Supplier diversity has always been focused on growing underserved diversity classes and communities, but the challenge now is how to translate that goal into stakeholder value. How do we prove the value of our supplier diversity programs beyond checking the box on a corporate social responsibility mandate?If you're just sharing direct-spend dollars with your stakeholders, then you're missing a significant part of the story. It's important to show the ripple effect of investment made in diverse suppliers, which is where economic impact comes in.
What is economic impact?
Economic impact is, in its simplest terms, the impact that doing business has on the economy. In the case of your supplier diversity program, it is a measurement of how doing business with small and diverse companies generates revenue, income, and jobs and how that activity impacts the local economy.
An economic impact analysis (EIA) examines the effect of an event or, in our case, doing business with small and diverse suppliers on the economy in a specified area, ranging from a localized region to the entire country.
Four types of economic impact
An EIA primarily examines four types of economic impact: output effect, employment effect, income effect, and tax effect. Before we take a closer look at each, let's set up an example scenario. Suppose you own Global Widget Co., manufacturer of a bestselling product that's taking the world by storm. Because you value innovation and competitiveness, you've integrated several diverse suppliers into your supply chain. Rainbow Ltd. is an LGBT-owned company located in Maryland that manufactures gizmos you need for your widgets, and Sanchez Marketing Group is a Hispanic- and woman-owned marketing agency located in Texas that is responsible for marketing your brand. Now let's see how these business partnerships impact local economies.
- Output effect is a measure of revenues generated by small and diverse suppliers within your supply chain. This is a fairly simple, straightforward measure of economic impact. Every time you place an order with Rainbow Ltd. for a new shipment of gizmos, its revenue increases. Your account with Sanchez Marketing Group means its annual revenue increases. This is an example of direct impact, where your spend with these diverse suppliers directly impacts their bottom line.
- Employment effect is a measure of the number of jobs created as a result of the business activities of small and diverse businesses within your supply chain. When Global Widget Co. contracts with Rainbow Ltd. for gizmos, Rainbow Ltd. must hire additional employees to fulfill Global's order. In addition, Rainbow orders more supplies from its own suppliers to make the gizmos, so Rainbow's suppliers must also hire additional employees. Small and diverse businesses are a driving force in job creation, which has a tremendous ripple effect on the local and national economies.
- Income effect is a measure of total income generated with small and diverse suppliers within your supply chain. Now we're starting to see how we impact the broader economy. As noted above, when Global Widget Co. contracts with suppliers, new jobs are created to meet increased demand. The income paid to these employees and the employees on down the supply chain is another type of economic impact.
- Tax effect is a measure of federal, state, and local business taxes as well as personal taxes that are supported through economic activity. After Global Widget Co. hires Sanchez Marketing Group to market the brand across the country, the marketing agency launches a segmented campaign in Texas. They will support both local and state taxes with the campaign, as well as contribute to personal taxes via income paid to employees.
The Multiplier Effect in Economic Impact Reporting
We know that the impact of spending with a minority-owned company is greater than direct purchases made from the company. One of the most powerful results of integrating diverse businesses into the supply chain is how the money we spend with those suppliers continues to work far beyond our direct spend in a phenomenon known as “the multiplier effect.”
We see this in our example above where Global Widget Co. contracts with Rainbow Ltd., which results in job creation on down the supply chain. Money spent with a diverse company is spent again on payroll, goods and services, and other suppliers in its supply chain. Employees use their salaries to purchase goods and services from other businesses. Downstream suppliers similarly use the proceeds from their sales to pay their employees and other businesses. All of this spending is met with tax contribution on a government and personal level. A chain reaction of indirect and induced spending continues, creating a multiplier effect.
Measuring economic impact and demonstrating the multiplier effect of partnering with diverse suppliers is a powerful tool for increasing stakeholder buy-in. Demonstrating how economic impact promotes a strong, sustainable supply chain gives your stakeholders compelling reasons to not only support but champion your supplier diversity program.