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Top-performing organizations studied by The Hackett Group apply supplier diversity tenets to new areas such as supplier partnering, reputation management and global expansion. Research shows that the most successful organizations take their cues from high up in the company, where commitment to enterprise-wide diversity begins.
Several trends in supplier diversity where procurement organizations have significant opportunity for added benefit have been identified. They include:
• 99 percent of diverse suppliers meet buyers' expectations; nearly a quarter of them consistently exceed expectations.
• Currently, more than 75 percent of U.S.-based procurement organizations’ diversity programs are domestic only; 40 percent of these plan to expand their program globally in the next two to three years.
• The most common tactics used to develop local suppliers are knowledge-sharing (by 42 percent of procurement organizations) and partnering programs (32 percent).
Narrow Set of Objectives Can Limit Potential Benefits of Supplier Diversity Programs
Respondents to our 2016 Supplier Diversity Study say their company emphasizes only a narrow set of supplier diversity objectives: improving the corporate image in the marketplace; supporting corporate culture around diversity and social responsibility; and complying with regulatory requirements (Fig. 1). However, more companies are beginning to realize that they cannot maximize benefits from supplier diversity programs if their objectives stop there. By expanding the goals and activities of supplier diversity programs, they can gain access to new markets and more beneficial supplier partnerships. Survey respondents indicated the importance of a well-developed supplier diversity program in meeting revenue goals. Case in point: up to 10 percent of sales come with supplier diversity requirements, suggesting that the lack of such a program can result in lost revenue.
On the other hand, there are high hurdles to obtaining the necessary support to invest in a supplier diversity program. Often, business leaders worry that dedicating resources in this area means sacrificing procurement savings or even quality. However, our research suggests that not only do procurement organizations with top-performing supplier diversity programs experience no loss in efficiency, they extract even more benefits from the program. Furthermore, quality does not suffer — in fact, often it improves. But even if procurement gets a green light to launch a supplier diversity organization, leaders may have limited resources or knowledge about the subject, leaving them unsure where to start, what to focus on or even how to measure success.
The most common metric used to monitor diversity programs is the percentage of spend with diverse suppliers. However, this is clearly a limited, compliance-based measure and does not get at the true value of the program. Satisfaction levels, an indirect measurement of value, should also be considered when reporting on supplier performance. For example, our research shows that 99 percent of all diverse suppliers meet or exceed expectations, dispelling any notion that quality and overall performance suffers. While the majority meet expectations, there is still plenty of room to help more suppliers succeed (Fig. 2). Selecting metrics that are aligned to objectives (see sidebar) and developing both short-term and long-term plans will help steer a growing supplier diversity program in the right direction and ultimately ensure that goals are met. Additionally, tracking market share by demographic can quantify positive revenue impacts from the program, which can be useful when sharing results outside a procurement audience.
Top-Performing Organizations Take Strategic Approach to Developing Supplier Diversity Programs
Supplier diversity is evolving from a check-the-box, corporate social-responsibility requirement to a strategic enabler providing access to new and innovative products and increased market share. Recognizing this, top-performing organizations have begun working toward achieving a broader range of benefits from their supplier diversity programs. In the near term, they are addressing supplier partnering and reputation management, and over the longer term, globalization (where it makes sense).
Further, organizations looking to increase market share through supplier diversity programs often start by increasing the amount of diversity spend. Our research showed a strong relationship between high levels of diversity spend and increased market share. For example, companies that allocate 20 percent or more of their spend to diverse suppliers attribute 10 percent to 15 percent of their annual sales to supplier diversity programs. Conversely, companies that direct less than 20 percent of spend to diverse suppliers attribute under 5 percent of sales to their supplier diversity program.
Supplier partnering is the process of developing and enhancing relationships with suppliers. Small and minority-owned businesses can be the source of added benefits, including cost savings, process improvements and product innovations. Organizations with diversity-program partners share the following three practices:
1. Develop and mentor local suppliers. Knowledge-sharing (the most common supplier development practice) and mentorship programs are commonly used due to their advantages for both buyers and suppliers (Fig. 3). Workshops and other in-person learning options help current and potential diverse suppliers gain a more competitive footing. In turn, the procurement organization wins by discovering and building relationships with local suppliers. At a bare minimum, newer supplier diversity programs need to have strong communication and collaboration skills to ensure that diverse suppliers can obtain the support they need.
2. Join forces with suppliers on product innovations. Supplier-buyer innovation is frequently the most immature area of supplier diversity programs. Today, few companies integrate supplier partnering and innovation into their relationship management goals.
Small business suppliers can be particularly successful partners due to their interest in innovation as a strategy for gaining competitive advantage over larger businesses. For example, more-established companies can share access to their technologies with smaller suppliers who are ready to innovate.
3. Share experiences with other companies. Meeting with companies that have supplier diversity programs is useful for sharing lessons learned (e.g., supplier onboarding success tips, program growth strategies). Experienced supplier diversity program managers we interviewed as part of the study suggest joining diversity organizations or local diversity boards and attending meetings, roundtables and conferences to meet and network with other program leaders.
