Secrets of success
Best-in-class organizations emphasize (in this order): business case, accountability, return on investment
By Anne Millen Porter -- Purchasing, 8/14/2003 2:00:00 AM
It's very easy, especially in a slow-growth economy, for companies to deploy procurement or other business strategies that end up hurting minority- or women-owned suppliers. For example, the practice of extending payment terms can be particularly harmful, but it's happening even at companies with strong public commitments to supplier diversity.
"I keep a top-10 receivables 'hit list' of companies that are beyond 50 days," notes William Mays, president and owner of Mays Chemical, a $166-million minority-owned chemical distributor based in Indianapolis, Ind. "It's amazing to me how many Fortune 500 companies are consistently on that list. The practice hinders minority-owned businesses because they depend on cash flow to invest and grow."
What's more, Mays says there can be a double standard for payment terms. "We buy from the same companies we sell to. We might sell them ten times what we buy, but we can be put on credit hold for paying in more than five days, while we're fortunate if they pay us in fewer than 60. They owe us ten times what we owe them, so there's no credit risk whatsoever," he says.
The problem, Mays says, is that commitment to supplier diversity—or to strong supplier relationships in general—doesn't always reach to a level that encompasses both procurement and accounts receivable functions of a company. "Procurement will say, 'We know they're not paying you. Receivables will say 'We 're graded on collecting in 30 days.'"
Because of his company's larger size and business connections, Mays says, "We can often negotiate reasonable solutions to this problem by going to people higher up in our customers' organizations, but smaller companies can't always do that."
Other types of cost-shifting activities intensify also in a slow-growth economy. For example, companies demanding things like just-in-time (JIT) delivery don't always increase the amount of scheduling or forecast information they provide to their suppliers, which can result in lower profitability or diminished competitiveness for suppliers—effects that get magnified in smaller, often less diversified, businesses.
"We see good JIT programs and bad ones," notes Donna Fujimoto Cole, owner and president of Cole Chemical & Distributing, a $66 million Houston-based independent petrochemical distributor. "The good ones give us eight weeks worth of production schedules, so we can plan. The bad ones go from buying four pallets of something to sending a truck every day to pick up nine bags." It makes the distributor less competitive, Cole says, "because we have to charge them more to cover the costs of breaking a pallet."
Then there's the trend toward strategic sourcing where large companies pool their demand for goods and services across business units, precluding smaller suppliers with more limited geographic reach from competing for increasingly large, bundled contracts that have national or global service requirements. "Larger companies want to deal with larger companies. They want to see more volume across bigger geographies," observes Mays. "We're bigger, so we have some advantage in that respect."
Indeed, Mays Chemical, with 16 stocking locations, was ranked 13th in P URCHASING 's Top 100 chemical distributors listing last year. But even for a company that size, Mays has needed to team up with his competitors to stay in the game. "For example, we had an opportunity to support 48 PepsiCo locations. For us to do that, we had to set up an alliance with a smaller, competing distributor that could service other geographies. We said, 'Neither of us can win this national contract alone, so we'll handle the East and you handle the West.' It's been successful."
The difficulty, Mays notes, comes in forging the right alliances at the right times to compete for contracts as they come into the marketplace. OEMs that care about promoting supplier diversity, can help, he suggests. "There's nothing wrong with putting a global supplier with a domestic minority supplier and suggesting to the larger concern that they work, where possible, with the minority supplier."
Two longer-term business trends also creating hardships for diversity suppliers:
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Globalization, where OEMs move manufacturing and sourcing offshore, pitting U.S.-based suppliers against competitors with lower labor and capital formation costs, and
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Supply base rationalization, where OEMs opt to deal directly with fewer, larger suppliers, transferring the supplier diversity onus—but not necessarily the commitment, culture, or long-term learning around supplier diversity—to their Tier 1 supply base.
"Like many companies, we used to be first tier, now we're second tier," remarks Cole. And, in some cases, she notes, the concept of supplier diversity is "brand new" to the new first tier customer base, which means long-standing problems, like buying from so-called fronts to meet supplier diversity objectives, start cropping up afresh.
