The Importance of Vendor Diversity

Vendor diversity, also known as supplier diversity, is a business practice that encourages the consistent inclusion of small and diverse-owned businesses as suppliers. The proactive program aims to ensure equal opportunity for potential vendors to compete for business opportunities within their supply chains – particularly those that are otherwise under-utilized.

This can include minority-owned businesses, such as those owned by women, immigrants,  LGBTQ+, armed forces veterans, disabled veteran-owned, or micro, small, or medium sized organizations (as defined by the U.S. Small Business Administration, or SBA). Generally, vendor diversity can result in enhanced supply chain diversification.

According to research by American Express in 2019, an impressive 4 million new jobs and $981 billion in revenue could be added to the American economy if the average revenue of minority women-owned businesses matched those of white women-owned businesses.

Clearly, the number of minority-owned businesses is significant. So what can supporting these businesses by adopting vendor diversity do for your organization?

Show social responsibility by supporting growth of diverse businesses

Vendor diversity falls under the umbrella of corporate social responsibility (CSR). This self-regulating model helps businesses be socially accountable to themselves, their stakeholders and the general public. The model helps companies be aware and conscious of the impact they have on society in economic, social and environmental terms.

By incorporating vendor diversity, businesses can source from previously under-utilized suppliers and help encourage the growth of diverse businesses in their communities. By contracting with these businesses, you would help increase spend and consumption, as well as encourage job creation on a local level. Basically, it’s the perfect way to do your part and give back to the local community.

According to the Harvard Business Review, large companies can also encourage – or require – their vendors to create diversity programs. In 2019, for instance, Target spent $1.4 billion on goods and services provided by first-tier diverse vendors and influenced them to buy over $800,000 worth of products from second-tier diverse vendors. It’s another way to promote vendor diversity and increase the impact within your own community.

And, of course, there are some economic benefits to vendor diversity too.

Drive economic impact

As a recent Forbes article highlights, the COVID-19 pandemic may add some urgency to the adoption of vendor diversity practices. As businesses return (or adapt) to their new normal, it may be well worth noting that vendor diversity lifts the perception of a brand valuing diversity. In fact, according to Stefanie Francis, founder of Hootology, they found that vendor diversity can lift the scores for different metrics by between 25% and 70%. That’s a pretty significant increase at a time when brand perception may be the key to increasing your bottom line.

A study by the Hackett Group also showed that top performers in vendor diversity see increased market share and access to new revenue opportunities. Not too shabby!

Promote innovation

As with most DEI initiatives, diversity in your supply chains will help increase creativity and encourage innovation. Using the same vendors consistently, instead of branching out into new markets, can hinder creativity – not a positive for anyone involved. Small and diverse businesses can offer added innovation, helping them stand out from the competition. They may also be more agile and have the ability to create and innovate faster than more traditional, bigger companies.

According to a study by the Boston Consulting Group, businesses with above-average diversity in their leadership teams see a higher amount of innovation revenue. 45% of total revenue at companies with above-average leadership diversity comes from innovation revenue, while companies with below-average diversity have a much lower 25% innovation revenue.

Multiply your procurement channels

By building a large database of vendors, you have the opportunity to create scenarios that involve multiple vendors for one sourcing event. Multiple procurement channels also allow you to analyze the prices and range of products from several vendors and creates the opportunity to build new vendor relationships.

Promote vendor competition

As you widen your vendor pool to incorporate more diversity, you’ll generate more competition as vendors try to outdo each other and give you the best deal to secure your business. Increased competition benefits you by lowering your direct and indirect spend.

Attract and retain top talent

There’s also the simple fact that diversity, equity and inclusion is becoming increasingly important to job seekers. As you incorporate and encourage vendor diversity, you’re building and cementing an ethical reputation that will help you attract top talent in the future.

DEI is created reactively and becomes ‘non-essential’

Diversity, equity and inclusion programs are often created reactively. Unfortunately, this means they can easily be treated as ‘non essential’, and have little influence over buying decisions. This is an underlying issue that is slowly being remedied; as more studies and research show that diversity initiatives go beyond a ‘feel-good’ issue and can affect your productivity, employees and ROI, organizations are taking DEI more seriously. As the diversity programs become more important to procurement decisions, vendor diversity will be established in a more concrete manner and given more consideration.

Lack of accountability

As with many DEI initiatives, accountability can be an issue.

First, there’s the simple fact that many organizations may support diversity initiatives in words, but their actions may not always hold up under scrutiny. This can reflect poorly on an organization if it comes to light, and end up creating a poor image of the business to the public. That’s a definite no.

On another note related to accountability, businesses are fair to question if their investments in diversity programs are going to the right groups, and whether or not those groups are authentic. This is where the U.S. Small Business Administration can help, as they lay out some of the rules and regulations that define governmental requirements. Many companies also have programs with oversight mechanisms in place. From audits to steering committees, there are various options you can decide to implement to help deal with the challenge of accountability.