3 Ways to Drive Value Through Supplier DiversitySupplier Management
What is Supplier Diversity?
Supplier diversity is not a new concept. Many organizations have had some form of program in place for many years, with a myriad of agencies certifying vendors for one of many possible types of diversity.
Yet the scale of such programs has generally been very limited. The real challenge is that supplier diversity has generally been viewed as competing with other objectives, such as cost reduction or lowering risk. Any program that involves such a compromise will struggle to make progress in all but the most committed organizations.
Fortunately, 2021 presents the perfect environment to drive meaningful progress, without the perceived compromises. Yes, you can kill two birds (in this case, actually 4) with one stone.
Step 1: Supply Chain Resilience
Until recently, the focus at most organizations was rationalizing their supply base, and increasingly shifting it to Asia. China first was a common strategy employed by many organizations. With diverse suppliers generally being local, that meant supplier diversity competed against the core supplier strategy.
As the risk involved in such strategies became clear once Covid-19 struck Wuhan, companies looked at diversifying their supply base. For example, China first has become China + 1 in many cases. A recent study by Forrester on how procurement can help restore growth found that 62% of respondents plan to increase the size of their overall supply base this year (and only 13% decrease it), after years of targeted reductions.
This presents a great opportunity to support resilience while increasing supplier diversity. Diverse suppliers tend to have very different risk profiles from emerging market ones and hence compliment a low supplier risk portfolio. Risk factors like geopolitics, natural disasters and transportation issues are normally very low for them.
As you look to diversify your supplier risk profile by adding new suppliers, diverse ones can be a great fit. So if you are considering a China + 1 strategy, make that + 1 a local, diverse supplier.
Technology can help with building your supplier strategies and assessing risk. Solutions that unify supplier records and combine 3rd party, supplier provided and internal data provide accurate view of supplier risk. By including sub-tier supplier risk and enabling visualization at a category level, you can improve your supplier management and reduce risk. This transparency will likely show that a supplier mix involving diverse suppliers offers a lower supply chain risk profile.
Step 2: Cost
The most significant compromise with supplier diversity programs has traditionally been cost. Diverse suppliers do tend to be significantly smaller so have less economizes of scale to pass on though lower pricing. And more local operations mean higher operating costs than those of emerging market suppliers. Furthermore, difficulty in identifying diverse suppliers often meant limited options to bid.
Fortunately this compromise can be mitigated, if not eliminated, in many cases. Leveraging technology with integrated diverse supplier discovery increases the competitiveness of sourcing events. Sourcing optimization technology, once reserved for complex categories such as freight, has been simplified and can be found embedded in leading sourcing technologies. Leverage it to optimize among procurement’s growing list of objectives, from cost to sustainability to diversity.
And while diverse suppliers may have higher product costs, they often offer lower transport costs due to their local proximity. That can make total cost be competitive.
Step 3: Value
Lastly, we need to change our mindset, and realize that diverse suppliers often offer greater value. When you embrace that mindset — and fully engrain diversity into your business operations – the value follows. According to Hackett Group, “long-term supplier diversity programs generate 133% more ROI than businesses that continue to rely on the same suppliers.” This value comes from several sources.
First, diverse suppliers are often more agile and adaptable. They are also more willing to collaborate with large customers. And when local, can offer reduced lead times plus less chance of disruption. Furthermore, there is growing brand value as diversity and inclusion has become a mainstream topic and consumers increasingly search for brands whose value align with their own.
For supplier diversity to really take off and be more than a nice blurb in an earnings report or website, it must be good business, not charity. Recent events have shown that expanding supplier diversity programs can be just that.