How well are supplier diversity programs doing?
Tough economic times coupled with supply base paring create difficulties.
By James Morgan -- Purchasing, 8/15/2002 2:00:00 AM
Success or failure of minority/women-owned supplier development programs often depends on what the creators of such programs had in mind when creating them. As a result it's often difficult for companies to put a number on the success or failure of their supplier diversity programs.
Simply put, the problem is that the objectives of many supplier diversity programs have shifted over time. In the beginning the objective of most programs was simply to open the marketplace to minority/women-owned enterprises (MWBEs). The idea was hardly new, but it didn't officially become part of the American business scene until 1968 when the Small Business Administration established a program to channel some government purchases to socially and/or economically disadvantaged owners of small business. This was followed the next year by a presidential executive order establishing the office of Minority Business enterprise within the Commerce Department.
In the beginning, such programs were considered mainly as public programs aimed at achieving wealth distribution by opening up governmental contract bidding to women and minorities.
Ironically, as it turned out, interest in getting small minority and women-owned enterprises into the bidding for federal and state business struck a chord with big businesses who were not particularly interested in government contracts. Some, such as the Equitable Companies, General Motors, and the old Western Electric division of AT&T began extending contracts to minorities and women on their own. Indeed, many (maybe most) were less driven by the governmental promises of contracts than advocacy.
Over the years, while opinions about such privately organized programs have varied sharply from corporate do-goodism, to government meddling in the marketplace, to the right thing to do, to a best business practice, corporate MWBE programs have continued to grow. In fact, many business leaders now see doing business with MWBE's as a good way to stay competitive and share in business growth trends. Many, for instance, cite recent studies that predict minorities will constitute 40% of the U.S. population by around 2012.
In addition to the important marketing connection, many sourcing executives also put minority- and women-owned businesses into the outsourcing picture. Many with significant specialized knowledge can produce goods and services at costs below traditional insourcing costs. A growing number of MWBEs are also selling their know-how as providers of specialized talent, ideas, and entrepreneuralism.
Mixed measures
With a background filled with so many mixed objectives, is it any wonder that business executives have a hard time answering such straight-forward questions as "how's business?" Attempts to determine success or failure of supplier diversity programs often yield mixed metrics. Even simple attempts to measure how numerous MWBE programs are versus, say, five years ago, often yield debatable findings. Data that show MWBEs are more numerous may indicate one thing to those primarily interested in the public relations value of supplier diversity—and something totally different to companies looking to supplier diversity as a source of competitive advantage. Pure numbers of programs in place often mean very little, especially to companies interested in benchmarking, where a mixture of measurements often is needed in judging success or failure. In another vein, measurements of dollars spent with MWBEs, may only be recording what is already known—i.e. many MWBE contracts are often for purchases of relatively unsophisticated goods and services.
Companies that have been involved in developing supplier diversity over a long time often need and use a number of specially developed metrics in judging the efforts of their MWBE suppliers. Companies such as IBM, American Airlines, GM, and Ford all use a number of metrics in measuring how well MWBEs are handling their supply requirements over time.
This all leads to the fact that while the number of MWBE programs has grown over the past several years, the numbers, themselves, are not necessarily cause for celebration. Many companies in the past year or so have been forced to either cut back or postpone implementing already approved supplier diversity programs.
Too much glow!
In fact, for many small MWBEs the past year or so has not looked very good at all. Failure to understand the just mentioned dichotomy of goals and measurements in the field has played its part in many of their disappointments. But also nagging at many MWBE supplier program heads has been the continuation of an "affirmative action backlash" that surfaced in the late 1990s and persists to a degree even today.
In hindsight, much of the backlash talk was set off by descriptions of supplier diversity that often painted the rewards of supplier diversity in overly glowing tones. Minorities and women were pictured as receiving untoward help from governmental agencies and large corporate benefactors. Ironically much of this negative talk backfired in a way—as heads of many corporate MWBE programs began taking a more active role in making supplier diversity work. In more recent times much of the backlash talk has tended to fade as some of the harsher truths about what happens to buyer-supplier relationships in times of weak business conditions began to surface.
In truth, especially where large companies are concerned, many firms (ones dedicated to making minority supplier development work) are still struggling to reach purchasing goals that were set a decade or more ago. PURCHASING and supply professionals in many large companies confirm that they are reducing the numbers of suppliers they're dealing with and that small MWBEs are finding themselves operating in a much harsher business climate.
Success takes more work
If talk about MWBEs was too optimistic in the late 1990s, it also is unfair to overplay pessimism now. Most MWBE programs are operating successfully, albeit with little slack for marginal operations. Like their large company champions, most MWBEs are working hard for the business they get and their large company benefactors are working with them to improve their performance.
