The Contribution of Supplier Diversity to Competitive Advantage
Leonard Greenhalgh | Tuck School of Business at Dartmouth
Michael Robinson | IBM Corporation
Many leading corporations have sophisticated supplier diversity programs. These exist when there is strong support from visionary senior managers who see the strategic advantage of ensuring long-term supply chain excellence. In the absence of such vision, the focus is on the next quarterly accounting report: In that context, the procurement function is judged on achievement of short-term savings and the supplier diversity function is dismissed as superfluous and a target for budget-cuts. In this article, we show that the proper role of supplier diversity professionals is to increase the competitive advantage that results from cogent outsourcing.
The Corporate Role of Supplier Diversity Professionals
The procurement function has grown in importance during the past decades. For most of the 20th century, major corporations were vertically integrated. They were structured to perform value-chain activities in-house whenever possible, so as to maintain control of supply, safeguard intellectual property, and maximize profits by owning all the value-added revenue streams. That approach had benefits, but it also led to inefficiencies. No corporation can be at peak efficiency and at the cutting-edge of innovation in everything it does. So the conventional wisdom in management evolved from insourcing to outsourcing. Corporations retained in-house the functions that had strategic importance, that depended on the corporation’s distinctive competencies, or that created particular economic efficiencies. Other functions were outsourced. Reflecting this shift, supply chain managers replaced purchasing agents in the procurement function.
This evolution is perhaps most obvious in the transformation of the U.S. “Big Three” auto companies. Henry Ford, for example, once owned almost the entire value chain, from steel mills in Ford’s River Rouge complex, to company-owned dealerships. His successors reconsidered the wisdom of his approach, and began outsourcing to suppliers that could do a better job. Today, approximately two thirds of the value of a vehicle comes from the supply chain; and downstream in the value chain, dealers are independently-owned. And the outsourcing phenomenon is not unique to the auto industry: indeed, some pharmaceutical companies outsource as much as 90 per cent of the value-added.
In this new economy, supplier diversity professionals who do their job well are talent scouts. Their job is to understand their corporate strategies, know the supply base, and bring new outsourcing opportunities to the procurement function. They are looking for innovation, technical excellence, lower total costs, compliance with mandates, and in some cases, enhancement of the marketing message. They bring opportunities of which procurement professionals may not be aware.
“The Business Case” for Supplier Diversity
The supplier diversity professionals’ job is challenging when their roles are misunderstood by upper level managers. Supplier diversity professionals are neither civil rights advocates nor agents of corporate philanthropy; nor are they human resource specialists charged with extending workforce diversity into the value chain. They are outsourcing specialists who should be contributing to the strategic conversation about how to enhance their corporation’s competitive advantage. They have a voice when they bring value; when they bring no value, they lament not being listened to and complain about how their corporations don’t understand the value of supplier diversity.
Supplier diversity professionals who don’t create value strive to justify their existence by seeking out “the business case” for supplier diversity, as if there are some magical words that can be spoken to justify their share of the management budget. There are no magic words, but the fact that they feel the need to make “the business case” for their role reveals a misunderstanding within the supply chain profession. Procurement professionals aren’t asked to make “the business case” for outsourcing to majority-owned suppliers. Everyone in procurement is expected to bring optimum value to the corporation through outsourcing.
So we need to focus on what opportunities supplier diversity professionals bring to their colleagues in procurement, and how doing so contributes unique value to the corporation. We will see that the contribution is different in different industries.
The Strategic Value of Supplier Diversity Professionals
The most important contribution of supplier diversity professionals is to identify resources that other procurement professionals might overlook. Because competition is relentless and global, major corporations need to innovate and refine their operations in order to stay ahead of marketplace rivals. The majority of new ideas come from suppliers who are outside the mainstream businesses that typically serve the corporation’s procurement function—particularly small businesses, immigrants, and diverse businesses. It is in this sense that supplier diversity professionals are talent scouts, scouring unfamiliar marketplaces domestically and globally to discover technical excellence and innovative ideas that will bolster the competitive advantage of their corporations.
