Why your program is ineffective
In my career I have been astounded by the corporate mandates to increase supplier diversity that occur without a strategy or plan. Corporate directives are typically to find minority suppliers and get the numbers up. The process buyers frequently use to do this is simple: cast the net, bring in diverse suppliers and get them on-boarded so they can be counted to allow their companies to compete for government work. The big conflict arises when the other directive given to procurement is to drive maximum cost and value improvement. When this happens, the diversity program usually does not include supplier development and many of the diverse suppliers are unable to compete on price with larger, well capitalized businesses (that will eventually replace them). Every year the process is repeated: cast out the net, bring in new suppliers and replace the suppliers that are unable to compete on price.
What can be done to stop this cycle? The only way the supplier diversity process can work is to attract diverse suppliers, develop them and build strong relationships that will endure over time. To do that, a company must be committed to work with the diverse suppliers, understand their business and assist them in building a growth plan for your business. This may include long-term contracting for finance purposes and forgoing the benefits of long payment terms for these suppliers.
Supplier relationship management is essential for all strategic suppliers, but it is critical if you want to succeed with a stable diversity program. Many of these firms are disadvantaged to begin with, based on access to growth capital, talent and networks. When we add reduction of margin through price reductions and terms extensions, they have little to no chance to remain as suppliers. One diverse client that I worked with was forced to use customer directed priced materials at fixed labor rates and a fixed overhead rate with a net margin of 2%. This supplier lost the business to low cost country suppliers who reduced the cost an additional 1%. This diverse supplier never had a chance–given capital he could have automated several operations, providing the OEM a 5% reduction and increased his margin 2%.
If your firm does not have:
- Budget for diversity development
- Strategy and process for attracting and on-boarding diverse suppliers
- Formal supplier relationship management process
- Fast payment terms
- Timelines for growing diversity programs and its suppliers
You may be paying lip service to supplier diversity.
Review your strategy, budget for developing suppliers and recognize:
“Suppliers are only as good as we let them be.”
David Johnson, Campbell Soup