Supplier Diversity – another sample of Spend Matters PRO content

Editor’s Note – here is another example of the material we’re providing on our new Spend Matters PRO subscription service.  This is an extract (or collection of extracts)  from an in-depth and excellent two-part article by Thomas Kase (Spend Matters US Lead Analyst) - do read the whole piece here .

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Supplier Diversity -- Creating Shared Value for the Future of the Nation

In November last year, we wrote about Buying Locally – a great segue story into a broad topic commonly rolled into a convenient bundle called supplier diversity and also a corporate activity that stirs up all sorts of emotions. Jason stoked the diversity fire with A Critical Topic for Black History Month: How Far Should Supplier Diversity Programs Go? in February this year. I think much of the controversy around this topic is based on lack of information and not enough perspective on the underlying drivers. Let me expand on that by quoting the famed Michael Porter – this is from Competitive Strategy, his legendary 1980 piece on the nature of competition:

"Where experience cannot be kept proprietary, new entrants may actually have an advantage if they can buy the latest equipment or adapt to new methods unencumbered by having operated the old way in the past. A crucial strategic choice for competing in emerging industries is the appropriate timing of entry. Customer loyalty will be great, so that benefits will accrue to the firm that sells to the customer first."

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The regular supplier diversity approach among the Fortune 500 falls into engagement "maturity tiers" like this:

Sell-side reporting compliance – the baseline – "we have clients that want us to report on our diverse spend so I guess we have to do it," at least enough to meet our SLA requirements

  • This approach requires data cleanses of the vendor master to identify who the diverse vendors are, some A/P data added back and a handful or two of reports to provide to clients – second tier reports can also be added to bring visibility into the greater spend affected
  • This is definitely a rear-view mirror approach that only counts where the beans fell

Buy-side procurement effort– "our CEO has told us to buy more from diverse firms so we're making some effort," especially if it is tied to my annual performance review and bonus structure...

  • This requires the same data cleanses and reports as described under #1 above. At this level, more firms add second tier reporting solutions to track where the money goes that they spend with their largest contractors
  • This is still mainly a rear view mirror approach in most firms – although some firms incentivize their staff to actively engage with diverse companies

Mission & Vision– "We're fired up about supplier diversity from the C-room to the receiving floor and we see this as part of our corporate life journey."

  • All the technical solutions of the above two, as well as outreach activities, corporate social responsibility programs etc.
  • In all honesty, few companies have adopted Porter's shared value approach, so many activities are either focused on less productive guilt-driven redistributive efforts, or about the painfully slow process of growing successful small diverse firms into larger suppliers with greater capacity

To be honest, most firms by far fall in either bracket #1 or #2 above or a combination of the two – while talking a good #3 game.

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To summarize in a nutshell, supplier diversity is about these steps:

  • Identify able diverse companies
  • Introduce them to your supply chain
  • Build capacity and capabilities
  • Grow together – develop a lasting mutually economically beneficial relationship

Does this sound familiar? Well, it's certainly not the antagonistic Econ 101 picture of suppliers and companies playing mind games around how to best trick each other at the negotiation table – this is a shared value model! Drawing on Porter's words again: "when firms buy locally, their suppliers can get stronger, increase their profits, hire more people, and pay better wages--all of which will benefit other businesses in the community."

To be able to have local suppliers, your business needs to be open to small companies. The good news is that current technology has made this easy – yesterday's reasons for keeping the vendor master list rationalized (read: short) have been eliminated by current supplier information management systems, where there is practically no cost associated with maintaining the records of yet another supplier. On the contrary, the self-service approach to modern vendor management can provide a large pool of well-documented potential suppliers at the fingertips of buyers at nearly no expense. Actually, if the efficiencies and other savings from such solutions are factored in, the business case is reversed, i.e. companies that do not use modern solutions and approaches are losing money every day they remain "old school."

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Summary
The article offers a fresh look at the bigger picture around supplier diversity – how this is a core component in the effort toward long-term competitiveness, both as a company and as a nation. The new (or rediscovered) approach, labeled the shared value model by Michael Porter, shows how "when firms buy locally, their suppliers can get stronger, increase their profits, hire more people, and pay better wages--all of which will benefit other businesses in the community."

Supplier diversity is fundamentally about engaging with local suppliers, and in order to have local suppliers, a business needs to be open to small companies. Current supplier information management technology remove yesterday's vendor master rationalization justifications and provides a large pool of well-documented potential suppliers with large savings opportunities at a marginal expense.

Takeaway action items:

  • Assess your company's activities in the supplier diversity area against three basic tiers of sell-side reporting compliance, buy-side procurement effort, and mission & vision.
  • Review supplier information management systems and processes in place – do they aim to provide the company with the largest pool of qualified potential suppliers, or are they set up as a system of roadblocks with restricted access and mainly serve to keep the accounts payables team happy? Many modern procurement systems have the potential to do far more than they have been configured to – the 'trick' is to get your solution providers to implement to their full potential.
  • Formulate your shared value strategy – with tactical goals such as identifying areas where short-term success opportunities exist – and make sure this is addressed not only in systems and processes, but also in business level category and product strategies.
  • Supplier diversity groups need to break out of their silos and proactively investigate internal company opportunities where shared value strategies can be applied – including procurement, corporate capital investment divisions, and of course marketplace availability of capable suppliers ready to support your specific shared value strategy

 

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