Chain reaction: why supplier diversity matters
The global movement for racial and social justice has called on businesses to play their part. What better place to start than with their procurement practices?
Like several other commercial functions, procurement is being influenced by changing consumer demands. Public pressure on businesses to adopt more ethical supply management practices, which had been growing steadily over the preceding years, has intensified significantly since the eruption of Black Lives Matter protests in 2020.
As a result, many companies are seeking to improve the diversity of their supply chains, shifting their focus away from cost control and towards value creation. For instance, Coca-Cola has pledged to spend $1bn (£730m) annually with “diverse suppliers”. Part of this commitment includes “doubling our spending with Black-owned enterprises across our US supply chain – by at least $500m cumulatively – over the next five years”.
Similarly, UPS has committed to doubling its expenditure with Black-owned suppliers by the end of this year, while Siemens has awarded $140,000 in grants to Black-owned enterprises in seven US cities to help them “develop their businesses so they can compete for our contracts and become part of our supplier base”.
Diversity and business goals
Behind such pledges is the desire to improve the resilience of supply chains, create more commercial opportunities and achieve environmental, social and corporate governance (ESG) goals. Improving diversity in the supply chain also helps to drive organisation-wide change and demonstrate to the world what these companies stand for.
“Procurement teams play a critical role in creating equity across supply chains and in achieving companies’ ESG goals,” says Mandi McReynolds, senior director of ESG at software company Workiva. “Supplier diversity improves an organisation’s market growth and its image among employees, customers and investors.”
UPS started its supplier diversity programme back in 1992, notes its vice-president of international sustainability, Peter Harris. He adds that the company has more than doubled its expenditure with diverse businesses in just under four years. This has been driven by UPS’s commitment to working with suppliers that reflect the make-up of its employees and customers.
“Diverse suppliers contribute to the economic development of communities and provide expertise and innovation that helps us serve our customers and outperform the competition,” Harris says.
The company’s chief officer for procurement, real estate and global business services, Jose Turkienicz, agrees. “We know that working to ensure that diverse companies, including small businesses, have opportunities to bid for UPS contracts makes us stronger. Their solutions provide tremendous value to our customers and shareholders,” he says.
Everyone’s a winner
McReynolds believes that companies with truly diversified supplier bases can benefit communities that are underrepresented economically by offering them commercial opportunities that will create income and employment. “Supplier diversity also has a positive impact beyond those directly related to the organisation by progressing global diversity and sustainability objectives,” she says.
By opening the request-for-proposal process to firms that would typically fall outside the normal field for consideration, procurement teams can stimulate greater competition among suppliers, according to McReynolds, who adds: “This can lead to better pricing; access to a larger pool of products and services; and improvements in product quality and service delivery.”
Since 2014, L’Oréal has partnered AAK, a Swedish provider of vegetable oils, and fair-trade company Olvéa Burkina Faso to source shea butter from the impoverished west African country. L’Oréal says that the partnership is designed to provide a fair income, with no middlemen, directly to the country’s shea-nut gatherers and processors, nearly all of whom are women; to train them in best production practice; and to protect the environment by preserving shea trees.
The company, which imports all of its shea butter from Burkina Faso, has empowered 42,000 female workers in the country since starting the programme, according to Gemma Bell, procurement director at L’Oréal UK and Ireland.
“We’re well aware of the significant impact that our purchasing decisions can have on suppliers and local communities,” she says. “We run a well-established ‘solidarity sourcing’ programme that directs a proportion of the group’s global purchases to suppliers that give people from disadvantaged backgrounds access to work and a sustainable income.”
When a business is developing a programme to improve supplier diversity, a common challenge for the procurement director is to secure sufficient backing from the top of the organisation and ensure that other key functions are strategically aligned with the initiative. A fully engaged senior leadership team should allocate enough finance to support smaller, diverse suppliers, while adequately resourcing the team that will implement the programme, McReynolds says.
“It’s also important to set clear objectives and report on them transparently, using diversity and inclusion metrics to build trust among employees, investors and other stakeholders,” she adds.
Toyota promotes supplier diversity by requiring its tier-one suppliers to achieve specific annual expenditure targets with certified diverse suppliers upstream of them. The car maker says it also offers a range of resources to “provide diverse-owned businesses with the professional growth opportunities, expert guidance and capacity-development resources they need for economic viability”. These include technical and managerial assistance, mentoring programmes and scholarships.
Another common challenge is creating equitable procurement requirements which will ensure that smaller firms can compete with bigger players on a level playing field, according to McReynolds.
Large suppliers have several advantages granted by their scale. They can invest heavily in marketing and lead generation, for instance, and are more able to bear the costs associated with international travel, she says. Procurement teams must therefore understand the relative disadvantages that smaller suppliers may face in such respects – and also how vital it is for them to be paid on time.