I’ve had discussions about supplier diversity with the C-suite of many companies over the years. The question that comes up the most frequently is whether or not supplier diversity can contribute to the business financially. It isn’t a question of whether it is the right thing to do or whether C-suite leaders think it has to be the right thing for the company to support it. Leaders just don’t understand what, if any, financial impact supplier diversity can have.

This really isn’t their fault. Supplier diversity is often sold to the C-suite differently than most everything else they see. Many companies have a defined process to gain funding. Yet, supplier diversity often doesn’t follow the usual funding or reporting process. It is a missed opportunity because supplier diversity is a critical business strategy, and like any other business strategy, the C-suite needs to be fully behind it for optimal results.

Listed below are my top five top ways that supplier diversity affects the bottom line in business.

1 Diversity and Inclusion

Diversity and Inclusion (D&I) received more coverage in 2020 than in the previous 10 years combined. The topic hit the mainstream after the killing of George Floyd by police in Minnesota. The global outrage pushed reactions beyond the individual. From Nike’s “For once, Don’t Do It” ads to Mercedes-Benz, companies have gone on record about where they stand. Companies are also putting their money where their corporate mouths are. Companies including Lululemon and Peloton announced six-figure donations, while Amazon committed $10 million and a promise to match each employee donation up to $10,000 per employee. This is in stark contrast to years past when companies usually made no comment at all on social and political issues.

D&I has been associated in years past with employee headcount and has lived a relatively quiet life in the human resources department. That scenario is no more. In addition to overall headcount, many companies now receive reports on the diversity breakdown of executives, entry and middle management, as well as the board room.

Another event began to take place in the boardrooms of venture capital (VC) companies. Riders, standard language in the term sheets VCs submit to startups, are not new. Diversity riders are new. Conceived by Alejandro Guerrero from Act One Ventures, the diversity rider lists, as a condition of funding, that efforts will be made to include co-investor(s) who are Black, LatinX, women, and other diverse orientations. Launched in August of 2020 with 10 VCs, the list now numbers more than 35. VCs are also putting pressure on existing investment recipients to get on the bandwagon.

If D&I in the company is good, D&I throughout a company’s entire supply chain is better. Whether a company has been moved by social events or concerns about losing its investors, there has been a sharp increase in companies implementing supplier diversity strategies. Like any necessary business strategy, being last to market is not where a company wants to be. Certifying organizations, third-party reporting companies, and consultants in the space have all seen an uptick in business. Companies that already have supplier diversity are looking to update their programs and take advantage of increased interest. Some organizations have added diversity-minded services for their corporate members. For instance, WBE Canada, which certifies Canadian woman-owned businesses, launched its Supplier Diversity Accelerator Program that provides training and consulting support for its corporate members committed to including women-owned businesses in supply chains.

Bottom Line: Companies that don’t have supplier diversity and do not fully embrace D&I or investment sources may be curtailed or at risk.

2 Informed and Demanding Consumers

At the cross-section of the interest in supplier diversity is the perfect storm of consumers who expect the companies they do business with to support diversity and a social media universe that has the capacity to determine the validity of that diversity support. For example, even 10 years ago, if two Black men had entered a Starbucks and been arrested for no reason other than an employee thought they should be, it might have garnered a small paragraph on page six of the local paper. In April of 2018 when that incident happened in Philadelphia, part of it was caught on video and was viewed more than eight million times on Twitter. When Starbucks publicly apologized, their consumers were having none of it and took to social media to tell Starbucks so. Starbucks ended up shutting the company down — in 14,000 locations nationwide — for diversity and bias training.

Consumers can now find out in a millisecond if organizations are good “citizens,” and consumers are continuing to make it known that the answer matters. If you think this phenomenon only applies to retail brands or B2C (business to consumer) markets like Starbucks, let’s catch you up.