While speaking frankly of the troubles they sometimes encounter in dealing with larger companies, it's important to emphasize that minority business leaders like Mays and Cole are—by no means—sitting around, wringing their hands, and doing nothing to help themselves. Philosophically, these business leaders expect to be exposed to the same economic realities as all companies, expect to pay their price of admission in an increasingly global economy, are taking positive actions to keep themselves competitive, and, in fact, emphasize the good things—the best practices—that companies are implementing with respect to supplier diversity.
The most critical best practice, according to Reginald Williams, CEO of Procurement Resources in Atlanta, Ga., is to build and market aggressively a rock-solid business case for supplier diversity, complete with a plan for earning a return on investment.
Indeed, Williams, whose company provides supplier diversity program design, sourcing, policy formulation, supplier certification and staff training for such organizations as American Airlines, Sprint, Phillip Morris, AT&T, IBM, Marriott and Coca-Cola, says the hardships inflicted by larger companies on minority- and women-led businesses, inadvertently or otherwise, are really just symptoms of companies placing too little emphasis on the essential business cases for supplier diversity.
"You shouldn't have to point fingers, attack or cajole people in the organization to support supplier diversity," he says. "If people don't believe it's good for the business, they'll go about identifying minority-owned suppliers in a half-hearted way, which increases the likelihood they'll identify suppliers who can't really compete. It defeats the purpose of supplier diversity by confirming the beliefs of people who are waiting for it to fail."
From the federal government's sociopolitical perspective, that purpose is to put the greatest number of economic resources in the hands of the fastest-growing segments of the U.S. population, thereby promoting things like long-term economic and employment growth, entrepreneurship, high standards of living, cultural advancement, and more. From a purely business perspective, that purpose is to put the greatest number of economic resources in the hands of the fastest-growing segments of the U.S. population so they'll be in a position to buy more products and services. Combined with the right marketing strategies, the hope is they'll buy products and services from the companies that, they feel, put them on the road to prosperity.
As Cole puts it, "Someone finally recognized that minority-owned businesses should hire minority employees, do business with other minority businesses and find other ways to give back to minority communities."
Where a company sits in the supply chain, what it sells, and to whom, are key determinants in how its business case for supplier diversity gets built. For example, the consumer products manufacturer may combine its own market research with predictions about future population and demographics. For that company's direct suppliers, it's the same business case once removed, meaning they need to pursue supplier diversity because it's a condition of winning future business.
For Corporate Express, the $5 billion distributor of office and computer products and services, the business case for supplier diversity is about winning market share in a commoditized market that doesn't offer a wide array of opportunities for competitive differentiation.
"The message from our customers is clear," says Mike DuBose, VP of strategic accounts, for Broomfield, Colo.-based Corporate Express. "They have supplier diversity goals that they're trying to achieve, so we've made it our strategy to win market share by making it easier for these customers to reach their goals."
That means, according to DuBose, pursuing joint ventures and partnerships with diversity suppliers that assist customers in buying direct at whatever levels they require, be they local, regional, or national. It also means making available—through Corporate Express' catalogs—items manufactured by minority and women-owned companies. In addition to offering some 2000-plus such products in its catalog (40% from certified businesses), DuBose notes that Corporate Express has, in the last year, created a Diversity Products Solutions (DPS) brand, which includes things like office paper and recycled toner cartridges manufactured by certified minority suppliers that Corporate Express has put through its own qualification pro-cess for things like cost, quality, customer service capability, and more. Emphasizing supplier diversity as a business strategy makes Corporate Express a model customer, according to Ashoke (Bappa) Mukherji, CEO and cofounder of Brentwood, Tenn.-based Guy-Brown, a certified minority supplier that makes recycled toner cartridges for the Corporate Express DPS brand label. Mukherji started Guy-Brown along with Jay Chawan, chief financial officer, whom he met in business school, and Maria Teresa (Tera) Vazquez, vice president of sales and marketing, who had worked for an existing manufacturer in the same industry. However, the fact that Guy-Brown is 100% minority-owned does not, in itself, satisfy the business case, Mukherji notes.
What does satisfy the business case, according to Mukherji, is the company's status as a manufacturer that employs minority people, engages in economic value-adding activities, supports minority communities, and is poised for growth. "We see a lot of companies that have goals for supplier diversity—maybe a percent of the spend or some arbitrary number they think they can hit. But when people are simply trying to hit numbers, they don't necessarily care if the supplier is doing anything more than brokering products. The goals are useful only if there are systems in place to qualify who the suppliers really are."
