As environmental, social and governance (ESG) standards continue to gain awareness among consumers and investors, much of the focus has been on how increased demand for sustainable products will impact supply chains. However, events of the last year, particularly the social unrest in many U.S. cities, have emphasized the importance of the “S” in ESG.
For procurement organizations, one of the biggest contributions to the corporate social responsibility (CSR) space is supplier diversity — which could impact future supply chain design and planning just as the coronavirus pandemic has, says Brian Peters, senior director of procurement at Gilead Sciences, a biopharmaceutical company based in Foster City, California.
“The importance of thoughtful supply chain and procurement process design has been elevated because of the initial challenges that occurred with supply of personal protective equipment (PPE) and vaccines,” Peters says. “People now better appreciate the importance of a risk-managed supply base, and it’s a similar dynamic with how diverse businesses (owned by women, people of color, veterans and members of the LGBTQ communities), especially smaller ones, are part of the makeup of your supply base. By prioritizing spending with small suppliers, we benefit from their greater agility and quicker response times and stabilize our supply base (in a compliant manner).”
He continues: “(Supplier diversity) should be a focus at the highest level of management and shared by all within an organization. At Gilead, key supplier diversity goals are part of our CEO and CFO goals, and the culture of supplier diversity is driven enterprise-wide.”
However, to paraphrase the familiar saying in business, for a strategy to be meaningful, the process must be measurable. In many ways, supplier diversity analytics are a work in progress, as the most-used metrics — those involving spend — don’t tell the entire story, Peters says: “Spend is a metric that should be there, but it has limitations. It’s important to also measure how the process is working. To what level are you including small, diverse suppliers and are they being awarded business? I think these measures, combined with spend, will tell you more about the impact of your supplier diversity efforts.”
A Fraction to Measure Opportunities
In recent years, surveys have shown that companies measure supplier diversity goals primarily through total supplier diversity spend, or percentages of sourceable and managed spend allocated to qualified suppliers. Those can be incomplete metrics, Peters says, if one large contract accounts for a disproportionate percentage of spend.
“I’ve seen scenarios like this: a company may have (US)$11 million a year in diversity spend, but $10 million could be from one contract, one opportunity,” he says. “If only looking at that spend metric, it would look like you’re hitting the target, but there’s no guarantee you’ll repeat that. If that $10-million opportunity doesn’t happen the following year, if you don’t have a high number of other opportunities, you risk missing your target.”
At Gilead, “supplier inclusion” is a term used more often than “supplier diversity.” Inclusion is at the heart of how the company defines supplier “opportunity.” It does not only mean being awarded business, Peters says, but also if a company routinely considers small and diverse businesses as part of the process.
Which leads back to the importance of measuring more than spend. The opportunity-measuring metric, which can be calculated with a fraction: the numerator (number of times a diverse supplier was included) over the denominator (total business awards), can measure process health. Citing company policy, Peters did not disclose Gilead’s figure, but confirms that the target has intentionally been set at an ambitiously high bar, in line with the company’s CSR committee’s ethos.
“At Gilead, we set ambitious goals and bring people along,” Peters says.
The Value Drivers of Diversity
It’s somewhat ironic that supplier diversity KPI dashboards are mostly focused on spend, because such bottom-line concerns often sidetrack diversity efforts at many companies, Peters says. “There will be a period of time when emphasis is put on a supplier diversity or inclusion program, and progress is made,” he says. “But invariably, the highest priority will come back into focus, and that’s driving cost savings or cost optimization, and many of the resources allocated to supplier diversity or inclusion get reprioritized.”
However, at Gilead, supplier inclusion has three drivers: (1) fostering innovation, which is vital for a sciences-based company, (2) engaging suppliers (always in a compliant manner), which improves relationships and helps lead to repeat business, and (3) impacting the community. The third element is another instance of the company measuring more than spend — helping ensure that economic benefits reach their intended communities.
To Peters, the three drivers are part of the duty of “being a multiplier,” he says: “At Gilead, with our scale, we feel we have an opportunity and a responsibility to move beyond the spend metric to include measurement of Tier-2 small and diverse suppliers. Are your suppliers mirroring your company culture, behaviors, and compliance driven focus within their supply base?”
This year, Institute for Supply Management® (ISM®) launched its Diversity and Inclusion Pledge to help advance those ideals in the profession. While companies could have altruistic or box-checking motivations, decades of research and data indicates supplier diversity improves innovation, provides competitive advantage and benefits bottom lines.
“At workplaces, team performance goes up with a diverse and inclusive environment,” Peters says. “Because many voices and perspectives come together, the starting point might be more difficult, but ultimately, the performance ceiling is much higher. Our belief is that applies to supplier bases as well.”
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