Business to business (B2B) companies have long had tier 2 reporting as part of their supplier diversity programs. Under tier 2, businesses look to all of the companies in their supply chain (i.e., companies they spend dollars with) to provide reporting to show what each company is doing in supplier diversity. Tier 2 reporting pushes the demand out and creates a ripple effect in spreading the necessity of supplier diversity within the business ecosystem.

If you are wondering how many of these companies are affected, note that more than 90% of the Fortune 100 companies have supplier diversity sections on their company website that tell potential suppliers how to engage with them and what they are looking for. Similar numbers also include supplier diversity questions in their Request for Proposals (RFPs) as part of their evaluation for awarding business and have language in their legal agreements about what is required. Sales organizations find they are throwing evaluation points out the window if they cannot demonstrate a solid supplier diversity strategy at their company. Supplier diversity and supply chain professionals are finding themselves sitting down with the sales group to help create sales collateral that addresses supplier diversity. In a previous life as one of those professionals, I found myself responding to sections of the RFP and attending quarterly business review (QBR) meetings with the sales team to explain what the company was doing to meet supplier diversity goals. If sales are paying attention and asking for help, you know the customers are showing them it is important.

The availability of information also creates accessible tracking and reporting services. The Human Rights Campaign Foundation created the Corporate Equality Index in 2002. The index is published annually and rates workplaces on their treatment of diverse employees, consumers and investors.

The Greenlining Organization publishes its annual Supplier Diversity Report Card of California companies in the energy, phone and cable, wireless, and water sectors. This detailed report looks at both the dollars and percentages along with increased and decreased results in each category.

Bottom Line: Customers of all types vote with their feet and their dollars. If your company doesn’t have supplier diversity a) everyone knows it; and b) you are leaving revenue dollars on the table.

3 Informed and Demanding Talent

If you think your customers are getting tough on supplier diversity, go talk to your human resources department. Recruiting and retaining top talent is one of the single biggest challenges that companies face.

I interviewed a partner at an international consulting and accounting firm several years ago about supplier diversity. He discussed how most of the talent being hired by his firm were recent MBA graduates, so his firm had to be competitive with Millennials and Gen Zs. I asked what the firm’s expectations were related to diversity. He smiled and pointed out they didn’t expect so much as demand diversity. He closed the question out by saying if they couldn’t actively demonstrate diversity, including supplier diversity, they could not expect to attract or retain the top talent, his company’s differentiator.

I’ve been asking potential employers what they do in the area of supplier diversity for the past 20 years. Because I was interviewing for some sort of supply chain position, I wanted to know that it was going to be taken seriously. If not, then I was one of those demanding talents who would pass on the opportunity and keep looking. I love what I do. I’m passionate about it. Therefore, I spend a lot of time doing it. Life is too short to spend that much time working that hard for a company that is, at minimum, less than ideal, and at worst, an embarrassment. I grew up in the South. I know all about being on the wrong side of history.

The demanding talent isn’t waiting until they graduate to make their requirements known. When a Kansas State University student posted an insensitive tweet regarding the death of George Floyd, football players made it known they had no interest in playing for a school that would tolerate such actions from the student body. The university responded with an investigation as well as launching a diversity and education fund.

Bottom line: Companies that want to attract and retain the best talent had better have a working supplier diversity strategy.

4 Innovation

Similar to talent, companies that are known for their innovative approach have diversity at their core. Just take a look at the list of corporate members of the National Minority Supplier Development Council (NMSDC), the certifying body for minority-owned businesses. The roster reads like a who’s who of leaders in innovation. It’s all there: financial, pharmaceutical, professional sports, retail giants, technology and more. Is your company one of the approximately 500 organizations on the list? If no, why not?

