Supplier Diversity ROI – Distribution and Supply Chain Impact

The strategic return on investment (ROI) of working with small and diverse suppliers can be hard to define. This is a topic that we've covered in detail on Spend Matters before. The link is worth reading if you haven't already.

Largely on this note, the Jan 1 edition of the Wall Street Journal featured an op-ed piece around "How Capitalism Can Repair Its Bruised Image." The column provides ideas on how to rev-up the economy and also put a new shine on the free market machine. It's jointly written by Adam Posen (Harvard Econ PhD, former member of the Monetary Policy Committee of the Bank of England), currently President of the Peterson Institute for International Economics) and Lynn Forester de Rothschild, co-chair of the Henry Jackson Initiative on Inclusive Capitalism Task Force.

The article includes several well-argued positions around what is needed to fire up the economy – and I would like to feature (with my own highlights, below) their opening argument:

"First, big business can do more to support smaller enterprises in their supply and distribution chains.

To encourage small and medium-size businesses on the basis of their productivity rather than their experience or size would help establish the idea that everyone has a stake in the capitalist system. Larger businesses can source from these smaller enterprises and use the larger companies' better financial access to provide credit to them. The bigger outfits could also actively counsel the smaller companies about best practices and standards.

IBM addressed this issue in March 2012 through the creation of the web-based Supplier Connection, which allows small and medium enterprises to connect to the requirements of large companies. AT&T, J.P. Morgan, UPS, Office Depot and Pfizer have all made themselves accessible through the Supplier Connection. Large businesses that invest in this way create a more reliable business environment for themselves."

What's the procurement angle here? As we argued in July's Spend Matters piece on this topic, procurement has several opportunities here – let me list a few:

Sell side impact – by purchasing from SMWBE (small, minority, woman-owned business enterprises) and being able to document this activity (preferably via multi-tier analysis – ref Overcoming Supplier Diversity Capacity Challenges – When Suppliers are Too Small (Part 1) ) – you remove a good deal of the cost center stigma that surrounds procurement when you can show the sales team how you help them close deals by showing prospects how you have made a difference with their stakeholders. This of course requires good data with multi-tier spend analysis and relationship building.

Innovation – although far from all small companies are truly entrepreneurial in the innovative sense, it is clear that all high-growth companies start from small beginnings. Not even venture capitalists can identify the winners with certainty, but this shouldn't keep us from trying. Clearly, new economy powerhouses like Google, Facebook and their older tech siblings like Apple and others are high growth companies that have contributed a significant net increase in jobs and revenues. Finding innovation is a core mission for sourcing efforts so make sure to keep those SMWBE firms engaged – get a great SLM tool to support the initiative!

Growth – fundamentally, larger market-dominating firms grow with the market, so the larger the firm, the more you should be concerned with having a healthy market to sell to. The lack of employment growth in the current recession is by far the worst among all post war recessions – imposing a large damper on growth.

SMWBE impact – the renowned non-partisan Kauffman Foundation has published findings based on research (using Census Bureau data) that shows that:

  • In any given year, the top-performing 1 percent of firms generate roughly 40 percent of new job creation
  • Fast-growing young firms, comprising less than 1 percent of all companies, generate roughly 10 percent of new jobs in any given year
  • Of the 3 million new jobs that are created in a typical year [SM note: we hope for those "typical" years to come back], nearly every one is at a firm that's been in existence five years or less

Talent development – a perpetual challenge for procurement, and not likely to get any better. The Posen and Forester de Rothschild article points out the value of training and apprenticeship programs:

"Conversely, a well-targeted training program or apprenticeship can nurture employees for long-term work with their companies, as well as motivate continuing learning. Investing in such programs, either as individual companies or as a federation across an industry, sends a powerful signal to a wider range of workers about where productive career paths lie.

Rolls-Royce has been a leader in this area. At any time, the company has almost 900 apprentices working. And Rolls-Royce is thriving: In the first half of 2012, the company reported profits up 7% from a year ago, with revenues up 5%. Investing in apprenticeships and other training programs means a more productive and engaged workforce, and better aligns workers' motivations with the success of their employers."

Some Spend Matters readers might view their procurement and supply chain myopically, but as the examples and arguments above illustrate, the opportunities for procurement to make a significant impact on not only the company bottom line, but also in the communities and countries where you operate are significant, and should not be ignored.

I'll close this column with a request to let us know how you view this challenge, and to share success stories and other learnings with us.

- Thomas Kase

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