Why investing in diverse suppliers is good for business
Triggered by last summer’s wave of protests against racism across the US, an increasing number of organisations have increased their engagement with businesses owned by under-represented groups, including Black people and women.
In fact, the commitments to diversify supply chains by America’s corporate giants have been staggering of late.
Race riots kicked off commitments to diversity
Since last year’s summer protests, Wall Street giant Citibank announced it was exclusively working with four Black-owned investment firms for a strategic US$2.5bn bond issuance; Unilever committed to a US$2.43bn annual spend with diverse suppliers by 2025; and telecoms giant Vodafone committed to evolving its vendor assessment criteria to give significant weighting to its suppliers’ commitments on diversity.
But that’s not all. CBRE announced a US$3bn commitment to supplier diversity; General Motors doubled its commitment to spending with Black-owned media to 4% of its ad budget in 2022 with a target of reaching 8% by 2025; and Target promised to spend more than US$2bn with Black-owned businesses by 2025, including adding more products from companies owned by Black entrepreneurs, spending more with Black-owned marketing agencies and construction firms, and introducing new resources to help Black-owned vendors navigate the process of creating products for a mass retail chain.
Some companies, like Target, UPS and Pacific Gas and Electric, were already building more diverse supplier pools and have been doing so for decades. But, in recent years and certainly in the last 18 months, there’s been a very real increase and the data bears this out.
Recent research from Bain & Company reveals that spending on suppliers that are more diverse rose 54% between 2017 and 2020. So, what’s leading to this increase? And does it mean that executives are finally seeing that diversifying supply chains is good for business?
Good for society, good for business
Well, in short, yes. Bain’s report, with data provided by Coupa, reveals that the companies in the top quartile of spending on diverse suppliers saw an average of 0.7 percentage points more savings off total procurement expenditures, compared to their peer group. The report further points to tangible advantages of diverse supply chains, including a higher annual retention rate, to the tune of 20+ percentage points.
That there is business value in having diverse supply chains is something Bain’s Procurement practice has thought for some time, but now the data bears this out, with procurement officers increasingly finding business value in such diversification.
According to Andrea Greco, CBRE’s Chief Procurement Officer, “having a diverse supplier pool drives competition and promotes innovation through the introduction of new products, services and solutions”.
Why recognising supply chain diversity as business objective is important
Companies are starting to think of the journey to global supply diversity as one that relates to business performance, rather than just a social initiative, and this pivot in thinking is what ultimately will lead to success. Why? Because businesses will then look to incorporate supplier diversity into the procurement process.
In the past, explains Donna Wilczek, SVP of Product Strategy and Innovation at Coupa, decisions related to diversity, equity and inclusion were happening in silos, which makes it “difficult for organisations to realise their full impact”.
However, by embedding supply base diversification practices within the spend process, it can maximise business and societal impact in concert, she says.
Take Target. The retail giant integrated its supplier diversity goals into its commercial strategy and this has helped the company double spending on diverse Tier 1 and Tier 2 suppliers to US$2 billion between 2016 and 2019. When Target organises and hosts events to identify diverse businesses for specific product lines, for example, procurement staff help potential suppliers get certified and grow.
According to David Schannon, who co-leads Bain’s Procurement practice in the Americas, when “companies stop thinking of diversifying their supply base as a standalone initiative and start to recognise the benefits of investing in under-represented groups, we see meaningful business improvements”.
What's stopping all companies from doing it?
So, why isn’t every company getting in on the diverse supply chain action? Well, according to Bain & Company, there are a number of key challenges that companies need to overcome in order to boost spend with diverse suppliers. Here are a few:
- Stop thinking of diversity as a standalone initiative Many leadership teams eager to embrace supplier diversity limit their efforts to a series of short-term strategic sourcing events. This approach won’t address the long-term engagement required to develop a sustainable pipeline of diverse suppliers. For example, it typically takes 12-to-18 months to fully qualify a new supplier.
- Make sure the organization is aligned from the board to the business unit Boards make strong commitments to increasing supplier diversity but may overlook vital changes in the day-to-day decisions that are critical to implementation. Business units need a mandate to channel procurement spending to a new set of unknown suppliers — and a clear sense of how diversity goals stack up against other competing priorities.