Selling diversity
The business case, according to Williams, is only the starting point. Next, he says, a company has to be aggressive about marketing its business case and creating a corporate culture that will answer the question: How does supplier diversity support the overall business strategy?
The Coca-Cola Co., according to Williams, is a great company for making and marketing its business case for supplier diversity. "Coca-Cola is brilliant at creating excitement around supplier diversity." First, he notes, the company requires every employee that is involved—either directly or indirectly—in procurement decision making to take a course on the company's business case for supplier diversity. Through this dialogue they learn that African American, Latino American, Asian American and Native American consumers support the product disproportionately to their numbers in the marketplace. In fact, they learn that minorities are only 25% of the population, but consume 40% of products and that women of all races are the predominant decision makers over all retail purchases. According to Williams, "The business case for supplier diversity is a no brainer. What better way to support the customer than to become business partners with them?"
He points out that Coca-Cola pushes the same business case with its supply base—companies doing millions of dollars worth of business with Coca-Cola each year—in order to promote diversity throughout its supply chain. "They show suppliers the levels of market penetration for Coca-Cola among distinct race and gender groups. They show their biggest suppliers where the money they're earning from Coca-Cola really comes from," Williams observes.
When Bristol-Myers Squibb's Global Strategic Sourcing (GSS) group began to organize back in 1996, it immediately became concerned about the potential impact for the company's diversity supply base, says William Stirling, senior director, GSS.
"We were building a center-led sourcing organization that was going to be focused on leveraging spend and consolidating the supply base," he notes. As we presented our intentions to our suppliers and business units, a common question was 'How will we address the potential impact on our base of small and diverse suppliers?' Since we deal with a diverse customer base, it makes good business sense to engage a diverse supply base—to get their ideas and diverse perspectives." In response, he says, GSS decided to increase its focus on supplier diversity.
To do that, GSS created its Supplier Diversity program and over the years has been focusing on enhancing it to become best in industry. Today, supplier diversity is one of GSS's key priorities with increased sponsorship from top executives in the organization.
A key part of Ingrid Sheremeta's role as associate director of supplier diversity involves heading a newly formed Supplier Diversity Council, which comprises 22 representatives covering all major spend categories and North American site locations at Bristol-Myers Squibb. Through the Council, says Sheremeta, GSS has trained all of its category representatives on using the tools the organization has put into place for locating small and diverse suppliers, understanding how much of their category spend is going to these suppliers, and the impact their sourcing decisions will have on the organization's goals for spending with small and diverse suppliers.
Good data, according to Sheremeta, has been a key part of building a culture that consistently thinks about supplier diversity. At Bristol-Myers Squibb, one part of the data structure is an online supplier registration process that allows small and diverse suppliers to classify themselves according to the various minority-owned, women-owned, veteran-owned, or small-disadvantaged business certifications they have received. The resulting database is one of the tools GSS sourcing managers use to build RFIs or RFPs for strategic supply contracts. The second part of the data structure is a newly implemented information system that allows GSS to review the extent to which small and diverse suppliers are being included in bids and winning business awards. Another way Sheremeta works to promote a culture that supports supplier diversity is by routinely inviting GSS sourcing personnel to accompany her on trips to various events for small and diverse supplier development. "People always thank me for taking them to these conferences or networking events," she says. "They come back with a passion for supplier diversity because they get to witness first hand how dedicated and qualified these companies are and how their own actions as sourcing professionals can positively affect these suppliers and our organization."
Goal setting
Once the business case for supplier diversity is firmly rooted in a company's culture, Williams of Procurement Resources says accountability through performance measurement is another key best practice for corporations to implement. He says, "supplier diversity has to be part of the performance measurement process because people do what they're held accountable for." His favorite example of this is Hewlett-Packard (HP). Indeed, HP, Williams notes, has gone so far as to incorporate supplier diversity goals into its corporate internal audit process.
