This article was first published by MIT Sloan Management Review on the 20th of May 2021.
As we emerge from the pandemic, broad interest in socially responsible companies is accelerating. Investors are pouring their money into funds designed to promote social good, and one company after another is announcing initiatives to encourage diversity and inclusion. Until now, driving economic growth and confronting social equity haven’t necessarily gone hand in hand. Today, companies can not only meet both requirements but also combine them into a competitive advantage by procuring more from diverse suppliers — defined as small businesses or companies owned by minorities, women, veterans, members of the LGBT community, or people with disabilities.
Supplier diversity and inclusion initiatives can make a significant difference to companies’ revenues and to communities. First, customers are three times more likely to purchase a product or service from a brand they perceive to be committed to diversity and inclusion. Second, directing $1 million in procurement spending toward diverse suppliers can create as many as 10 new jobs, according to research conducted by diversity analytics provider Proximo. These jobs drive at least $124,000 in economic impact through tax revenues, helping to build local communities where the suppliers operate.
Yet even though 85% of Fortune 100 companies in the United States have such initiatives, only 59% of these companies report how much they source from diverse suppliers, according to our research. These companies procure on average only 10% of their supplies and services from diverse suppliers. Moreover, much of this spending is directed toward small businesses, regardless of whether members of underrepresented groups own them.
Few industries are well positioned to use their supply chains proactively to encourage diversity and inclusion. Telecommunications, health care, and pharmaceutical companies source the most from diverse businesses, in part because the government is a large customer and they have developed the infrastructure to do so over decades. These are followed by manufacturers and automotive companies, which pioneered supplier diversity and inclusion initiatives in response to the civil rights movement in the 1960s. Energy, financial services, and technology companies source little from companies owned by members of protected classes. (See “Percentage of Procurement From Diverse Suppliers, by Industry.”)
As driving a more equitable economic recovery from the pandemic becomes a higher priority, companies can take these five steps to create more effective supplier diversity initiatives.
1. Set the right tone at the top. For starters, companies need to have an up-to-date plan, with executive sponsorship and support across the business. It should be crystal clear that a company’s management team wants to encourage diversity and inclusion by procuring products and services from suppliers owned by members of protected classes. Given that the procurement team has the most comprehensive overview of corporate ecosystems, including internal structures, suppliers, assets, and customers, let it lead efforts to select the partnerships and relationships that best support diversity. Frequent top-down communication of the importance of supplier diversity to a company’s vision, plan, and progress is the best way get employee buy-in.
One telecommunications company saw its initiatives gain traction once its chief executive made the company’s diverse spend objectives clear and provided regular progress updates in his town halls and quarterly reporting. If employees can see the value, they will feel more inspired to procure from a broader range of suppliers. Establishing a steering committee or advisory board with representation from across the organization and across levels can also help to energize and mobilize employees.
2. Invest in dedicated resources. For a supplier diversity initiative to succeed, you need to invest in the people and resources to make it happen. Our research revealed that companies with two or more full-time employees dedicated to supplier diversity sourced four times as much from diverse suppliers than companies with only one dedicated employee. Two-thirds of Fortune 100 companies employ at least three people in their supplier diversity initiatives, and one-third have at least five.
Resources should be well integrated within the organization’s procurement function. While your staffing requirements will vary based on your supply chain complexity and goals, the key is to invest in talented people who will advance the supplier diversity vision. Likewise, it is important to invest in the right technology to manage diversity data and facilitate supplier relationships, such as user-friendly supplier tracking and sourcing tools.
We’ve seen how investing in the right resources can minimize operational disruption. During the height of the pandemic, a large bank was struggling to get personal protective equipment from its usual suppliers. Thanks to its dedicated supplier diversity team, the bank was able to bring together diverse suppliers to quickly address shortages. By tapping into a nimble and more flexible supplier base, it secured its much-needed supplies at a lower cost.
3. Expand your diverse supplier network. The more actively your team builds diverse supplier networks, the more successful your initiative will be. Make sure your initiative seizes every chance to expand and improve your company’s access to diverse suppliers. Join industry groups, local groups, and associations, where you can learn — and eventually share — best practices.
Organizations that certify diversity standings can also be great sources.1 One automotive company we spoke with expanded its reach into battery technology more easily because its supplier diversity initiative had developed relationships with groups that certified suppliers with that niche expertise.
4. Set concrete goals. Set specific and realistic goals the same way you do for other sourcing strategies. Companies with internal goals for supplier diversity and inclusion source almost twice as many parts and services from companies owned by members of protected classes than companies without set goals, our study showed.
Setting goals encourages employees to consider a much more robust set of metrics to measure progress. With clear goals, employees are more likely to include both Tier 1 and Tier 2 suppliers, scrutinize suppliers’ workforces, and encourage the consideration of diverse suppliers in requests for proposals. In fact, some companies go so far as to require managers to justify why a diverse supplier has not been included in an RFP.
5. Publicize progress. Progress made toward these goals should be shared regularly with internal and external stakeholders. By doing so, companies create accountability throughout their organization and make clear that diversity is a priority.
About a quarter of Fortune 100 companies publicly share their supplier diversity goals and the portion or absolute dollar amount of their goods and services sourced from diverse suppliers. Of these, almost 60% distinguish goods and services sourced from companies owned by underrepresented groups from those procured from small businesses. Some tech giants also provide interactive tools that allow users to review their procurements from diverse suppliers over years and across different categories.
Not surprisingly, we found that the nearly 80% of Fortune 100 companies that report the results of their supplier diversity initiatives source about three times as much from suppliers owned by members of underrepresented groups than companies that do not. Given the rapidly growing interest in furthering diversity and inclusion, more companies should follow this example.
COVID-19 has exposed many vulnerabilities in our society. Although many supplier diversity initiatives have evolved beyond token gestures, there remains much work to be done. While it is unclear exactly what the post-pandemic world will look like, inclusion and diversity are becoming a higher priority. Putting a supplier diversity initiative in place can drive positive change, boost earnings, and build resilience both inside and outside your organization.