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The Multiplier Effect: How Supplier Diversity Pays

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The Multiplier Effect: How Supplier Diversity Pays


For decades, governments and large corporations have focused on optimizing their supply chains, not only for profitability but also for stability and sustainability. As the number of U.S. manufacturing companies and factories has steadily declined over the past 25 years, strategic supply chains have become increasingly reliant on imports and thus more vulnerable to global shocks and disruptions.

While the pandemic has made supply chains a household name, it’s not the only supply shock that companies continue to face. Changing consumer trends, material shortages, political pressures and climate change have created a sense of urgency for business leaders to improve the health, resilience and diversity of their company’s supply chains.

Of these, minority and women-owned businesses (MWBEs) represent a huge untapped opportunity, especially as today’s consumers, investors and other stakeholders increasingly prioritize having meaningful diversity, equity and inclusion (DEI) strategy of the company. A diverse business ecosystem has multiple benefits for businesses.

As my McKinsey colleagues Shelley Stewart III, Ken Yearwood and team have shown in their research, MWBE provides their corporate partners with 8.5% annual cost savings, well above the 3% to 7% achieved by most organizations. % annual purchase savings, helping companies access more geographies, demographics, and contracts. MWBEs can implement cost-saving strategies and take advantage of many federal and state tax benefits and potential rebates. These savings are not to be underestimated, especially when companies spend an average of 58 cents per dollar of revenue on supplier payments.

Additionally, MWBEs are more likely to employ a small number of talent at all levels of the company. By doubling spending on certified MWBEs to $2 trillion, businesses could create an additional 4 million jobs for minorities, with approximately 200,000 new jobs at the executive and managerial level. MWBE also provides employees with a living wage – an average of $73,000 a year. All told, increased spending with these suppliers could generate up to $280 billion in additional revenue for minorities. In short: Supplier diversity is a fundamental practice in creating an inclusive economy that everyone and every business can benefit from.

However, gaps remain in some of the fastest-growing industries: Finance, real estate and engineering remain low priorities for even the most established supplier diversity programs. Many are considered out of scope: Only 9%, 7% and 4% of companies, respectively, cite real estate, engineering and financial services as the top supplier diversity spend areas.

To unlock more value from supplier diversity programs, companies can double their focus on industries that are experiencing abnormal U.S. economic growth. Using a set of best practices, there are more opportunities than ever to drive diversity efforts at traditional suppliers. If you’re a business owner and don’t know where to start, take a step back. Examine categories that have traditionally been out of scope or not prioritized for inclusion in supplier diversity efforts. Also, look at your current partnerships across the wider value chain to determine where you can work with MWBE. Supplier diversity is similar to business development: just as your existing relationships take time to develop and develop, not all MWBE partnerships are immediate. Committed to building relationships through mutual learning, small-scale pilots, and ultimately broader partnerships.

Also focus on the big picture: In most companies’ business ecosystems, not all players are direct suppliers. Inviting more MWBEs to compete for your business may increase innovation, competition and resilience across the value chain, with additional benefits for all. It also demonstrates your company’s commitment to DEI, fostering goodwill—for example, employee engagement, satisfaction, and a positive brand reputation—and meeting regulatory scrutiny, while strengthening your presence and influence in diverse communities.

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There is no doubt that traditional supplier diversity programs yield considerable business and socioeconomic benefits. But if MWBEs fail to compete in areas often considered out-of-scope or not a priority, America’s wealth gap will widen. Best-in-class organizations should consider expanding their focus to MWBEs in areas related to professional services and develop vendor partnerships with MWBEs across the business ecosystem to expand benefits to businesses, MWBEs, communities, and more.

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