6 minute read 22 Oct 2021

Diverse sourcing is both a social and business imperative that can help drive supply chain resiliency as well as ESG goals.

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How diverse sourcing can create more resilient supply chains

Theresa Harrison
By Theresa Harrison

EY Global Environmental Social Governance Services Leader

A recognized leader in the industry. Works to build awareness on the importance of driving inclusion and sustainability within the supply chain that delivers innovation to EY and our clients.

6 minute read 22 Oct 2021
Related topics Consulting Supply chain Sustainability
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Diverse sourcing is both a social and business imperative that can help drive supply chain resiliency as well as ESG goals.

Two questions to ask:

  • What are the advantages in continuing to use the same vendors?
  • Are your longest-tenured vendors also your riskiest?

Many organizations have established supplier diversity programs. As far back as the late 1960s, the US government required agencies and contractors to work with minority-owned companies and made reporting it mandatory. Since then, there have been increased requirements on this reporting to make sure that small or minority-owned suppliers are given fair access to procurement contracts.

However since 2020, supplier diversity has been put increasingly under the spotlight, driven by social justice movements, and companies have accordingly upped their anti-racism and diversity, equity and inclusiveness (DEI) commitments.

Sourcing from diverse suppliers (defined as at least 51% owned, operated and controlled by a minority, woman, LGBTQ+, veteran, service-disabled veteran, person with a disability, indigenous person, or as defined by the local country) is a social imperative that’s also good for the top and bottom line. It is a business imperative: buying decisions are often swayed when businesses can demonstrate and articulate their diverse sourcing policies. Increasing spend with diverse suppliers creates value and shows your company is serious on social commitments to its broader ecosystem: customers, investors, regulators, communities, employees, suppliers, industries and competitors. Moving from monitoring spend to measuring impact is critical to sustained supplier diversity success.

But an added benefit is often left out of the equation: diverse sourcing can contribute to building more resilient supply chains. And if the COVID-19 pandemic has taught supply chain leaders anything, it’s the importance of supply chain resiliency.

How EY can help

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Spread the bets

A resilient supply chain is one that’s both diverse and sustainable. One that can flex when stressed, is not disrupted by geopolitical, meteorological, health, or economic shocks, and is secure for the long term.

To successfully apply this equation relies on understanding exactly where your suppliers are, and what they supply. Multi-tier mapping of suppliers and reviewing supplier sourcing approaches for critical parts are fundamental to resilient supply chains — it’s often the delay to deliveries of small but crucial components that can halt production.

Economic nationalism increasingly impacts supply chains, and as a result many organizations are looking to localize or nearshore their suppliers. A "glocalization" approach, driven by the pandemic and sharp changes in global trade policies, focuses on balancing localized and globalized business options to stay competitive.

This may require looking to suppliers that the organization hasn’t dealt with before. Use of diverse suppliers, given their vast and unique footprint can contribute to building resiliency, better environmental, social and governance (ESG) outcomes — and more cost-effective and innovative approaches.

Diverse suppliers can help cut costs and drive innovation

What are the advantages in continuing to use incumbent suppliers? They may be reliably low-cost. They’re familiar. They require little new effort to engage with. But are they agile? Are they fit for a future that is more unpredictable and unstable than ever before? Are they ready to embrace change to the extent that your organization may want to — or be forced to? Are your longest-standing suppliers also your riskiest?

Exploring new diverse suppliers could help your supply chain be more agile too. Their product or service may be more innovative — as your supply chain strategy changes, you may find diverse suppliers are more open to proofs of concept. Another advantage is that diverse suppliers tend to be more localized to your manufacturing and distribution sites, which in turn has a ripple effect of helping local businesses buy the goods and services they need to sustain their own operations.

Closer-to-home diverse suppliers also could be nimbler in helping meet on-demand requirements as global supply chains crack under pressure. And they may be better placed to respond to market trends and help you be more innovative too — their fresher view and brighter outlook could equate to being more willing and able to try new approaches than your incumbent suppliers.

