Supplier Diversity: The Hidden Sales Weapon
Disadvantaged Business Enterprises (DBEs) are for-profit small businesses where socially and economically disadvantaged individuals own at least a 51% interest, and also control management and daily business operations. Businesses owned and controlled by minorities or women are typically presumed to meet the “socially and economically disadvantaged” requirement. Common examples are: small-business enterprises (SBEs), minority-owned business enterprises (MBEs) and woman-owned business enterprises (WBEs). Since certification of DBEs are typically done at the local, state, or regional level, the requirements vary slightly from one region to the next, but the following criteria are widely used:
- At least 51 percent of the business must be “owned and controlled” by a “socially and economically disadvantaged” individual or individuals.
- The socially and economically disadvantaged owner must “control” the company’s daily management and operations.
- The DBE must be an independent business whose viability does not depend on its relationships with other companies.
- The DBE must employ its own workforce and equipment necessary to perform its work.
- The DBE must meet its financial obligations.
By incorporating a larger percentage of DBEs into your firm’s sourcing activities, the active pool of vendors will naturally shift to include a higher concentration of these diverse businesses, and your firm’s Tier 2 diverse spend will increase. This helps to drive competition between your company’s existing and potential vendors, and to promote innovation through the introduction of new/unconventional solutions. And there’s something else, which can be far more important to CEOs: the correlation between high diverse spend and increased market share. According to a Hackett Group study, “companies that allocate 20% or more of their spend to diverse suppliers attribute 10%-15% of their annual sales to supplier diversity programs. Conversely, companies that direct less than 20% of spend to diverse suppliers attribute under 5% of sales to their supplier diversity program.” Furthermore, companies that increase their diverse spend have been proven to see an increase in market share relative to companies with below-average DBE spend. In other words, companies that spend more with diverse suppliers see a direct correlation to increased sales. Pretty cool, huh?
From a social responsibility perspective, supplier diversity involvement directly improves the economy by promoting the growth of diverse businesses which often encounter barriers to their startup and to sustainability efforts, such as networking opportunities and access to capital. According to the “Disparities in Capital Access” report released by the U.S. Department of Commerce, it is estimated that half of all Hispanic families have less than $7,950 in wealth, and half of all African American families less than $5,446. Wealth levels among whites are 11 to 16 times higher. The report states: “Low levels of wealth and liquidity constraints create a substantial barrier to entry for minority entrepreneurs because the owner’s wealth cannot significantly be invested directly in the business, nor used as collateral to obtain business loans or to acquire other businesses.”
Additionally, demographic shifts create opportunities for diverse suppliers to meet the needs of evolving populations around the U.S. and the world. A recent U.S. Department of Commerce study has projected that this growing minority population will account for as much as 70 percent of the total increase in purchasing power from 2000 to 2045. Businesses that are ahead of the curve on incorporating DBEs into their supplier pool will have improved outreach to these growing populations compared to the businesses with low DBE engagement. Along with the many benefits that DBE’s deliver to larger organizations, diverse vendors often provide unique perspectives that allow them to meet your business needs in a way that might not be considered by many of the lager, non-DBE companies.
While the overall impact of increasing supplier diversity spend might not be immediately realized, the data shows that over time a robust supplier diversity program provides a true competitive advantage.
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