Businesses are rethinking their supply chains. Two years of backordered components, endless shipping delays, and subcontractor staffing shortages have shown the flaws in the ultra-lean supplier model that dominated pre-pandemic procurement. Simultaneously, the diversity, equity and inclusion (DEI) movement has businesses considering the social impact of their operations. These two forces are combining to drive interest in supplier diversity. 

Increasing supplier diversity can be intimidating. Diversity goals add another layer of complexity to the procurement process. But pursuing supplier diversity brings benefits for your company and your community. There are resources that can help you through this process.  

Why Diversify?

Supplier diversification can help businesses in several ways.

Compete for Federal Contracts: Federal procurement rules have long mandated that government agencies consider diversity when awarding contracts. The Federal Acquisition Regulation (FAR) 19.702< requires that any business bidding on a contract valued at over $750,000 ($1.5 million for construction) have a plan to maximize participation from subcontractors owned by entrepreneurs from historically disadvantaged groups. The law does not mandate a specific threshold for diverse spending.

Even if your business does not contract directly with the federal government, you may qualify as a Tier 2 supplier. Some of your largest customers may require that you implement a supplier diversity program, since your spending will be counted as a part of their required diversity program.

Build Brand Value: Customers are increasingly socially conscious, and they are likely to vote with their wallets. Ninety percent of millennials and Gen-Z consumers say they are more likely to purchase products with a social or environmental benefit. A robust supplier diversity program can build customer loyalty by demonstrating that your business is acting on its values.

Recruit Employees and Partners: A supplier diversity program can position you well with potential employees and B2B partners, notes Harvard Business Review. It is a signal that your business is taking concrete action to support marginalized communities, and that will say a lot about your commitment to creating an inclusive workplace.

Supplier Diversity Is Just Good Business: The supply chain disruptions of recent years have shown how a flexible network of suppliers can reduce the upstream chokepoints for business operations. Cultivating supplier relationships with a pool of small business enterprises can help minimize the risk of disruptive supply shocks. Competition between suppliers can also help contain costs.

In general, DEI programs have been broadly linked to profitability. A report from Deloitte cited studies that found S&P 500 companies with strong DEI initiatives were 12% more profitable than their peers, and organizations with inclusive workplaces have reduced employee turnover by 50%.

Tips for Cultivating Supplier Diversity

Start at the Beginning: Don’t wait until the awarding phase of the contracting process to consider diversity. When you’re drafting solicitations to bid and developing a procurement timeline, think about how your requirements can accommodate smaller, less-resourced firms that might compete for the contract.

Broaden Your Definition of Diversity: Diverse businesses come in many flavors. You may want to add local small business vendors to your supply base, or build connections among specific demographics like minority- and women-owned businesses. Businesses run by veterans, disabled people and members of the LGBTQ community may also be included in supplier diversity programs, as well as businesses located in federally designated historically underutilized business zones. Considering a broad variety of diverse businesses can help expand your pool of potential suppliers. 

Create a Verification Program: Verification is especially important if you are competing for a federal contract, since the FAR requires a business to be 51% owned and operated by members of a qualifying group in order to be considered diverse. Consider adding a diversity verification section to your request for proposals. Investigating the ownership and operation of every potential subcontractor can be onerous. Fortunately, third-party verification can ease the burden. The Small Business Administration maintains a database of verified minority- and veteran-owned businesses. Several states have certification programs, and many third-party organizations like the National LGBT Chamber of Commerce and the Vets First Certification Program keep rolls of verified businesses.

Set Transparent Goals: A common goal is to set a target percentage of your supplier budget awarded to diverse businesses. This goal should be based on market research. Identify specific products and services that are the best candidates for supplier diversification, and make sure diversity is a factor in awarding all contracts.

A good set of goals will go beyond budgeting, however. You might want to track how diverse suppliers are performing against their performance targets, creating savings and providing innovative solutions.

Also, consider your program’s wider impact on the community as a new KPI. Track how many jobs are being created in disadvantaged communities. Ask your suppliers how they are reinvesting contract revenue in the community. Look for new capital investments that are broadening the economic base, and try to estimate the total economic activity that is flowing downstream from the contract award.

Cultivate and Solicit Bids: Diversifying your supply base may require reaching out to potential vendors and helping them navigate the bidding process. Remember, these businesses are typically smaller and may lack the B2B sales sophistication of their larger competitors. They may not have the staff to actively pursue every opportunity to bid, and they may not be experienced in preparing the detailed project estimates that are required by many larger corporate clients.

So, if you want to maximize participation from diverse businesses, outreach is critical. Trade organizations like the National Minority Supplier Development Council and the United States Hispanic Chamber of Commerce can help you connect with potential suppliers. Diversity supplier fairs are another great opportunity for networking with diverse businesses.

During the bidding process, consider providing technical assistance to first-time bidders. This can help ensure that you will have competitive bids from diverse businesses to review during the selection process. You may find that some proposal requirements, such as high levels of insurance coverage or lengthy historical performance records, are prohibitive for small businesses and new startups.

If possible, shorten your payment timeline. Small businesses may have trouble accessing a line of credit necessary to bridge a 60- or 90-day payment schedule. Accelerating your payment process can help small suppliers meet payroll and purchase materials to fulfill their contract’s next phase.

Maintain the Relationship: Retaining diverse suppliers can be a challenge. Supply Chain Quarterly reports that small enterprises often face an uphill battle in establishing themselves as vendors for large clients. A small supplier may enter the company through a pilot program and secure a small contract for a specialized service. But if they fail to make connections among your procurement staff and secure larger contracts, they will never be able to take advantage of economies of scale and compete against established firms. A mentorship program is one way to help newly onboarded suppliers build connections inside your business.