Next Plateau for Supplier Diversity Development
“Is Corporate America willing to accept the challenge?
The changing United States (U.S.) demographics along with increases in minority purchasing power are leading to corporate initiatives for multicultural workforces and emerging marketing strategies to better reflect its diverse customer base. Today, more than ever, many corporations are recognizing supplier diversity as a business initiative to increase Minority Business Enterprise (MBE) purchases.
Despite these trends, corporate America is failing to meet its targets and within many corporations, supplier diversity is still an uphill battle.
In response to the increased emphasis on initiatives to boost MBE purchases, this document will provide a strategy to accelerate MBE purchases. The current strategies are not effectively taking supplier diversity to the next plateau.
Early Development of Supplier Diversity
In the late 1960s, the start of supplier diversity within the U.S. was attributed to public procurement legislation. Minorities were under-represented in the U.S and were not provided equal access to participate in the economic growth. Some of the key drivers for this situation were racial intolerance, lack of access to capital, business experience and lack of credibility in the marketplace. In an attempt to improve this situation, the federal government enacted laws that ensured contracts included a percentage of small and minority owned businesses. In addition, major corporations started supplier diversity programs to establish procurement practices to help minorities achieve economic equality by encouraging the placement of business with MBEs.
This approach to supplier diversity was viewed by many corporations as a social program (“set-aside” program) driven by government compliance, being a good corporate citizen and “the right thing to do”. The business case rationale for supplier diversity was weak for the following reasons:
- African Americans, Latinos and Asians accounted for an average of only 17% of the U.S. population in the 1960s, 1970s and 1980s1.
For this same period, minority purchasing power was viewed as insignificant as an economic driver to grow corporate revenue.
- Racial and economic barriers created an abundance of small MBE businesses with little to no technology and engineering capabilities. The majority of MBEs were in low growth potential businesses or low capital entry commodities with many suppliers competing for the same business opportunities. These commodities were price-sensitive with little value added opportunities.
- Gaining access to capital resources to grow their business was difficult. This created the situation that many MBE suppliers were undercapitalized.
As a result of the above barriers, supplier diversity lacked the commitment necessary from corporate America to increase MBE participation. In addition, these supplier diversity programs were viewed as a means of meeting government regulations and creating a “good corporate citizen” image. The weak business case rationale to develop supplier diversity programs worked against MBE business development rather than for an agenda to grow MBE businesses.
Evolving Business Case for Supplier Diversity
Currently, the U.S. population is becoming increasingly diverse. Corporate America recognizes that minorities and white females comprise the largest and fastest sales growth market opportunities in the U.S. This changing demographic composition is already having a significant impact on future U.S. economic growth as this emerging marketplace becomes a stronger economic force.
Diverse population now represent over 39% of the total U.S. population; it is a well- known fact that minorities (African American, Latinos and Asians) is expected to become the majority in the coming decades. Today, if you add white females who are recognized by most corporations as a diverse group, the minorities and white females are the majority. The diverse population is growing at seven times the rate of the general population.
With this projected increase in diverse population, minority purchasing power is forecast to reach $4.3 trillion in 2045 (50% of the total U.S. purchasing power) from $1.6 trillion in 20101.
The growth of minority population and purchasing power provide a compelling market driven business case for supplier diversity. From a business perspective, corporate America fully understands the economic growth opportunities for doing business with communities who will become their largest market segments in the future. Corporations, especially in the consumer driven industries, are attempting to understand these segments of rapid market growth and how their customers’ future purchasing power and product preferences will affect their markets. These consumer related corporations want to be viewed as supportive of diversity issues. They want this growing customer base to have the disposable income to purchase their products. In addition, minority consumers are, at the same time, becoming increasingly vocal about with whom and where they are willing to spend their money.
In the future, corporate America must develop business imperatives that allow all segments of the U.S. population to participate as employees, customers and suppliers to achieve business success. The current majority has been lacking the focus on developing successful supplier diversity programs; the future new majority, however, will expect supplier diversity and will base consumer decisions on it. To ensure continued economic growth in the U.S., business opportunities must be available to the future new majority (minorities) at the same proportions as it was for the current majority population.
Next Plateau for Supplier Diversity Development
Corporate America’s embracing of the rapid shifting of demographics and economic opportunities can provide a compelling business case for accelerating the implementation of successful supplier diversity programs. With this acceptance, corporate America’s drive to emphasize diversity is a logical and practice choice.
In today’s corporate purchasing activities, almost all purchasing award decisions are based on price, quality, customer service, technology and diverse supplier content. Most corporations have solid processes and systems in place for price, quality, customer service and technology development. WHY? Corporations recognize the pain associated with losing a business opportunity due to uncompetitive pricing, quality, service or technology. Whereas, with supplier diversity, in most cases, there is little or no pain associated with not meeting customer’s expectations for supplier diversity performance. As a result, the focus has been on diverse expenditure goals without having solid processes or strategies to drive the organization to develop a successful supplier diversity program. Until corporations treat supplier diversity as a strategic initiative like cost, quality, service and technology, they will continue to struggle and fall short of meeting expectations for supplier diversity performance.