Developing a strong reputation for dedication to supplier diversity can result in increased market share and talent retention. There are multiple channels available to facilitate a clear and positive message regarding supplier diversity, including both internally and externally facing activities. Millennial workers, for example, can be enthusiastic supporters and ambassadors of supplier diversity programs, due to their interest in “giving back” and making a difference in the world. Additionally, procurement groups should look for reputation management opportunities that align with corporate objectives, with the goal of increasing collaboration between groups. Organizations that are strategically approaching reputation management share these practices:
1. Make use of social media to develop customer and employer brand awareness. Social media provides multiple options to interact with customers, suppliers and employees. Participation in company or procurement newsletters is a good option to highlight success stories, share interactions with the community, and provide updates on progress and goals. Spreading the message of diversity and inclusion can also help bring in new talent and retain top performers already working in the organization.
Create marketing videos to showcase programs on company websites and social networks. Regardless of which social media options are used, it is important to communicate with a broad audience and to keep things brief and informative.
2. Educate procurement stakeholders on the value of supplier diversity. Communication with the rest of the organization is crucial. Category managers, business leaders and executives should understand the supplier diversity program, including its purpose, operating procedures and goals (at a high level or in detail, depending on role). Stakeholders must accept that supplier diversity is advantageous before they will support cultural changes aimed at maintaining the program. In our survey, 65 percent of respondents indicated that supporting corporate culture around diversity and social responsibility is either a “very” or “critically” important objective of their supplier diversity program.
3. Interact with local communities of suppliers and consumers. Attend or sponsor local events, even hosting them on site if appropriate. The goal of this type of interaction is to understand the market, establish relationships and share companywide supplier diversity goals. In addition to reputation management successes, positive supplier and community interactions can also improve broader diversity networks.
Longer Term: Global Expansion
Supplier diversity programs usually start small and then grow in terms of domestic volume and geographic reach. Our survey found that 76 percent of organizations have diversity programs that are currently limited to the domestic (U.S.) market. Of this group, 41 percent plan to expand their program globally in the next two to three years (Fig. 4).
Global expansion of supplier diversity brings further benefits, including investment in global economic development and improved relationships with local suppliers and their communities. In fact, the survey found that 58 percent of organizations deliberately leverage local suppliers to support economic development of local communities to some degree. Organizations should research the advantages as well as which markets have the most potential before designing a global expansion of their program. Companies with the most successful global supplier diversity programs share the following practices:
1. Manage both U.S. and global programs as a single initiative. Supplier diversity programs, whether large or small, should have a handful of specific, meaningful goals at their core. Once the program has been established in one market, the same processes, goals and materials can be used for each additional market. This ensures consistency between regions and enables economies of scale. The exception to this practice is when certain regions or countries have different regulations and laws. Research local laws and customs before launching supplier diversity efforts and make any adjustments to the strategy that are necessary.
Additionally, a dedicated supplier diversity leader should manage both the U.S. and global supplier diversity programs in order to maintain consistency and ensure that diversity goals are aligned with overall strategy. Eighty percent of study participants currently have a dedicated supplier diversity manager or equivalent role supporting their diversity program.
2. Partner with the corporate diversity group. There are advantages to partnering with the corporate diversity group, which usually manages workforce diversity. Whether the relationship is informal or formal, the increased level of communication presents opportunities to align goals and performance metrics. Also, duplication of effort can be reduced and leverage increased by sharing materials and best practices.
3. Work with diversity organizations to identify suppliers. Locating suppliers, even just to participate in RFPs, is a critical success factor but one of the more difficult parts of starting and managing a supplier diversity program. Try engaging third parties that specialize in connecting buying organizations with diverse suppliers. For example, WBENC and WEConnect International are partnering-certification providers for woman-owned businesses. Their corporate memberships provide access to a database of certified suppliers. Similar organizations exist for other underutilized supplier types, such as small or veteran-owned businesses. Specialists like these are also where most companies go to validate diverse suppliers (Fig. 5).
Program Objectives Must Come From Highest Levels of Company
Top-performing supplier diversity programs are developed and planned with substantial guidance from companies’ executive leadership. Many of these programs receive attention and guidance from the corporate level due to recognition of their potential to boost revenue and empower diverse businesses.
Leaders of supplier diversity initiatives should make it a priority to create a culture that is supportive of diversity and inclusion, not just in procurement, but throughout the enterprise. All diversity objectives, including supplier diversity, workforce diversity, and community and market interaction, should have the same strategic objectives in order to take advantage of a larger network and create a more collaborative workplace. Since supplier diversity programs tend to be newer and thus less mature than other similar initiatives, they should be modeled on more established ones, such as workforce diversity, and ensure collaboration between such groups.
Patrick Connaughton is senior research director at The Hackett Group. Laura Gibbons is research director of The Hackett Group’s Procurement Executive Advisory Program.
The Hackett Group
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