Direct and indirect spend. Tier 1 and Tier 2 reporting. Third parties and fourth parties.
These terms are used often in procurement and have inevitably found a place in the supplier diversity discussion. The distinction between the two of them is something you should be paying attention to.
In our forthcoming 2018 State of Supplier Diversity Reports, 68 percent of responding supplier diversity professionals said they tracked Tier 2 spend. The percentages were higher for companies with more than 5,000 employees—these organizations are increasingly aware of the benefits of Tier 2 reporting.
Understanding Tier 1 and Tier 2 reporting is vital to maximizing the success of your supplier diversity program. Here’s a brief primer on direct and indirect spend, and how both benefit supplier diversity initiatives:
Tier 1 Explained
The concept of Tier 1 suppliers is quite simple: They are the third parties you directly contract to provide goods and services that support the operations of your business.
Tier 1 suppliers come in many forms—the tech company whose software and hardware you use to run your organization; the manufacturer that delivers a key component for your product; the small business that landscapes your grounds; the consulting firm that offers specialized knowledge for your operations; and so on.
A typical large business will contract hundreds, even thousands of Tier 1 suppliers, thus giving supplier diversity programs plenty of opportunities to hire diverse partners and increase spend.
Tier 2 Explained
Tier 2 suppliers are the vendors your vendors contract to ensure their operations are successful.
These fourth parties are indirectly tied to your business but play an important role—if a key Tier 1 supplier doesn’t have the vendor-provided materials necessary to manufacture its component for your production line, they either must temporarily halt production or scramble to find another supplier that can deliver what you need.
Tier 2 reports give supplier diversity programs a view of how diligent their Tier 1 suppliers—diverse or non-diverse—are at contracting their own diverse partners.
Why Tier 1 Matters
Tier 1 suppliers are the most immediate gauge of supplier diversity.
The number of diverse suppliers under contract can be tracked, as can the percentage of diverse businesses in the overall supplier portfolio. Spend can also be measured, both by dollars and by percentage.
Despite this straightforward approach, challenges abound. Tracking these metrics is a considerable task, particularly if your program is working with hundreds of diverse suppliers.
Moreover, confirming that a Tier 1 supplier is diverse can be time-consuming and not always accurate—the business you contracted a few years ago may have experienced an ownership change and may no longer be considered diverse.
Dedicated supplier diversity software solutions can help with accurately tracking your program’s important metrics, as well as giving you more immediate answers on the status of suppliers in your program.
The Potential of Tier 2
More and more, Tier 2 suppliers are being accepted by government contracts as an acceptable inclusion in an organization’s overall diverse spend.
This development is significant because direct, large, non-diverse suppliers can indirectly contribute to meeting supplier diversity requirements.
Besides encouraging key vendors to embrace supplier diversity, Tier 2 strategies give companies more criteria to assess suppliers before they are contracted. The challenge with this approach is generating accurate Tier 2 reports.
Supplier diversity software with Tier 2 reporting capabilities provides a big boost in this regard.
Web-based portals are easy to use and can combine Tier 1 and Tier 2 spend as needed. The reports generated deliver accurate indirect spend numbers to meet government requirements as well any internal guidelines.
Tier 2 reporting is part of supplier diversity’s future. With the right strategy and tools, your program will be ready for that future.
Does your supplier diversity program currently report Tier 2 spend?