Most leaders acknowledge that supplier diversity programs can bridge critical gaps in opportunity, wealth creation and achievement. But, similar to sustainability initiatives, if not done correctly, they can easily morph into marketing kits that hold little weight on the ground. As ESG measures and public disclosure laws become more commonplace, organizations are increasingly accountable for their environmental and social impacts, and consumers are demanding change too. Whether your program is new, or you’re trying to improve current practices, take a look at some of the foundational pieces of implementing a supplier diversity program and how to seamlessly build on top of it.
History of Supplier Diversity Programs in the US
Supplier diversity programs are certainly not new, but they have seen a renewed focus over the last several years. In the US, the first of these programs were developed more than 50 years ago in light of the Civil Rights Act to address economic disparities among historically marginalized groups. Over time, the creation of groups such as the National Minority Development Council as well as the Women’s Business Enterprise National Council proved instrumental in providing support and opportunity to diverse businesses via training, certifications, sponsorships and more. Companies like General Motors and IBM were some of the early adopters of a supplier diversity program, and since then similar programs have been adopted nationwide (and globally), both in the private and public sectors.
Definition & Certification
A supplier is generally considered diverse if the organization is at least 51 percent owned and operated by a person(s) from one of the following categories: minority-owned (Black, Asian, Hispanic, Native American or other indigenous group, Pacific Islander, etc), woman-owned, veteran-owned, disability-owned, or LGBTQ-owned. Each category typically has one or more agencies that offer different types of certifications, such as the Minority Business Enterprise, Disadvantaged Business Enterprise, and more. While self-certification has become more commonplace, typically, third party certification is preferred or required from buyers.
The State of Supplier Diversity in 2022
According to a University of Georgia study, buying power for African American, Asian American, Native American and Hispanic consumers represents nearly 30% of the nation’s total buying power – and it’s only increasing. With that growth comes more demand for products and services that represent the minority communities that buy them.
But another study shows the average percentage that a company spends on diverse suppliers is 6% and 15% for more advanced programs. Keep in mind that determining the right benchmark for your diversity spend is not a simple calculation, and it’s very specific to the organization and industry; however, it’s clear that there is a long way to go to bridge the gap.
Supplier diversity programs were born out of a way to address social and economic disparities – an important purpose they still serve – but they have also proven to be quite advantageous over the past few years when agile supply chains were clearly too few and far between. Many women and minority-owned companies are also small or medium-sized enterprises, and their resilience was on full display as many pivoted in the wake of the pandemic to fill necessary gaps in materials and goods.
There are other reasons to be optimistic about the state of supplier diversity. In a recent report, almost 40% of respondents stated that supplier diversity is part of their management performance objectives. And in 2019, only 25% of respondents’ programs were two years old or less; in 2021, the number jumped to 40%, indicating an upward trend in diverse programs.
Where to Start: Set the Right Foundations for Your Supplier Diversity Program
Certifications & Supplier Onboarding
Third party certifications are considered best practice when implementing program standards, and diverse suppliers may also be more inclined to utilize resources from the certifying agencies and their partners as well. While there are many certification agencies out there, here are some of the most common:
- National Minority Supplier Development Council
- Women’s Business Enterprise National Council
- National Gay & Lesbian Chamber of Commerce
- Vets First
- National Veteran Business Development Council
However, self-certification can have advantages, one of the most important being the little to no cost it requires, especially compared to a third party certification. Make sure your procurement team takes into account when and how they will approve self certifications. For example, you could offer exceptions for small, diverse suppliers who generate less than a certain amount of money in revenue. Or perhaps LGBTQ suppliers in certain regions of the world could qualify for self certification if they do not feel safe being certified by a third party. But whether or not they are third party or self certified, make sure you have a sound supplier onboarding process that takes in all of this information at the beginning of the relationship and also makes it simple for suppliers to update their certifications over time.
How to Calculate Diverse Spend
The most important part of a successful supplier diversity program is knowing where your company currently stands and where you want it to be in one year, five years, or more. In order to do that, determine how much of your current supplier spend comes from diverse suppliers.