Another contribution is to realign the supply base with the corporation’s changing customer base. The customer of the last century is different from the customer of the new millennium, due to rapidly-changing demographics. Immigration, differential birthrates, and the changing role of women have transformed the homogeneous marketplace of past generations. Major corporations must adapt to the different tastes, culture, and languages of today’s and tomorrow’s customers, or lose competitive advantage. They need the input of suppliers and go-to-market partners that are as diverse as their customer base.
Another demographic shift is important: women and minorities are joining the entrepreneurial economy in increasing proportions. In the near future, diverse companies will outnumber majority-owned and -controlled businesses. Thus the supply base is changing, and corporations need to keep abreast of these trends and the opportunities they present, if they are to maintain competitive advantage. Supplier diversity professionals are the link between outsourcing professionals and the evolving supply base.
Major corporations have recently focused largely on the global economy, and have tended to overlook their impact on the local economy. This inattention is strategically short-sighted. When jobs are eliminated in the local economy, the aggregate wealth of the locale diminishes. Obvious symptoms of this decline include shuttered-up businesses, crumbling infrastructure, and higher local unemployment with its attendant increase in crime and social instability. Less obvious are the effects on the local work force, whose education suffers when the shrunken tax base results in reduced funding for education, and in tax revenues being diverted to increase police presence, build and staff larger jails, operate drug rehabilitation programs, and pay unemployment compensation in all its various forms. Some of the corporation’s work force is necessarily local, even when much of the value-added is largely from global outsourcing. Higher local costs, under-funded local infrastructure, and a less-able work force diminish the corporation’s competitive advantage.
Note that in some industries, supplier diversity professionals create economic as well as strategic advantages. Utilities are a case in point. It makes economic sense to outsource to local diverse companies because the multiplier effect works to the utility’s advantage. Who struggles the most to pay their utility bills on time?—diverse customers with limited earning power. Who votes on public utility commission price increases?—local customers, an increasing number of whom are minorities and women. Where are new power plants usually located?—in low-income, minority-dominated communities. For these reasons, outsourcing to local diverse businesses creates public goodwill at the same time that it helps the bottom line.
Sometimes the value of a strong supplier diversity function is to facilitate compliance with mandates. An example is publicly-funded construction of sports stadiums, convention centers, and schools. Local taxpayers help pay for the projects, so it makes economic sense for local taxpaying companies to participate in the construction and operations. By putting money back into the community and letting the multiplier effect expand local wealth, public officials bolster the tax base and make the local economy more robust.
The effect is more diffuse but just as logical in the case of federal mandates. Job-creation and wealth-creation are antidotes to urban decay, so it makes sense to allocate some proportion of federal spending to alleviate poverty in poor communities. Supplier diversity professionals in this context are not agents of corporate social responsibility: they facilitate linkage of a public good—such as a strong defense or a good highway system—with targeted federal spending. When there is a public mandate, competitive advantage accrues to corporations that comply and produce real economic impact.
A final—and largely untapped—strategic advantage that comes from an effective supplier diversity function is increased consumer loyalty. We have seen “Made in USA” and “Buy Local” campaigns drive sales. Similarly, many women like to buy products and services from women-owned businesses, and the Women’s Business Enterprise National Council (WBENC) is having increasing success in promoting this marketing initiative. Given that the fastest-growing sectors of the consumer market are minorities and women, when supplier diversity professionals do their jobs well there is an opportunity to connect their success to the marketing message. General Motors, for example, is adamant about outsourcing to minorities; minorities, in turn, show disproportionate preference for Cadillacs, which have a large proportion of minority-sourced content. Thus, supplier diversity can be a source of competitive advantage in the consumer marketplace if the fruits of this effort are publicized.
Developing the Supply Base
It should be obvious from the foregoing that the supplier diversity function is important to major corporations when it is thoughtfully integrated into the outsourcing operation. But being a talent scout is only half the job of the supplier diversity professional. It is not sufficient in any context to engage high-potential participants then “hope for the best.” Recruiters for professional sports, for example, find people who have the potential to be excellent players, but that’s only step one: the talented players need to be trained to be as good as they are capable of becoming, and they need to be successfully integrated into the team. Suppliers are no different. They need to be developed from high-potential suppliers into high-performing suppliers.
