This edition of The Monthly Metric focuses on an analytic that currently falls under the environmental, social and governance (ESG) umbrella. In the future, however, it might be considered a critical measure of overall supply chain performance, among a company’s most strategic and valuable KPIs.
Spend with diverse suppliers measures an organization’s expenses with vendors certified as diverse. Amid a growing focus on ESG standards from lawmakers, investors and consumers, the metric could be considered an altruistic or box-checking exercise by companies.
However, decades of research and data indicates supplier diversity improves innovation, provides competitive advantage and benefits bottom lines. While many supplier diversity metrics are nascent, it’s likely that as annual data accumulates, companies that are top-performing in spend with diverse suppliers are top-performing companies, period.
“If you look at the top priorities for business today, the things they are most focused on is supply chain, managing inflation and business continuity,” says Michael Van Keulen, CPO at Coupa, a San Mateo, California-based business spend management technology platform. “And there’s many things businesses can’t control, for the economy to geopolitical issues. But a thing they can control is their supply chains.
“It’s critical to have optionality in your supply chain and access to innovation. Diverse suppliers are often nimbler. They’re more agile and more willing to seek deeper strategic relationships and partnerships with their customers. And they’re hungry, which often benefits their customers.”
Last year, Coupa added spend with diverse suppliers to the metrics covered in its annual Business Spend Management (BSM) Benchmark Report. It’s an important metric but not a tell-all; Van Keulen says spend with diverse suppliers should be just one supplier diversity KPI on a company’s dashboard.
And as he discussed the benchmark for a best-in-class organization, the CPO candidly acknowledged that his own company has ways to go.
Meaning of the Metric
Coupa defines spend with diverse suppliers as the percentage of an organization’s Tier-1 spend with certified diverse vendors. The best-in-class benchmark across the company’s more than 3,000 customers is 23.9 percent.
The metric doesn’t tell the whole story, as a suppler diversity program needs to be “More Than Spend,” the title of a feature in the upcoming March/April issue of Inside Supply Management®. “When you think about what you’re accomplishing, it’s not spending more money with diverse suppliers,” Andrea Greenwald, senior director, advisory and key initiative leader for sourcing and procurement at Gartner, the Stamford, Connecticut-based global business research and advisory firm, says in the article.
She continues, “The root of a supplier diversity program is to create generational wealth. That’s why governments require it. … So, to me, spend is just a programmatic element to then determine what you are trying to achieve.”
Van Keulen concurs, saying that Coupa’s supplier diversity initiative has three pillars: (1) risk mitigation through supply chain optionality, (2) access to innovation and (3) building a presence in diverse communities that are talent sources. “These are communities where many of our own employees live,” he says.
Regarding spend, Coupa has some catching up to do: Just 2 percent of its Tier-1 spend was with diverse suppliers in 2022, and the company’s goal for this year is 4 percent. “It’s a little more challenging for a tech company like us, but it’s going to take a few years to get where I’d like us to be,” he says.
The goal is 8 percent of spend with diverse suppliers; another is 10 percent of suppliers that are diverse — a good metric to use in tandem, Van Keulen says. That’s just for Coupa’s first tier. As supplier diversity metrics mature, he says, they should measure execution across all tiers, which requires robust visibility and sound supplier relationship management.
“It has to be a holistic approach,” Van Keulen says. “You need good technology to expand your network of diverse suppliers that provide great quality and performance. And our strategy for 2023 and beyond is not only to identify those suppliers, but also build a program that helps them do those things even better.
“That will really move the needle for a supplier diversity program. You want to provide resources and help them scale their businesses, not just write a check.”
What Companies Can Do
The strategies Coupa researchers suggest for companies aiming to improve spend with diverse suppliers include:
- Require sourcing events to include at least one diverse supplier
- Provide diversity managers to have visibility into sourcing events and spend, to analyze and provide proactive support
- Monitor diverse suppliers for hardship risk and be willing to provide financial support or amend contract terms
- Participate in community programs that network diverse suppliers and highlight such vendors to business partners.
One of the most effective vehicles for a company to build supplier diversity is having a diverse workforce of its own. “Hitting a metric for diverse spend is great, but there’s more to it,” Van Keulen says. “It should include mentorship programs and hiring practices, how an executive team is comprised, and gender neutrality in terms of pay. There should be more to it than trying to hit a metric and saying, ‘OK, we’re done.’ ”
Spend is just one facet of a supplier diversity program, but it is a key barometer of a company’s efforts.
While an organization can provide what Van Keulen calls “window dressing” on diversity spend, it’s typically a harder metric to massage because it involves several, smaller suppliers. A company is less likely to devote a large amount of spend to one or two vendors and claim it hit a percentage target, especially if it also measures percentage of suppliers that are diverse.
Finally, Van Keulen says, executive compensation should be linked to a company’s supplier diversity performance.
“It should be no different than if you’re not hitting revenue targets,” he says. “A lot of forward-thinking companies are already doing that. If you’re not, then those goals are something (executives) are only talking about. … We have a goal to get to 4 percent of our spend with diverse suppliers. At the end of the year, if we’re not there, it should impact my pay.”
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