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 / Winter 2008 /Issue 53(originally published by Booz & Company)


Supplier Empowerment and the Bottom Line

When you adapt your sourcing strategy to a more diverse world, everybody benefits.

Illustration by
Lars Leetaru

Steve Reinemund, former chairman and CEO of PepsiCo Inc., said it best in March 2007: “The re­sponsibility of leadership for diversity…is now in the hands of business…. That’s where the entrepreneurs are; they’re in diversity-led businesses.” His comment, in a speech to the Kentuckiana Minority Business Council in Louisville, Ky., reflects an emerging recognition of the impact of corporate leadership in promoting ethnic and gender diversity in business today, espe­cially in the face of less-effective government efforts. Reinemund’s comments also reflect the increasing emphasis on integrating supplier diversity practices into overall supply chain strategy.

The strategic imperative of supplier diversity is not immediately obvious to many businesspeople, because the most compelling argument starts at the broadest macroeconomic level. Companies succeed best in a flourishing economic climate, and small-business entrepreneurship provides critical engines for innovation and job growth. For example, research has demonstrated that in the United States, new firms and small businesses consistently produce more innovations and create more jobs than large enterprises throughout the full business cycle. In fact, a team of economists led by re­nowned entrepreneurship professor William J. Baumol argue that this form of “entrepreneurial capitalism” produces growth superior to that brought by the large-firm, oligarchic, or government-led capitalism found in many other countries. Without the creative destruction of entrepreneurship, even dominant economies grow stagnant — as has been demonstrated by the tepid growth of much of western Europe over the past decade. As they be­come more dependent on the low wages of developing countries in addition to foreign oil, developed nations must tap the entrepreneurial innovation of smaller businesses to ensure a healthy economy.

The entrepreneurial world in turn increasingly reflects the diver­sity of the general population. In the U.S., minority-owned and women-owned businesses have grown in number and capacity, expanding at twice the na­tional average rate in recent decades. They now account for 20 and 30 percent of all U.S. firms, respectively. This expansion has been fueled by demographic and macroeconomic phenomena, including increases in population diversity, improvements in educational attainment, and rising household incomes. According to recently released U.S. census data, minority groups — Hispanics, blacks, Asians, and Native peoples — now account for 43 percent of Americans under 20. Current demographic trends suggest that the white majority will drop to less than half of the total U.S. population by 2042. Asian-Americans now hold college degrees in greater proportion than the white population, and black educational attainment rates have risen faster than those of the white population. One in six adult blacks now holds a college degree.

In short, whereas large firms reflect the demographics of the past, the small firms at the heart of an innovative economy almost certainly reflect the ethnic and gender diversity of the current population. Thus, one of the most effective ways for a larger company to help foster a more vibrant economy is to build supplier relationships with the growing base of businesses led by women and minorities. At the same time, promoting supplier diversity can yield direct business benefits for corporations. It can be an effective strategy, for example, to find and support local entrepreneurs, and to develop them into top-tier suppliers that are more cost effective and committed than physically distant firms. In some industries, especially consumer products, dealing with diverse suppliers can provide a company with important insights into current and growing markets that are themselves diverse in culture and language.

Improvements in supplier di­ver­sity, however, require a change in the mind-sets of many corporate leaders. Unfortunately, few com­panies have a clear sense of the potential range of diverse businesses around them. Not surprisingly, few have engaged in the development of their minority supplier network with more than a “compliance” or symbolic mind-set. There have been many efforts to encourage women- or minority-owned business development in the U.S. over the past four decades, often sponsored by public–private partnerships, but they have yielded disappointing results. Research shows that they often suffered from ill-defined goals and objectives. Those programs that tracked results tended to focus on the percentage of budget spent rather than areas of benefit. Some procurement officers resisted programs designed to promote social welfare, and tried to change them to simply expand the base of small suppliers, whether or not they were owned by minorities or women. Other causes of failure included a lack of innovation in developing suppliers’ capacity, poor understanding of the requirements of major corporate customers, and a lack of familiarity within procurement departments of the proven methods of minority business development.

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