American businesses must make supplier diversity a strategic priority and stop viewing it as simply a corporate citizenship obligation, according to a new Boston Consulting Group (BCG) book.

"U.S. companies need to do a better job of supporting and developing minority businesses. Minorities will become the majority of the U.S. population by 2045. Therefore, minority businesses need to deliver the value that American corporations expect - at every level of the supply chain. Right now they do not - as they are relegated to low-value or peripheral work that does not directly support the corporate value chain," said BCG senior advisor James H. Lowry, coauthor of Minority Business Success: Refocusing on the American Dream (Stanford Business Books, 2011).

"Modern competition pits a corporation's supply chain against rival supply chains, so developing supplier excellence is a management and strategic imperative. Given inexorable demographic shifts, supplier diversity needs to be a strategic priority at just about every large company," he added.

Lowry underscores the following as reasons current approaches to supply chain and minority business development need to change:

-- The adverse economic impact of minority underachievement will only grow as minorities become a larger and larger portion of the workforce. Their success in creating wealth will determine the fortunes of the nation; so if America does not make minority business success a priority, the U.S. economy is destined to stumble.

--  The "procurement culture" is outdated and cannot deliver results. Adding supplier diversity to traditional procurement is ineffective, as mandated diversity-spend targets are tactical, not strategic. And in this model, minority businesses are relegated to low-value or peripheral work that does not directly support the corporate value chain. The current procurement approach does nothing to develop the skills, scale, and financial stability necessary for minority businesses to grow into partners that can create and deliver value.

--  Soon the majority of U.S. suppliers and value-chain partners will be diverse businesses, those owned by women and minorities. So today's C-Suite executives need to see minority businesses as a strategic asset - ripe for development - rather than avenues for corporate philanthropy, tools for image building and PR, or mechanisms for meeting outsourcing quotas.

--  Value chain development is a strategic process, focused on developing outsourcing partners as a substitute for in-house operations. Successful diversity programs need to be managed within this "developmental" paradigm. Leading companies create inclusion, and loyal allies, by developing long-term strategic relationships with minority outsourcing partners - up to and including equity investments in their suppliers. And these relationships should be developed at all levels of the value chain, not just for non-essential goods and services.

-- One of the biggest challenges facing minority businesses is cash flow: operations, growth, and R&D all require working capital. Yet large corporations often expect suppliers to deliver immediate value, and then wait patiently for months to get paid. The competitive bidding process also pushes down margins on the "non-essential" work allocated to diversity targets (e.g., janitorial or landscaping services). To make matters worse, minority entrepreneurs have demonstrably more limited access to capital and credit. As a result, diversity programs often do more harm than good - bankrupting suppliers through low-ball pricing, high delivery demands, and failure to pay.

"We desperately need a new approach to supply chain diversity," said Lowry, whose coauthor is Leonard Greenhalgh of the Tuck School of Business at Dartmouth. "America's competitive edge depends on throwing out an outdated procurement mentality that isn't working - and in some cases is doing more harm than good."

Source: Boston Consulting Group