The case for supplier diversity

Supplier diversity offers businesses a chance to increase their resilience, boost their ESG performance, and improve their overall efficiency.

A strong supplier base is a prerequisite for an effective and efficient supply chain, but it’s also essential for overall business health. Supplier diversity is one way of reaching a point of strength in your supplier base.

And with ESG (Environmental, Social and Governance) criteria increasingly used to evaluate a business’s performance, supplier diversity is also important in meeting ESG goals.

Businesses that embrace supplier diversity can build a stronger and more resilient supply chain and benefit from a better reputation with the labor market and their customer base.

What is supplier diversity?

Supplier diversity is an approach to procurement and sourcing whereby organizations work to include a certain percentage of minority-owned businesses that otherwise might be underrepresented in their supplier base.

By intentionally broadening the diversity of their supplier base, organizations can improve their corporate reputation, gain competitive advantage, and invest in local communities.

Generally speaking, a diverse supplier is a business of any size, at least 51% owned and operated by a person or persons from a group that has traditionally been societally or economically disadvantaged or underserved.

Historically, the first supplier diversity efforts were aimed at businesses that were minority-owned and women-owned. Over time, these have grown to include veteran-owned, disabled-owned, and LGBTQIA+-owned enterprises.

The term ‘supplier diversity’ may also mean increasing the diversity of a company’s supplier group in terms of other factors, like suppliers’ size and geographical location. This approach can allow businesses to operate more flexibly, be innovative and creative, and even save costs.

What is supplier diversity?

So, how are you supposed to know whether a supplier is considered diverse? In the US, more than 15 categories are used to identify diverse businesses. They include:

• Disabled Owned – A business that is at least 51% owned, managed, and controlled by one or more individuals with a disability.
• LGBT Owned – A business that is at least 51% owned, operated, managed, and controlled by one or more LGBT persons.
• Minority Owned – A business that is at least 51% owned, managed, and controlled by one or more members of a socially and economically disadvantaged minority group.
• Women Owned – A business that is at least 51% owned, managed, and controlled by one or more women.
• Veteran Owned – A business that is at least 51% owned, managed, and controlled by one or more veterans.

Why supplier diversity is important

The case for supplier diversity isn’t just an ideological one, though. Plenty of evidence supports the potential benefits of broadening the diversity in your supplier base.

According to a survey by PwC, for example, 91% of business leaders believe their company has a responsibility to act on ESG issues. And 86% of employees prefer to work for companies that care about the same issues they do.

In another study, McKinsey & Company found that 64% of millennials say they won’t work for companies that perform poorly on corporate social responsibility (CSR).

Both studies reinforce the idea that embracing supplier diversity doesn’t have to be a purely altruistic move. It can have a tangible, long-term impact on your business’s reputation, access to the labor market, and even the bottom line.

Benefits of supplier diversity

By adopting a supplier diversity program, businesses can enhance their CSR/ESG credentials, become more attractive to investors, enhance their status with potential employees, and increase their overall brand appeal.

And this doesn’t necessarily come with a downside, either. According to research from the Hackett Group, virtually all diversity suppliers meet or exceed expectations. The top corporate performers in supplier diversity experience no loss in efficiency and often see improved quality, increased market share, and access to new revenue opportunities.

But that’s not all. Other benefits of supplier diversity include:

A broader choice of suppliers

Embracing supplier diversity allows a business to consider suppliers it might have previously overlooked. According to WEConnect International, a global network connecting women-owned businesses to buyers worldwide, a third of all privately owned businesses are owned by women – yet women-owned businesses earn less than 1% of large corporate and government spend with suppliers.

By adopting a supplier diversity program and having minority-owned and operated partners in the supply chain, businesses can not only gain a wider range of skills – they can also access different perspectives and experiences. By encouraging supplier competition, companies can foster innovation and drive down costs.

Increased supply chain resilience

A diversified supplier network that includes underrepresented groups reduces a company’s dependence on a limited pool of suppliers. By embracing supplier diversity, a business can increase supply chain resilience and reduce risk.

Rather than relying on a small number of suppliers or suppliers located in a specific region, companies with a diversified supplier base spread across different regions will be better placed to mitigate disruptions caused by regional instabilities and local crises.

Improved ESG performance

Although historically, diversity has been viewed as separate from a firm’s commitment to sustainability, diversity very much falls into the ‘S’ category of ESG. In other words, it is concerned with enabling a positive social impact.

A business can improve its ESG performance through a commitment to supplier diversity. This, in turn, can lead to an economic impact through top-line growth, cost reductions, reduced regulatory/legal interventions, productivity uplift, and investment and asset optimization.

Embrace supplier diversity for a stronger, more equitable supply chain

In order to achieve supplier diversity, a company needs its internal stakeholders to buy into the project. It’s also critical to make sure that onboarding procedures for new suppliers are as streamlined as possible.

As such, companies need a procurement model that helps rather than hinders the process. This may mean ensuring that preferred provider lists include diverse options, using diverse supplier databases or portals, or using specific onboarding processes for diverse suppliers. Supplier relationships can be strengthened over time using suitable supplier management software.

The resiliency of a supply chain is determined by its ability to avoid potential disruption and to mitigate those disruptions that do occur. A diverse supply chain should embrace both reliance and sustainability. By widening their pool of suppliers, companies will be better able to withstand economic and geopolitical shocks.

Last but not least, using diverse suppliers, which often have unique characteristics and far-reaching footprints, can result in better ESG outcomes and more innovative and cost-effective approaches to business challenges.