As an example, Chrysler Corporation is taking an aggressive approach for holding their Tier 1 Suppliers accountable for meeting supplier diversity performance. Chrysler is utilizing a two-step process — meeting supplier diversity requirements is ranked as an important factor in awarding business opportunities just like cost, quality, service and technology. If a Tier 1 Supplier fails to meet Chrysler’s supplier diversity objectives, the supplier must develop and present a business case outlining their actions to achieve the supplier diversity objectives or potentially risk losing the business opportunity.
Another example, two years ago at a National Minority Supplier Development Council (NMSDC) conference in New Orleans, Johnson Controls (JCI) made a powerful strategic statement regarding its future supplier diversity direction. Steve Roell, JCI’s Chairman and Chief Executive Officer, said, “Supplier diversity is a core business strategy of the company.” WHY? Mr. Roell indicated, “It is a core business strategy that helps us better understand our customers.” “It expands our markets and capabilities and it strengthens our network of suppliers”. “He added that it also helps JCI win and retain customers, along with delivering stakeholder satisfaction with employees, advocacy groups and the government”. This is why JCI is purchasing approximately 15% of its purchase value from diverse suppliers while most corporations are struggling to achieve 5%. JCI treats supplier diversity as a key business initiative just like cost, quality, service and technology. This approach places JCI in a position to exceed their customer expectations for supplier diversity performance as well as being recognized as a proactive leader for supplier diversity innovation. Based on JCI’s successful approach to using supplier diversity to generate revenue opportunities, one would think that more corporations would adopt their business practices and philosophies toward supplier diversity for a competitive advantage.
With the expanded definition of diverse suppliers to include certified MBEs and certified Woman Business Enterprises (WBEs), corporations are still struggling to source 5% to 10% of their purchase value to diverse suppliers. This is the only initiative that a corporation can fail 90% to 95% of the time and still meet its customer’s supplier diversity expectations. Outlined below are the major reasons why corporations are failing to meet their customer’s supplier diversity expectations:
- Failure to treat customer’s supplier diversity requirements as a serious business initiative for winning business opportunities
- Lack of solid processes and strategies to drive supplier diversity as a core strategic initiative like cost, quality, price and technology
- Lack of internal resources and skills to develop and implement a successful supplier diversity program
- Lack of leadership commitment, involvement and accountability for meeting customer’s expectations for supplier diversity performance
With the increased emphasis on supplier diversity initiatives and corporate pressures to boost MBE expenditures, it is time for Corporate America to take supplier diversity to the next plateau by holding corporations accountable for supplier diversity performance just like cost, quality, service and technology. Without this change, corporations will continue to struggle with meeting customers’ requirements for supplier diversity performance because there is little or no pain for not meeting these objectives. The pain should be the potential of losing business for not having an actionable plan for increasing diverse expenditures.
Corporate customers reflect current demographics; therefore, the supplier base should closely reflect the diversity of customers. Awarding 5% to 10% of purchase value is a low target; however, if Corporate America continues to utilize the same approaches, the results for supplier diversity achievements will basically remain the same. To achieve these supplier diversity objectives will require innovative strategies and approaches. Treating supplier diversity as a core business initiative is a major innovative strategy for significantly improving supplier diversity performance.
In today’s global competitive environment, a compelling business case can be made that diversity is a necessary element for success in business.
Is your corporation ready to make the commitment to use supplier diversity as a strategic initiative to grow revenue opportunities and meet your customer’s supplier diversity expectations just like cost, quality, service and technology?
About the Author
As a former purchasing executive and supplier diversity leader at General Motors, Glenn Stafford’s responsibilities involved developing and implementing strategies for growing MBE suppliers. In addition, he has extensive expertise in facilitating and creating several strategic alliances and joint ventures. With his vast knowledge, experience and strong understanding of supplier diversity future trends, he developed this article to state that it is time to take supplier diversity to the next plateau by treating it as a core strategic business initiative.
Mr. Stafford is the owner of VAS Consulting Services, specializing in developing and implementing contemporary supplier diversity initiatives. VAS is one of the best consulting firms specializing in integrating supplier diversity initiatives into corporate strategy and developing “best-in-class” supplier diversity programs. Stafford has over 20 years of experience and is recognized as an expert in the area of supplier diversity development.
Mr. Stafford has provided supplier diversity consulting services to several major Fortune 500 corporations helping to develop and implement “best-in-class” supplier diversity strategies.
Mr. Stafford has written several articles titled, “Using Supplier Diversity as a Core Business Strategy”, “Current State of Minority Joint Ventures”, “Business Rationale for Supplier Diversity” and “Procurement Outsourcing – A Potential Solution”. In addition, Mr. Stafford has developed several supplier diversity educational training modules.
Mr. Stafford has been a featured speaker at Chrysler’s Matchmaker Event, Toyota’s Opportunity Exchange Event, California Supplier Diversity Council and Michigan Minority Supplier Development Council just to name a few. His speeches have included, “Changing Landscape of Supplier Diversity and its Impact on Corporate America”, “Creating and Sustaining Your Supplier Diversity Program”, “How to Develop Effective Minority Joint Ventures and Strategic Alliances”, Growth Strategies for MBEs” and “Developing a Successfully Tier II Supplier Diversity Program”.