This blog was originally published on 1/9/2017 and updated on 12/18/19.
Have you been hearing the term “supplier diversity” but aren’t sure what it means? As with many business terms, the definition and implementation of the words can vary by company. Let’s start with the general definition, then we’ll dig a little deeper.
In general, supplier diversity is a business strategy that ensures a diverse supplier base in the procurement of goods and services for any business or organization. It emphasizes the creation of a diverse supply chain that works to secure the inclusion of diverse groups in the procurement plans for government, not-for-profits, and private industry.
In other words, supplier diversity refers to a supply chain that incorporates businesses owned by diverse individuals or groups.
What Is a Diverse Supplier?
A diverse supplier is, in the broadest sense, a business owned and operated by an individual or group that is part of a traditionally underrepresented or underserved group. In the United States for example, there are approximately 16 categories used to identify diverse businesses. Common examples are small-business enterprises (SBEs), minority-owned business enterprises (MBEs), and woman-owned business enterprises (WBEs). In order for an organization to record and report diverse supplier spend, it is important to ensure that its suppliers are certified through third-party certification agencies.
Diverse certification is an important milestone in the life of a supplier because it authenticates that the business is owned, managed, and controlled by a qualifying diverse group. Certification also opens the door for opportunities to contract with the federal government, which has a mandate to increase the number of diverse suppliers within an organization’s supply chain.
Entities such as the Women’s Business Enterprise National Council (WBENC), the National Minority Supplier Diversity Council (NMSDC), the National LGBT Chamber of Commerce (NGLCC), and the U.S. Department of Veterans Affairs Vets First Verification Program focus on ensuring that businesses are appropriately categorized by offering nationally recognized third-party certification services. Regional councils and state and local governments also offer certification services.
Why Is Supplier Diversity Valuable?
Why should companies make inclusive supply chains a priority? The reasons range from social responsibility to the bottom line. Ideally, supplier diversity combines the best of our desires for a better, more equitable world and the drive to be a competitive leader in the marketplace.
Let’s look at the value-add on the social responsibility side first. Does your enterprise have a corporate sustainability/social responsibility mandate? If so, then supplier diversity should be in alignment with that mandate.
First and foremost, supplier diversity programming adds economic value because it encourages the growth of diverse businesses. Diverse businesses typically encounter barriers that challenge their startup and sustainability efforts, such as access to capital and networking opportunities, and effective supplier diversity strategies can alleviate these pain points.
Not only does supplier diversity benefit underrepresented businesses, but it also uplifts the communities where those businesses are located through job creation, increased wages, and tax revenue. This is called economic impact, a metric that demonstrates how valuable supplier diversity is to local economies and communities.
More and more corporations are measuring the economic impact of their supplier diversity programs to gain a clearer picture of what diverse spend means for the communities they reach. For example, CVS Health reported that their 2018 diverse spend contributed $5.5 billion to the U.S. economy and sustained 31,095 jobs.
As small businesses grow, so will our nation’s economy. Because most diverse businesses are small businesses, they aid in the economic recovery and sustainability of their communities. Research shows that when companies increase their diverse spend, they see an increase in market share. Specifically, the correlation between high diverse spend and increased market share was markedly superior to the ROI from companies with low diverse spend.
Beyond the social responsibility and economic impact metrics, the fact is that inclusive supply chains present a competitive advantage, as progressive organizations that have already implemented an effective strategy have realized.
Research shows that when companies increase their diverse spend, they see an increase in market share. Specifically, the correlation between high diverse spend and increased market share was markedly superior to the ROI from companies with low diverse spend.
According to The Hackett Group, "companies that allocate 20% or more of their spend to diverse suppliers attribute 10%-15% of their annual sales to supplier diversity programs. Conversely, companies that direct less than 20% of spend to diverse suppliers attribute under 5% of sales to their supplier diversity program.
A supplier diversity commitment benefits a company because it:
- Promotes innovation through the introduction of new products, services, and solutions
- Provides multiple channels from which to procure goods and services
- Drives competition (on price and service levels) between the company’s existing and potential vendors
- Allows a company to take advantage of new opportunities for business expansion with the emergence of new consumer needs based upon shifting demographic realities
That last point alone hints at the tremendous untapped potential of working with diverse suppliers. Although traditional products and services remain available to consumers, demographic shifts create opportunities for diverse suppliers to meet the needs of emerging and/or shifting populations in the U.S. and across the globe.
According to a Department of Commerce study, this growing minority population will account for as much as 70 percent of the total increase in purchasing power from 2000 to 2045. What company wouldn’t want a share of that consumer market?
We expect data from the 2020 U.S. Census to reflect a continued increase in the economic impact of small and diverse businesses on the U.S. economy.
It is clear that diverse-owned businesses are a driving force behind economic growth and will continue to be a major segment of the U.S. economy in the 21st century as the transition toward a more diverse demographic majority continues.
To know the importance of supplier diversity in-depth, Harvard Business Review published this interesting article. And, to know how your company can implement a supplier diversity program, give us a call.
Supplier Diversity Thought Leadership
If you’re reading our blog, then you are probably in search of information about creating or improving a supplier diversity program. And that’s why we’re here—to share our knowledge and insights as garnered from more than 60 years of combined supplier diversity experience.
Thought leadership in supplier diversity benefits everyone because it provides a forum for sharing information, resources, tools, methodologies, and experiences to assist in the growth, expansion, and development of the industry. As we all share our experiences, we enable success within other organizations and, in turn, build a stronger industry and stronger communities with stronger diverse businesses.
As the premier provider of supplier diversity services and solutions, CVM Solutions is positioned as a thought leader in the industry. We offer resources and solutions that enable supplier diversity success for our clients. Our team is composed of supplier diversity leaders from the corporate, government, nonprofit, and technology sectors. We specialize in solutions designed to solve real-life supplier diversity challenges that can help our clients achieve their operational objectives.