Some of the world’s largest companies, such as Walmart, Accenture, and Johnson & Johnson, are in on one of procurement’s best-kept secrets: supplier diversity.
Supplier diversity is a proactive business program encouraging the process of sourcing supplies from minority-owned, women-owned, veteran-owned, LGBT-owned, service-disabled veteran-owned, historically underutilized businesses and SBA-defined small business vendors.
This diversification helps organizations build more strategic relationships with suppliers and provides benefits in several areas, stretching from cost savings to talent management.
Want to get started with your own supplier diversity program? Learn our 5 step process here!
What is Supplier Diversity?
Before we dive into the benefits of supplier diversity, we should first answer the question, what is supplier diversity?
Supplier diversity is defined as a proactive business program that encourages the use of minority-owned, women-owned, veteran-owned, LGBT-owned, historically underutilized business, and SBA-defined small businesses.
This is a program that can have a huge impact on the bottom line of your company but also can have a ripple effect on other departments, company culture, and your community at large.
In a recent webinar on supplier diversity, we received a question from an audience member who wanted to know how their organization should define “diversity.” Specifically, he wondered whether small and medium businesses should be included in diversity, but we’ve received similar questions for all kinds of supplier designations.
The answer is ultimately, “it depends.”
If, for example, you work in public sector procurement, you might find that you have specific legal requirements to meeting diversity thresholds and supplier qualifications may already have been defined.
However, if you’re in the public sector, you might not have such clear definitions. Some companies define diversity at an organizational level. Others will depend on procurement to create their own definition. The key is for your team to do your research and determine what definition best fits, but however you define it you’ll see the benefits quickly.
Driving Bottom-Line Success
Supplier diversity is a best practice that every organization should be encouraging. Not only does it benefit the community around you, but it also provides a distinct competitive advantage for businesses.
In a report titled “ROI-related Supplier Diversity,” the Hackett Group found that companies who participate in a long-term supplier diversity program generate a 133% greater ROI than those firms who look no further than the suppliers they traditionally rely upon.
The report claims supplier diversity programs also drive an additional $ 3.6 million to an organization’s bottom line for every $ 1 million spent in procurement operating costs.
Beyond ROI, the Hackett Group concluded that procurement organizations that work with a diverse supplier base also had lower overall operating costs and spent 20% less on their buying operations. This success all occurred while employing half the number of people in their procurement department.
Although there are more benefits of supplier diversity than I can write about in one blog, here are five of the main advantages of supplier diversity to your organization.
Five Benefits of Supplier Diversity
1. Promoting Innovation
If you continually use the same suppliers without branching out into new, diverse markets, you risk stymieing the creative benefits you should be receiving. We should encourage new small and medium-sized businesses because they bring along added innovation, differentiating themselves from their competitors.
Small businesses, unlike their larger counterparts, are more agile and can create and innovate quickly. Buyers should capitalize on this opportunity because if they continue to use their larger, more traditional suppliers, they are not going to experience the depth and breadth of innovation that naturally occurs when you have a diverse supply base.
Plus, when you work with smaller organizations, you have an increased opportunity to develop truly collaborative relationships, so you can take advantage of that innovation and help to shape it as your relationship grows.
2. Providing Multiple Procurement Channels for Goods and Services
Open up the opportunity to create scenarios that involve multiple suppliers for one sourcing event by building a large database of suppliers from which to source. This allows you (the buyer) to promote and engage several suppliers while simultaneously reducing the overall cost of the product/service.
Multiple channels also allow you to analyze the prices, location, and range of goods of several suppliers and choose the one that works best for them. Finally, you benefit from having multiple channels because of the volume of opportunities created by forging new relationships with suppliers’ alliances.
3. Drive-Up Competition, Driving Down Prices
When sourcing the products you need, there are many factors you take into consideration when choosing a supplier. Whatever factors they may be – price, location, service levels, deliverable date, etc. – suppliers are looking to give you the best deal they can to win your business. This drives competition between suppliers, which reduces your direct and indirect spend.
4. Display your Company’s Interest in and Commitment to the Economic Growth of Your Community
Contracting with local small-medium-sized enterprises (SMEs) or minority business enterprises (MBEs) has a profound effect on your surrounding community. By contracting with these suppliers, you’re helping increase spend and consumption while promoting job creation on the local level. Engaging with local suppliers enhances and bolsters the communities you live and work in, and in the end, isn’t that what matters most?
5. Gain Access to a Whole Different Network
Organizations implementing supplier diversity programs are more likely to penetrate new markets and gain new customers. As you reach out to more and more suppliers, you will become privy to each of their business networks and certification networks.
For example, the National Veteran-Owned Business Association (NaVOBA) certifies veteran-owned businesses. Organizations like this typically maintain event lists they attend for networking purposes. By attending those events, you will gain access to new suppliers and relationships in the space.
Start Diversifying Now
Supplier diversity is instrumental in improving your bottom-line, and as we’ve reviewed above, it will benefit your business in more ways than impacting spend. Discover how you can strengthen your supplier diversity programs and bring these five advantages to your business with supplier management.
