But experience suggests that corporations can develop innovative, firm-appropriate approaches to supplier diversity. The first step is to understand the history — and limitations — of past efforts to promote supplier diversity. The second is to change the corporate mind-set to consider supplier diversity as a strategic imperative rather than a vaguely defined moral obligation. The final step is to make a few key changes in sourcing processes to recognize and overcome the challenges inherent in working with diverse suppliers. These include identifying and focusing on the most promising potential suppliers, providing financing for undercapitalized women- and minority-owned businesses, and investing in building those suppliers’ management capabilities.
Beyond Social Responsibility
The U.S. policy experience with encouraging diverse business ownership is particularly evocative because it represents more than 40 years of intensive trial and error. Although U.S. government policy designed to aid small business dates back to the Great Depression — the era when economist Joseph Schumpeter began highlighting the importance of entrepreneurial creative destruction — the federal government’s focus on increasing the base of diverse business owners began during the Civil Rights movement as a response to discrimination in hiring. Just after taking office, President Richard Nixon in 1969 established the Office of Minority Business Enterprise through executive order. By increasing the base of diverse business owners, the reasoning went, the government could ensure that minority workers would fare better in the labor market. Related policies were initiated that spurred many corporations, especially those with government contracts, to develop their own supplier diversity programs. It was through these (and similar) programs that the phrase “corporate social responsibility” first came to the attention of many businesspeople.
Unfortunately, in this crucible, many supplier diversity programs were formed with a compliance, rather than a strategic, mind-set, and accordingly were susceptible to the criticism that they were meddling with free-market processes. Defenders argued that market intervention and incentives were needed to overcome high levels of racial discrimination among many sources of capital and customers. The stigma resulting from the political debate discouraged many managers from considering strategic reasons to pursue supplier diversity.
Nonetheless, some corporations joined forces in support of organizations such as the National Minority Supplier Development Council (chartered in 1972 as the National Minority Purchasing Council), which now includes 3,500 corporate members. In 2001, a group of large companies formed the Billion Dollar Roundtable to commemorate annual spending of US$1 billion or more with women- and minority-owned businesses, and to share best practices. Thirteen companies, including well-known corporations such as Procter & Gamble, IBM, Toyota, Johnson Controls, Verizon, and Wal-Mart now rank as Roundtable members.
However, because these programs were poorly understood, even by those implementing them, they experienced a continuing tension between being “socially responsible” and improving efficacy and value through the supply chain. Efforts to build supplier diversity that never addressed these contradictions were well-intentioned but ineffective. For example, some programs took a broad-based approach, often focusing on percentage of spending, that would allow firms to report large expenditures with a diversity of business owners. These programs, based on social equity considerations, often set a common target for buyers across all purchase categories. Unfortunately, a sole focus on ends (percentage or magnitude of spending) may have the unintended consequence of obscuring careful thinking about the means (which entrepreneurs to target for development and why). Such one-size-fits-all guidelines oversimplify the challenges of strategic investment in diverse suppliers, leading to mixed results that in turn can exacerbate negative stereotypes about such programs. Proportional goals may be necessary to encourage action, but are insufficient in the competitive marketplace.
Certain companies — particularly those that deliberately stay close to consumers, such as PepsiCo and Wal-Mart — have been at the forefront of strategic efforts to grow their share of total purchases. These companies understand that supplier diversity is not a social cause but a strategic necessity. Unless a company can make this critical shift in mind-set, its efforts will likely be ineffective, at best, or value destroying, at worst. If purchases from small and disadvantaged businesses merely represent a necessary evil to meet customer-imposed or government-mandated targets, the programs will inevitably focus on damage control rather than value creation.