GSC October 2011 Newsletter Articles

From the Desk of the President, Michael Gibbons

 

Supplier Diversity

The history of the melting pot theory can be traced back to Letters from an American Farmer (1782) when J. Hector de Crevecoeur, a French settler in New York, envisioned the United States not only as land of opportunity, but as a society where individuals of all nations are melted into a new race of men, whose labors and posterity will one day cause changes in the world.

Our nation is ever-changing. The great melting pot continues to morph, but with different concentrations. Oftentimes, minorities are shut out of business opportunities. Progressive companies and the US government are taking steps to implement supplier diversity programs and these programs are paying off.

As a consultant in the past, when bidding on an RFP, certain diverse suppliers were given preference in the vetting process. Invariably we would always poll the group to see what people we might have on board that might help us meet these criteria. This is certainly not what the supplier diversity programs had in mind – and it never worked.

Supplier Diversity is a business program that encourages the use of suppliers in the following categories:

  • Minority-owned
  • Women-owned
  • Veteran-owned
  • Service disabled veteran-owned
  • Historically underutilized business
  • SBA-defined small business vendors

It is not directly correlated with supply chain diversification, although utilizing more vendors often enhances supply chain diversification.

Minority- and women-owned business enterprises (MWBEs) are among the fastest-growing segments of the U.S. economy. Minority-owned businesses generate an (1997) estimated $495 billion in annual revenue and employ nearly 4 million workers, while women-owned firms employ about 19 million people and generate $2.5 trillion in annual sales.

Veteran-Owned (VOB) and Service Disabled Veteran-Owned Businesses (SDVOB) are some of the most prominent groups on the American entrepreneurial landscape, and being sought after by corporate supplier diversity directors. There are over 25 million veterans in this country; roughly 1 in 5 adult males. 1 in 7 small businesses are owned by a veteran.

Many companies provide incentives for minority – and women-owned operations to do business with them. Many managers are accountable for ensuring that each area of the value chain—from suppliers and vendors to customers —is fully represented by companies with effective diversity initiatives of their own.

Contrary to misconceptions, supplier diversity does not have to cost more and may provide tangible benefits to the bottom line. According to recent research from the Hackett Group, there is no evidence that companies that pursued supplier diversity programs had less effective operations. This finding was based on a study of 50 companies from both the service and manufacturing sectors.

Companies that have supplier diversification programs generated 133% greater returns in the cost of procurement than the average company, which resulted in an additional $3.6 million to the bottom line.

Companies that focus on supplier diversity, driven by a sense of social responsibility, government mandates, or a range of other factors, are just as able to run effective procurement operations as their peers that ignore supplier diversity,” said Hackett Senior Business Advisor Kurt Albertson.

The government also plays a role. I was recently watching a speech by President Obama to a veterans group announcing that the US was going to implement a policy where companies that hire wounded vets, particularly from Iraq and Afghanistan, would receive tax credits.

One company that is a good example of this is Wyndham Worldwide. Wyndham Worldwide, one of the world’s largest hospitality companies, achieved significant growth in its spending with diverse suppliers in 2010. Wyndham Worldwide spent 10.3% of its total purchases with diverse suppliers, a 51% increase over the previous year. The program focuses on nine groups: African-American; Hispanic-American; Asian-American; Native-American; gay, lesbian, bi-sexual and transgendered; women; veteran and disabled-veteran; and disabled-owned businesses.

“Internationally, developing relationships with diverse business owners and organizations also supports our growth in emerging markets, generating new ideas and opportunities for business in local communities, and supports the overall strength of the global travel and tourism economy.” – Paul Davis, Senior VP, Strategic Sourcing at Wyndham Worldwide

Implementing a supplier diversity program is also good PR. In 2000, total purchasing power in the United States was over $6.5 billion, with white non-Hispanics accounting for nearly 80% of that purchasing power. This number will drop significantly as minority purchasing power rises from approximately 20% in 2000 to over 45% by the year 2045. In fact, between 1990 and 1997, buying power in African-American, Hispanic, and Asian communities rose by 54%, 58%, and 72%, respectively. This trend is expected to continue with minority purchasing power surpassing $2 trillion by 2015 and $3 trillion by 2030. In the Wyndham Worldwide case, the supplier diversity initiative has received numerous accolades, including awards from the U.S. Minority Business Development Agency, Florida Minority Supplier Diversity Council, the Kissimmee/Osceola County Chamber of Commerce, and the Morris County Hispanic-American Chamber of Commerce in New Jersey.

Diverse communities pay attention to these types of programs and will reward companies that implement supplier diversity programs. The GSC supports initiatives that provide opportunities for businesses that might otherwise be marginalized in the corporate world. Experience has shown that these diverse suppliers allow corporations to maintain or increase profits while demonstrating socially responsible attitudes towards sourcing.