Suppliers face a new definition
By By Brian Milligan -- Purchasing, 8/10/2000
Consolidation. Raising capital. And finding out a way to make B2B e-commerce work.
These are the challenges facing minority-owned suppliers in today's business environment. And even as they strive to come to grips with new rules that define their status, many suppliers are asking themselves a question. In a day and age of competing corporate priorities, is the plight of the minority-owned business still important?
In the past year, in many ways, these suppliers have made great strides. But still, few people are admitting that the battle is won.
"It's mixed," says Reginald Layton, minority business development manager for the Wisconsin-based Johnson Controls. "Some companies are doing a very good job working with the suppliers. They have well-developed minority business development programs.
"But others have not discovered or recognized or even paid attention to how the minority is becoming a major population in the United States, or the buying power of minority groups. Some companies get it, other companies are not looking at this. So shame on them."
The problems these suppliers face are not necessarily unique to their cross section. They face some of the same daunting problems that many suppliers now face. Among these is the challenging problem of trying to find and hire qualified employees and landing larger contracts.
A changing landscape
And they exist in an industrial landscape that continues to change. The ongoing consolidation of the supply base is still forcing small suppliers to grow to a position of strength, forming strategic partnerships that offer long-term value and become a part of a very focussed supply chain.
In many ways, minority-owned suppliers have strong factors working in their favor. The suppliers have, until now, been typically small and hungry for work. They offer good prices and, to make their mark known, strive for the best quality.
Minority-owned suppliers know this and are capitalizing on it.
"They don't want to do business with you just because you are a minority-owned supplier," observes Dwight Morgan, president of the Michigan-based POM Co. The company creates fabrication technology, direct metal deposition and laser processes. "You need to convince them that you have value-added services in cost, quality or unique technology that gives them a competitive edge."
So, too, are they capitalizing on their traditional ability to undercut other suppliers with cheaper prices. Glen Mayer, corporate supplier diversity coordinator for the Georgia-based United Parcel Service, still notices this. He sited the example of the Atlanta-based BNS Electric Co., a minority-owned electrical supply distributor that saved UPS $300,000 on a contract. Mayer says when UPS put the project out to bid, four companies bid for it. BNS Electric said it could do the job for $300,000 less than its competitors. And their supplies met UPS standards.
"That's three hundred thousand reasons in the forms of dollars for why they are doing business with us today," Mayer says.
Success stories like this lead to other success stories. Today, Mayer considers himself a big proponent for BNS Electric. When UPS needs the parts, he pushes for the company to get the contract.
Inroads are certainly being made. Mayer says diversity councilors like himself are helping effect change. He says UPS alone has 200 advocates working among suppliers.
"The main part of my job is to be out there training," Mayer says. "You get new people in, and you've got to constantly train them on supplier diversity activity."
Joint ventures
And the types of joint ventures that make minority-owned suppliers stronger are happening. Mayer says, for example, that if UPS is working with Boeing, it asks Boeing if it has a minority-owned supplier that can help out on a given project.
"I feel that it's growing out there, with more and more companies holding each other responsible to hold supplier diversity programs when they do business," Mayer says.
Today, companies like the Michigan-based Delphi Automotive Systems pride themselves on their efforts to foster better relationships with minority-owned suppliers. Delphi, for example, now has a National Minority Supplier Development Council (nmsdc) Plus program that asks departmental teams to pinpoint minority-owned suppliers that they wish to sponsor, and make a commitment to helping them grow. They search for new business opportunities for these suppliers, help them develop strategic business plans, and direct them toward new technology that will allow them to expand. The company also brings in financial partners who can assess their strengths and weaknesses.
This sort of partnering has helped Delphi form its own strategic partnerships with minority-owned suppliers. In May, for example, Delphi announced it will form an industrial partnership with the Michigan-based Regal Plastics Co. to seek expanded business opportunities in the automotive interiors market. Regal Plastics is a minority business enterprise.
"Our strategy is to identify key areas and key initiatives for the minority-owned company," says Deborah Pickens, manager of supplier diversity for the Michigan-based Delphi Automotive Systems. "In doing so, we focus our initiatives from the supplier development side, focus on small minority-owned suppliers, and work with them in detail.
"We are heading them so they will be ready for new business in future years," Pickens continues.
A concern
But still, Reggie Williams, CEO of the Georgia-based Procurement Resources Inc., says there is cause for concern. Too many of the small, minority-owned suppliers aren't growing at a fast enough rate. Hindered by the lack of venture capital and other problems, they either stagnate or disappear completely.
"Minorities are out of the loop with regard to those realities," says Williams. "There still is a long ways to go."