The program set up at Bayer Corp. in 1995 is fairly typical of what has been happening in corporate supplier diversity programs in recent years. As a result of tightening budgets, many MWBEs and their sponsoring companies now face increasing challenges. According to Robert Rudski, chief purchasing officer at Bayer, for instance, early successes that were made in the boom years are often coming back to haunt them these days. Capital equipment budgets have been shaved, healthy product volumes of the late 1990s are down some, and few program directors are making glowing predictions.
But the good news is that there has not been an across-the-board reduction of MWBE programs—either at Bayer or most other major companies contacted by PURCHASING. R. David Nelson, vice president global purchasing at Delphi Automotive Systems, for instance, makes a point of supporting minority purchases. The only caveat is that "they must be competitive in every way to earn the business."
Still, at many companies, commitments made in years of strong fiscal health are being trimmed back. More worrisome, suggests Bayer's Rudski, is that corporate goals in many companies are no longer being clearly established, budgets have been or are in the process of being cut, and promised IT support systems have not been upgraded.
Success at many of the affected MWBEs, he notes, has come as a result of the MWBEs being viewed in terms of business development programs rather than part of social advancement causes. By playing the causes of MWBEs in terms of economic improvement, many companies have raised the awareness of Corporate America and provided opportunities for many small and minority/women-owned businesses. In a number of companies, MWBEs are being given training in the principles of integrated cost reduction.
A major reason for disappointment with many MWBE results is lack of reality, points out Lance Dixon, executive director of JIT education at Bose Corp. in Framingham, Mass. As he sees it, those suppliers who have remained reasonably competitive have kept most of their business. "What small MWBEs can't expect," he says, "are orders not supported by sales volume."
Credit for much of this MWBE advancement in the face of business downturn, says Bayer's Rudski, has to be given to such organizations as the National Minority Supplier Development Council and the Small Business Administration in providing centralized certification, data base management, and business skills development.
And as small business enterprises wrestle with the tougher business climate some are considering such steps as consolidation and merger, joint ventures, specialization in the development of new products and services that are unique to them, and carefully crafted programs targeted to winning over more second-tier business.
Where the problems lie
Despite the considerable success of MWBEs in recent years many continue to find themselves at a severe disadvantage in competing for business in the current marketplace—especially in the private sector. Thus, while there has been much talk about backlash against awarding of government contracts to MWBEs, the real disappointments are coming in the private market and most of them have little or nothing to do with backlash. According to many purchasing executives and consultants, the current relatively poor showing of some MWBEs in the private sector seems to hinge on a number of factors.
Without a doubt the most significant of these factors is supplier base downsizing. With many large firms reducing the number of suppliers they deal with, it has become more difficult for small MWBEs to set up and maintain close business relationships with their larger customers. Fortunately, however, many of their key customers are deeply aware of the problems posed by supply base paring and are willing to help.
For example, John R. MacLean, vice-president-purchasing at AMR Corp. (parent of American Airlines) notes that his company has honored its commitment to increase MWBE purchasing every year for the past decade. In addition, despite supply base cuts, he intends to increase the amount of business AMR does with MWBEs. To meet the challenge he plans to take action in these areas:
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Do more work in second-tier sourcing and making this a priority with second-tier suppliers.
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As AMR moves more procurement offshore it will also expand the sourcing it does with MWBEs.
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Form an advocacy group of airlines who are willing to share their supply base with each other in order to provide greater volumes and opportunities.
Here's a look at some of the other problems facing MWBEs in the next year or two:
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Preferred suppliers. One result of severe supply base downsizing has been that many customers are relying more heavily on preferred suppliers, often at the expense of newer MWBEs.
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Order sizes. As companies buy more from fewer suppliers, average contract sizes are increasing, making it difficult for small MWBEs to compete.
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JIT delivery. In many companies, increased use of JIT delivery brings with it increased dependence on preferred suppliers. In many cases, such shifting of business has resulted in drastically reduced business for the MWBE and/or strains on capital reserves.
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Electronic ordering. Greater use of EDI processing has in recent years posed some obstacles to small MWBEs trying to compete for more business. This problem, however, is being dealt with rapidly as new, relatively cheap, software is being made available to small suppliers. In a growing number of companies, equipment and/or software are being made available to MWBEs at less than cost.
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Quality. Higher quality standards are posing many serious problems for relatively small MWBEs. Ken Stork, president of Ken Stork and Associates, Batavia, Ill., notes, for instance, that he has watched a number of contracts falter while small MWBEs struggled with new higher standards of quality.
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