The majority of today’s consumers have an expectation that the businesses they patron support righteous causes. This expectation extends well beyond making public statements or donating to philanthropic organizations, but rather should be evident in the fabric of a company’s operations and adopted by all groups within a business.
For sourcing and procurement professionals, this is reflected in the overwhelming interest in supplier diversity and responsible sourcing. According to research from Gartner, 75% of organizations have some form of responsible sourcing program. Supplier diversity is the next trend in sourcing that is improving operations and endearing consumers to businesses. Companies including Coca-Cola, Target, AT&T, PepsiCo, and Walmart have already invested billions in their own supplier diversity programs. However, this form of corporate social responsibility isn’t merely for massive corporations. It benefits businesses of all size and may be easier to establish in your organization than you think.
What is Supplier Diversity?
Supplier diversity is an organizational practice adopted by sourcing programs to actively seek opportunities to source goods and services from diverse suppliers. Diverse suppliers are businesses that are at least 51% owned and operated by members of traditionally underrepresented groups. There is a wide array of categories that are considered diverse, and they include small businesses and enterprises which are women-owned, minority-owned, veteran-owned, LGBTQ-owned, and/or disability-owned. Diverse businesses can be certified by groups which align to their diversity classification. For example, woman-owned businesses are certified by the Women’s Business Enterprise National Council (WBENC) and LGBTQ-owned businesses are certified by the National LGBT Chamber of Commerce (NGLCC).
Often, supplier diversity is not the only deliberate focus by companies that roll up into their greater corporate social responsibility within sourcing operations. The adoption of supplier diversity consistently goes hand in hand with embracing ethical and responsible sourcing practices, as well. Ethical sourcing is the process of ensuring that products are made and obtained through ethically responsible processes. This means processes support human rights and social good. Responsible sourcing is a voluntary commitment by companies to consider social and environmental considerations when managing their relationships with suppliers. Including responsible and ethical sourcing factors are frequently taken into consideration as part of a larger supplier diversity program.
How to Build a Supplier Diversity Program
In your typical sourcing process, procurement will identify suppliers for the goods or services based on need and complete some due diligence on potential suppliers. During that process, they ensure both sides are aligned on expectations, that the supplier is not on a sanctioned list, and that they have reasonable ESG compliance. If all boxes are checked, the business begins using that supplier and the sourcing teams move on to a new project – but responsible sourcing doesn’t end the moment the contract is signed, and your supplier diversity program begins before your due diligence begins.
Establishing a supplier diversity program begins with reflection. Your organization needs to reflect on what values are important to you and how they should be represented in your supplier diversity program. To start, decision makers need to identify whether and to what degree diversity, social responsibility, environmental sustainability, and similar factors align with your company’s mission and values. Once these values are determined, identifying how these factors can be rated and tracked is necessary. For example, money spent with diverse suppliers and the number of diverse suppliers present in your supply base are simple, straight-forward metrics to track for supplier diversity. For environmental factors, suppliers with ISO14000 certification, yearly CO2 emissions, and water consumption per product produced may be useful for keeping tabs on environmentally friendly suppliers. There are a number of metrics which can be used to provide a portrait of a supplier’s responsibility based on exactly what your company values and what products are being produced.
Once your company’s values and the applicable metrics are identified, it is necessary to collect information in order to inform your organization’s policies on supplier diversity and social responsibility. A common starting point for this step is publicly available government sources. Another valuable resource can also be interest groups on supplier diversity, sustainability, and social responsibility. With both sets of sources, deliberate research is performed, and statistics compiled providing averages for companies across the country. You can also look to your internal organization and existing suppliers for information to inform policies. Performing an audit of your existing supply base and/or requesting questionnaires and evidence from suppliers you already are engaged will furnish you with a baseline idea of your operations and expose areas for improvement.
After collecting your evidence, the next step is setting your company’s ESG requirements. These requirements may also be known as a “Responsible sourcing policy” or “Supplier code of conduct.” This policy is the set of requirements that your organization puts in place to guarantee the ethical compliance of any suppliers to the standards of your organization. The sourcing policy should align ESG values with procurement metrics and set clear expectations for the requisite levels of metrics and how they will be tracked. Once adopted, your responsible sourcing policy should be clearly communicated with new, potential suppliers and applied to existing suppliers. In order to facilitate adherence to responsible sourcing policies, supply chain leaders may utilize incentives or recommend a policy gap analysis to engaged suppliers.
The final step in establishing a supplier diversity program is creating a system to track your suppliers’ ESG factors. The creation of a policy for diversity and sustainability is nothing if the metrics you have identified are not properly tracked or easily accessible for comparison. The right tracking system improves visibility into your ESG supplier data and ensures that suppliers which fall out of compliance with your policies are clearly detectable. A flexible tracking system also allows for policy improvements and scalability over time. Crafting a new supplier diversity or ethical sourcing policy takes effort and review. Flexibility in your tracking system gives you the opportunity to add or remove tracked ESG factors and surfaces information useful to inform later iterations of your policy. Take the metrics and insight you gain from this system and improve your processes over time.
In conclusion, building out a supplier diversity program is a 6-step process:
- Reflect on your company values
- Identify what metrics align with those values and require tracking
- Research to inform your policy and performance expectations
- Set your code of conduct
- Create system for tracking supplier performance against established metrics
- Track metrics, analyze, and iterate
What are the Benefits of a Supplier Diversity Program?
Like many socially conscious actions that companies take, adopting and promoting a supplier diversity program builds consumer trust and brand value with your customers. The benefits don’t stop with positive perceptions though. A deliberate, formalized supplier diversity program also has numerous bottom-line benefits.
A focus on diversity and responsibility among your supply base is an effective risk mitigation practice. Prioritizing ESG factors like human rights, environmental issues, and health and safety practices protects against supply base risks associated with them.
Research from the Hackett Group found that 99% of diverse suppliers meet or exceed expectations. As a result of the effort and expectations laid out in the supplier vetting process, relationships between companies and their diverse supply base are more involved and communication is more open. Diverse suppliers, especially small businesses, also frequently offer customizations and higher quality goods than many larger and traditional suppliers. The combination of the relationship and quality of goods leads to this overwhelming success with diverse suppliers.
Intentionally seeking out diverse suppliers naturally broadens your supplier pool. This expands competition and ultimately can drive down operations costs. Competition and cost savings directly affect your bottom line. A conscious expansion of your diverse supplier base directly improves the quality of products and allows for reduction in business costs.