You don’t have to be doing leading-edge research and development to need innovation. One thing you learn in the supply chain industry early on is that a problem in one area can have a huge impact on the business. During my career, I have specialized on the indirect side of supply chain — the infrastructure or what the company doesn’t build or sell. Satisfaction with infrastructure services often has more to do with a location’s local service agent than anything I could negotiate at headquarters. This is especially true in businesses that have large numbers of locations across a diverse geographic footprint. My team began giving those locations a choice in which providers they could use. Instead of corporate coming down from on high and giving them the provider, we gave them three providers to choose from. We bid the services with full disclosure that at least two companies and as many as three would be awarded a contract. However, each location got to select the provider they wanted. So, even though the winning suppliers were one of three, the supplier could conceivably win 100% of the business.

There were several benefits to this arrangement. The winning companies were not able to get complacent once they had a contract. Customer satisfaction from the branch locations went way up because they had some control over their destiny and could make changes if there were problems after a defined cure period and process. When supply chains were stretched (think personal protective equipment in 2020), we had three companies to work with instead of the usual one. And diversity? Two of the three companies awarded agreements were diverse-owned businesses. It doesn’t work for every category, but where it does makes sense, it works really well. With this model, we also found each company did a much better job of keeping us up to speed on new developments in the industry. I didn’t have to chase these companies down for improvements. Instead, they brought improvements to me. The majority of the time, it was the diverse-owned businesses bringing me the nuggets that helped my company run more efficiently and saved money. Diverse companies actually brought more innovation to the table. And when my company made a major acquisition and compared its pricing to the traditional “all eggs in one basket” pricing, my company was more competitive.

The research also backs this up. In 2018, Harvard Business Review conducted a study to find if there was a correlation between innovation and performance with diversity. They surveyed more than 1,700 companies across eight countries (the United States, France, Germany, China, Brazil, India, Switzerland and Austria) and a variety of industries and company sizes. The review examined diversity in management positions measured with respect to gender, age, national origin, career path, industry background and education. The results found a statistically significant relationship between diversity and innovation outcomes in every single country. Not only was the relationship there, but the more dimensions of diversity that were represented, the stronger the relationship was.

Bottom line: Like talent, innovation follows the path of diversity, and that includes the company supply chain.

5 Profitability

Finally, we’ve arrived at the point the C-suite has been waiting for. If your business doesn’t need investors; if customer demands don’t sway you; if you don’t need innovation in what you do; if you can get by with adequate talent, I will bet you are still interested in more profits.

Most everyone else is, too, and that is why there is so much research to back up the relationship between diversity and profit — the more diversity in the company, the better the profits. Deloitte, McKinsey, Business Insider, the American Sociological Review, and many more organizations have researched whether diversity affects a company’s profitability. All studies agree the answer is a resounding yes. Just like innovation, the more diversity there is, the better the financial results. Also, like innovation, the lack of diversity pushes a company further down the profitability list.

In June of 2020, MIT Sloan Management Review looked into the benefits of supplier diversification and supplier diversity and found that having a supplier diversity program alone doesn’t move the needle for companies. However, the review also found that when supplier diversification was used as a supply chain strategy, the results were not only cost-effective but created better supply chain performance overall. MIT Sloan Management also pointed out that it doesn’t hurt to get to know the diverse portion of the population. This is especially important since that “minority” population will represent as much as 70% of the total increase in purchasing power from 2020 to 2045. Who wants to be the last to market with a strategy everyone else has already implemented?

Bottom line: Not only does diversity help achieve at the top of the revenue stream, not having diversity puts the company at a disadvantage and contributes to bringing up the rear of profits. The story only gets worse the longer it is put off.

At the end of the day, the message for that curious executive is that supplier diversity really is the missing business strategy and pays off in a number of ways. COVID-19 put a strain on supply chains on a global basis that has not been seen previously. As a semblance of normalcy returns, everyone is looking for lessons learned. Supply chains are currently being re-evaluated more than they have in a long, long time. Surveys are showing that companies are more willing to invest in their supply chains to improve performance. This is the perfect time to introduce changes to your company’s sourcing process. By including a supplier diversity business strategy as part of the changes, companies will realize benefits across the business and bring diversity to the supply chain. Diversity is something that should have been there anyway. Making money never felt so good.