The Supreme Court’s decision to end affirmative action in higher education created a lot of questions for businesses, with uncertainty around the implications in business practices tied to diversity, including supply management. Supply chain and procurement leaders may be wondering how to view supplier diversity, which helps organizations spend and source with small, local and diverse suppliers.
What are the considerations for supply chain and procurement leaders, and what lies ahead for the organizations that have dedicated years to nurturing their supplier diversity programs? Here’s what you need to know.
Affirmative Action and Supplier Diversity Are Not the Same Thing
Affirmative action, widely known in the context of higher education, has been a subject of debate well before the Supreme Court’s recent ruling. The practice grants special consideration to underrepresented groups and has been a key component of promoting diversity in higher education.
And it has nothing to do with the supplier diversity programs in our supply chains today.
Supplier diversity is not an affirmative action policy. It’s a voluntary and intentional procurement practice designed to increase supply base competition and value to drive positive business outcomes. Unlike the use of affirmative action in higher education admissions, using diverse suppliers isn’t mandatory for companies. They chose to use them – and for good reason.
Supplier diversity represents more than increased access. The goal of supplier diversity is not to be more diverse – it’s to strengthen business by opening supply chains to new ideas, alternative providers, disruptive technologies, new talent, specialized insight and local expertise.
Opening your supply chain – and increasing supplier diversity – means a lot of things. Yes, it includes minority-owned businesses, but it also includes small businesses. Women-owned business. Veterans. Disability-owned businesses. And more.
In all these cases, supplier selection isn’t a zero-sum game. Supplier diversity programs don’t mandate that a contract must be awarded to a specific group, whether it’s a small business or a veteran-owned organization. Decisions to award contracts are always made based on which supplier provides the best value for the company including the service or product. Supplier diversity programs ensure procurement has a plethora of options and capabilities to select from, which makes the business more competitive.
Supplier Diversity is Good for Business.
The main reason supplier diversity isn’t going anywhere: it’s good for business.
The most successful companies in the world prioritize supplier diversity because it makes their businesses better. Mature supplier diversity programs are proven to mitigate risk, increase innovation, reduce costs and positively impact brand reputation. In fact, previous studies have shown that supplier diversity programs lead to a 133 percent greater return on procurement investments.
Specifically, supplier diversity helps enable two of the most critical procurement mandates right now: cost savings and supply chain risk. According to a McKinsey study, MWBEs (Minority- and/or Women-owned Business Enterprises ) offer enterprises year-over-year cost savings of 8.5 percent, which is considerably higher than the average 3 to 7 percent annual procurement savings that most companies generate.
Supplier diversity also fosters a more robust and resilient supply chain ecosystem. Small and/or diverse suppliers bring agility, flexibility, and localized expertise, which reduces procurement’s reliance on a limited set of suppliers and helps mitigate risks associated with disruptions. Diversifying your supply base – whether that be by location, business type, size, ownership or specialty – is a tried-and-true supply chain best practice, because it enhances a company’s ability to adapt to market changes.
The ultimate business impact of supplier diversity programs – whether it comes from cost savings, increased resilience, innovation, or more sales– goes to the bottom line. According to a recent study by Bain and Company and EcoVadis, ESG activities – which supplier diversity is a core element (the ‘S’) – are associated with revenue growth and increased EBITDA.
Supplier Diversity is Good for the Economy.
The economic impact of supplier diversity programs is undeniable.
Jobs. Tax revenue. Wealth creation. Supplier diversity is proven to have an impact on all three — which makes it a critical lever in today’s economy and labor market.
McKinsey says that if spending with MWBEs doubled to two trillion, the move could generate $280 billion in additional income and four million jobs. The firm also notes that today, many high-growth areas of our economy — including finance, IT, legal, and engineering — remain underrepresented in supplier diversity programs. McKinsey calculates that if enterprises directed 40 percent of the funds, they have already committed to MWBEs to high-growth economic sectors, it would generate more than 190,000 jobs and $15 billion in additional income.
Leveraging Supplier Diversity as a Competitive Weapon Requires the Right Data Foundation
Reaping the full benefits of supplier diversity, along with larger ESG programs, requires the right data, technology and approach. Today, too many organizations are still managing their programs manually, or relying on outdated and inaccurate information.
That’s a problem because the supplier diversity landscape changes constantly. Certifications constantly change or expire. Requirements evolve. New standards are introduced to the market. Businesses merge, change ownership and get acquired. Put another way: Supplier.io insight shows that 23 percent of supplier diversity data changes each year. If procurement doesn’t have an easy and reliable way to stay on top of the changes, at best, the program won’t drive maximum business value. At worst: companies are likely over-reporting or under-reporting diversity data, which creates its own risks.
It’s a similar story when it comes to expanding supplier diversity. Most mature organizations understand and value the benefits of supplier diversity, and actively invest to expand their programs. But for those with data issues or manual programs, it’s easier said than done. In fact, the number one supplier diversity challenge, as reported by 75 percent of organizations surveyed, is finding credible new suppliers.
Reporting is another challenge. While many businesses still measure supplier diversity as a percentage of spend, the opportunity is much bigger. How does your supplier diversity program impact your business and the economy? Those insights can be demonstrated with the right tech, data and process.
Supplier Diversity is Here to Stay.
Ultimately, supplier diversity is a strategic and intentional practice that’s driven by companies’ recognition of its potential to enhance competition, foster innovation, and yield positive business outcomes. Double-digit growth in supplier diversity programs between 2021 and 2022, as noted in Supplier.io’s annual State of Supplier Diversity report, is evidence that some of the world’s most successful companies recognize the value of diverse suppliers.
It has become clear that embracing diversity and inclusion in the supply chain is not just social responsibility, but a critical driver of business success. The bottom line: supplier diversity is here to stay – and that’s a good thing for business, our economy, supply chains, small and medium-sized businesses (SMBs), and society.