Why Corporations Need a Supplier-Diversity Program
Jo Rawald • June 27, 2024
UNLOCKING POTENTIAL AND FIGHTING SOCIAL INJUSTICE THROUGH SUPPLIER DIVERSITY
Why Corporations Need a Supplier-Diversity Program
Supplier diversity programs are a vital strategy to combat social injustice in the United States. This article dives into the socioeconomic contributions these programs can make and the myriad ways they can benefit businesses. I'll also spotlight model programs from large companies who have embraced supplier-diversity programs, leading the way for the expansion of diversity programs within thousands of corporations.
A handful of socially conscious major companies have long led the charge in addressing racial injustice through supplier diversity programs that promote an inclusive approach to procurement. As the spotlight on systemic racism in the U.S. intensifies, these programs are more crucial than ever. Yet, too few companies have them, and many who do have allowed their diversity initiatives to turn into mere token gestures.
Through my research, including published interviews with companies and diversity organizations, as well as analyses of media coverage and company reports, I’ve mapped the history of diversity programs and their social and commercial impacts. My research confirms the benefits of these programs and urges companies to revisit their efforts and, if necessary, take them seriously.
What is Supplier Diversity?
A diverse supplier is a business that is at least 51% owned and operated by an individual or group traditionally underrepresented or underserved. Common classifications include small-business enterprises (SBEs), minority-owned enterprises (MBEs), Veteran-owned business enterprises (VBE), and woman-owned enterprises (WBEs). Over time, the definition has expanded to include businesses owned by other minority groups, such as LGBTQ+ and proprietors with disabilities.
The history of supplier diversity in the U.S. is deeply rooted in the civil rights movement of the 1950s and 1960s. Following race riots in Detroit in 1968, General Motors set up one of the first supplier diversity programs, inspiring much of the American auto industry to follow suit. Early movers in the electronics industry, like IBM, established supplier diversity programs around the same time. Later, Public Law 95-507 encouraged government contractors to include minority-owned businesses in their supply chains.
Public Law 95-507
Public Law 95-507, enacted in 1978, significantly amended the Small Business Act of 1958. This law aimed to provide greater opportunities for small businesses, particularly those owned by disadvantaged individuals, in federal contracting. Here are the key aspects of Public Law 95-507:
- Subcontracting Requirements:
The law required that large prime contractors, who receive federal contracts valued at $500,000 or more ($1 million for construction), establish subcontracting plans with specific goals for small businesses, including those owned by socially and economically disadvantaged individuals (OCC.gov) (Justice).
- Creation of OSDBUs:
Public Law 95-507 mandated the establishment of Offices of Small and Disadvantaged Business Utilization (OSDBUs) in all federal agencies. These offices are tasked with ensuring that small and disadvantaged businesses have maximum practicable opportunities to participate in federal procurement processes. OSDBUs conduct outreach programs, sponsor small business fairs, and provide training to help small businesses navigate federal contracting (Justice) (HHS.gov).
- Federal Contract Goals:
The law directed federal agencies to set annual goals for awarding contracts to small businesses, women-owned businesses, and businesses owned by socially and economically disadvantaged individuals. These goals are reviewed and adjusted annually to ensure fair and equal opportunities (OCC.gov) (HUD).
Public Law 95-507 has had a profound impact on the landscape of federal procurement, making it more inclusive and accessible for small businesses. It has facilitated the growth and development of many small enterprises by providing them with significant opportunities to compete for and secure federal contracts.
Some of the Fantastic Benefits of Public Law 95-507
Public Law 95-507 brought several significant benefits to small businesses, particularly those owned by socially and economically disadvantaged individuals. Here are the biggest benefits:
1. Increased Contracting Opportunities:
Subcontracting Requirements: The law mandated that large federal prime contractors establish subcontracting plans with specific goals for including small and disadvantaged businesses. This requirement created substantial new opportunities for small businesses to participate in large federal contracts (OCC.gov) (Justice) .
Set-Aside Programs: Federal agencies were required to set aside a certain percentage of their contracts specifically for small businesses, ensuring that these businesses had a fair chance to compete and win government contracts (HHS.gov) .
2. Creation of OSDBUs:
Dedicated Support Offices: The establishment of Offices of Small and Disadvantaged Business Utilization (OSDBUs) within each federal agency provided dedicated support and advocacy for small businesses. These offices are tasked with ensuring that small businesses have the resources and opportunities needed to participate in federal procurement (Justice) (HUD).
Outreach and Training: OSDBUs conduct outreach programs, sponsor small business fairs, and offer training sessions to help small businesses understand and navigate the federal contracting process (HHS.gov).
3. Promotion of Fair Competition:
Annual Goals and Accountability: The law required federal agencies to set and report annual goals for contracting with small and disadvantaged businesses. This not only promoted accountability but also ensured continuous focus on increasing small business participation in federal contracts (OCC.gov) (HUD).
Economic Growth: By leveling the playing field, the law helped small businesses grow and thrive, contributing to economic development and job creation within communities (HUD).
