Modernizing Supplier Diversity

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By Tom Kadala

For over four decades, supplier-diversity initiatives have been designed to help minority-owned companies penetrate corporate coffers by granting them direct access to lucrative vendor contracts that would otherwise be awarded to a close-knit group of established suppliers. Although supplier diversity has succeeded in highlighting minority entrepreneurial potential, most corporations still struggle with developing effective ways to integrate minority-based vendors into their supply chain.

Corporations have spent millions of dollars funding fully staffed supplier-diversity departments designed to attract qualified minority-owned companies into their roster of approved vendors. By now, one might expect to see tangible progress such as expanded supplier-diversity departments within corporations, an increase in the number of approved minority vendors, and, ultimately, a positive return on investment. Instead, the supplier-diversity departments at most corporations have been either drastically reduced in size or eliminated altogether. What remains today is a mere shell of what existed in the early and mid ‘90’s, prompting one to wonder why supplier diversity failed and how we can learn from the experience.

Background

The term “supplier diversity” is the brainchild of Reginald Williams, an African- American consultant and community leader who, in the early 1990s, was solicited by corporate leaders to share his vision and guidance. Williams encouraged companies to seek greater profits by increasing their minority vendor base, arguing that a corporate vendor base that best reflected the ethnicity of its customers would benefit from improved customer loyalty and, in turn, increased sales.

According to Williams, if a company sold 80% of its products to minority-based customers, having 20-30% minority-owned suppliers, rather than the less than 2% norm, would provide a healthier social/economic balance at a local level. Since minority-owned companies tend to hire minority employees, increasing the number of approved minority vendors would not only look good from a public relations viewpoint, but also provide an efficient channel for reinvesting profits to increase sales. The earnings paid to employed minorities would help the local economy, which would in turn secure their customers’ buying power. It was a classic win-win situation.

In fact, so compelling was Williams’ thesis that public-sector entities became involved. For example, the US Department of Commerce created the Minority Business Development Agency as a policy-making arm to provide guidance for companies helping to grow supplier diversity initiatives nationwide. As a result, ancillary organizations such as the National Minority Supplier Diversity Council emerged. Even academia chimed in with the Tuck School of Business at Dartmouth in Hanover, NH, and the Kellogg School of Business in Chicago successfully lobbying for legislation to fund annual scholarships for minority business-owners attending a condensed MBA program. Despite the widespread support from the public sector and universities, corporations have failed to see a viable return on investment from their supplier diversity investments, and have chosen, for the most part, to reduce their financial commitments.

A Recent Discussion

Several weeks ago, I was invited to a meeting with several top Fortune 100 companies and representatives from their respective ad agencies on record. At the table were supplier diversity officers from both sides, along with a few potential minority-based vendors. The lively exchange generated a number of interesting comments and questions. Some of the issues discussed provided an interesting perspective to the current status of supplier diversity:

“On the one hand, my CEO is very supportive of our supplier-diversity goals, while on the other, he’s holding me accountable for an increase in procurement supplier- diversity spending.  How can I nurture young minority-owned companies who can’t deliver the capacity I require, while at the same time show increases in supplier diversity spending? It’s simply not possible.”

Another followed: “The pool of truly qualified minority-owned businesses has grown smaller forcing corporations to use minority-owned shell companies to meet their quotas. Since these shell companies normally operate on paper and not in the field, their benefit to a local economy is minimal at best.”

One more added, “The metrics used to measure the success of a supplier-diversity program is the total value of contracts awarded. Wouldn’t it make more sense to measure success by the number of contracts awarded rather than their accumulated value since the objective of supplier diversity is to increase the number of minority-based vendors?”

A Mentorship Solution

The candid exchange among the supplier diversity officers allowed the unprecedented opportunity to explore solutions to these problems. One was the formation of mentorship programs that would allow young minority-based companies to perform at a more controlled pace. By matching vendor capacity with corporate-procurement needs, minority-based vendors would be assigned to jobs where they could gain the knowledge and confidence needed to become larger vendors. Possible metrics to measure success would include the number of successfully completed contracts and the rate at which vendors acquire larger contracts.

This program would require coordinated efforts between a non-profit organization that would be hired to profile and match qualified minority-based vendors and a corporate procurement department, which would work closely with their respective supplier-diversity officers to carve out contracts into manageable segments that selected minority vendors should be able to handle successfully. Academic institutions would work with minority-vendors offering legal and business advice. As minority vendors complete their assignments, they would automatically qualify for more business, and in return be asked to mentor the next crop of minority vendors. This perpetual relationship would encourage cross-cultural cooperation while allowing corporations to harness and leverage minority entrepreneurial enthusiasm to their long-term competitive advantage.

All the pieces of the supplier-diversity puzzle exist. What’s needed is new leadership to modernize supplier diversity to meet the changing requirements of the 21st century.

Tom Kadala is the former president of ResearchPAYS, Inc., a strategic business consulting firm dedicated to the development and expansion of Hispanic consumer markets.

 

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Tom Kadala
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