Standardizing Supplier Diversity Measures

Accepting standards for reporting supplier diversity spending will bring greater transparency and better benchmarks.

Supplier diversity spending is notoriously difficult to compare between companies.  Every company has their own definition of what is included in “diverse spending”.  Here are just a few examples of the variations we have seen:

  • What is a diverse supplier? There isn’t a common standard for the types of suppliers that are considered diverse – some include only MBEs and WBEs, while others include additional categories such as Veteran-owned and LGBT-owned businesses.  Some also include small businesses in this definition.
  • Do they have to be certified? Some corporations only accept businesses that have been certified through an agency, while others also accept self-certified businesses.
  • Which certifications are accepted? Some companies restrict themselves to only NMSDC and WBENC certified suppliers while others accept all agencies. 
  • Is 2nd Tier included? Some companies that have implemented Tier 2 programs sometimes include these numbers in their totals, while others do not.  Of course, companies that have not implemented Tier 2 programs do not include these numbers.
  • Is spend double counted across categories? There is a persistent question of how to handle suppliers that fall into multiple categories. Some include suppliers in every they qualify for (our recommended approach). Others count them only in one “primary” category which artificially reduces their spending in other categories.   

Accepting a standard approach for reporting numbers will allow supplier diversity departments to collaborate with their peers and develop insights that can help them grow their programs. Some benefits that can be realized are:

  • Better and credible benchmarks: Without a common method for counting diverse spending, any benchmark that is created is flawed by design.  This frustrates supplier diversity managers trying to measure their program against the industry and understand the potential of in their space.  
  • Improved learning: The supplier diversity ecosystem is an extremely collaborative one. Understanding how their peers have achieved their numbers can help companies develop better insights on how to enhance their own programs.  For example, some industries do not lend themselves to certified suppliers, and it may be better to accept self-certified suppliers.  Or, perhaps, better results may be achieved through a stronger Tier 2 strategy. 

We propose the following standard for reporting supplier diversity information:

  • Diversity Categories: When reporting supplier diversity spending, break results out by categories instead of reporting consolidated numbers.  This provides greater transparency.
  • Certified vs. Self-Certified: With the number of certification options available to suppliers today and the relative ease of completing these, there is little reason for suppliers to not have some form of certification.  Registration on the government’s SAM database is simple and fast.  Given this, we recommend that reported numbers should only include certified suppliers.
  • Certification agencies: We accept this can be a sensitive topic and do not offer an opinion on which approach is better.  However, in the interest standardized reporting, we recommend that companies do not restrict their reporting to only WBENC and NMSDC suppliers. This allows for the inclusion of a much larger set of suppliers and provides a truer reflection of actual spending. This should not be too onerous a standard since most companies have access to this information through their data enrichments.
  • Double Counting: We recommend that suppliers be counted in every category that they qualify for. However, when reporting total spend, spend should not be double counted.   This is the accepted standard for most government reporting and also provides a more accurate reflection of spending in each category. 
  • Tier 2 spending: If Tier 2 spending is included in the reported numbers, these should be broken out. 

At supplier.io, we are working to bring better tools to supplier diversity managers. We have initiated the Open Supplier Diversity project to provide supplier diversity managers insight about their performance against their peers.  Contact us to find out more about how your organization can participate and benefit in this effort.

 

 

 

Should you add a small business criteria to your supplier diversity program?

Adding a Small business allocation to your spending with diverse businesses can make a greater impact to diverse communities.

Small businesses are important to the economy for their ability to create jobs. Many supplier diversity programs either do not track small business spending, or marginalize small business results in comparison to other categories.   With Small Business Saturday less than a week away (November 26th), we want to highlight the benefits of smaller firms and explain why your supplier diversity program should be tracking small diverse businesses .

When it comes to supplier diversity, an emphasis is placed on minority, women, veteran, disabled, and LGBT businesses.  Although each category has a history of underrepresentation, large diverse organizations are less likely to need supplier diversity assistance versus small firms. Once a company has grown past it’s “small” status, the necessity of resources like supplier diversity programs, decreases.

This is not to say supplier diversity programs should exclude a women owned business with revenue in excess of $100 million, for example.  Instead we recommend that corporations allocate a portion of their spending towards small businesses. We believe this action will help drive economic impact in local communities.

Let’s take a look at the recent Initiative for a Competitive Inner City (ICIC) report, which highlights small business job creation in five cities (Chicago, Dallas, Detroit, Los Angeles, and Washington DC) as an example.  According to the ICIC, small businesses create over 50% of jobs in four of the five cities covered, “58 percent in Chicago, 53 percent in Detroit, 74 percent in Los Angeles and 62 percent in D.C.”  Within the inner-city, small businesses create an even greater portion of jobs, totaling “70 percent in Chicago, 64 percent in Detroit, 77 percent in Los Angeles and 74 percent in D.C.”  The study goes on to argue that unemployment in four of the five cities could be solved if every small business created one new job.

Corporations are at times hesitant to engage with small businesses as smaller firms may lack the experience or the scale to support them.  A Catch-22 of sorts is created as small diverse businesses are not able to acquire new customers due to scale and cannot scale due to a lack of new customers.  This is unfortunate as many small organizations can be nimble, work more closely with customers, and are willing to develop custom solutions for customers.

Targeting and developing small diverse organizations is key to economic improvement in underrepresented communities.  In most supplier diversity programs, purchasing dollars are spent with a few large minority and women owned firms.  Supplier Diversity professionals have the opportunity and obligation to drive inclusion of small diverse businesses as part of their program.  A clear and distinctive separation focusing on small minority, women, veteran, disabled, and LGBT firms can help bolster spend within inner-city communities and grow low income economies.

Small suppliers struggling with low cash reserves

Providing better payment terms to small businesses may reduce your supplier chain risk.

Paying suppliers slowly as a way to conserve cash is a common practice among corporations of all sizes.  However, it may be hurting your smaller suppliers and increasing your supply chain risk.

Many small businesses do not have sufficient cash on hand to withstand a major impact. According to a recent Bloomberg article, most firms are operating month to month with cash reserves only lasting an average of 27 days.  One of the contributing forces behind the lack of cash reserves is the extended payment terms frequently required by corporations. Long payment terms can increase supply chain risk in the event of an economic slowdown or supplier setback.

One way to reduce this risk is to provide smaller suppliers shorter payment options. Many governments are recognizing the cash flow needs of small businesses and, in an effort to aid them, are instituting policies to pay suppliers early while also encouraging large corporations to do the same. The US government has implemented the Prompt Payment Act to help accelerate payments to small government contractors and subcontractors.  The Act mandates that contractors are paid within 15 days of invoicing without requiring an early payment discount. In addition, the US has rolled out the SupplierPay initiative where private companies have agreed to shorten payment periods with small suppliers. The United Kingdom and the Netherlands have also instituted similar initiatives (more information available here and here).

Some Supplier Diversity departments are also leading the charge in this area by offering better payment options to small suppliers that need them (see an example of such a program at the Vanderbilt University). With their direct interaction with small and diverse suppliers, these departments are more aware of suppliers that may need such assistance and in a better position to recommend special considerations for these suppliers within their departments.

>For small businesses, long payment terms are a double edged sword. While large corporations have the purchasing power to demand extended terms, small suppliers are unable to do the same with their own supply base. They have to pay their suppliers early, and receive payments late. This further increases their working capital requirements.

Does your supplier diversity program offer short payment terms for your small and diverse suppliers? If not, it’s worth considering implementing such a program. It helps your suppliers, and also lowers your company’s risk of having to replace a supplier that failed because of insufficient working capital.