Kansas City was able to realize immediate value through a 3-month cost savings ROI, significant process improvements, and diversification of their vendor pool by using Fairmarkit. And, to learn more about supplier diversity, check out our blog, The Source.