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Supplier Diversity Blog by supplier.io

Maintaining Supplier Diversity through a Down Economy

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In 2020, there was a surge of new supplier diversity programs. A broad desire for social change served as the catalyst for many companies to create programs, and their commitments to suppliers, consumers, investors, and the public were visionary and optimistic. 

Now, two years later, we find ourselves working through very difficult economic conditions. Inflation is at 40-year highs, and the Federal Reserve is taking a measured response, one that will hopefully reduce inflation by increasing the cost of capital but may also lead the country into a recession.Executive teams must address many competing challenges at the same time. Costs are up, and talent remains scarce. Supply chain disruptions are a constant threat. These conditions are now testing corporate commitments to inclusive business principles and diverse-owned suppliers, especially for programs that are only a couple of years old.

How and why should companies support their diverse-owned suppliers even though they are also fighting the effects of a down economy?

Investing in Small Business

While not all diverse-owned businesses are small, many are. More than  75 percent of the companies that responded to supplier.io’s latest diverse supplier survey employ 50 people or less, and 21.7 percent earn less than $500K in annual revenue. Small businesses will be among the hardest hit by cost increases and talent shortages. 

Fortunately, continuing to support small suppliers does not have to be a purely altruistic decision for corporations. In a down economy, it can be hard to get (and hold) large suppliers’ attention. By contrast, smaller suppliers are naturally more attuned to what their customers need because of what is at stake for them. Smaller suppliers may also be willing to sign shorter-term contracts, providing their customers with more agility and access to innovative approaches.

Protecting Brand Reputation

We’ve already mentioned the public nature of corporate supplier diversity commitments. Whether a company’s metric of choice is a set number of contracts or a targeted increase in spend, they have had plenty of time to pursue and find new diverse-owned supply partners. These suppliers have hired, purchased inventory, and invested in equipment or real estate to deliver against the new contracts. Terminating these agreements puts the suppliers at risk, but the decision to move away from them puts the corporate brand reputation of corporations at risk as well.

According to the 2021 State of Supplier Diversity report, companies with supplier diversity programs award an average of 5.9 percent of their spend to diverse suppliers. It may be a legal option to reassign that volume to large conventional suppliers, but this is not necessarily a win. Companies must determine whether they can save enough by changing their contracts or consolidating their demand to outweigh the potential brand damage associated with breaking their diverse supplier partnerships.

Meeting Contractual Commitments

Some of the newly launched supplier diversity programs were founded in response to customer requests or requirements around tier 2 spend. These companies formed supplier diversity programs in order to provide data back to their customers for their supplier diversity targets. Those agreements and contract terms are unlikely to be lifted just because the economy is not thriving.

supplier.io’s research reveals that 56 percent of contracts with diverse suppliers sometimes/always include tier 2 requirements. Switching contracts away from diverse-owned businesses may jeopardize a company’s ability to meet these requirements. Depending on the contract terms, the consequences may range from damaged relationships to reduced demand—neither of which is good for business in an already challenging economy.

Preserving Executive Performance

In an effort to incentivize their leadership teams, 39 percent of companies include supplier diversity in executive performance objectives. This is not just limited to procurement but is intended to encourage all budget owners in the company to expand their supplier selection criteria.

Although a supplier diversity quota is just one incentive of many, allowing sagging company support for supplier diversity to devalue executive-level compensation may have negative implications for retention and hiring. It may also undermine the whole supplier diversity program if such performance objectives are put on hold in the face of challenging conditions.

The economy will eventually return to growth mode. Once that happens, it will be apparent which companies took a strategic and sustainable approach to increase the diversity of their supply partners and which were simply swept up in the larger trend, only to withdraw support when the going got tough. 

Learn more about enhancing your supplier diversity experience.

 

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The team has a long history in driving innovative solutions in supplier diversity. We believe that companies deserve solutions that are effective and provide measurable value and results. Started more than a decade ago, supplier.io has rapidly become a prominent provider of supplier diversity solutions to leading corporations. We currently support customers in automotive, healthcare, insurance, retail, manufacturing, education, and banking. One in five Fortune 50 company relies on supplier.io.