Companies that are consistently ranked by analysts as top global supply chains add diverse companies to their supply base. For example, since 2008, P&G has spent more than $2 billion with diverse-owned businesses globally every year, and the company is well on its way to spending $3 billion by 2030.1 And Cisco Systems plans to commit $50 million over five years to increase the diversity of its partner ecosystem.2

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Harness your supply chain to feed into broader goals

Chief procurement officers (CPOs) can at last balance cost, quality, risk and diversity. Because – and this may be a surprise to many CPOs – diverse suppliers often cost less while delivering an equal or superior product or service, and spreading bets often equates to lower risk.

Organizations can also integrate supplier diversity into broader ESG goals – it effectively becomes another lever and generator of value – as supporting diverse businesses helps them grow, feeds wealth and opportunity into their communities, and gives them access to a broader ecosystem, all of which are reportable and good news for investors and stakeholders.

How to move toward more diverse supply

There are some short-term and longer-term ways to build greater diversity into your supply chain.

In the short term:
  • Adjust procurement requirements: Many companies have a requirement to include diverse suppliers in tenders based on a dollar threshold or a requirement in their tender process.
  • Rethink insurance requirements: Finance departments often have somewhat arbitrary criteria for suppliers’ insurance. For example, would it make a huge difference if the certificate was $80m rather than $150m?
  • Review payment terms: Are they punitive? Could they be relaxed a little to take advantage of all the benefits of diversity in sourcing?
  • Change RFPs: Many diverse companies are small to medium-sized enterprises that don’t have bid response teams ready to respond immediately. Could you make RFPs shorter, less complex and less urgent?
In the longer term:
  • Make diverse suppliers part of your end-to-end procurement processes
  • Pivot from a mindset of pure cost savings to one that combines social value, sustainability and cost savings
  • Set up the structure and process for organizational change: position someone who is dedicated but not ultimately responsible for delivering supplier diversity goals, then embed new approaches into business-as-usual, category strategy and all normal day-to-day activities

When consumers, corporations and governments are seriously concerned and engaged with equality and inclusion, every organization should consider diversifying their sourcing pool. However, one of the biggest challenges in building a diverse and resilient supply chain is changing mindsets among senior leadership to drive change and adoption of new policies.

Organizations – particularly committed CPOs – can start by changing perceptions that diverse suppliers cost more, are small operations only, or are hard to find. And they can actively communicate across and throughout the organization the substantial benefits of sourcing from diverse suppliers.

No organization can afford to ignore or lag behind this peaking wave. Supplier diversity is a business imperative; long gone are the days when we look at this as simply right thing to do. As supply chain disruption is the new normal, supplier diversity is one key strategy to help you weather the next major disruption.

Rae-Anne Alves, EY Americas Supply Chain ESG & Sustainability Lead, also contributed to this article.

  • Show article references#Hide article references

    1. "Creating a citizenship ‘ripple effect’ in Procter & Gamble’s supply chain,” Procter & Gamble website,  us.pg.com/blogs/procter-and-gamble-supplier-diversity, 12 April 2021.
    2.  “Tech companies made big pledges to fight racism last year — here’s how they’re doing so far,” CNBC website, www.cnbc.com/2021/06/06/tech-industry-2020-anti-racism-commitments-progress-check.html, 6 June 2021.

Summary

Sourcing from diverse suppliers is a business imperative for multiple reasons. Consumers want it. It makes for more resilient supply chains. And it can feed into broader goals, including ESG, agility and cost savings. To reap these benefits, mindsets need to change first.

About this article

Theresa Harrison
By Theresa Harrison

EY Global Environmental Social Governance Services Leader

A recognized leader in the industry. Works to build awareness on the importance of driving inclusion and sustainability within the supply chain that delivers innovation to EY and our clients.

Related topics Consulting Supply chain Sustainability
Upvote