Supply chain managers need to be aware that the paradigm shift in sourcing, from insourcing to outsourcing, omitted an important principle. Vertically-integrated corporations of the mid-20th century strove to make every functional unit as effective and efficient as possible—because corporate success depended on having no weak links in the internal value chain that would create a competitive disadvantage. So if a department was under-performing, corrective action in the form of training or consulting would be prescribed. During the shift from insourcing to outsourcing, the locus of corrective action shifted from upper-level managers to purchasing agents, and the emphasis shifted from business unit development to supplier replacement.
Supplier replacement is seldom as good a solution as supplier development because of the learning curve effects. No new supplier is a perfect outsource partner at the outset. The supplier needs to learn the corporation’s systems and processes, its culture, and its procurement decision structure. Then the supplier has to adjust its own operations to the corporation’s priorities regarding cost, quality, delivery, innovation and flexibility. Good suppliers engage in continuous improvement and relationship-building. Whatever progress has been made is lost when a supplier is replaced, generating real transaction costs that are not recorded in accounting reports.
In an outsourcing context, efficiency and effectiveness are system-level challenges. The supplier diversity professional brings in high-potential supply candidates, then it is up to supply chain managers to make them as good as they can be. Here are four examples of actions forward-thinking corporations can take:
Focus consultants on value chain success. When outsourcing shifts the locus of competitive advantage to the value chain level, consultants need to pay attention to the efficacy and integration of the supply chain and the go-to-market partners. The strategies of many large corporations have been stymied by the combination of high dependence on outsourcing and weaknesses in the supply chain. Boeing, for example, has a large backlog of orders for its 787 commercial airliners, and has the factory capacity to ramp up production. But planes cannot move through the complex assembly process without critical outsourced components. That has led to rethinking the issue of when to outsource and when to insource. Today, consultants need to span the boundary between corporations and their suppliers.
Allow suppliers to sit in on corporate training sessions. In the days of vertical integration, managers and employees of the various divisions were expected to learn how to do their jobs best, and the corporation would engage trainers to teach them. Most corporations that outsource a large proportion of the value-added give access to these training programs only to their own employees. This is myopic. Suppliers need training, too, and the variable cost of allowing suppliers to sit in on corporate programs is negligible. The strengthening of inter-organizational relationships is a bonus. Clark Construction has an exemplary program of sharing corporate training resources with diverse suppliers: the better the suppliers function, the better off is Clark Construction.
Pay suppliers on time. Accountants think like accountants. They know that if they stretch out payment terms, they will get free use of working capital that is owed to suppliers, improving the corporation’s bottom line. The issue of fairness and bullying aside, this is unwise business practice. Good suppliers are often cash-poor, especially when they are succeeding in the marketplace and growing. The corporation’s cost of capital is usually lower than a supplier’s, so the practice of stretching out payment terms creates value-chain inefficiencies, and is therefore self-defeating for the corporation. Google is an example of a company that has figured this out, and pays its suppliers, if necessary, on 15-day terms.
Mentor suppliers that need mentoring. Corporations are strategically wise to make an investment in the success of their highest-potential suppliers. Entrepreneurs tend not to be business school graduates. They tend to be more motivated to start a business and face the challenges of newness than to sit in class and learn about what they might do if they ever started a business. The result is that most entrepreneurs are better at performing the task—manufacturing a product or delivering a service— than they are at running the business. It is in the corporation’s self-interest to help these suppliers succeed. Some of the supplier development can come from intensive learning experiences (it is hard to get entrepreneurs to leave their business for more than a week!), but they also need coaching. IBM has led the way in establishing the optimum balance between being taught and being mentored. IBM provides a strategic retreat for its diverse protégé companies, then invites the mentors to join the entrepreneurs’ top management teams to plan—then help the suppliers implement—their strategy for greater success.
If supplier diversity professionals focus on increasing the corporation’s competitive advantage, there is no need to justify the business case. They are allies to supply chain managers, providing novel opportunities from outside the mainstream of traditional procurement. If they want to be taken seriously, supplier diversity professionals must speak the language of the C-suite, particularly the language of the CPO and the vice-president of procurement. The proportion or total value of the corporation’s “diverse spend” is irrelevant; honors at diversity-oriented conventions are irrelevant; publicity from sponsoring a golf outing or a “power breakfast” is irrelevant. Contributing to competitive advantage and fostering economic self-interest are persuasive and earn the supplier diversity professional a seat at the table.