Modernizing Supplier Diversity

After several years of downsizing, Supplier Diversity is due for an overhaul.  It needs new leadership and a revised blue print that reflects the many years of good and not so good practices.  Even the industry experts agree and shared their personal views for this article.

For decades Supplier Diversity initiatives have been designed to help minority-owned companies penetrate corporate coffers by granting them direct access to lucrative vendor contracts that otherwise would be awarded to a close-knit group of established suppliers.  Although Supplier Diversity has succeeded in highlighting minority entrepreneurial potential, most corporations still struggle with developing effective ways to integrate minority-based vendors into their supply chain.

For over 40 years, corporations have spent millions of dollars funding fully-staffed Supplier Diversity departments designed to attract qualified minority-owned companies onto their roster of approved vendors.  By now, one might expect to see tangible progress such as expanded Supplier Diversity departments within corporations, an increase in the number of approved minority vendors, and ultimately a positive return on investment.  Instead, Supplier Diversity departments at most corporations have been either drastically reduced in size or eliminated all together.   What remains today is a mere shell of what existed in the early and mid ‘90’s, prompting one to ask, “Why did Supplier Diversity fail and how can we learn from these experiences?”

Background
The term Supplier Diversity is the brain child of Reginald Williams, an outspoken African American consultant/community leader who in the early nineties was solicited by corporate leaders to share his extraordinary vision and guidance.   Mr. Williams encouraged corporations to seek profits by increasing their minority vendor base.  He argued that a corporate vendor base that reflected the ethnicity of its customers would benefit from improved customer loyalty and in turn market share. (Arabe, 2001)

According to Mr. Williams, if a company sold 80% of their products to minority-based customers, such as a fast food company, having 20 to 30% minority-owned suppliers, rather than the less than 2% norm, would provide a healthier social/economic balance at the local level.  Since minority-owned companies tend to hire minority employees, increasing the number of approved minority vendors would not only look good from a public relations point of view but also provide an efficient channel for reinvesting profits to increase sales.  The earnings paid out to employed minorities would help the local economy, which in turn would secure their customer’s buying power.  In Mr. William’s opinion, “It was a WIN, WIN situation”.

Mr. William’s thesis caught the attention of established public sector entities including the Minority Business Development Agency’s (MBDA) founded in the early ‘70’s and financially supported by the US Department of Commerce.  In the early nineties the MBDA became a policy-making arm for companies helping to grow Supplier Diversity initiatives nationwide.  Over time other ancillary organizations such as the National Minority Supplier Diversity Council (NMSDC.org) became more involved.  Even academia chimed in with the Tuck School of Business at Dartmouth in Hanover, New Hampshire and the Kellogg School of Business in Chicago both successfully lobbying for legislation to fund annual scholarships for minority business owners attending a condensed MBA program, (L. Greenhalgh, personal communication, December 17, 2005).  Despite the wide spread support from the public sector and universities, corporations have failed to see a viable ROI from their Supplier Diversity investments and have chosen for the most part to reduce their financial commitments.

A Recent Discussion Among Supplier Diversity Officers
Several weeks ago I was invited to a meeting with several top Fortune 100 companies including representatives from their respective ad agencies on record.  At the table were Supplier Diversity officers from both sides along with a few potential minority-based vendors. The lively exchange generated a number of insightful comments and concerns. I have listed a few below:

“On the one hand my CEO is very supportive of our Supplier Diversity goals while on the other he is holding me accountable for an increase in procurement ‘Supplier Diversity’ spend.  How can I nurture young minority-owned companies who can’t deliver the capacity I require, while at the same time show increases in Supplier Diversity spend?  It is simply not possible.”

Another followed.  “The pool of truly qualified minority-owned businesses has grown smaller forcing corporations to use minority-owned shell companies to meet their quotas.  Since these shell companies normally operate on paper and not in the field, their benefit to a local economy is minimal at best.”

