Supplier diversity should be a corporate strategy that removes barriers and provides access for diverse businesses to compete for contracts in an environment that fosters fair competition and equitable practices.
Successful programs are built on deliberate actions and strategies supported by policies and procedures with measurable and integrated results tied to bottom-line profits. These guidelines should apply to all program components:
- Tier-1 (prime) suppliers, you’re organization’s diverse suppliers
- Tier 2, your primes’ reported use of diverse suppliers.
A Tier-2 program is necessary for mature supplier diversity programs. However, Tier-2 reporting is often viewed as an after-the-fact exercise. While asking Tier-1 suppliers to report on their suppliers checks the box for having a Tier-2 program, it does not move the needle on building diverse communities.
Tier 2 Explained
The most common type of Tier 2 reporting submission is an indirect allocation, which is based on the Tier 2’s proportion of a Tier-1 supplier’s sales. In other words, indirect submissions are a way of distributing diversity spend, rather than increasing spend with diverse suppliers.
Indirect Tier-2 submissions are mathematically logical. Such a submission is quick and easy. It is designed for primes that are not able to trace their spend with diverse suppliers to a specific corporation, as is often the case in banking and finance. However, it has become a default submission.
The second type of Tier-2 submission is direct; it allows the prime to report the amount it spent with specific diverse suppliers for your company. However, such a submission can be time-consuming for primes that use multiple diverse suppliers for a company.
Focus And Strategy
Direct submissions align to supplier diversity strategy by providing visibility further into a company’s supply chain and allow it to influence its primes to use diverse suppliers to service the relationship. Such submissions provide transparency, listing the names of the diverse suppliers used by the prime as well as the associated spend. Some programs set targets for first-tier suppliers, requiring a percentage of the contract value to be with diverse suppliers. Their Tier-2 direct report can be a way to monitor contract compliance.
Indirect submissions are more nebulous. Primes report their spend by category of supplier, such as women-, minority, veteran, disabled or LGBTQ-owned businesses.
Several methods can be used to choose first-tier suppliers for reporting. A common practice is asking primes that already track diversity spend to provide indirect submissions — although this does not foster an increased use of diverse suppliers. Another approach is to target primes with the largest spend and hope they will agree to report. Even though indirect submissions are relatively straightforward, many primes balk at the thought of reporting, and appeal to their relationship managers, which ends the conversation.
A third approach — finding primes that agree to develop the ability to report — can foster strategic partners whose actions increase opportunities for diverse suppliers. It may take time for these primes to build capability and internal processes. Emphasize that they should always be selecting the best suppliers for the work, not opting for a supplier just because they are diverse. Using diverse suppliers should never compromise quality or add unnecessary costs.
Give Tier-2 Programs a Strategic Focus
Successful Tier-2 programs need a strategic focus. Provide education about the business value of using diverse suppliers across your supply chain. Internal stakeholders should understand the business case and be able to articulate it when asking their prime suppliers being to report on Tier 2.
Involve relationship managers when selecting new primes to report. Some companies include reporting of Tier-2 spend in contracts. Others include weighted questions, such as requesting prospective primes to report Tier 2 if asked, in RFPs. This emphasizes the importance and support for supplier diversity across procurement.
Be mindful when selecting the primes who will be reporting Tier 2. Direct submissions are preferential; use this knowledge to identify sourcing categories to target. While all primes should have the ability to report Tier 2 if asked, don’t ask everyone to submit. Limit the number of primes that report indirect, removing primes that will be submitting small dollar indirect submissions. Instead track their ability to report, saving both of you time and effort.
Set meaningful Tier-2 goals. Since increasing spend is not always realistic, or controllable, use action-oriented targets such as 90-percent reporting compliance or increase the number of primes reporting.
Add Tier-2 reporting in quarterly business reviews. This will enable newly selected “reporting primes” an opportunity to discuss challenges. If they need to develop the capabilities to report Tier 2, ask them for a timebound roadmap of their process. For those primes already reporting, this focus encourages them to report on time and opens the dialogue for shifting from an indirect to a direct submission.
Tier-2 reporting increases an organization’s sphere of influence, setting expectations for primes to engage diverse suppliers. A strategic Tier-2 program allows companies to make a wider impact on society by unleashing the potential of your supply chain.