How supplier diversity can create more resilient supply chains

Supplier diversity is a social and business imperative that can help drive supply chain resiliency and support organizational innovation.

Three questions to ask

• How does diversifying suppliers contribute to enhancing supply chain resiliency?
• How can supplier diversity practices impact overall supply chain risk management? 
• How can diverse sourcing practices support a company’s overall sustainability goals?

Outsourcing manufacturing and sole sourcing had been a focus to drive overall cost savings and create supplier leverage for procurement organizations since the early 2000s. With the increasing total cost of ownership by organizations, the effort to nearshore their operations and diversify their supply chain had become an imperative to stay cost-competitive and still provide quality product to their customer base.

Supplier diversity has a long-rooted history in the US, beginning with the civil rights movement in the 1960-70s, and it has continued to remain prominent, driven by social justice movements, such as the 2020 Black Lives Matter protests. Also, in April 2023, the Group of Seven (G7) nations – the United States, Canada, Britain, France, Germany, Italy and Japan – pledged to focus on two key objectives: financial stability and supply chain diversity.

Sourcing from diverse suppliers (defined as at least 51% owned, operated and controlled by a minority, woman, LGBTQ+, veteran, service-disabled veteran, person with a disability or an Indigenous person, or as defined by the local country) influences customer buying decisions, as it shows the organization’s mature, diverse sourcing policies comparative to peers. Furthermore, an increase in an organization’s diverse supplier base can be an important goal to its own workforce and solidify awareness of the organization’s supplier diversity policies.

There is an additional benefit that is not often thought about in the supplier diversity equation: diversified sourcing can support an agile supply chain. Supply chain leaders during the pandemic learned the effect of disruptions and the importance of being agile to adapt to the constantly changing environment.

Sustaining the investment

Sustaining the investment into a diverse supply chain requires inbuilt agility and responsiveness to any type of network disruption (geopolitical, environmental, economic or availability). With inflation significantly affecting cost for many organizations, the considerations around nearshoring and understanding supplier capability are crucial to enabling an agile supply chain.

During the pandemic, organizations moved from global to more localized supply chains, and, as we emerged, organizations began finding a balanced middle ground in what some call “glocalization” to be agile in the response to disruption. This new approach has created an uptick on organizations’ balance sheet around inventory due to suppliers negotiating more procurement leverage around discounts up front.

Supplier diversity investment by individual firms is an area of topical interest for financial investors as organizations are revamping how they present their sourcing strategy to the public markets. Sustainment of diverse supplier investment requires firms to consider three key principles:

1. Tying supplier diversity spend goals to overall corporate financial targets when reporting earnings as a firm
2. Developing key spend targets for procurement organization on diversification of spend by suppliers
3. Implementing a glocalization approach to achieve high levels of customer service while investing in the local communities

Diverse suppliers can help cut costs and drive innovation

Innovation has become a central focus of most organizations, as consumer preferences and demands are constantly evolving. Supplier diversity plays a crucial role in supporting firm innovation and providing a key competitive advantage over other firms. With any new product initiatives developed by the research and development (R&D) department, the ability to have a stronger relationship with a diverse supplier base offers the procurement team the ability to creatively be cost-efficient while providing high-quality products.

Some organizations are leveraging their diverse supply base while driving innovation comparative to their peers in the market. For example, an American retail company partnered with a supplier to bring electrification to support consumer demand while supporting corporate sustainability initiatives and being the first major grocery chain to provide major electric vehicle (EV) charging.

What are the advantages in continuing to use incumbent suppliers? They may be reliably low-cost or familiar. They often require little new effort to engage with. But are they agile? Are they fit for a future that is more unpredictable and unstable than ever? Are they ready to embrace change to the extent that your procurement organization may want to – or be forced to? Are your longest-standing suppliers also your riskiest?

Exploring new diverse suppliers could help your supply chain be more agile. As your supply chain strategy changes, you may find that diverse suppliers are more open to proofs of concept. Another advantage is that diverse suppliers tend to be more localized to your manufacturing and distribution sites, which, in turn, has a ripple effect of helping local businesses buy the goods and services that they need to sustain their own operations.

Closer to home, diverse suppliers also could be nimbler in helping meet on-demand requirements as global supply chains crack under pressure. And they may be better placed to respond to market trends and help you be more innovative too – their fresher view and brighter outlook could equate to being more willing and able to try new approaches than your incumbent suppliers.

Key supplier diversity imperatives

There are both short-term and longer-term imperatives to build greater diversity into your supply chain.

In the short term:

• Redefine internal procurement policies: Organizations have a minimum requirement to involve diverse suppliers based on a certain dollar threshold or organizational spend.
• Rethink insurance requirements: Finance departments often have arbitrary criteria for suppliers’ insurance. For example, would it make a drastic difference if the certificate were $80m rather than $150m?
• Review supplier payment terms: Are they punitive? Could the terms be negotiated to be relaxed a little bit to take advantage of all of the benefits of diversity in sourcing?
• Change requests for proposal (RFPs): Many diverse companies are small to medium-sized enterprises that do not have procurement bid response teams ready to respond immediately. Could you develop a unique RFP process for smaller suppliers to provide them with an opportunity to bid on the RFP?

In the longer term:

• Make diverse suppliers’ part of your end-to-end procurement processes through refreshing policies.
• Pivot from a mindset of pure cost savings to one that combines social value, sustainability and cost savings.
• Set up the structure and process for organizational change: Position someone who is dedicated but not responsible for delivering supplier diversity goals, then embed innovative approaches into business-as-usual, category strategy and all normal day-to-day activities.
• Redevelop corporate governance goals to include supplier diversity targets.

How to start as an organization

As organizations are being challenged with balancing supply chain challenges, changes in consumer behaviors and financial pressures, they should be considering how to diversify their sourcing pool. However, one of the biggest challenges in building a world-class, diverse and resilient supply chain is changing mindsets among senior leadership to drive change and adoption of new procurement policies.

Organizations – particularly committed chief procurement officers (CPOs) – can start by providing direction to the team around the importance of diverse suppliers and changing the sourcing strategy. A significant advantage that can be communicated to the team around supplier diversity is the ability to drive stronger innovation practices and have a stronger competitive supplier base on a cost and quality basis.

The imperative for starting or continuing the development of supplier diversity best practices is essential. It is the new normal of having supplier diversity as part of a procurement organization – and not simply the right thing to do. As the environment challenges supply chains of organizations, supplier diversity will only strengthen the ability of a supply chain to meet and exceed consumer expectations and become more resilient.

No organization can afford to ignore or lag behind this peaking wave. Supplier diversity is a business imperative for resiliency; long gone are the days when we look at this as simply the right thing to do. As supply chain disruption is the new normal, supplier diversity is one key strategy to helping you weather the next major disruption.

Adarsh Muralidharan, Senior, Business Consulting, Ernst & Young LLP also contributed to this article.