One more added, “The metrics used to measure the success of a Supplier Diversity program is the total value of contracts awarded.  Wouldn’t it make more sense to measure success by the number of contracts awarded rather than their accumulated value since the objective of Supplier Diversity is to increase the number of minority-based vendors?”

A Vendor-Mentorship Solution
The candid exchange among the participants gave us an unprecedented opportunity to explore solutions to these problems.  One such solution was the formation of vendor-mentorship programs that would allow young minority-based companies to perform at a more controlled pace.  With contracts valued in the tens and hundreds of millions of dollars, a young firm strapped for resources could never compete despite their sincere intentions to deliver.  By the same token a multi-national corporation’s procurement office would never risk awarding a large contract to a vendor that lacked sufficient resources and experience.  As a result, the gap between a corporation’s intent to fill their vendor pipeline with qualified minority vendors and minority vendors in search of business growth opportunities remains wide and dysfunctional.

A midway solution to close the gap would require procurement offices of multi-nationals to take charge by restructuring large contracts to include a variety of smaller contracts, custom-made for a vendor- mentorship program.   By matching vendor capacity with the appropriate size sub-contract, minority-based vendors would gain the knowledge and confidence needed to become larger vendors.  As they successfully complete their assigned jobs, they would automatically qualify for a sub-contract of greater value and responsibility.

Currently procurement offices of multi-nationals segregate their vendors by tiers where Tier-1 vendors are allowed to bid for large contracts.  Approved vendors who do not meet the requirements of a Tier-1 vendor due to size, capacity or business focus are classified as either Tier-2 or even Tier-3 vendors.   Normally Tier-1 vendors are required to sub-contract to qualified Tier-2 and 3 vendors.   For example, Interpublic Group (IPG), a holding company comprised of numerous small ad agencies and independent creative teams would qualify as a Tier-1 vendor and potentially win the national advertising account for a multi-national.   To comply with government regulations, the multi-national awarding the contract to IPG would mandate that a percentage of the contract be awarded to minority-owned businesses.   Without proper oversight, what is mandated and what is actually accomplished can be easily manipulated.

Tiers 2 and 3 vendors mandated to work with minority vendors usually have fewer resources or bottom-line incentives to properly groom rising minority vendors.  Some circumvent the mandate by selecting shell companies with a controlling minority interest or by improperly classifying large and established minority vendors to appear as young companies.   At two to three levels removed, procurement officers have little chance of knowing if their efforts to fill the vendor pipeline with qualified minority entrepreneurs are accomplished fairly.  Since these departments measure the success of a minority vendor initiative by the total dollar value of contracts awarded, there is no way of knowing for sure if one or ten minority vendors actually participate.  During our discussion this very issue regarding the inaccuracies inherent with the current practice for measuring minority vendor involvement became contentious.  Minority vendors present expressed the need for greater accountability while the Supplier Diversity officers disagreed vowing that any other method would be too difficult to track while potentially adding to their current work load.

The proposed vendor mentorship program addresses the Supplier Diversity officer’s work load by involving one of many non-profit organizations that are already approved to qualify minority vendors such as the National Minority Supplier Diversity Council (NMSDC).  These organizations can assist in profiling, qualifying and matching minority-based vendors with a list of custom-fit corporate procurement offerings.  The corporate procurement and Supplier Diversity departments would develop a tiered vendor program with manageable segments per tier as well as per industry that selected minority vendors could be expected to handle successfully.  In addition, associated academic institutions along with an assigned mentor would offering legal advice and relevant business coaching.

As minority vendors complete their assignments, they would automatically qualify for more business and in return be asked to mentor the next crop of minority vendors.  This perpetual relationship among minority vendors would encourage cross-cultural cooperation while allowing corporations to harness and leverage minority entrepreneurial enthusiasm to their long term competitive advantage.   Rather than equating the success of this program by the total dollar value of contracts awarded, a company would measure success by both the number of completed contracts and the rate at which vendors acquire larger contracts.

All the pieces of the Supplier Diversity puzzle already exist.  Now what we need is new leadership to modernize Supplier Diversity to meet our changing requirements into the 21st Century.

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