How to measure supplier diversity in procurement | Metrics and KPIs

Supplier diversity is a proactive procurement strategy that encourages organizations to include minority-owned businesses that are underrepresented in their supply base.

Organizations classify diverse suppliers in several standardized ways. Common classifications include businesses that are at least 51% owned and controlled by minorities, women, veterans, people with disabilities, and LGBTQIA+ individuals.

More recently, classifications have expanded to include specific minority sub-groups. In the United States, there are more than 15 categories used to identify diverse businesses.

As with most procurement initiatives, clearly defined KPIs are important. 

This article outlines commonly used supplier diversity calculations and performance metrics.

Why is supplier diversity important for procurement?

A supplier diversity program promotes the use of traditionally excluded groups. Many large organizations across industries have adopted supplier diversity programs for both economic and social reasons.

Early adopters include multinational companies such as Coca-Cola, UPS, Delta Air Lines, and IBM, which publicly report supplier diversity spend and outcomes. Supplier diversity is increasingly referenced in sustainable procurement strategies and supply chain resilience planning.

These programs are slowly moving away from being a corporate social responsibility (CSR) driven initiative to being a business imperative and driver of competitive advantage.

They are being adopted not only to manage corporate reputation but also to invest in local communities and contribute to corporate diversity culture.

Some benefits impact wider economic and social development. According to data published by Dun & Bradstreet, minority-owned businesses in the USA between 2013-2014 contributed jobs for 2.2 million people, women-owned businesses contributed 7.9 million jobs, and LGBT-owned businesses contribute 2.4 million jobs.

The National Minority Supplier Development Council (NMSDC), in its 2018–2019 annual report, projected that between 2000 and 2045:

• the number of minority business owners would increase by approximately 3.3 million
• minority business sales would grow at an average annual rate of 24%
• minority-owned businesses would account for roughly 70% of total growth in U.S. purchasing power

Supplier diversity uplifts local communities, in the areas where businesses are located, through job creation, increased wages, and tax revenue.

Campbell’s Soup has called Camden, New Jersey home for over 150 years. As part of their strategy, they have pledged to increase their procurement spend with New Jersey-based small and diverse suppliers by 25%, by 2025.

Expanding the supplier base reveals sourcing opportunities that promote competition, improve product quality, bring new solutions, and drive innovation.

Challenges in diverse procurement

Small, emerging and diverse businesses often have limited access to capital and funding and may have little knowledge of the processes required to become accredited.

There is a growing trend for buying organizations to support them in the certification process on a practical level.

A challenge for the buying organization is verification of actual ownership and confirming that the business is legit. Subscribing to certification programs helps but there is still a risk of fronting and misrepresentation.

Finding minority-owned suppliers that comply with quality, quantity, security, and safety requirements can become an obstacle.

Large companies with enough resources are creating mentoring and training programs to help diverse suppliers meet the required standards. These initiatives also have the spin-off in that it benefits other buying organizations too.

Success Factors in Supplier Diversity Programs

Removing obstacles standing in the way of achieving diversity goals is the first step. Successful diversity program steps include:

1. Get commitment from senior management. Every firm on making strides in supplier diversity has a CEO who personally signed off on goals and metrics.

2. Establish a clearly defined and communicated supplier diversity program with measurable targets. Communicating your efforts enables diverse vendors or diversity-related organizations learn about your initiatives and potentially encourages them to reach out to you.

3. Get visibility of the supplier data. Digitization makes diversity tracking easier. Cloud-based spend analysis solutions can provide ways to identify and categorize suppliers.

4. Monitor and track spend in each diverse supplier category on an ongoing basis.

5. Partner up with an organization that supports diversity. There are organizations that specialize in diversity and can help you add new vendors that broaden your network. 

6. Embed diversity into supplier onboarding, sourcing and the Procure-to-Pay (P2P) processes.

7. Assist diverse organizations to become suppliers to your organization. You may want to consider offering an educational program to help diverse business owners navigate through your supplier qualification process.

8. Leverage your supplier relationships. Communicating your diversity targets to your existing partners gives them an opportunity to seek for diverse alternatives further down the chain. As you start working with diverse suppliers you may be able to access new networks of diverse partners that you may not have otherwise been exposed to.

To learn more about how to create a holistic Sustainable Procurement strategy to serve the triple bottom line, read our complete guide Sustainable Procurement 101.

Header photo by: Brian Wangenheim (unsplash)