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Embracing Supplier Diversity: Objectives, Resources, and Framework

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Diversity within an organization is seen as positive through many lenses: Diversity of ideas, of culture, of ethnicity, so why not also supplier diversity?

Corporations have already embraced diversity within the workforce and noticed benefits from it. Many of these benefits are outlined in the excellent book, Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations.

Supplier diversity is well developed in the U.S. but much less so in Europe. The process starts with corporate objectives, assesses the country resources, and finally, implements a well-planned framework.

Corporate Objectives

Critically, supplier diversity does not work if a corporation does not define it as a key objective for the business. Companies are often driven to start supplier diversity because of customer or government requirements. U.S. suppliers of Auto OEMs, for example, have been requested to provide information about their spend in terms of minority- or women-owned businesses. The same is true with local, state or federal governments, where suppliers must have some level of spend from minority-owned businesses.

Corporations that have defined supplier diversity as a key priority have reported benefits in four areas:

Corporate social responsibility (image)
Access to emerging markets and technologies (start-ups)
Community economic development near to their operations
New revenue driven by minorities (consumer level)

The first benefit can be seen at DiversityInc.com where they publish their annual Top 10 companies for Supplier Diversity and single out AT&T, Wyndham Worldwide, WellPoint, Ernst & Young, Hilton, KPMG, Marriott, KeyCorp, Accenture, and Abbott. There is also the Top 50 Companies for Diversity (featuring Novartis, Ernst & Young, PricewaterhouseCoopers, Proctor & Gamble, and others) that includes workforce and corporate culture.

Resources

It must be recognized that minority- and women-owned businesses have grown substantially in the U.S. In 2002 and 2007, the U.S. Dept. of Commerce (through the Minority Business Development Agency) published data based on the U.S. Census; showing minority-owned businesses (5,800,000 enterprises represented only 29% of companies) grew 47%, reaching US$1 trillion and 46 million jobs. Also in 2007, women-owned businesses reached US$1.2 trillion. As a comparison, the entire U.S. economy grew only 11% in the same period.

In the U.S., government guidelines classify minorities as follows: African American, Asian Indian, Asian Pacific, Hispanic, Native American, lesbian, gay, bisexual, and transgender, service disabled veterans, veterans, and women. These classifications are certified by the National Minority Supplier Development Council.

In Europe, the legislative and cultural acceptability for requesting and capturing data, particularly around ethnicity, is quite different. Europe identifies two preconditions for supplier diversity: “An understanding of diversity and the benefits it brings, amongst large corporations” and “a critical mass of under-represented businesses.” Only the U.K., France, Germany, and Sweden meet these preconditions. The data published by Supplier Diversity Europe in their Handbook on Supplier Diversity for 2008 listed 5,580,000 Micro, Small, and Medium enterprises, accounting for 90% of their companies. (No revenue data was available).

Framework

First and most important is to have supplier diversity as one of key objectives for the corporation.

The basic framework has three requirements: Standardize data, analyze spend, and establish metrics.

Standardize data. This is important because you need to understand your current spend in terms of vendors and commodities. Commodities like raw materials, packaging, logistics, MRO, capital, and corporate services must be classified (under UNSPSC codes or your own taxonomy) accordingly, so you will be able to define your targets.

From the Vendor point of view, your database will need to be standardized so you can consolidate spend for the same vendor with different names and also classify them in terms of minority status. Software vendors like D&B, Ariba, and Coupa provide software with minority classifications, so you are able to report how much spend has been from minorities.

Analyze spend. Some companies simply look at their total spend and then establish their goals and objectives from there. This approach can be used knowing that minority- and women-owned businesses account for 22% of the U.S. economy. Other companies prefer to cleanse the data in terms of availability, or which potential spend can be from minority suppliers. For example, you will not find minority-owned businesses supplying natural gas or crude oil (raw materials), turbines (MRO/capital), or marine freight (logistics). Some companies also include Tier 1 or 2 spend from minority suppliers; for example, auto OEMs ask their suppliers to report their spend with minority suppliers, so auto OEMs are able to report their own spend plus their suppliers, yielding a much larger figure.

Establish metrics: Optimally, you should look to define metrics at different levels like minority type (ethnicity, gender, etc.), comparisons to total company spend or cleansed spend, and company minority spend. Note that some companies also need to report minority spend at local or state levels in the USA or at national levels in Europe.

Spend can either be reported as total value (US$) or percentage of spend. Either reporting should have notes explaining if the value includes tier 1 and 2 suppliers, or in percentage, if it is based on total spend or cleansed spend.

Take-Away

Supplier Diversity is optional for any company. However, those companies that embraced diversity both as a corporate objective and a purchasing initiative have benefited from it.

Taking Purchasing to the next level,

Paulo Moretti

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