And it's this fact that led to a dramatic change in the minority-owned supplier landscape this year. As the trend toward consolidation continues, Williams says the national council had no choice but to act to ensure a place for minority suppliers in this evolutionary process.
"Now, having said all that, the nmsdc had to act. And act they did," Williams says.
In February, the council, which influences billions of corporate purchases, changed its widely followed definition of what constitutes a "minority-owned business enterprise." Now, the definition includes businesses with as little as 30% nonwhite ownership. Under this guideline, minorities must still control the business by holding at least 51% of the voting stock.
The decision is designed to help minority-owned suppliers seek equity infusions from willing investors. It allows them to make their companies more attractive to such investments by diluting their ownership to something less than 51%. If it works, the move will provide these suppliers with greater access to capital than they have ever had before.
The council made the decision out of recognition that minority businesses must expand rapidly to compete. This is especially important in an environment where major corporations continue to consolidate their supply base to a small number of large suppliers.
Many in the workforce readily supported the decision. One was Pickens, who believes the decision will fuel growth in a supplier sector that sorely needs it.
"My personal opinion is that the new initiative will benefit those suppliers seeking to grow at a significant level," Pickens says.
Needed capital
Pickens agrees with the council's argument. She believes the decision may in fact open up the door to much-needed capital for minority- and women-owned suppliers.
"Historically, minority-owned suppliers' major barrier is access to capital," Pickens says.
Layton agrees. He says a dramatic step like this had to be taken, given the constantly consolidating business environment.
"The growth initiative is a good thing," Layton says. "It will open the door to access of capital, equity capital, and allow the minority-owned suppliers to develop the capability to follow companies around the globe. They can handle larger contracts and be more competitive."
Tommy Hodinh, chairman of the Texas-based minority-owned business MagRabbit.com, says he has a simple reason for approving the decision.
"It's a good rule. If we don't' do that, we can't grow," Hodinh says. "At last somebody sees that."
But the council's decision had its share of detractors. The definition flew in the face of the notion that the minority community's business worth is measured by direct ownership. Some argue that the decision is too focussed on finances and it is condescending to minority-owned suppliers who struggled to make inroads in the industry.
Carlton Highsmith, for example, still has his doubts about the decision. Highsmith is the president of the Connecticut-based Specialized Packaging, a minority-owned supplier. He worries that while the move makes it possible for minority-owned suppliers to attract investors, it also opens up the possibility that those investors can obtain greater control of the companies. If this happens, is it possible that a minority-owned supplier can cease to become a minority-owned supplier?
"It might be difficult to attract the money and at the same time not let the investors seek some input," Highsmith says. "I would prefer to remain at 51% and find ways to raise capital for acquisitions or further investments so our business is run by us, as opposed to relinquishing control to some outsider."
Another detractor was Williams-at least initially. When the ownership decision was still being bantered about, Williams worried that the vast majority of minority companies would not fit the proposed, tighter definition.
"I was opposed initially to the idea of establishing separate standards by which we determine if a business is minority owned," Williams says. "I did not see enough attention put on those supporters who did not have the capacity or capabilities to serve as these strategic supplier partners."
Opposition
When he heard of the pending decision, Williams phoned Harriet Michel, the national council's president, and told her his opinion. He also informed many of his corporate clients and advised them to oppose the measure.
But today, Williams has reversed his opinion. He believes the council was right. In order for them to grow, minority-owned businesses must get the green light to expand. They cannot do this unless they have the necessary capital, he says.
"The circumstances are such that if we don't have minority players in the major leagues, we are not in the game," Williams says. "As long as we are the mom and pop variety companies and the smaller suppliers, we will never be at the table where the real deals are cut."
But still, today, Williams worries that there is a kind of "fallout" from the council's decision. And he believes the council has a lot of work to do before it can clean this up. He says the problem comes from confusion. Many don't understand the reason for the definition change. Many don't understand why or how it can help them.
"The public is quite confused," Williams says. "The everyday lay person doesn't understand the difference between a minority-owned company in this new category and one in the old category."
"The nmsdc has to address all those perceptions, because for some, perception is reality," Williams says.
And while he may at last agree with the council's decision, Williams is still a stern gadfly for the council in other areas. He believes, for example, that it must still offer more help to minority companies that are just starting out. Williams, in fact, contacted the council's directors and urged them to develop programs designed to help these firms in every way that it can.
"Where the nmsdc still fails is in development programs aimed at emerging minority-owned companies," Williams says. "They have to grow the major league strategic partnerships that they are now espousing, and to reach out and provide fundamental support for emerging minority-owned businesses that are just now coming to the fore."
