How Procurement Teams Can Diversify Suppliers And Manage Risk

Over the past few years, large enterprises have made incremental progress toward a more diverse supplier ecosystem, but we’re still not there. A recent survey of 100 large global companies by The Hackett Group found these companies intend to increase spending on diverse suppliers by over 50% during the next three years. While these commitments are a start, DE&I initiatives are empty without a plan. But, with the proper framework and tools, procurement teams can start diversifying their supplier ecosystems and experiencing the inherent benefits of working with small business suppliers.

A procurement team tasked with diversifying its company’s supplier network must perform a careful balancing act. First and foremost, they must ensure that the company has access to the right goods and services when it needs them. For larger companies, this means finding suppliers with the resources to scale their business, which tilts the balance in favor of larger suppliers. Just as “no one ever got fired for buying from IBM,” procurement teams naturally seek to reduce risk by buying from larger, more established suppliers rather than smaller alternatives that can provide a comparable product.

Yet this tendency to seek out large suppliers to manage risk often conflicts with mandates to diversify a company’s supplier ecosystem. While there are large suppliers run by women and people of color, the vast majority of underrepresented suppliers are small or medium-sized businesses. Procurement teams tend to steer away from working with smaller underrepresented suppliers, as it could mean a higher risk that the supplier won’t be able to deliver. As a result, they stick with the safe option, and the promised supplier diversity fails to materialize.

I saw this happen directly with my first company, Nourish Inc. We produced spill-proof bottles for children and toddlers, and during the early years, we had no problem meeting demand from smaller retailers. But when we had the opportunity to supply our product to a major food distributor, we couldn’t pay for the cost of scaling because our cash was stuck in unpaid customer invoices. We were a completely free, no-interest bank to our customers. We had no other option but to turn down the major contract that could have taken our company to the next level.

This experience taught me a valuable lesson: Most small suppliers don’t go out of business; they grow out of business. The problem is that small businesses typically lack the capital and resources they need to scale, which creates a paradoxical situation where a small business becomes a victim of its success. This phenomenon hits minority-owned suppliers particularly hard and undermines sourcing diversification efforts. Fortunately, there are several steps procurement teams can take to support these businesses while diversifying their supplier network and minimizing risk.

How Procurement Teams Can Meet DE&I Supplier Goals

1. Be Honest About Payment Time

While it is common for many suppliers to submit net-30 invoices to their customers, the reality is that procurement teams rarely meet this timeline. Procurement officers should work with their accounts payable team to reduce the time to pay rather than paying net-whenever they want.

Paying suppliers faster will help them grow their business while simultaneously reducing the risk of non-delivery. However, finance teams are incentivized to hold onto company cash as long as possible and that means delaying payments. If payments cannot be accelerated, be honest with suppliers about the likely time to wait for payments to arrive and educate them about solutions they can use to get paid faster.

2. Clarify Supplier Contract Requirements

From types of insurance to certifications and delivery timelines, most large enterprises have very rigorous requirements for suppliers who want to do business with them. These requirements are often buried deep in the company’s website – if they’re online at all – which makes it difficult for suppliers to vet themselves before submitting a bid. By making supplier requirements more accessible, procurement teams limit the risk of contracting with an unprepared supplier while ensuring potential suppliers have all the necessary information to submit a strong bid.

3. Make the Sourcing Decision-Making Process Transparent

It is often unclear to SMBs how procurement decisions are made in large enterprises. To ease the process for suppliers, buyers and procurement organizations should increase visibility to the decision-making process, lifting the curtain on the sourcing process. Efforts that small and diverse suppliers currently spend ferreting out the right person to talk to can instead be spent preparing a contract bid, completing the preparation steps to qualify as a supplier or searching for other customers that are a better fit for their business.

4. Use Curated Supplier Networks

A significant challenge for procurement teams is finding a diverse supplier for their business that fits its parameters and that can deliver at the required scale. While supplier databases exist, most procurement teams do not have the bandwidth to perform due diligence on thousands of potential diverse suppliers.

Working with both diverse suppliers and with enterprise supplier diversity teams, my team saw the profound need for a network that creates intelligent connections in real time between procurement teams and diverse suppliers with the readiness to deliver at an enterprise’s specified scale and that develops the diverse suppliers’ readiness.

5. Create a Supplier Apprentice Program

Suppose a procurement team finds a supplier that they like but that isn’t quite ready to meet the demands of their organization. In that case, they can still give them a boost while diversifying their supplier network by connecting them with some of their other suppliers. This creates an opportunity for the small supplier to become a subcontractor for a larger supplier to the enterprise.

Through this subcontractor role, the smaller supplier can grow their business while simultaneously getting exposure to the requirements of the larger enterprise. This has the function of a “supplier apprentice program” that will help smaller suppliers prepare to become larger suppliers to a business in the future.

The Bottom Line

Large enterprises are sincere in their desire to help level the playing field for small and underrepresented businesses. While many offer a variety of programs, including grants, technical assistance and mentoring, nothing levels the playing field in a sustainable way as buying from them.

Of course, not every solution will work for every business. The strategies chosen by a procurement team will depend on their unique situation, but both procurement teams and suppliers will benefit by leveraging these tips. When procurement teams commit to diversifying their suppliers and meeting DE&I goals, there is a positive ripple effect: promises are fulfilled, requirements are met, diverse perspectives and products are introduced, small businesses prosper, the public approves and customers are happy.

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