4. Support for Disadvantaged Groups:
Focus on Diversity: Public Law 95-507 specifically aimed to increase opportunities for businesses owned by socially and economically disadvantaged individuals, including minority-owned and women-owned businesses. This focus on diversity helped these businesses gain access to federal contracts that might have otherwise been out of reach (OCC.gov) (HUD).
Encouraging Minority Business Participation: The law promoted the development and implementation of incentive techniques to encourage greater minority business subcontracting by federal prime contractors (HUD).
Overall, Public Law 95-507 has been instrumental in enhancing the participation of small and disadvantaged businesses in federal procurement, fostering a more inclusive and competitive marketplace.
The Right Thing to Do
Supplier diversity programs can enhance a company’s efforts to maintain high moral and ethical standards. Kris Oswold, vice president of global supplier diversity at UPS, mentioned in an interview that her company’s program, started in 1992, grew from a deep desire to be more inclusive and do what is right. Now, UPS spends $2.6 billion annually on business with around 6,000 small and diverse suppliers, aiming to increase that spend each year.
The UPS program has evolved in its identification and support of fledgling diverse suppliers. For example, UPS partners with multiple councils and third parties, such as the Women’s Business Enterprise National Council and the National Minority Supplier Development Council, to run mentoring and training programs that support the growth and success of diverse suppliers. This includes workshops, professional matchmaking at supplier diversity conferences, enhancing opportunities for capital investment, and management education.
Inclusive procurement also delivers broader societal benefits by generating economic opportunities for disadvantaged communities. The U.S. Small Business Administration estimates there were 8 million minority-owned companies in the U.S. as of 2018. The National Minority Supplier Diversity Council reports that certified MBEs generate $400 billion in economic output, leading to the creation or preservation of 2.2 million jobs and $49 billion in annual revenue for tax authorities. These numbers are steadily increasing.
To encourage such growth, large companies, like Coca-Cola spends over $800 million annually on diverse suppliers and aims to surpass $1 billion by the end of 2020. Terrez Thompson, vice president of global supply inclusion and diversity at Coca-Cola, highlighted in an interview with Forbes Magazine, the role of diversity programs in fostering entrepreneurship among highly impacted minority groups. Together with Georgia State University, Coca-Cola formed a supplier-development institute to educate small and disadvantaged groups on starting businesses. Coca-Cola also has the STEP initiative to support women entrepreneurs through training, education, and mentorship.
Other large American companies encourage, and sometimes require, their suppliers to create their own diversity initiatives. For instance, as of 2019, retailer Target spent $1.4 billion on goods and services from first-tier diverse suppliers and influenced its first-tier suppliers to buy over $800,000 worth of offerings from second-tier diverse suppliers.
Supplier diversity programs are also a selling point for hiring. A survey conducted by Hootology found that 52% of respondents want to work for a company with a supplier diversity and inclusion program. This insight has shaped recruitment approaches for large companies to consider promoting their supplier diversity efforts to potential candidates.
Commercial Advantages
Beyond moral and ethical arguments, there are sound commercial reasons for creating supplier diversity programs. An inclusive procurement strategy broadens the pool of potential suppliers and promotes competition, improving product quality and driving down costs. By providing more sourcing options, inclusiveness can make supply chains more resilient and agile — a crucial advantage in uncertain times. Certified diverse suppliers are now considered for contracts they would not have been otherwise due to the imperative for flexibility.
Stacey Key, president and CEO of the Georgia Minority Supplier Development Council (GMSDC), shared in an interview how minority businesses adapted during the pandemic by leveraging their expertise in hair products to create hand sanitizers and disinfectants. The “feel-good” factor associated with diversity programs can also enhance a brand’s image.
A 2019 study Hootology found that individuals aware of Coca-Cola’s supplier diversity initiatives were 45% more likely to perceive the brand as valuing diversity, 25% more likely to think favorably about the brand, and 49% more likely to use Coca-Cola products. Hootology estimated these favorable perceptions would lead to an additional 670,000 consumers using Coca-Cola products more frequently.
The increasing support for movements like Black Lives Matter will likely bolster the impact of supplier diversity programs on brands.
Challenges and Speed Bumps
A key issue is that diversity programs are often created reactively as distinct entities treated as nonessential. These token departments may not have a seat at the procurement table, limiting their influence on buying decisions. The remedy is to integrate these programs into central procurement strategies.
Finding minority-owned vendors that meet procurement requirements is another potential obstacle. Companies can seek out small, diverse suppliers needing support in the certification process and create mentoring and training programs to help them meet standards. Partnering with relevant councils and chambers of commerce that provide these support systems is another approach.
Accountability is another challenge: ensuring that investments in diversity programs benefit genuine groups. Federal contractors must comply with specific reporting requirements, and companies with long-running programs have established oversight mechanisms. For example, UPS has a Diversity & Inclusion Steering Council, including its CEO and other executives, and employs a third-party firm to validate supplier certifications and audit diversity spend.
Time to Step Up
All identified barriers are surmountable if companies genuinely want to make their procurement strategies inclusive. Creating a supplier diversity program might be challenging in specialized markets with few qualified suppliers, such as defense. But for most major companies, these programs represent an opportunity to fight racial discrimination actively, create economic opportunities, and enhance their businesses.
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