Measuring the performance of supplier diversity program

In collaboration with Aishwarya Challa, Analyst - Procurement and Finance Business Services

Big companies can follow the approach of engaging with minority-owned businesses to make procurement more inclusive and increase their ethical standards. Supplier diversity is slowly moving away from being just a corporate social responsibility (CSR) initiative -- instead it can also act as a corporate strategy to gain access to innovative suppliers.

A 2017 study by the Hackett Group shows that 76 percent of diverse suppliers met the expectation of buyers and close to 23 percent exceeded expectation. From identifying diverse suppliers to bringing together internal and external stakeholders and measuring the progress of the supplier diversity program (SDP), the procurement team plays an important role. Forty percent of companies have an individual who dedicates 50% to 100% of their time to the success of the SDP.

One of the earliest adopters of supplier diversity in the technology sector is IBM. They established a minority supplier development program back in 1968 aimed at expanding their purchasing to companies operated by minorities, women, LGBT, veterans, disabled people, etc.

Coca-Cola has been sourcing from diverse suppliers since 2014 and has spent $675 million in 2018, sourcing from minority owned businesses. Coca-Cola has committed to increasing its spending with diverse suppliers to $1 billion in annual billing in the coming years.

Walmart stores invested $13.94 billion in diverse suppliers last year, with the majority of their investment going to women-owned businesses.

The table below shows the approximate spend by procurement teams of big organizations on SDPs.

Source: Beroe Analysis

Benefits of engaging with diverse suppliers

Supplier diversity programs can add up to $3.6 million to the bottom line for every 1 million in procurement costs (Hackett Study 2015). Research has shown that the main reason for supplier diversity programs to create a positive impact on the bottom line is due to the competition that it fosters among businesses.

Generally, competition is restricted to few large players in the market, wherein there is minimal leeway for discounts, whereas, when the buyer has an SDP, larger suppliers will be forced to reduce prices further, thereby benefiting the buyer.

An interesting benefit of engaging with diverse suppliers is how the partnership spurs innovation. Diverse suppliers are more agile compared to their larger counterparts and can come up with innovative products/solutions at a faster pace and lower cost.

Engaging with minority suppliers can also help attract and retain top talent in organizations as it enhances the corporate reputation. Big brands also gain a commercial advantage while partnering with minority-run businesses. A 2019 study by Hootology showed that knowing about supplier diversity initiatives increased brand loyalty among consumers by up to three times.

Measurement Metrics

The most commonly used metrics include total procurement spend with diverse suppliers, percentage spend with diverse suppliers in relation to the total procurement spend, and the number of contracts with diverse suppliers.

Source: Beroe Analysis

Diversity total spend is the most commonly used method to measure the success of an SDP, followed by the number of suppliers engaged. Organizations also measure value in terms of supplier development and community impact.

A survey among 119 industries of all maturity levels by CVM solutions showed that 43 percent of them do not measure the financial ROI of the SDP and mostly focus on savings related to low-cost procurement from diverse suppliers and the overall economic impact (employment) achieved from the program. While this approach is not wrong, it runs the risk of diverse suppliers being seen only from the prism of the CSR program, limiting the potential benefits one can derive.

Conclusion

Well-defined and measurable goals and financial performance monitoring can help reap maximum benefits from an SDP. Procurement should focus not only on identifying a diverse supplier; instead, it should find a best-fit diverse supplier who can add value to the supply chain.

References

http://cramton.umd.edu

https://sloanreview.mit.edu

https://www.thehackettgroup.com/

https://hbr.org/