By Leonard Greenhalgh, Tuck School of Business at Dartmouth, and Michael Robinson, IBM Corp.
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 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, depended on corporations’ distinctive competencies or 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 — including steel mills in the Ford River Rouge Complex and 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; downstream in the value chain, dealerships are independently owned. And, the outsourcing phenomenon is not unique to the auto industry. Indeed, some pharmaceutical companies outsource as much as 90 percent of the value added.
In this new economy, supplier diversity professionals who do their jobs well are talent scouts. Their job is to understand their corporate strategies, know the supply bases 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. They are not 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 corporations’ competitive advantages. 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 existences by seeking out the “business case” for supplier diversity, as if there are some magical words that can be spoken to justify their shares of management budgets. There are no magic words, but the fact that they feel the need to make the “business case” for their roles 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 corporations 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 values to corporations. 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 corporations’ procurement functions — 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 advantages of their corporations.
Another contribution is to realign supply bases with corporations’ changing customer bases. Customers of the last century are different from the customers 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, cultures 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 bases.
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, supply bases are changing, and corporations need to keep abreast of these trends and the opportunities they present, if they are to maintain competitive advantages. Supplier diversity professionals are the link between outsourcing professionals and the evolving supply bases.
Major corporations have recently focused largely on the global economy and have tended to overlook their impact on local economies. This inattention is strategically shortsighted. When jobs are eliminated in local economies, the aggregate wealth of the locales diminishes. Obvious symptoms of this decline include shuttered-up businesses, crumbling infrastructures and higher local unemployment with its attendant increase in crime and social instability. Less obvious are the effects on the local workforces, whose educations suffer when the shrunken tax bases result 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 corporations’ work forces are necessarily local — even when much of the value added is largely from global outsourcing. Higher local costs, underfunded local infrastructures and less-able workforces diminish corporations’ competitive advantages.
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 utilities’ 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 communities and letting the multiplier effect expand local wealth, public officials bolster the tax bases and make local economies more robust.
The effect is more diffuse — but just as logical — in the case of federal mandates. Job 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 strong defenses or good highway systems — 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 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 successes to the marketing messages. 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 these efforts 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 operations. 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 and 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 No. 1. The talented players need to 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 chains that would create competitive disadvantages. So if departments were underperforming, 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. Suppliers need to learn corporations’ systems and processes, cultures and procurement decision structures. Then suppliers have to adjust their own operations to the corporations’ 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 suppliers are 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. The Boeing Co., 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 bottleneck 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 corporations 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 type of thinking is myopic. Suppliers need training too, and the variable cost of allowing suppliers to sit in on corporate programs is negligible. The strengthening of interorganizational relationships is a bonus. Clark Construction Group LLC 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 an unwise business practice. Good suppliers are often cash-poor, especially when they are succeeding in the marketplace and growing. Corporations’ costs of capital are usually lower than suppliers’, so the practice of stretching out payment terms creates value-chain inefficiencies, and is, therefore, self-defeating for corporations. Google Inc. is an example of a company that has figured 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 tasks —manufacturing products or delivering services — than they are at running their businesses. It is in corporations’ self-interest to help these suppliers succeed. Some of the supplier development can come from intensive learning experiences. However, it is hard to get entrepreneurs to leave their businesses for more than a week! But, they also need coaching. IBM Corp. has led the way in establishing the optimum balance between being taught and being mentored. It provides a strategic retreat for its diverse protégé companies, then invites the mentors to join the entrepreneurs’ top management teams to plan and then help the suppliers implement their strategies for greater success.
If supplier diversity professionals focus on increasing corporations’ competitive advantages, 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 chief procurement officer and the vice president of procurement. The proportion or total value of corporations’ diverse spending 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.