Old problems
Williams says this is imperative because some of the old problems faced by minority-owned suppliers are still holding true. One, of course, is the continued consolidation of purchases. It is a supplier base reduction that has the ability to devastate the number of minority-owned suppliers. Many companies no longer have the staff numbers that are capable of easily managing purchases from a large number of suppliers. Instead of buying from 400 different companies, for example, they reduce the supplier base and purchase from perhaps three different suppliers. They search for huge supplier ventures that are capable of providing supplies on a global scale.
Some caught up in the reduction process are invariably minority-owned suppliers.
"This is the process of bund-ling and integrating purchases in a way in which you get a bigger bang for your buck," Williams says. "Instead of buying a chasis or suspension from three vendors, companies buy one module from a vendor who assembles all of them. Supplier-base reduction."
Highsmith agrees that the problem of consolidation is still very real. And he says the loss of hard-working minority-owned suppliers can be devastating for all industries.
"They [major corporations] have been consolidating their supplier base at an accelerated pace for the last 12 months," says Highsmith. "If they do this for too long, they will lose suppliers that have broader capabilities, more geographic coverage, and even global capabilities."
Highsmith says this sort of activity is putting the onus on the remaining suppliers today. They must hear the council's warning, form joint ventures, become bigger and more powerful, or lose out.
"In my view, unless we aggressively involve ourselves in acquisitions or strategic partnerships, we will become incapable of meeting the requirements of the larger corporations today," Highsmith says.
Mayer agrees that the problem of consolidation is still very real for minority-owned suppliers. Mayer, who is a member of the national council's Board of Directors, says the number of minority-owned suppliers is still dwindling.
And Mayer believes this problem is only being fueled by the Internet, where companies may be tempted to base purchasing decisions on price, not quality or the fact that a company is minority-owned.
"Most companies are finding out that they can deal through the Internet or Web," Mayer says. "There is the danger that with all the mergers, the minority-owned business part may be cut out from a company."
Internet changes
In many ways, though, the Internet can be a boon for minority-owned suppliers. Mayer believes minority-owned companies are learning that they can make the Internet work for them. This is a sharp difference from a year ago, when many experts worried that the typically small minority- or women-owned supplier was not taking enough advantage of the Internet.
That fact that the typically small minority-owned venture is becoming increasingly Internet savvy has been documented by Dun & Bradstreet. The company's 19th annual Small-Business survey indicates that the number of small companies conducting business on the Web is growing. Seventy percent of small-business owners responding to the survey, conducted in February and March, say they now have access to the Internet, up from 57% last year. More than a third have their own Web page or site, up from just over a quarter last year.
The study indicates that women-owned small businesses were more likely to have Internet access than their male-owned counterparts (67% vs. 63%). The survey indicates they are more likely to conduct business research on the Web, 62% vs. 52%.
The survey indicates that minority-owned businesses also use the Web to conduct business research more often than do other small businesses-64% vs. 54%. They also buy business goods and services more often (53% vs. 37%) and market their products more frequently (39% vs. 23%) than do nonminority-owned businesses.
But despite these Internet inroads, some believe the minority-owned suppliers must now pick up the pace.
"Compared to a year ago, it is a little better. But is it great? No," says Mayer.
New interest
The percentages are encouraging some Internet companies to zero in on minority-owned suppliers and help them use the Worldwide Web to more of an advantage. One is the Texas-based MagRabbit.com, a minority-owned company that helps other minority-owned companies get online.
"The idea is to assist them getting online and give them the opportunity to compete with larger national firms who have more capital, more funding and more opportunity," says Hodinh. Hodinh is a member of the Board of Directors for the Central Texas Minority Business Council, a branch of the national council.
"For the average company to become e-enabled is extraordinarily important," Hodinh says. "It is the new distribution method for companies. It is not just a competitive advantage, but a necessity for firms in the 21st century."
A similar company, the Connecticut-based Computer Consulting Associates International Inc., is also approaching the minority-owned supplier with online intents. The company helps hook minority-owned suppliers up with major corporations.
Kenton Clark, president of the company, says supplier diversity is increasingly a moving force on the World Wide Web.
"There is a huge Internet presence building when it comes to supplier diversity right now," Clark says. "This is replacing how diverse suppliers have worked, and the Internet is a great facilitator."
Clark says Computer Consulting Associates International has 7,000 members and more than 1,000 corporate contacts. These allow minority-owned suppliers to contact major corporations with the click of a mouse.
"With just that click, the diversity supplier which doesn't have a full-time sales or marketing person can contact 100 corporations in 20 minutes," Clark says. "They [the companies] can then look at their profile online."