There are several ways to do this, but one of the most common methods is dividing your spend from certified diverse suppliers by your total sourceable spend. Sourceable spend in this case refers to anything related to a supplier – in contrast, non sourceable spend would include employee expenses, travel or charitable contributions, for example. While there are some programs that track all spend when calculating the diversity percentage, for the sake of procurement leaders, who are typically overseeing the supplier diversity programs, this is more common.
Getting an idea of your sourceable spend can be time consuming and may require the help of your company’s finance team to get a comprehensive list of all accounts. Supplier intelligence solutions should also offer diversity spend reports that aggregate this information into comprehensive but easily digestible information.
Set Your Benchmark
A common mistake that procurement teams make when developing or updating their programs is that they compare their supplier diversity metrics against different industries or organizations of different sizes and resources. Thus, they set goals that are too low and don’t require much effort to achieve, or they set the benchmark too high and get defeated when they miss the mark. Try to find benchmarks for your particular industry, and if you rely on many local suppliers, take a look at demographic breakdowns in your region. Of course, this may not include statistics on veterans, LGBTQ business owners and more, but it can be a useful start. Remember that the main goal is to increase supplier diversity spend from what your company previously spent last year and the year before.
Identify Recurring Spend
Using diverse suppliers for your recurring spend has a couple advantages. It makes the procurement function easier, as you’ll spend less time sourcing new, diverse suppliers each time a one-time purchase is needed. In addition, as your company grows, so does the supplier. Identify your recurring suppliers, how many are diverse and ways that you can optimize that percentage.
Get C-Suite Buy In
Supplier diversity programs should be treated the same as any other serious program that reports to the executive level. For large companies, a strategic subcommittee with multiple stakeholders should be able to measure progress via continuously updated supplier diversity metrics and more. Buy in from a variety of stakeholders, including the C-suite, adds in the necessary levels of accountability you need for success.
Building out the Program
Implement the Right Incentives for Procurement Managers
Most supplier diversity programs are managed by procurement teams, which means that sourcing managers need to have the right incentives in place in order to realize the program goals. This can be done in a number of ways, but one of the key ways to achieve success is not only tying diversity goals with employee performance objectives, but also ensuring that at least one diverse supplier is included in every bid.
Offer Favorable Payment Terms
One of the fundamental problems that diverse and small businesses face is the time it takes to receive payment. According to a Sage report, late payments cost small to medium-sized businesses over $3 trillion, and the time to receive payments has increased substantially over the years. If you’re a large organization, consider providing immediate payment terms to diverse suppliers, or at least more expedited payment terms.
Tier 2 Programs
Monitoring your entire value chain’s ESG scores won’t be an option for very long, and supplier diversity metrics are likely not far behind. After you’ve set up a good foundation for your program, work closely with your own suppliers and determine how they support diversity programs. If you find you aren’t in alignment, set up dedicated procurement and supply chain functions and processes so you’re on the same page.
How & Why to Connect Supplier Diversity Metrics with ESG Initiatives
ESG often brings to mind measures of environmental sustainability and employees’ human rights. And while those are critical trackers, supplier diversity metrics fit squarely into the social category by boosting economic empowerment for minorities and historically disadvantaged groups as well. With legislative trends such as the German Supply Chain Act sweeping Europe and and the US, more companies will be responsible for ESG compliance throughout their entire value chain as well.
However, understanding the ESG framework is not always well understood by company employees, including procurement teams. While not the only framework, the United Nations’ Global Compact is one of those widely used standards for tracking and measuring performance across environmental, social and governance pillars, and it provides standardized methods for achieving each of the 17 Global Goals, or Sustainable Development Goals (SDGs).
Work closely with the departments that are engaged in ESG initiatives to ensure that you’re not operating the supplier diversity programs in a silo. You can also learn how to engage with your suppliers for more optimal ESG performance in our previous article. Supplier diversity programs are only becoming more robust, with more demand for public disclosure for where companies stand. Make sure you have the right processes and supplier intelligence solutions in place to effortlessly build on your success.
Learn more about Craft’s supplier diversity spend report here.