Ignored No Longer

One of the biggest challenges supplier diversity programs face, however, is the long-standing trend in procurement toward consolidation and optimization. Put another way, organizations have been shrinking, not expanding, their supplier bases in a bid to achieve cost efficiencies by placing larger orders with fewer vendors. For instance, a consumer products company might buy plastic to package its shampoo, deodorant, and razor blades from three separate suppliers. But it could theoretically save money by consolidating all of its plastic purchases with one supplier.

But, as the pandemic showed, the fewer suppliers an organization has, the more trouble it can run into in terms of accessing inventory. Melissa Hadhazy, a senior client partner in Korn Ferry’s Industrial practice, says having fewer suppliers might save organizations money, but it costs them with regards to agility and resilience when supply is constrained. COVID-19, she says, made clear the benefits of a more broadly distributed supply chain in reducing risk; organizations with more consolidated supply chains suffered.

“A more distributed supply chain doesn’t just help with diversity, it provides a true operational value,” Hadhazy says.

In fact, one could argue that while organizations can save money on the front end by consolidating suppliers, it may actually cost them more on the back end when factoring in transportation costs, environmental impact from increased carbon emissions, and reduced innovation and development opportunities stemming from fewer partner collaborations. All of which can further cost organizations in the form of decreased brand equity in the minds of employees and customers who value corporate purpose, and potentially investment dollars from investors who use sustainability as a performance metric.

It’s a difficult mindset shift for procurement functions to grasp, let alone for CEOs who are laser-focused on bottom-line costs, particularly in the current business climate. Indeed, Hadhazy says clients frequently say they’d love to have more business owned by people of color in the supply chain but can’t find any large enough to fulfill their procurement needs. The complaint, she says, underscores a fundamentally flawed way of looking at the issue. “They are still thinking about procurement in huge chunks when what they should be doing is breaking it down into smaller pieces,” Hadhazy says.

Starting with smaller pieces would provide the foundation for organizations to begin being more strategic and tactical in terms of building up businesses owned by people of color with capital, access to funding, training and development, and other capabilities to eventually grow them to the point where they can fulfill ever-larger orders.

“Consolidating and optimizing procurement alone doesn’t help anyone else along in the process,” says Hadhazy. “This does.”

When people think about supply chain vendors, they typically do so in terms of direct spend, meaning the materials needed to make an organization’s products or stock its shelves. One of the biggest headlines from this spring, for instance, was when a number of retailers signed onto the 15% pledge, an initiative that started on social media asking major brands to show their commitment to racial equality by devoting 15% of their shelf space to products made by Black-owned businesses.

Indirect spending, or investments made into services that organizations need to function, not for their products, gets little attention when discussing supply chain diversity. Think about financial firms that administer 401(k) plans or advertising agencies and public relations firms retained for customer engagement. Sharon Patterson, president and CEO of the Billion Dollar Roundtable, says if organizations really want to make headway in achieving supply chain diversity, they need to widen the scope of their spending on services. “That’s where the real money and opportunity is for diverse suppliers,” she says.

Patterson recites a litany of areas where organizations aren’t looking at businesses owned by people of color. Chief among them are law firms, investment banks, insurance providers, and consulting firms that advise on mergers and acquisitions, IPOs, and other strategic corporate work. Patterson says procurement officers who claim they have no more money to invest in businesses owned by people of color aren’t looking in the right places. “A lot of the money organizations spend on services goes untouched,” she says. “CPOs can certainly tap into those core contracts that are bigger and have legacy suppliers.”

Moreover, Patterson says organizations can build up business owned by people of color and create economic impact and jobs without investing directly in them. They can do so in a way they hardly ever consider—by selling assets to them. “Corporations that are slimming down can build up minority- owned businesses through divestitures,” she says.

Changing where an organization gets its legal counsel or investment banking advice, however, is more of a philosophical undertaking than a programmatic one, says Andrés Tapia, a Korn Ferry senior client partner and the firm’s global diversity and inclusion strategist. By that, he means retaining a Black-owned law firm is a start, but the real issue is what prevented the organization from doing so in the past. It may be systemic racism, perhaps, or racial stereotypes—the existence of which many business leaders have openly acknowledged for the first time this year. “If organizations want diversity and inclusion to be part of the story they bring to people, then it needs to be embedded into its strategic thinking rather than rooted in one-off decisions,” Tapia says.

Achieving true supplier diversity requires a sustained commitment from larger, better- capitalized organizations to build up businesses owned by people of color so they are able to compete on an equitable basis, not just in size but also in capabilities. As D’Cruz-Young notes, organizations with completely digitized supply chains are actually better equipped to introduce new strategic diverse suppliers or expand the spend with existing ones with the added benefit of supporting their digital capability. “CPOs are committed to increasing their diversity spend, but the adoption in many companies has been too slow,” she says.

Her advice: you can begin to accelerate your programs wherever your starting point. Not everyone can be Microsoft, which last year spent almost $4.5 billion on diverse suppliers, after all. But they can learn from the company, whose supplier diversity program is considered best in class. “Your spend, whatever it is, matters,” D’Cruz- Young says. “Accountability has to start somewhere, and you must equip your supplier diversity leader so that they can achieve transformation.”

Where accountability starts is with performance, which requires the meticulous measurement of a supplier diversity program’s impact. One simple step organizations can take to start holding CPOs accountable, for example, is to mandate that any supplier proposal over a certain monetary amount must include a diverse business as a candidate. Tracking the percentage of wins versus proposals by diverse suppliers by business area is another way to measure performance. “There’s no point to including diverse suppliers in proposals if they have no chance of winning,” says Microsoft’s Hernandez, who mentors other organizations in determining metrics, reporting standards, and infrastructure for their own supplier diversity programs.

There is no shortage of associations and trade groups to help connect organizations with businesses owned by people of color, either. Included among them are the Diverse Manufacturing Supply Chain Alliance; Chicago United’s Five Forward program, where major corporations sign up with five diverse suppliers that they mentor to grow their business; and the Diversity Alliance for Science, which focuses on businesses in the life sciences and healthcare industries owned by peple of color. Another step organizations can take is to require suppliers to report on the diversity of their subcontractors, known in industry parlance as tier-two spending.

The goal of any supplier diversity program isn’t simply diversity for diversity’s sake. It’s a path to enable revenue, support the brand’s purpose, and create talent pipelines—and it’s within the chief procurement officer’s power to make it a competitive differentiator for organizations.

Or, as Hernandez says, “Wouldn’t it be great to look back 20 years from now and say the CPO was critical in changing the world?”

For more information, contact: Cheryl D’Cruz-Young at cheryl.dcruz-young@ kornferry.com, Melissa Hadhazy at melissa.hadhazy@kornferry.com, or Andrés Tapia at andres.tapia@kornferry.com.