- Don’t assume success will happen without resources One of the key reasons supplier diversity initiatives flounder is that organizations underinvest in the capabilities required to support new or developing suppliers, including onboarding, risk mitigation and mentoring.
- Expand goals beyond Tier 1 spending and suppliers A narrow focus on Tier 1 spending restricts the ability to grow a diverse supplier ecosystem and may render company targets unsustainable. It also reduces the full potential benefits of working with a diverse supplier group, including collaboration and innovation as well as access to new markets, customers and services.
Charting the rise of the chief sustainability officer
There has been a dramatic increase in the hiring of the chief sustainability officer (CSO) role among Fortune 500 companies, with demand for CSOs growing 228% in corporate America over the last decade, according to the latest report from CSO recruitment firm the Weinreb Group.
There were more first-time CSOs recruited by Fortune 500 companies in 2020 than the previous three years combined, with numbers of CSOs in corporate America soaring from just 29 in 2011 to 95 today, demonstrating the importance corporations are placing not just on reducing their environmental impacts, but also in supporting issues of social justice.
Businesses are increasingly under pressure to assume more responsible practices with customers, regulators and investors demanding increased transparency of business ESG performance.
And the past year in particular has been seen great upheaval, with increased new attention brought to “social justice, climate change, and an ever-widening political divide”, according to Ellen Weinreb, founder and CEO of the Weinreb Group, which has tracked the rising role of CSOs over the past decade.
CSO role is expanding and shifting
But it’s not just the number of CSOs that have changed, sustainability teams are getting bigger, with the average team size increasing from five professionals in 2011 to 15 today, according to the report.
This is in part due to the fact that the CSO role has expanded beyond simply ‘sustainability’ to incorporate social justice too. Sustainability isn’t exclusively about the environment anymore. The role has also come to incorporate social justice, especially with the rapid growth of, and increased attention on, environmental, social, and governance, or ESG.
And many roles recently have been renamed as such with Head of ESG or ESG Officer becoming increasingly prominent.
Women make up over half of CSO roles
What's also changed over the last decade is the percentage of women holding the title of Chief Sustainability Officer.
A decade ago, in 2011, the majority of CSO roles were held by men (72%), with just 10 of the 29 then CSO roles held by women. A decade on, in 2021, the percentage of women in CSO roles has almost doubled, now accounting for more than half (54%) of CSO positions.
However, according to the report ‘The Chief Sustainability Officer 10 Years Later’, despite the movement toward gender balance within the role and its expanded focus on social justice, in particular, in 2021 the CSO position remains overwhelmingly ‘white’.
Probably not surprising considering there are just three black CEOs at Fortune 500 firms.
How the chief sustainability officer role has grown
The first-ever named chief sustainability officer in a US publicly traded company was Linda Fisher for Dupont, who joined the chemical giant in 2004 as CSO, just at the time when innovative companies were looking at sustainability as a driver for business growth. Joining from the Environmental Protection Agency where she spent 13 years, Fisher was a corporate sustainability trailblazer, spending more than a decade as CSO here, and leading DuPont’s efforts to establish its first set of market-facing sustainability goals.
By 2006, a slew of firms had joined the CSO movement, including Mastercard, Nissan and Microsoft; and Kellogg’s became the first firm to replace a CSO with Dianne Holdorf taking over from Celeste Clarke. And by 2011, a decade ago, Coca-Cola, Verizon, AT&T and P&G had appointed their first CSOs.
In fact, it was in 2011 when Virginie Helias invented her idea of the perfect CSO job – to make sustainable consumption not only possible, but ‘irresistible’ – and pitched it P&G’s then CEO. A decade later, in 2021, and Helias is still in the job she first created.
The majority of CSOs have been internal hires, such as Peter Graf of SAP, who joined the software giant in 1996, and served as EVP for Marketing before being named CSO in 2009. The same is true at UPS, whose first-ever CSO, Scott Wicker, started at the package delivery giant 34 years before being named CSO in 2011. Increasingly, however, external hires are being made with organisations increasingly searching for more high-profile leading voices in the ESG forum.
In February 2021, JP Morgan hired former British high-profile Labour politician Chuka Umunna while just last month hotel chain Accor hired high-profile French politician Brune Poirson, who has previously championed the anti-waste law within the French government and was secretary of state for the environmental transition for three years.