by Alexis Bateman, Ashley Barrington and Katie Date - hbr.org
A handful of socially conscious major companies have long played a role in addressing racial injustice through supplier diversity programs that promote an inclusive approach to procurement. As the spotlight on systemic racism roils the United States, these programs are more important than ever, yet too few companies have them and many of those who do have allowed their diversity initiatives to become token gestures.
Through our research, which includes interviews with companies and diversity organizations as well analyses of media coverage and company reports, we have mapped the history of diversity programs and their social and commercial impacts. Our research affirms the commercial and social benefits of such programs and makes the case for companies to revisit their efforts and, if necessary, commit themselves to taking them seriously.
What is Supplier Diversity?
A diverse supplier is a business that is at least 51% owned and operated by an individual or group that is part of a traditionally underrepresented or underserved group. Common classifications are small-business enterprises (SBEs), minority-owned enterprises (MBEs), and woman-owned enterprises (WBEs). Over time, the definition of diversity has expanded to businesses owned by other minority groups such as LGBQT, veterans, and proprietors with disabilities.
The history of supplier diversity in the United States is firmly rooted in the civil rights movement of the 1950s and 1960s. Following race riots in Detroit in 1968, General Motors set up what is regarded as one of the first supplier diversity programs, and much of the American auto industry followed suit. Early movers in the electronics industry such as IBM established supplier diversity programs around the same time. Later, Public Law 95-507 established a program to encourage government contractors to include minority-owned businesses in their supply chains.
The Right Thing to Do
Supplier diversity programs can be part of a company’s efforts to maintain high moral and ethical standards. Kris Oswold, vice president of global supplier diversity at UPS, told us that her company’s supplier diversity program, which started in 1992, grew out of its deepening desire to be more inclusive and do what is right. The company now spends $2.6 billion annually doing business with around 6,000 small and diverse suppliers with a goal to increase that spend amount year over year.
The UPS program has evolved in the ways it identifies and helps fledgling diverse suppliers. For example, UPS partners with and supports multiple councils and third parties such as the Women’s Business Enterprise National Council, the National Minority Supplier Development Council, and the U.S. Hispanic Chamber of Commerce to run mentoring and training programs that support the growth and success of diverse suppliers. This work includes workshops, professional matchmaking at supplier diversity conferences, enhancing opportunities for capital investment, and management education.
Inclusive procurement also delivers broader societal benefits by generating economic opportunity for disadvantaged communities. The U.S. Small Business Administration estimates there were 8 million minority-owned companies in the United States as of 2018. The National Minority Supplier Diversity Council reports that certified MBEs generate $400 billion in economic output that lead to the creation or preservation of 2.2 million jobs and $49 billion in annual revenue for local, state, and federal tax authorities. And those numbers are steadily increasing.
To encourage such growth, Coca-Cola is spending over $800 million annually on diverse suppliers and has a goal of increasing that to more than $1 billion by the end of 2020. In an interview, Terrez Thompson, vice president of global supply inclusion and diversity at Coca-Cola, highlighted the role that diversity programs play in fostering entrepreneurship in highly impacted minority groups. Together with Georgia State University, Coca-Cola formed a supplier-development institute four years ago to provide education on how to start businesses for small and disadvantaged groups. Coca-Cola also has the STEP initiative to support women entrepreneurs through training, education, and mentorship.
Some large companies encourage, and in some cases, require their suppliers to create their own diversity initiatives to broaden the impact. For instance, as of 2019, the retailer Target spent $1.4 billion on goods and services provided by first-tier diverse suppliers and influenced its first-tier suppliers to buy over $800,000 worth of offerings from second-tier diverse suppliers.
Supplier diversity programs are also a selling point when hiring. Fifty-two percent of respondents to a survey conducted for UPS by Hootology, a specialized marketing and consumer insights research firm, said they want to work for a company that has a supplier diversity and inclusion program, according to Oswold. The research helped to shape the company’s approach to recruitment because “letting candidates know about our supplier diversity efforts wasn’t anything we had considered before the research was conducted,” she said.
Aside from these moral and ethical arguments, there are sound commercial reasons for creating supplier diversity programs.
An inclusive procurement strategy widens the pool of potential suppliers and promotes competition in the supply base, which can improve product quality and drive down costs. And by providing more sourcing options, inclusiveness can make supply chains more resilient and agile — an increasingly important advantage in these uncertain times. “Diverse suppliers can turn on a dime and are now considered for contracts that they would not have been otherwise due to the imperative for flexibility. They have proven themselves to be agile in terms of responsiveness,” Coca-Cola’s Thompson said.
Stacey Key, president and CEO of the Georgia Minority Supplier Development Council (GMSDC), gave one example of how that flexibility has helped during the pandemic: Minority businesses drew on their expertise in formulating and manufacturing hair products to create their own line of hand sanitizers and multi-purpose disinfectant cleaners.
The “feel-good” factor associated with diversity programs can also burnish a brand. In a 2019 study for Coca-Cola, Hootology, itself a diverse supplier, found that the individuals who were aware of Coca-Cola’s supplier diversity initiatives were 45% more likely to perceive the brand as valuing diversity, 25% were more likely to think favorably about the brand, and 49% were more likely to use Coca-Cola products. Hootology estimated that these favorable perceptions would lead to an additional 670,000 consumers using the company’s products more frequently.
The current furor over race relations in the United States and increasing support for movements such as Black Lives Matter will surely bolster the impact of supplier diversity programs on brands.
Challenges and speed bumps
A key issue is that diversity programs are often created reactively as distinct entities that are treated as nonessential. These token departments may not have a seat at the procurement table and hence wield little influence on buying decisions.
The obvious remedy is to go beyond tokenism by making programs more central to procurement decisions. In a UPS Longitudes blog post, Oswold of UPS says, “To truly drive toward economic equality, supplier diversity can’t feel like a secret tucked away in the procurement function; it has to hit the main stage.”
Finding minority-owned vendors that comply with a buyer’s procurement requirements is another potential obstacle. To help address this issue, companies can seek out small, diverse suppliers that need support in the certification process and create mentoring and training programs to help them meet standards. Another approach is to partner with relevant councils and chambers of commerce that provide these support systems.
Yet another issue that needs to be addressed is accountability: How can firms verify that their investments in diversity programs go to the right groups and that these groups are genuine? Any company that is a federal contractor must comply with small-business-subcontracting requirements or federal acquisition regulations that define specific reporting requirements. In addition, a number of companies with long-running programs that we studied have established oversight mechanisms. For example, UPS has a Diversity & Inclusion Steering Council to perform that function. Its members include its CEO, other people on its executive leadership team, and other managers. UPS also employs a third-party firm to validate supplier certifications every quarter and conducts audits of diversity spend and the economic impact of programs.
Time to Step Up
All the barriers we’ve identified are surmountable if companies genuinely want to make their procurement strategies inclusive.
Creating a supplier diversity program might be difficult in the near term in specialized markets where there are very few qualified suppliers such as defense. But for most major companies, these programs represent an opportunity to actively join the fight against racial discrimination, create economic opportunity, and enhance their businesses.