Jo-Ann Butler, director of Hewlett-Packard's multicultural procurement and sales support program says the company's supplier diversity history dates as far back as 1968. "We're positioned as a business rather than a social program," Butler says. "We have a history of spending over 45% of our dollars with small businesses. Small businesses are the fastest growing segment in a weak economy. They are creating more jobs than larger businesses and they have potential to expand and become larger businesses. Our support has never been tied to whether or not a company buys our equipment, but we know that people tend to buy what they've been exposed to. We know that, in many instances, people are going to buy from companies they believe have helped to support their growth. This is especially true of minority business owners," Butler adds.
While Butler classifies HP's supplier diversity initiative as inclusive and flexible, it does have some teeth. First off, the executive sponsor is CEO Carly Fiorina. And, while there are no hard goals for each business unit, Butler says every HP business must identify ways in which they can develop diversity suppliers and show at least incremental growth in supplier diversity spending from year to year. "There are no witch hunts," Butler emphasizes, "and we never pit one business against another."
Each HP business unit helps to set its own goal for diversity purchasing; the corporate group then aggregates the goals to set a companywide objective for spending with diversity suppliers. Then, through the internal audit process, the business units are held accountable for meeting their goals. Examples of questions that get asked:
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Name one minority-owned business to which you intend to award more business. Says Butler: "Just because they're using a minority supplier, doesn't mean they can sit on what they're awarding to that supplier.
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Identify between five and 10 commodity areas for which the business has never used a minority supplier. "At the rate HP is growing," Butler says, "if we don't develop new minority suppliers, our spend will outstrip our program."
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Identify a minority- or woman-owned business for development in an area where you will always spend money.
This last question is aimed at building long-term stability and growth prospects for minority- and women-owned suppliers. Butler says it led to one supplier development initiative at an Oregon-based HP business unit that makes pens for inkjet printers. "They looked at the fact that all the pens are tested literally millions of times before they go into the marketplace. They're tested in every printer, on every conceivable type of paper, in every conceivable environment that a person might place a printer. At one point, they were thinking of moving the pen line to Singapore, but there were people in Oregon who were aligned closely with various Native American tribes." In the end, HP moved its entire pen test line out of Oregon and onto a Native American reservation in Montana and then added remote test monitoring capabilities.
In terms of diversity supplier development, Butler notes that each HP business unit has considerable leeway in deciding what it will do. "Some even do direct loans," she says, "if credit or financing is not otherwise available to the supplier." She emphasizes, however, that what HP does in terms of supplier development for diversity suppliers is no different than the development work it does with larger companies.
According to Butler, combining a strong business case with a gentle, albeit insistent, system of accountability is a good formula for ensuring that procurement initiatives don't inadvertently sideline or harm the company's diversity suppliers. "Another twist in our system is that any HP procurement organization that makes a decision to take business away from a diversity supplier is responsible for making up the difference somewhere else," Butler says. "They can't just say 'Oh well, someone else will have to make it up.'"
An example of how this plays out shows up in HP's pursuit of a corporate level supply relationship with New York-based real estate services firm Cushman & Wakefield. "We communicated to the service provider that we wanted to continue dealing with certain minority-owned companies who were providing real estate services, such as acquiring, disposing of, and maintaining properties, to various business units," Butler says. Cushman & Wakefield responded by working with HP to assemble a group of nine minority- and women-owned businesses and persuading them to launch an alliance called Concordis Real Estate. In addition to HP, the alliance, which launched in April 2003, already boasts Sears and Discovery Communications among its clients. The key to making alliances like this work, says Butler, is to have real business on the table. "I think having HP and Cushman & Wakefield together in a room created the level of comfort that would allow these competing firms to start sharing information."
Another example of how the replacement metric plays out shows up in HP's approach to globalization. Says Butler: "In several instances, we have taken our minority business partners offshore with us." She notes, for instance, the example of a native Eskimo firm doing injection molding for printers. "We've taken them into Mexico and Ireland."
Return on investment
By definition, any business case for supplier diversity has to include a return on investment. To do that, according to Reginald Williams, there has to be a marketing focus to every supplier diversity venture—processes for encouraging brand or product loyalty among minorities and women as customers.
"Ford Motor Company is very effective at this," Williams observes. "They do it in two ways: First, they have a minority dealer development program where they go into a community, identify business people that are good candidates for coaching and financial assistance and help them to become Ford dealers. Second, they invest in grassroots community initiatives that help to create customer synergy." An example of this, according to Williams, is Ford's headline sponsorship of the Power Networking Conference that was held in Cleveland in June. "The conference brought together thousands of African American business leaders to promote networking and self sufficiency. For Ford, it's an exercise in creating market share by being active in the minority business community at a grassroots level," Williams says.
