At the intersection of supplier diversity and sustainability, firms have the opportunity to do more to improve performance on responsible procurement metrics.
Consumers continue to tell businesses that sustainability issues matter to them. The same consumers also want companies to be doing more on with supplier diversity. By linking these two zones of concern together, firms have the potential to dramatically move the needle on both fronts under responsible procurement protocols. However, many companies have not yet made the most of this winning opportunity.
Here, some of the options available to more deeply connect supplier diversity with sustainability will be discussed. Companies will be encouraged to evolve their responsible procurement metrics, shift certain spending priorities, and ultimately unlock ever greater levels of impact and economic returns.
Leverage the sustainability budget to expand supplier diversity
In a multi-year research study at George Washington University, it was found that corporate sustainability initiatives tend to have much larger budgets and more staffing resources than corporate supplier diversity initiatives at the same organization. One of the reasons behind this, the study posited, was that sustainability has traditionally been viewed as separate from diversity. However, as time has gone by it has become ever more clear that the two areas impact each other.
Supplier diversity helps create sustainable economic strength in communities around the world. It also builds resiliency and nimbleness into supply chains in multiple ways, something that the recent pandemic-induced supply chain disruptions have highlighted. Localized suppliers, for example, can adapt to shifting logistic in more flexible ways than supplier thousands of miles away, while also offering wins on carbon impact. Or, well-distributed suppliers around the world can leverage culturally diverse approaches to problem solving that ensure supplies continue to flow, minimizing the potential for negative community impacts of site closures due to shortages.
As a result, it no longer makes business sense to keep sustainability and supplier diversity as separate budget buckets. Investing more in diversity programs for the supply chain improves sustainability metrics, and shifting how the spend is allocated internally offers firms the potential to create more impact without needing to ask for additional funding.
Shift the metric from “spend” to “impact” for climate and communities
Speaking at a roundtable hosted by MIT’s Center for Transportation & Logistics this past January, Nalini Bates from Procter and Gamble and Kris Oswold of UPS discussed the limitations of current metrics being used to measure supply chain diversity and sustainability. For many years, the emphasis has been on total spend. Companies are rewarded for increasing spend year over year, but spend and overall impact do not perfectly correlate.
As a result, the roundtable group advocated for a shift in what’s being measured. Rather than looking exclusively at dollar amounts, it was suggested that the programming metrics evolve to also consider total climate impact as well as overall community impact.
For example, if a diverse supplier shifts their packaging to a more minimalist design, it might keep 40 tons of non-biodegradables out of local landfills. That’s an undeniable win for sustainability. However, that same packaging redesign might cost 50 percent less overall, resulting in a lower spend with the supplier even if the company buys 30 percent more of their packaging from them. This can make it look like a firm is slipping on its diversity goals, even though they’re sending more business to a diverse and innovative part of their supply chain.
So, the incentives are not, at present, perfectly aligned for the actual end goals desired. This is an area where companies have an opportunity to do things differently. Being more thoughtful and holistic in how impact is being described and measured going forward could bring incentives into better alignment.
Allow more innovations to trickle up the supply chain
It has been demonstrated, time and again, that when given the chance, small- and medium-sized suppliers who may be more resource constrained than other supply chain choices, are able to meet any performance demands that are asked of them. Toward this end, one of the ways that firms can evolve their sustainability and supply chain initiatives is to do more listening and testing of ideas that come up the supply chain in response to market demands and corporate goals.
This can open the door to some major bottom-line wins. At times, innovative proposals from small suppliers get overlooked because the supplier doesn’t have the contracts or contacts to demonstrate proof of concept at scale. However, supporting smaller bids with unusual approaches can help even large corporations with entrenched processes uncover new savings and opportunities.
According to the Hackett Group, each additional million spent on procurement operations with supplier diversity programs can add up to $3.6 million to the bottom line. Much of that economic impact comes from disruption (the good kind!) of established norms and a fresh perspective on existing challenges. When sustainability is the challenge of the day, it pays to listen to not just Tier 1 but also Tier 2 and Tier 3 suppliers.
Sustainability and supply chain diversity are interconnected in ways that many firms are still exploring. By linking their budgets, firms can begin to foster deeper internal connections between the two corporate spaces. Further, by evolving the scope of the metrics from spend alone to community and environmental (climate) impact, companies and suppliers alike can manage incentives in an aligned pursuit of end goals. Finally, by doing more listening and testing of ideas from smaller suppliers and suppliers further down the chain, firms can unlock valuable insights with the potential to have a serious impact on the bottom line.