Managing the Performance of Diverse Suppliers
Russ Banham | Grainger Industrial Supply
Procurement management has become an increasingly complex undertaking in many businesses today, due in large part to U.S. government regulations mandating the formation of supplier diversity programs.
Since the 1950s, the federal government has required companies that sell Uncle Sam's goods and services to dedicate a percentage of their supplier spend to small businesses, then and now the bedrock of the nation's economy. A decade later, President Nixon signed Executive Order 11458 establishing the Advisory Council for Minority Enterprise, requiring that a percentage of government spending be dedicated to small businesses owned and operated by minorities and women. In more recent years, the law has been extended to cover other under-represented small businesses owned by military veterans, people with disabilities and the LGBT community.
Several U.S. states and municipalities have enacted similar laws; and many companies, regardless of whom they do business with, have implemented supplier diversity programs as a corporate social responsibility (CSR) initiative.
Effectively managing this diverse supplier network is not to be taken lightly. The challenges include sourcing reputable and qualified diverse suppliers, and verifying that businesses are indeed owned and operated by one of the aforementioned under-represented groups. To qualify for diverse status, the business owner must own a 51 percent minimum stake in the company.
In order to be awarded certification as a diverse supplier, many government agencies have developed minimum eligibility criteria for businesses. The number of documents needed to achieve certification is voluminous. The website GetDiversityCertified.com lists more than three dozen required documents, including proof of citizenship; and résumés of all owners, directors, officers and senior managers.
Companies contracting with diverse suppliers must obtain copies of these certificates and annually track the percentage of money spent on these suppliers with respect to all other suppliers. Six different federal regulators are mandated by the Dodd-Frank Act to assess a company's supplier diversity practices, making their accuracy as well as the corporate spend on these entities critical compliance issues.
Ensuring compliance with government regulations as well as adherence to internal CSR initiatives requires meticulous expense management and other arduous administrative tasks. For instance, companies must stringently monitor the financial health of the diverse supply base, as only two-thirds of small companies survive their first two years in business.
To achieve these various ends, it is considered financially prudent to develop a variety of performance metrics that are tracked and reported on over time. As Ramesh Thamotharan, a senior director at global procurement consulting firm GEP Worldwide, puts it, "You can't manage what you don't measure, but the trick is to make sure you're measuring the right things."
The task of developing and monitoring key performance indicators (KPIs) and a supplier diversity program is typically a collaborative effort among supply chain managers, procurement managers, facilities directors and supplier diversity program leads, depending on the size of the business.
While tracking and tabulating the percentage of spend accorded each diverse supplier is important for compliance reasons, the metric indicates very little about the supplier's performance -- insofar as its impact on the buying company's revenues, cost savings and profits. The goal is to ensure that the supplier is meeting the performance criteria stipulated in the contract.
Traditional KPIs include product quality, percentage of incoming rejects, lead times from order, on-time delivery performance against agreed delivery times and percentage of warranty claims, among many other factors. The challenge is to determine which KPIs -- both financial and nonfinancial -- present the most comprehensive and accurate picture of supplier diversity for compliance and internal CSR purposes.
More qualitative nonfinancial KPIs encompass a supplier's innovativeness and diversity of thought, which can guide enhancements in a product or service; the supplier's impact on customer satisfaction and the number of deals lost or won due to a supplier. "Tallying these metrics tells a much richer story about the impact of a diverse supplier on a company's business," Thamotharan says.
These "softer" measurements may require the use of surveys and polls to ferret out the insights. "A key soft metric is a supplier's emphasis on continuous improvement -- how a supplier continually drives innovation in its own organization, which then flows up the supply chain," says Amol Jawale, also a senior director at GEP Worldwide.
One way to quantify this value is to gauge the supplier's incremental improvements in areas such as turnaround times -- gradually lowering the time it takes to receive an order to provide the good or service, he says.
Process and Technology
Once relevant supplier metrics are developed, a program governance structure is needed to collect, monitor and report on the KPIs. Accountability for the metrics should be embedded in the Service Level Agreements signed by the suppliers. It is advisable to benchmark the program against established and successful initiatives in other industries, thereby learning from these organizations' setbacks and realized gains to seize a competitive advantage.
A best practice is to require diverse suppliers to register their businesses on a dedicated portal that captures their diversity status, size, number of employees, price quotes, contract values and market information (such as revenues, profits and geographic footprints) in a database. Other best practices include the requirement for diverse suppliers to certify their diversity status in all requests for proposals (RFPs).
The use of technology can assist effective oversight of the supplier diversity program. Numerous software providers have created tools to onboard diverse suppliers, dispatch their certification documents to relevant government agencies and monitor the impact of the suppliers' performance on the buying organization. The goal is to acquire near real-time visibility into each supplier's performance criteria.
The database portal serves another important business purpose: providing the means for diverse suppliers to find a company and reach out to it. And, it can effect a better understanding of the diversity status of tiers of suppliers, the case with the supply chains of large original equipment manufacturers (OEMs). Companies can then balance their portfolios of under-represented groups -- for example, increasing their spend on veteran-owned or LGBT-owned businesses.
By applying data analytics to this storehouse of information, companies can compare diverse suppliers in terms of which ones are producing the most value, with specific areas needing improvement being highlighted. The database also serves as an accurate and reliable repository of information ensuring compliance with diversity regulations and internal CSR goals.
Following this path to success will result in a world-class supplier diversity program, one in compliance with evolving regulations that culminate in cost savings, greater market reach, product and service innovations and an improved competitive position.