Council Post: How To Use Your Purchasing Power To Address Social Inequality

Neha Shah, President & Co-Founder, GEP, a leading provider of procurement and supply chain solutions to Fortune 500 companies.

Global companies spend trillions on goods and services annually. The top five U.S. tech stocks alone have a combined value of $7.5 trillion, which is larger than the GDP of Japan, the world’s third-largest economy. These large enterprises have unequaled — and growing — power to provide sustained economic opportunities to minority- and women-owned business enterprises and to, in turn, bring more diversity in the supply chain.

So, what is hindering that from happening?

The stark reality is that large corporations, though likely unintentional, often stack the deck against minority- and women-owned businesses. Diverse businesses may not even be identified in a company’s search for new suppliers. Moreover, in my company’s 20-year experience in procurement, they are oftentimes eliminated early in the sourcing process, as many don’t have comparable scale, experience, references, capacity or track records of more established vendors.

As a result, people of color are about 40% of the U.S. population but only 20% of the nation’s 5.6 million business owners with employees, according to The Brookings Institution. Furthermore, women are 51% of the population but only 33% of business owners, despite decades-old federal and state mandates to hire more minority- and women-owned businesses.

And it’s about to get worse. The Covid-19 recession is disproportionately devastating to minority- and women-owned business enterprises, Brookings also reported. The pandemic has also been said to be setting equality back decades.

It’s time to introspect, and it’s time to change.

It’s not enough to shine a light on inequality with inspiring statements of support, nor is it enough to rely on diversity and inclusive leaders, programs, hiring and training (though those are meaningful early steps every company must take). The largest corporations with the greatest purchasing power must also significantly increase the value and volume of opportunities they provide to diverse businesses.

To succeed, multinationals — with their complex, multistep supply chains that set the standard for all corporations — need to:

Create competitive opportunities for all areas of spend: For starters, corporations must stop presuming that there is no diverse supplier for each of what procurement calls a category of spend. I’ve observed that high-quality minority- and women-owned businesses exist in nearly every category of direct (materials, components, ingredients, etc.) and indirect (marketing, consulting, IT support, office services, etc.) spend.

Some business functions might prefer to “sole source” to their “large preferred partners,” but that inclination must be thoroughly evaluated and challenged each and every time. Diverse businesses must get a chance to compete to become preferred partners or, at the very least, to obtain a significant portion of spending through tier-two subcontracting relationships.

Eliminate hurdles in the procurement process: Using stipulations that suppliers should demonstrate, such as having prior experience supporting a similar-sized company, makes it all but impossible for many minority- and women-owned business enterprises to compete. Instead, ensure the selection criteria — including the size of the supplier, tenure, references, track record, expertise, etc. — is right-sized for the opportunity.

While it’s appropriate to ask a potential supplier for five like-for-like references when they’re bidding for a $25 million contract, it should be adjusted when they’re bidding for a $2 million contract. Instead, create a two-by-two framework of strategic importance and contract size to ensure the selection criteria are appropriate.

Ask diversity-and-inclusion leaders to help drive procurement: While nearly all large companies have dedicated diversity-and-inclusion programs, few D&I leaders have a seat at the procurement table. D&I leaders must have an equal voice in procurement to identify gaps in the sourcing, request for proposal and selection processes, as well as to mentor the internal procurement and supply chain team.

Mentor diverse suppliers: In many instances, minority- and women-owned business enterprises lose out during the rigorous selection process because they’re unable to present their capabilities as effectively as more experienced companies. In short, these businesses are often ill-equipped to win in a complex, multistaged RFP process.

Establish a formal mentoring program to help diverse businesses understand where they fall short in the RFP process, take the necessary time to coach each diverse supplier on how they can better compete for future opportunities with very specific and actionable feedback, and proactively connect them with other diverse suppliers who have firsthand experience and learned how to win business.

Be open to co-innovation opportunities: Many companies know that the best opportunities for innovation come from their suppliers. Giving diverse businesses the chance in areas where proven products don’t exist will allow less-established and lesser-known diverse businesses to compete on their ability to innovate and create minimum viable products alongside the well-funded buying organization. Companies could go a step further and create a formal incubator program to proactively develop diverse suppliers’ businesses.

Get suppliers to hire diverse suppliers: Nearly all global manufacturers consolidate suppliers into a finite number of large strategic partners. Force your own diversity goals and programs down your multistep, complex supply chain, and make your suppliers accountable for fostering diverse businesses. The key is ensuring direct visibility into your second- and third-tier suppliers and requiring change when your first-tier vendors don’t achieve your targets.

Prioritize diverse businesses in the supplier scorecard: Multinationals use scorecards to evaluate every potential supplier, encompassing price, quality, lead times, etc. By giving significantly more weight to diverse businesses, you will ensure your supplier base becomes more diverse over time.

Demand third-party diversity certification: Contractors are adept at intending to partner with minority- and women-owned business enterprises and/or self-certifying their credentials. Instead, require your procurement function to only count expenditures with entities that are certified as diverse suppliers by credible independent certifying agencies. This is the only way you will be able to accurately track how much of your needs are being met by diverse businesses.

Companies, big or small, must address social inequality head-on and commit to hiring more diverse suppliers. To bring equity in the supply chain, they need to create realistic paths for more diverse businesses to become partners.

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