Supplier Diversity

Or: Why You Need a Supplier-Diversity Program

Alfred Verhoeven, October 26, 2022

In the past decades, many companies have made the journey from Sustainability to Diversity, Equity, and Inclusion (DE&I) within the context of Corporate Social Responsibility.

The phases

DE&I is a sensitive and complex issue, that comes in phases. Phase 1 is the definition of a company strategy, followed by an HR policy that acknowledges and supports employees ‘as they are’ and gives them a platform to express themselves in ERGs (Employee Resource Groups).

Phase 3 of DE&I is an above-the-line presence in marketing and communication, a subject I have researched extensively in Marketing the Rainbow. Diversity in advertising and other forms of marketing is only credible when Phase 1 has been properly implemented.

Participating in events like Pride or remembering Pride Month or IDAHOBIT is good and necessary, but it can also quickly devolve into, or be seen as pinkwashing. A more sustainable partnership with recognized non-profits can ‘solve’ this.

Phase 2 of DE&I is Supplier Diversity.

Supplier diversity is the intentional inclusion of historically underutilized businesses in a company’s supply base to achieve innovation; cost reduction; and revenue growth objectives. This may include minority-, woman-, LGBTIQ-, veteran-, disabled-owned businesses, and others.

In this strategy, companies proactively invite companies owned and run by diverse minorities to participate in RFIs and RFPs. The rationale for this ranges from a business commitment to social responsibility to the desire to be a competitive and dynamic leader in the marketplace. It also serves to mirror the diversity of communities in which companies operate and diversity of clients they have.

In addition to the growing interest from the corporate world, an increasing number of investment groups are keen to invest in companies committed to supplier diversity. Credit Suisse’s market-cap-weighted basket of about 350 LGBTIQ-inclusive companies has outperformed the ACWI global equity index excluding those 350 constituents by 378 basis points a year since 2010.

How it began

Supplier Diversity started in the 70’s in the USA, primarily addressing racial injustice. General Motors and IBM led the way, and soon governments issued directives for their own contractors to include minority-owned businesses in their supply chains. There are many publications about this, for instance, Five Steps To Defining Your Supplier Diversity Program and 7 Main Characteristics Of A Supplier Diversity Program.

Now, it is quite easy to determine whether a company is run and owned by women, entrepreneurs with an ethnic background, or of a certain age. However, there is neither a ‘flag’ in the Chamber of Commerce nor in any other register that indicates when this concerns members of the LGBTIQ+ community.

The role of the BGLBC

This is where the BeNeLux LGBTIQ+ Business Chamber (BGLBC) comes in. In close collaboration with our umbrella organization, the European LGBTIQ Chamber of Commerce, we screen entrepreneurs and validate their companies as “LGBTIQ owned and operated”. After validation, the members will appear in the European database. This register is accessible for peers and our corporate partners.

Primary and Secondary purchases (direct and indirect spend)

Procurement consists of Primary or Direct purchases (necessary for the primary process, for instance milk for a dairy producer) and Secondary or Indirect purchases (to run the company smoothly, like office equipment or marketing specialists). For the former, it will not be easy to find diverse suppliers as this concerns large quantities and equally large companies – which are most often either stock quoted or owned by families or non-LGBTIQ entrepreneurs. This means that diverse suppliers need to be found in the SME and self-employed brackets.

Tiers

Purchases are also distinguished as

  • First tier: direct procurement from diverse suppliers
  • Second tier: where the suppliers to the company make use of diverse suppliers themselves. For instance, as of 2019, Targetspent $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.[1]

UPS implemented their global Supplier Diversity in 1992 and 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.

Pepsico and Coca-Cola each spend $ 1 bln a year on diverse suppliers, and Unilever has even pledged € 2 bln annually.

Why You Need a Supplier-Diversity Program

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. Icertis: “Recent incidents in the US, and the globe, have brought supplier diversity initiatives back into the forefront for socially conscious businesses. Apart from the ‘seen’ social impact, diversity initiatives can have a tremendous ‘unseen’ commercial impact on businesses, aiding the development of resilient and agile supply chains by expanding the supplier base.”[2]

A study from the Hackett Group showed that companies that “focus heavily on supplier diversity” generated a 133% greater ROI when it comes to procurement than the typical business.[3]

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 productsHootology estimated that these favorable perceptions would lead to an additional 670,000 consumers using the company’s products more frequently.

Effect on image and sales

The feel-good factor associated with diversity programs can also polish a brand’s image. In a 2019 study for Coca-Cola, Hootology, itself a diverse supplier, found that those who knew about Coca-Cola’s supplier diversity initiatives were 45% more likely to also value the brand for diversity, 25% more likely to think more positively about the brand, and 49% more likely to use Coca-Cola products. Hootology estimated that these favorable perceptions would lead an additional 670,000 consumers to use the company’s products more often.

Phase 2 thus directly stimulates the consumer in a positive way  and marketing activities are facilitated and improved.

Andrea Fimian, CEO and Founder of fips consulting adds: “There is no reason to choose either sustainability or supplier diversity in a company. Inclusive sourcing or supplier diversity programs support and complement a company’s sustainability efforts in its supply chain.”

Conclusion

“Supplier diversity is a business strategy, not a feel-good story. Sure, it’s the right thing to do, but it’s also one of the most effective ways to drive real business value, far beyond just procurement.“[4]

[1] Harvard Business Review, “Why You Need a Supplier-Diversity Program”, August 17, 2020

[2] Icertis, “Whitepaper: Five Ways to Increase Supply Chain Diversity and Compliance

[3] Wall Street Journal, Benefits of Supplier Diversity May Go Beyond ‘Social Good’, Aug 21, 2006

[4] Jaggaer, provider of cloud-based business automation technology, 5 Steps to Start and Grow Your Supplier Diversity Program