Supplier Diversity: Cost Center or Revenue Generator?
Sustainability • Published on January 15, 2021
A problem supply chain managers often face when getting buy-in for implementing a supplier diversity program is that many view these programs as a means to spend money with small and diverse businesses, but not as a way to grow their company’s revenue. In order to prove supplier diversity should be an area of investment, these managers often need to show how that investment can turn into profit for their business. While this can be challenging, there is ample evidence that suggests that supplier diversity programs can lead to increased revenue for your company over time.
Supplier diversity programs are often viewed solely as philanthropic ventures that help historically underutilized businesses and underserved communities get a more equal footing in competing with bigger and more established companies for participation in supply chains. There may be some appreciation for the economic impacts of funneling money into these communities, as well as an acknowledgement of the benefits of building a more resilient supply chain through diversification, but ultimately many companies that implement these programs view them as a box to check to earn a feel-good public relations boost and little more. In this approach to supplier diversity, these companies frequently fall into the trap of viewing their program as a cost center – where they allocate funds and resources toward something they do not realize the full value of, as opposed to a substantial long-term revenue generator.
A supplier diversity program is a proactive business program which encourages the use of minority-owned, women-owned, veteran-owned, LGBTQIA-owned, service disabled veteran owned, historically underutilized business, and SBA-Defined small business vendors as suppliers. While the philanthropic approach may be more apparent at first glance, there is ample evidence that suggests that these programs also lead to incremental revenue gains for companies that implement them. These revenue gains as a result of supplier diversity typically take three forms: new contract wins and strategic partnerships, customer base expansion as a result of brand preference, and customer base expansion as a result of their economic impact in underserved communities.
Supplier diversity programs unlock new opportunities for companies to compete for and win contracts with U.S. government entities. These contracts can be for anything from vehicles and building supplies, to food and clothes and are often lucrative and highly sought-after contracts. Under the U.S. federal government’s Small Business Subcontracting Program, contractors who earn more than $750,000 in government contracts must set and meet aggressive goals to subcontract with historically underutilized small businesses (HUBZone Businesses). This means that if your company does not have an established supplier diversity program, you are blocked off from this potentially massive revenue-driving business line. Additionally, many large companies with supplier diversity programs have imposed similar standards for the businesses they subcontract with to take advantage of Tier 2 supplier diversity opportunities. So, not only are companies without supplier diversity programs precluded from accessing government contracts, they are unable to access subcontracts from many larger companies as well. If your company is looking for new revenue streams, implementing a supplier diversity program could play a key role in that.
Another way implementing a supplier diversity program can lead to incremental revenue gains at your company is by capitalizing on the growing trend of consumer consciousness. Since the 1990s, interest in the social and environmental impact of large companies has skyrocketed, leading to increased scrutiny of corporate social responsibility (CSR). Going into 2021, 19% of American consumers are prioritizing purchasing from companies and brands that focus on social causes and improving society. Take advantage of these trends by positioning your brand as one that operates sustainably – balancing the needs of the business with the long-term needs of your consumers and their communities. Once you’ve implemented your program, partner with your PR and Marketing teams to get the word out about it. The way consumers view your brand goes a long way toward influencing their buying behavior.
The third and most frequently overlooked way that a successful supplier diversity program can lead to revenue gains is by positively impacting the economies of underserved communities. By working with historically underutilized businesses, you are putting money in the pockets of small business owners and their employees who then have the resources and money to spend on your company’s products when they may not have been able to otherwise. Based on a 2014 report by the National Minority Supplier Development Council (NMSDC), certified Minority Business Enterprises (MBEs) have a total economic impact of over $400 billion dollars in output that results in the creation of and/or preservation of more than 2.2 million jobs held by persons who find themselves either directly or indirectly employed by NMSDC certified MBEs. That means over two million potential buyers of your company’s product have money to spend, in part, as a result of contracts with minority-owned businesses.
So, to the question of would a supplier diversity program be a cost center or revenue generator for your company? The answer is very likely: revenue generator, as long as you are willing to look at the big picture and long term impact of your investments. Small and diverse businesses may not always be your least expensive option when deciding on a supplier, but the opportunities for bottom-line revenue growth they enable far outweigh the upfront costs.
Convoy celebrates diversity in its carrier network. If you’re a carrier and want to learn about new opportunities, reach out to us at email@example.com or visit our supplier diversity page for more information.