The power of supplier diversity in procurement: Driving business success through inclusion — Part 1 (Definition and Importance)

In today’s diverse society, businesses have a crucial role to play in fostering equality and inclusion. However, the business world often needs to improve to reflect the true diversity of society, both within companies and in their supply chains. To bridge this gap, organizations are increasingly embracing the concept of supplier diversity in their procurement processes. Supplier diversity involves actively promoting and engaging diverse suppliers, including those owned by minority groups, women, veterans, LGBTQ+ individuals and persons with disabilities. By incorporating a wide range of suppliers, businesses can create an inclusive supply chain that reflects the diversity of the broader society.

In part 1 of our mini-series we explore the topic of supplier diversity, starting with defining what it is and why it matters. Then, in part 2 (Insider membership required) we will go deeper into the related return on investment (ROI) by looking at the impacts that supplier diversity has on the bottom line, top line and the broader community while also acknowledging the inherent challenges and listing a few good practices that organizations can put in place. In part 3 we will focus on the role of procurement technology and offer a landscape of providers that have solutions for managing supplier diversity.

Definition of supplier diversity

Diversity is an essential aspect of our society. However, the business world doesn’t always reflect this diversity. It is why there is a conscious drive to enhance diversity in business that aims to increase the representation of minorities in companies’ workforces. And this extends to the companies with which a company works: the diversity of its supplier base.

Supplier diversity focuses on proactively including diverse suppliers in procurement processes. It involves sourcing from businesses owned by underrepresented groups to foster equal opportunities and create a more inclusive business ecosystem. It goes beyond merely meeting diversity quotas and focuses on creating opportunities in the marketplace.

While diversity is a universal concept, there are regional differences in the focus of supplier diversity. North American companies primarily emphasize women-owned, veteran-owned, race/ethnicity-based, LGBTQ and small businesses. The rest of the world tends to focus mainly on women-owned, race-ethnic-based and small businesses.

Importance of supplier diversity

Diversity has become an important topic for companies because of the value it can generate, even if it can be challenging to have clear-cut correlations. There is an obvious compliance element concerning supplier diversity, especially in the public sector, but it goes beyond that. By embracing supplier diversity, businesses can unlock various benefits, including innovation, market access, enhanced reputation and reduced supply chain risks, ultimately contributing to social impact and economic growth.

Before going into the details and specifics of the ROI, let’s look at the different elements at play.

Regulatory compliance

Various countries have implemented regulations and initiatives to encourage supplier diversity. Although they often target public procurement, the private sector can also be impacted.

The following are two examples of regulations showing that supplier diversity is a global topic:

• United States:
  • The Federal Acquisition Regulation (FAR) requires government contractors to implement supplier diversity programs.
  • Executive Order 11246 mandates affirmative action in federal contracting to promote diversity and equal employment opportunity.
  • Several states have their own regulations focused on supplier diversity:
    • California: Requires state agencies to award at least 25% of their annual contracting dollars to certified small businesses (SBs).
    • New York State: Executive Law Article 15-A section 310-318 establishes obligations for state agencies and contractors to enhance opportunities for minority- and women-owned business enterprises (MWBEs). The current New York State required MWBE goal is set at 30%.
• Canada:
  • The Canadian government encourages supplier diversity through initiatives like the Aboriginal Business Procurement Policy.
  • Provincial programs support the inclusion of minority-owned and women-owned businesses in procurement processes.
• United Kingdom: Crown Commercial Service promotes diversity in government procurement. It encourages contracting authorities to consider social value and inclusion when awarding contracts.

Similarly, countries like Australia, New Zealand and South Africa have introduced government initiatives and policies to foster the participation of businesses owned by the indigenous population in public procurement.

Europe, as a whole, is “at the beginning of its journey regarding supplier diversity.” However, it is working on the topic as demonstrated by its “Handbook on Supplier Diversity.” The document looks at supplier diversity from a demographic and practice perspective as several member countries have developed initiatives to foster supplier diversity. The handbook aims to “be used to promote the benefits of supplier diversity for the whole of the public, private and third sectors and to encourage more businesses and public bodies to promote and implement it.”

As the landscape of regulations demonstrates, the maturity concerning the topic of supplier diversity varies between regions which translates into regional differences in terms of sensitivity of procurement organizations to the topic. The Spend Matters/Deloitte 2023 CPO Study shows that less than a third of CPOs in the Americas measure (actual and target) their diverse spend and the proportion reach two-thirds when looking at European CPOs.

Enhanced competitiveness (innovation + market access + reputation)

Diverse suppliers bring different cultural backgrounds and experiences, offering unique and, potentially, fresh viewpoints and insights into market trends and needs. In addition, diverse suppliers often have specialized skills and expertise, enabling them to provide innovative and/or differentiated products, services or ideas. Collaboration with diverse suppliers also fosters creative problem solving, contributing new ideas and approaches to business challenges comparable to the Six Thinking Hats technique.

In addition to having a deep understanding of the needs and preferences of different demographics that helps businesses tailor their offerings to these markets, diverse suppliers can unlock (new) diverse customer segments. It is because supplier diversity initiatives resonate with socially conscious customers who appreciate companies that support diversity and inclusion. By embracing supplier diversity, businesses can enhance their brand positioning, differentiate themselves from competitors and build trust and loyalty among customers.

Also, because supplier diversity contributes to social impact and economic growth by promoting economic development in diverse communities, companies with robust supplier diversity programs attract socially conscious consumers and partners and potentially create new ones by uplifting the economy/buying power of these communities.

Mitigated risks

Supplier diversity can also play a critical role in reducing supply chain risks and increasing resilience. That is because supplier diversity contributes to the diversification of a company’s supplier base. And procurement professionals know that diversification drives resilience because it reduces dependence on single sources. So, working with diverse suppliers across different regions and sectors can further mitigate geographic and industry concentration risks, providing flexibility and resilience in changing market conditions.

In addition, and more specific to supplier diversity, diverse suppliers are, more often than not, local suppliers. This mitigates the risk of supply chain disruptions (by creating transparency and increasing proximity) and provides alternatives if a remote supplier faces challenges or fails to deliver.

In conclusion, supplier diversity can be an influential contributor to business success by fostering innovation, improving competitiveness, mitigating risk and building a positive reputation beyond the company’s four walls. By embracing supplier diversity, organizations also contribute to social impact and economic growth. Supplier diversity is a way to further attract resources (human and material) internally through inclusive practices across all the layers of the supply chain. In part 2 of our mini-series, we will go deeper into these considerations to help organizations build their return on investment (ROI) based on the value they can generate but also by considering typical challenges inherent to supplier diversity programs.