When your supplier diversity program has been established and Tier 1 reporting is well underway, it's time to expand into tracking and reporting Tier 2 spend.
Not sure how to get started? We’ll cover the basics here—including what Tier 2 reporting is and why it is a crucial component of your supplier diversity program’s long-term success.
What Is Tier 2 Reporting?
Tier 2 spend (sometimes referred to as “indirect spend”) is what your prime or Tier 1 suppliers spend with diverse suppliers. For example, if you order $2 million in completed gizmos from Company A, and they buy $50,000 in widgets from minority-owned Company B to build those gizmos, then the $50,000 spent with Company B is reported as your Tier 2 spend.
About 61 percent of respondents to our 2019 State of Supplier Diversity surveys indicated that they track and report Tier 2 spend. Why is this metric important? Tier 2 reporting is one of the easiest ways to increase diversity spending—and meet spend goals—because you're simply reporting spend that already occurs within your supply chain.
But the benefits go beyond increasing your diverse spend numbers. Reporting Tier 2 spend can move you closer to other supplier diversity goals, such as expanding your diverse supplier base and finding opportunities for supplier development. Additionally, when you request that prime suppliers report their diverse spend, it encourages them to prioritize supplier diversity as well, spreading the benefits of working with diverse suppliers down the supply chain and into more communities through economic impact.
Implementing Tier 2 reporting is key to making your supplier diversity program sustainable.
How to Implement Tier 2 Reporting
Step 1: Identify Diverse Suppliers
To track Tier 2 spending, you need to know which suppliers in your current supply chain are certified as diverse-owned. A tool like CVM’s Supplier Explorer makes identifying those diverse suppliers relatively painless. Simply run a search through the supplier database—which tracks more than 1.6 million certifications verified by more than 300 trusted agencies—and receive a report verifying the certifications for every supplier reported by your primes.
Thorough knowledge of your supply chain and the certification status of your suppliers may reveal that you have a larger diverse supplier base than you realized—or it may reveal the opposite. Either way, identifying those suppliers can show you opportunities to work with diverse suppliers.
You may find that you need to work with procurement and/or your supplier diversity professionals to develop processes that will efficiently match diverse-owned suppliers with upcoming bid opportunities, especially when those businesses are best suited to subcontracting as part of a larger contract awarded to one of your primes.
Diverse-owned businesses are often also small businesses, meaning they do not have the capacity to provide goods and services to your company directly. Instead, you have Tier 1 prime suppliers that receive your large contracts. When you’ve identified and vetted diverse-owned businesses, you can begin introducing them to primes that might be in need of what they provide on a smaller scale, thereby adding them to your supply chain as Tier 2 suppliers.
Step 2: Ask Tier 1 Suppliers to Report
For your supplier diversity program to ultimately meet its objectives, your supply chain partners must also be on board with your supplier diversity goals. To accurately track Tier 2 spend, you need your Tier 1 or prime suppliers to contract with diverse-owned businesses and report their spend with those suppliers.
If you’re in the beginning stages of Tier 2 reporting, however, getting primes on board might seem like a big ask. After all, you’re assuming that they already have a supplier diversity program in place to track diverse spend and that those numbers are readily available.
The good news is that your top prime suppliers are probably already reporting this information to other customers, especially if they have a federal contract.
Tier 2 suppliers are accepted by government contracts as an acceptable inclusion in an organization’s overall diverse spend. This development is significant because it enables large, non-diverse prime suppliers to indirectly contribute to meeting federal contract supplier diversity requirements.
Many public and private companies now contractually require their top suppliers to report Tier 2 diverse spend, sometimes with goals attached to give primes a target for their own supplier diversity initiatives.
Adding your company to their reporting list should be a simple process for your primes. If you use a Tier 2 reporting platform that enables suppliers to report their diverse spend to multiple customers in one place, such as CVM’s Unitier, you make it even easier for them to comply.
If some of your primes have not yet established a supplier diversity program, look at this as a supplier development opportunity. Use your expertise and resources to help them create their own program and get started tracking and reporting their diverse spend.
Example—Pacific Gas & Electric (PG&E)
Take the example of Pacific Gas & Electric (PG&E). The West Coast utility giant has been recognized by the Billion Dollar Roundtable, the Women’s Business Enterprise National Council, the National Business Inclusion Consortium, and more for its supplier diversity program, which has an annual diverse spend topping $3 billion.
In 2019, PG&E added more than $712 million in supplier diversity subcontracting or Tier 2 spend. To achieve these Tier 2 numbers, PG&E encouraged its prime suppliers to consider different ways to include diverse suppliers in business solution partnerships and subcontracting opportunities. The Supply Chain Responsibility team partnered with Sourcing and Lines of Business to ask key prime suppliers to forecast and proactively manage and improve supplier diversity subcontracting performance.
PG&E’s Prime Supplier Program encourages prime suppliers to establish and execute their own supplier diversity programs, develop supplier diversity plans, set annual performance goals, describe internal best practices to increase diverse supplier participation, and accurately report to PG&E the monthly results of their subcontracting efforts with certified diverse-owned suppliers through their customized Unitier reporting portal.
PG&E’s award-winning efforts resulted in almost a quarter of a billion dollars in additional diverse spend with Tier 2 suppliers.
Step 3: Track Tier 2 Spend
When you’ve identified diverse businesses in your supply chain and brought your prime suppliers on board, it’s time to start tracking Tier 2 spend.
These numbers come from external sources, rather than your own procurement teams, so it’s important to maintain the same stringent controls in spend and accountability to ensure effectiveness. You may need to develop training to help primes optimize their supplier diversity efforts and accurately report spend.
A third-party partner can help track and report Tier 2 spend without putting an additional administrative burden on your supplier diversity team.
What to look for in Tier 2 reporting services:
- Has an intuitive, web-based client-configured portal for tracking Tier 2 diverse supplier spend
- Permits suppliers to report spend once, then pushes it to all clients automatically to reduce administrative workload
- Offers training and support for you and your Tier 1 suppliers that will need to use the reporting platform
- Aggregates data for on-demand reporting
- Enables automated supplier notifications such as reminders when reporting windows open and close
An effective Tier 2 supplier diversity program maximizes and strengthens your overall program, in addition to driving economic success through the creation and development of supplier diversity programs within prime suppliers. Measuring and reporting Tier 2 spend increases the sustainability of your supplier diversity program and provides added insight into how to continue improving.
But you don’t have to expand into Tier 2 reporting alone. Supplier diversity programs are often stretched thin trying to build supplier relationships, track metrics, produce meaningful reports, and integrate efforts across the enterprise. Third-party software built on a robust database and backed by experts in the field can help you implement a Tier 2 supplier diversity program with little additional burden.
CVM’s Unitier is a revolutionary Tier 2 reporting platform that simplifies the reporting process by enabling suppliers to report their diverse spend to multiple customers in one place. With this streamlined solution, suppliers spend less time reporting, and corporations improve the quality of their submissions and have the support they need to grow their programs.