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Author: Vengat Narayanasamy

Editor’s note: This article is part of the MyPurchasingCenter content archive. It was originally published in 2016 and appears here without revision.

 

Why do companies give special attention to supplier diversity programs? Many Fortune 500 companies have sponsorships from their C-Suite as well as a dedicated team to focus solely on this initiative. Though supplier diversity programs have been in place for a few decades, they have become more prominent over the past couple of years through the addition of concrete business goals. Despite this recent attention, however, a popular misconception still exists regarding the program, as some people still see it as a quota system designed to benefit certain select groups.

It is our belief that if a supplier diversity program can be implemented correctly, it can play a vital role in improving a company’s bottom line. These bottom-line gains are realized through contributions toward new product development, increasing market share, and developing new supplier sources.  While these benefits can all be tangibly felt and seen by a company, an additional contribution of supplier diversity programs is the enormous social benefit that they can have on a community.

It is well-known that consumers in the U.S. are becoming increasingly diverse, and companies must be prepared to address a consumer base that is anything but homogenous. Companies can take advantage of this by listening to their new ideas and involving them during the initial stages of product development, and considering their tastes, likes and dislikes. The results of this would exceed even what would normally be seen as a huge market research exercise. For years, Ford and GM have been leading the automotive industry in regards to supplier diversity spending, continuously reaping the benefits of more diverse thinking and the new ideas that come from these relationships. By implementing a supplier diversity program, it is more likely that a company’s suppliers will more accurately reflect the customers it serves.

Further evidence to support supplier diversity programs can be seen by looking at a prominent Japanese auto manufacturer, whose research indicates a major factor for its declining sales is due to unforeseen growth in consumer diversity. The data reveals that more than 70% of their customer base is Caucasian, most likely leading to a steady decline of sales over the past four years as the Caucasian percentage of the population declined during that same time frame. Census projections indicate that by 2025, the population will consist of approximately 50% Caucasians and 50% a mix of various ethnic groups, meaning even fewer customers will exist for this Japanese auto company unless they are able to adjust their marketing and supplier strategy. While supplier diversity is not the only factor in declining revenue, it is a relatively easy and immediate step to take towards winning back some of their lost market share. Since identifying the importance of supplier diversity, they have created a dedicated team to focus on developing a more diverse supplier base through concrete and aggressive business goals.

Sometimes being a smaller company can be advantageous. Often times, these small and minority-owned companies can be more nimble, geographically closer in proximity, and more innovative than their larger counterparts. These companies will also put forth their best efforts in order to work with major corporations, and are readily willing to invest their resources towards meeting the demands of their larger customers.

A recent example is a niche Chicago-based flavor development house that saw an opportunity to invest in a development lab near one of their major customers, helping the developers (customers) to work on new flavors.  Their effort has been a huge hit among the developers, as it helped to decrease travel time, provide more flexibility, and more important reduce new product development time. Taking a page from their initial success, the company readily extended the offer to their other major customers and their strategy is now viewed as a major differentiating factor from their competition. The new labs set up by this niche (and diverse) supplier certainly can be considered a success with their customers, and it was primarily due to the speed with which the supplier was able to seize the opportunity that separated them from their much larger competition. 

As these small businesses grow, so too will the economy. At the beginning of the relationship, larger companies will typically invest their time, resources, and energy into providing expertise and assistance to help develop the supplier’s systems and processes, helping to make them self-sufficient over time. As these businesses begin to grow, they forge a strong and continuous partnership with the mentoring company, emerging as key suppliers. This infuses competition to the existing supplier base and also provides new avenues to improve efficiency (consolidation, re-packaging etc.).

One example would be Mays Chemicals (est. 1980), which is based in Indianapolis and is currently being run by the founding family’s second generation. They are now viewed as a dependable partner for many large food corporations, including Kellogg. ChemicoMays, established in 1989, is another company that was mentored by GM in their early stages. Its founder, Leon Richardson, attributes much of his company’s success to the opportunities provided by GM’s supplier diversity program.

When small businesses grow, they contribute directly to the betterment of the local community while also serving as a great way to build a firm’s brand loyalty from the businesses and communities that benefit from the jobs and wealth created by the investment made in supplier diversity.

To conclude, supplier diversity programs implemented in the correct way can be a powerful and innovative way to achieve a stronger and more competitive supply chain, and ultimately lead to a healthier bottom line for all companies.