Developing customer synergy, as Williams sees it, requires corporations to invest directly in the base of minority- and women-owned business communities. They can offer revolving loans to small businesses, offer educational scholarships, sponsor supplier development activities that are focused on creating business capacity, or create mentor-protégé programs. It's about linking the company and product name through visible investments in supplier diversity, Williams says.
DaimlerChrysler, which was honored in May by the National Minority Supplier Development Council for "significant long-term achievements in minority business development," has several such initiatives in place, according to Jethro Joseph, director of diversity supplier development. For example, on Sept. 25, Chrysler Group will convene its annual "Matchmaker" session, which pairs 200 minority suppliers with more than 1,500 Tier 1 suppliers, "to encourage networking and generate business." Since the program's inception in 2000, Chrysler says the program has generated commitment for more than $75 million in new business for participating companies. How it works: Minority suppliers are invited to exhibit at booths. Representatives from nonminority suppliers receive stacks of barcoded cards and are invited to visit the booths. If there's a supplier in which they're interested, they leave a card, which DaimlerChrysler then uses to generate an e-mail letter noting that a contact has been made. Minority suppliers are asked to follow up with sales calls and report on their resulting activities. "If the new relationship looks inactive," Joseph says, "we get involved to find out why."
DaimlerChrysler also has created a fairly involved program for mentoring minority suppliers that it identifies as having the greatest potential for long-term growth. The work started with a query to DaimlerChrysler's buyers about what is required for minority suppliers to secure purchase orders. "From that," says Joseph, "we were able to identify barriers [to growth] that are prevalent in minority businesses." These include things like financial structures, quality processes and systems, program management capabilities, selling techniques, etc.
The next step was to ask the company's 12 commodity directors to provide names of minority suppliers based on their perceived ability to grow along with DaimlerChrysler, Joseph says. That generated a list of about 50 suppliers to which were assigned executive sponsors inside of DaimlerChrysler. Working with its own people along with representatives from ASB Renaissance and the ASABA Group (minority business-consulting firms) and Comerica Bank, DaimlerChrysler set about assessing the suppliers' capabilities in different areas including financial systems, sales systems, program management, quality and manufacturing. "We did a deep dive to see how they stacked up against best in class," Joseph says.
Since the mentoring was started, he says participating companies have secured some $95 million worth of lending through Comerica Bank and seen an 18% increase in their total sales to DaimlerChrysler. "That increase is a function of two things: The companies were programmed for growth based on commitments we made 2-3 years ago. The mentoring was in place to make sure they could absorb the business."
Another approach to supplier diversity ROI is through product co-development and co-marketing. For example, Butler of Hewlett-Packard says, "When we moved into the business of selling HP branded papers, we asked ourselves if we could find a way to bring a minority-owned supplier into that supply chain." A result of that exploration is the recently introduced HP Business Copy Paper, engineered by Hewlett-Packard to optimize performance of its printers, inks and toners, but manufactured and marketed by South Coast Paper, a certified, minority-owned converting operation in Hammond, La.
HP is, likewise, active in promoting matchmaking type events. For example, the company recently teamed up with the U.S. Small Business Administration and the U.S. Chamber of Commerce to put on a series of Business Matchmaking events—five in 2003 and seven scheduled for 2004. David Albritton, director public relations for HP, notes that of the $46 billion the federal government spends each year with small businesses, historically, more than 80% of those contracts have gone to companies within 50 miles of the Washington, D.C. beltway. "Small businesses in other regions find it next to impossible to compete for those contracts because they don't know the right contacts inside the agencies," Albritton says.
It's these types of activities, according to Reginald Williams, that ultimately support the business case and generate investment in the customer through supplier diversity. "We must remove the stigma of compliance and social return from supplier diversity," Williams says. "Major corporations must make supplier diversity a business proposition, then go about developing a bond or cohesiveness that extends beyond the products the company is selling." What's more, he emphasizes, each company must be sure that these efforts extend beyond a single minority segment of the population. "If 80% of your minority and women's business spend is going to one group, well, that's not diversity!"
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