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. Research shows that companies that embrace diversity are more profitable than companies that don’t:
"On average, supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement operation costs,” writes Lindsay Clark, referencing a 2015 study by The Hackett Group. “The high return on investment is undeniable... A positive ROI that boosts socially conscious reputation should push supplier diversity to the forefront of business strategy."
What Is a Diverse Supplier?
There are approximately 16 categories used to identify diverse businesses. Common examples are Small Business Enterprise (SBE), Minority-Owned Business Enterprise (MBE), and Women’s Business Enterprise (WBE). In order for an organization to record and report diverse spend, it is important to ensure its suppliers are certified through third-party certification bodies.
Diversity 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 Gay and Lesbian Chamber of Commerce (NGLCC), and the U.S. Department of Veterans Affairs Vets First Program focus on assuring that businesses are appropriately categorized by offering third-party certification services recognized nationally. Regional councils and state and local governments also offer certification services.
Why Is Supplier Diversity Important?
A common misconception is that diversity is a quota system or social program designed to benefit selected groups while adding little to no value to the bottom line. The fact is that a competitive advantage exists, as progressive organizations that have already implemented an effective strategy have realized. A Supplier diversity commitment benefits a company because it:
- Promotes innovation through the entrance 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
- Displays an organization’s commitment to doing business, beyond consumerism, in diverse markets
- Showcases the company’s interest in and commitment to the economic growth of all communities
Supplier diversity is beneficial to all stakeholders, not just to the companies with programs. 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 start-up and sustainability, such as access to capital and networking opportunities, so effective supplier diversity strategies can alleviate these pain points.
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. According to a report published by NMSDC, the nearly 12,000 diverse businesses certified by NMSDC as of August 2014 had a total economic impact of more than $400 billion in output. These minority-owned small businesses drove the creation of and/or preservation of more than 2.2 million jobs held by persons who find themselves either directly or indirectly employed by NMSDC-certified MBEs. These same minority suppliers also generated close to $49 billion in tax revenue for the benefit of local, state, and federal governments.
U.S. statistics show a similar economic impact. In December 2014, the U.S. Small Business Administration (SBA) reported 57 consecutive months of new jobs added back to the U.S. workforce after the worst recession in recent U.S. history. SBA Administrator Maria Contreras-Sweet reports that “…this new trajectory is attributable to the success of America’s entrepreneurs and the resurgence of our nation’s small businesses. About 7 million of the 10.9 million jobs added back were created not by large corporations, but by start-ups and small enterprises.”
In addition to driving job creation, supplier diversity is important because it provides products and services to emerging consumer markets. While 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.
A joint report from the U.S. Census Bureau and the Minority Business Development Agency (MBDA) shows that minority-owned businesses continue to outpace the growth of majority-owned firms. According to the report, the number of MBEs increased 39 percent between 2007 and 2012 (from 5.8 million to 8 million), or more than three times faster than population growth among minorities.
Employment at minority-owned firms increased 33 percent to 7.7 million jobs, while gross receipts were up 53 percent from 2007. In contrast, the number of non-minority firms shrank by five percent between 2007 and 2012. Employment at non-minority firms increased seven percent, or less than one-fourth as fast as in MBEs, and receipts in non-minority firms increased 27 percent, or half as fast as in MBEs. From this information, it is clear that MBEs are a driving force behind economic growth and will be a major segment of the U.S. economy in the 21st century as the transition to a more diverse demographic majority continues.
Supplier Diversity Thought Leadership
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. It is also important because it provides information to companies that are attempting to develop effective supplier diversity initiatives. As organizations share their experiences, they 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 management 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. With more than 40 years of combined supplier diversity experience, our solutions are designed to solve real-life supplier diversity challenges that can help our clients achieve their operational objectives.