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Yesterday I posted a blog titled “Everything you want to know about supplier Diversity.” You can read it here – Everything you want to Know about Supplier Diversity . That was a WHAT aspect of my three part series discussion – WHAT, WHY & HOW of Supplier Diversity.

Now the real question that procurement managers in an enterprise need to answer when there is a talk about implementing supplier diversity is “Why should we implement Supplier Diversity?” Is it just a fun stuff in CSR list – or does it make a perfect business sense?

 

Today let’s look at the key drivers behind the supplier diversity initiative and how one can not only justify but also build a business case around it to take organization along with you.

 

The basic premise here is – A supplier diversity program will partner your company with businesses that are owned and/or operated by women; African, Hispanic, Asian and Native Americans; gay and lesbian individuals; and veterans. It will also connect you with companies that may have been overlooked because of their size as well as those located in economically distressed areas.

Now all that is fine, but do these connections make a business sense for me? Do they make value addition in the overall supply chain? The answer is YES.

To list down few benefits of implementing supplier diversity program are –

 Since most diverse suppliers are also small businesses, companies find that diverse suppliers offer greater flexibility, more customer focus, and lower cost structures. The vast number of diverse suppliers and the fierce competition for business is also seen as a powerful driver for innovation.

A 2003 study by CHI Research determined that small businesses generate 13 to 14 times more patents per employee than large firms. Many companies use their supplier diversity programs as a means to tap into small businesses and the innovation that is occurring at these firms.

Additionally, companies that have strong supplier diversity programs appear to get more out of their procurement organizations than companies that do not. In a 2006 study by The Hackett Group, companies that focus heavily on supplier diversity generate 133% greater return on the cost of procurement compared to average companies.

 

And the most important point to look at is the trend in demographic shift –

According to findings of Minority Business Development Agency of US dept of commerce titled “AN OVERVIEW OF THE 2002 SURVEY OF BUSINESS OWNERS” –  

 

In 2002, there were 4.1 million MBEs representing almost 18 percent of firms that could be classified according to the race, ethnicity, or gender of ownership. These firms earned gross receipts of $668 billon (8 percent of gross receipts attributable to classifiable firms) and employed 4.7 million workers (9 percent of workers employed by classifiable firms).

 

For a number of measures, MBEs showed strong growth in the 5 years between the surveys:

 

  1. Between 1997 and 2002, the number of MBEs increased by 35 percent. The number of non minority firms5 increased by only 6 percent. The number of all U.S. firms increased by 10 percent.
  2. From 1997 to 2002, annual gross receipts generated by MBEs increased by 13 percent. Annual gross receipts generated by non-minority firms increased only 3 percent over the same period.
  3. The number of workers employed by MBEs grew by 5 percent between 1997 and 2002. Over the same period, the number of workers employed by non-minority firms declined 7 percent.

         

Large MBEs—MBEs with gross annual receipts greater than $500,000—showed particularly strong performance

 

  1. In 2002, there were 194 thousand large MBEs, representing 5 percent of all MBEs. These firms generated $498 billion in annual receipts and employed 3.4 million people. That year, large MBEs generated 75 percent of total gross receipts attributable to MBEs, and employed 73 percent of the workers employed by MBEs.
  2. The number of large MBEs increased by 15 percent between 1997 and 2002. The number of similarly sized non-minority firms grew by 13 percent.
  3. From 1997 and 2002, annual gross receipts of large MBEs grew by 11 percent. Annual gross receipts of similarly sized non-minority firms grew by only 3 percent.
  4. Over the same period, the number of workers employed by large MBEs increased by 9 percent. The number of workers employed by similarly sized non-minority firms declined by 6 percent.
  5. Average gross receipts of large MBEs decreased by 3 percent between 1997 and 2002. Over that same time period, average gross receipts of similarly sized non-minority firms declined 9 percent.

                   

If we look at the population trends –

 

  1. The minority share of the total US population is projected to increase from 29% in 2000 to 46% in 2045
  2. Minority population growth is equivalent to 86% of total population growth during these 45 years
  3. In 2025 the minority population will exceed the non – minority population in 5 states

       

 These demographic trends are having a substantial impact on supplier diversity in two primary ways.

 

First, due to the large number of new minority and women-owned businesses, companies will be more likely to work with diverse suppliers in the future than today. Companies with strong supplier diversity programs will be better able to identify and develop these young companies into valuable supply relationships.

 

Second, the growth of minorities as a customer segment presents the opportunity to market the use of a diverse supply base for retail companies. Many consumer products companies are already targeting minority segments by focusing on the company’s use of minority suppliers.

 

With the projected increase in population share the minority share of US economy is expected to grow as well. By 2045 minority purchasing power may reach $4.3 trillion as compared to 1.3 trillion in 2000 or as high as $6.1 trillion if income parity were eliminated by 2045. Furthermore the minority population may contribute 44 percent or as much as 70% of the total increase of purchasing power from 2000 to 2045.

 

Now the multi trillion dollar businesses makes perfect sense to start working on supplier diversity program of an enterprise and connect with these minority communities through your strong supplier diversity program. Companies with a diverse supplier base stands to gain access to multi cultural markets. 

Thanks

Prashant Mendki

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