This post originally appeared on Reuters Events, October 6, 2020.
While tightened budgets due to Covid-19 are causing some companies to row back on diversity and inclusion initiatives, some are reaping long term benefits by extending their programmes beyond their own workforces, reports James Richens
Most people are familiar with the concept of workplace diversity – that companies should provide equal employment opportunities for all, regardless of gender, race, disability or sexuality. Perhaps less familiar is supplier diversity, where larger companies ensure equal opportunities for smaller companies owned and managed by women, ethnic minorities, LGBT or disabled people to supply goods and services.
Supplier diversity has gained much greater traction in the US than the UK and Europe due to the civil rights movement of the 1950s and 60s, as well as its more racially diverse population. General Motors set up one of the first supplier diversity programmes in 1968 following race riots in its hometown of Detroit. In 1978, the US introduced a federal law requiring companies bidding for government contracts over a certain value to subcontract with diverse businesses.
“These programmes have been around for a long time,” says Alexis Bateman, director of the sustainable supply chains initiative at the Massachusetts Institute of Technology (MIT). “It’s just been flying under the radar as a way to create economic opportunities for historically disadvantaged groups, and now it’s coming to light as a result of social unrest in the United States.”
McKinsey found that companies with more women on their executive boards were 25% more likely to financially outperform their less diverse peers
In the UK, the only requirement set by the government is for 33% of spending by central departments to be with SMEs by 2022. Moreover, research by Minority Supplier Development UK (MSDUK), a non-profit advocacy organisation, found that only five companies in the FTSE 100 have supplier diversity programmes.
Mayank Shah, MSDUK’s founder and chief executive, would like to see the UK government target extended to explicitly include ethnic minority businesses. He also wants all FTSE 100 companies to commit to spend at least 1% of their annual procurement budgets (around £18bn) with diverse suppliers. Companies should mandate that every supply contract must have at least one bid from a diverse business.
“It’s basically good procurement practice to make sure that any sourcing process is transparent and allows everyone who is competent to bid for that work,” says Shah. “What we are talking about is access to opportunities for those under-represented groups.”
Few would contest the ethical argument that companies should provide equality of opportunity, both in their workplace and supply chains. Evidence also suggests that diverse companies are more successful businesses.
A survey of 1,000 companies in 15 countries conducted in 2019 by management consultants McKinsey found that companies with more women on their executive boards were 25% more likely to financially outperform their less diverse peers. For companies with more ethnically diverse boards this likelihood was 36%.
McKinsey says this is because diverse businesses have access to a larger pool of talented people who possess more of the attributes associated with good leadership and decision-making. Diverse teams are also better at anticipating shifts in consumer demand for new products and services, potentially generating a competitive edge.
Supplier diversity is not an area that we go to cut costs because we know we bring in more value than we cost
These strengths make diverse businesses more resilient and adaptable, says McKinsey; qualities that are needed now more than ever as companies try to navigate a way through the Covid-19 crisis. It urges firms not to pull back from diversity programmes as they struggle to manage the impact of the pandemic on their businesses.
Shah says that Covid-19 has highlighted the risks of procurement strategies that focus on managing costs by packaging together contracts to get the benefit of scale and sourcing from low-cost regions such as China. This consolidation of supply chains has left many companies vulnerable to disruption, whereas a more local and diverse network of suppliers would have offered greater resilience, he says.
Kris Oswold, vice president of global supplier diversity at package delivery company UPS, explains that during the pandemic, her company has continued its long-standing commitment to supplier diversity: “It’s not an area that we go to cut costs because we know we bring in more value than we cost.”
“Small and diverse suppliers are very often more innovative, more flexible and more efficient,” she says. “We want the best suppliers to compete for our business, so it is worth a little extra effort to go find these and help them develop.”
For example, one of the barriers that diverse suppliers in sectors such as transportation and logistics face is the lack of capital to invest in expensive items such as vehicles. UPS has worked with a group of companies to help them win discounts on capital-intensive equipment. UPS also provides training to diverse suppliers in how to create and submit bids for contracts.
Diverse suppliers can seek support from a range of specialist bodies that provide training, certification and networking opportunities with global enterprises including MSDUK and WEConnect International. “Our mission is to get more money into the hands of women-owned enterprises,” says Angela Walker, vice president of communications at WEConnect International. Its membership includes more than 100 corporate buyers including Dell, Facebook, Ford and Kroger, and 10,000 suppliers owned and managed by women. MSDUK has 125 companies such as Accenture, Cummins and GSK, and 1,465 ethnic minority businesses in membership.
Because diverse suppliers are usually smaller, they often are more adaptable than large companies
“This is not a charity case – this is good for a company’s bottom line,” says Walker. Further benefits are the boost to a company’s brand reputation by being able to show that you are supporting women-owned businesses.
She says that because diverse suppliers are usually smaller, they often are more adaptable than large companies. She cites examples of members that have started producing masks or hand sanitiser in response to the coronavirus. However, she also delivered a reality check. A survey of WEConnect International members found that 82% had been negatively impacted by the pandemic, such as a significant decrease in sales and revenue, whereas only 12% report being positively affected.
For Oswold, the greater impact of Covid-19 on disadvantaged groups, and growing recognition of institutional racism in the US, is all the more reason to recommit to supplier diversity: “We’re not stepping away – we’re leaning in to it,” she says. UPS recently committed to doubling its spend with black-owned businesses by 2021. It is also developing specific diversity strategies in all key spending categories such as fuel, automotive parts and professional services to better focus its efforts.
In 2019, UPS spent $2.4bn with over 5,400 small and diverse suppliers. About half the sum was spent with 1,200 certified diverse businesses. Analysis of the economic impact of this spend in local communities suggests it created 12,000 jobs and generated $4.3bn.
Gathering good data on supplier diversity is one of the biggest challenges, says Oswold. This includes knowing which suppliers are diverse, validating current certifications, and tracking bid participation and spend with diverse suppliers. This is important as it enables buyers to match their procurement needs to supplies offered by diverse businesses.
MIT’s Alexis Bateman has reviewed many corporate reports and says she is surprised by how little information companies provide about supplier diversity, even among the leading companies. For example, a survey conducted in 2019 by CVM, a supplier diversity solutions provider, found that 43% of companies do not measure the return on investment of supplier diversity programmes.
There are communities globally that are not on companies’ radars, and so by contracting with diverse suppliers you’re entering new markets
She says this could be because these programmes have often been in place for many years and have been overshadowed by other sustainability issues. However, it could also be that some companies’ efforts lack depth and are the minimum needed to meet US government public procurement rules. With the Black Lives Matter movement and coronavirus now centre stage, supplier diversity is likely to get a lot more attention.
Bateman would like to see a lot more disclosure on the support programmes that large companies offer to suppliers. “It’s a business development opportunity that is surprisingly under-explored,” she says. “There are communities in the US and globally that are not on companies’ radars, and so by contracting with diverse suppliers you’re entering new markets.”
Oswold advises companies that want to implement an effective supplier diversity programme to make sure it is aligned with the company’s overall business strategy, in particular how it supports plans for growth, recruitment and customer relations.
“If it’s just about values – and values are important, and certainly we value supplier diversity and inclusion at UPS – but if that’s your only argument, you're going to have a tougher road home,” she says.
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