Long coming
This day has been long coming. MagRabbit.com is a 10-year-old company. Throughout the last 10 years, Hodinh says he has watched as minority-owned suppliers awakened all too slowly to the World Wide Web. They were frustrated, he says, by the lack of capital necessary to get e-commerce systems up and running. Hodinh also believes the owners of these suppliers missed out on learning opportunities typically presented at trade shows and conferences.
"There was an opportunity gap for a lot of companies because there was not an overabundance of content. Not everyone has the content to build an e-enabled business, and the opportunity gap is larger for a minority-owned company," he says.
Hodinh says the future is looking brighter in this area. But the progress is still slow.
"I guess from my view it is changing," he says. "But how much, I don't know."
Mayer agrees that the minority-owned business Internet awakening is happening, albeit slowly. But it is an important development. He believes these suppliers will soon be working, to a large extent, out of an online arena.
"There's no doubt that every business has a computer and can actually have a Web page," Mayer says. "The way business is being conducted over the Internet, in the future, five years from now, most purchasing is going to be done over the Internet."
Layton also is noticing this turnaround when it comes to the Internet. The Internet, he says, has the potential to lower leadtimes, take the paperwork out of purchasing transactions, and streamline business processes.
"I think the minority-owned suppliers are just like regular suppliers," Layton says. "They are seeing the value of lowering transaction costs, running a business more efficiently, and lowering costs to reach potential customers in a way that they didn't have before."
Questions
But despite all the optimism, Layton also says nagging questions about the Internet are raising their head. For all the talk about how suppliers will benefit from taking part in online trade exchanges, he says suppliers have yet to see evidence of how it will help them.
"There are questions about where the Internet is going," Layton says. "Where will the benefit be in these B2B opportunities? How will e-commerce play itself out?
"It's a concern because they don't know how to figure it out yet," Layton continues. "No one does."
To back up his concerns, the Dun & Bradstreet survey indicates that while more small-business owners are becoming Web-enabled, many still are seeing few benefits from their efforts. While 31% of the small-business decisionmakers responding to the survey say the Internet has helped them, more than half say the Web has no measurable impact on their business. The number of small businesses saying they advertised on the Web in 1999 fell 10% from last year's survey.
Today, Williams says the issue of competing corporate priorities is further complicating this Web environment. He worries that too many companies-large and small-are obsessing over how to make the Internet work for them.
It is leading to a kind of Internet backlash, he says.
Major companies, he says, are so caught up in finding additional market share, reducing prices and launching e-commerce initiatives that working the minority-owned supplier has become a low priority item.
"Supplier diversity is subject to each of these initiatives," Williams says. "Because they [companies] are so wrapped up in these, they forget to inject supplier diversity as a tool in achieving these objectives."
Williams says there is some irony here. He says companies could easily increase their market share by establishing synergy with the fastest growing component of their marketplace-the minority population. This is a population that pledges allegiance to corporations that make strong ties to minority-owned suppliers. Its members buy their products and services.
"Minority-owned suppliers are not just suppliers," Williams says. "They are also customers."
And as for e-commerce, Williams says too many companies still don't realize the importance of having minority-owned companies involved in their e-business plans. In fact, he goes as far as to say that some companies seem to have a conscious effort to keep minority-owned suppliers out of the loop when it comes to formulating e-business strategies.
Williams says this is a mistake.
"We say that unless the corporations keep minority-owned businesses on the table as they develop e-business, it will disappear from the radar screen and will end up with an e-business strategy that has been excluded," Williams says.
Williams gave the example of Covisint, a major online trade exchange being developed by Ford Motor Co., DaimlerChrysler and General Motors Corp. The exchange plans to put all of its suppliers online, opening up vast opportunities for trade in the automotive OEM industry.
But as the trade exchange was being formed, Williams says the minority business directors at the three companies were kept out of the loop.
"When this was first announced, I called the minority business directors of Ford, GM and DaimlerChrysler, and none of them were aware this initiative was under way," Williams says. "As a result of my notifying them, they petitioned senior management so they could be involved in the planning process.
"Now, in some cases, they will be," he continues. "But until then, it wasn't on the radar screen."
Williams says he does not think the minority business directors were deliberately left out of this process. He says, instead, they were overlooked as the three automakers balanced competing business priorities. In the rush for an e-commerce strategy, they forgot, or did not have time, to consider the minority-owned supplier angle.
"Imagine how ludicrous it would be if I told you we don't have time for the best quality," Williams says. "If I said, 'We don't have time to make sure the product has competitive costs. 'That is absurd. No one would say that."
All of this sums up Williams' central argument-that minority-owned suppliers must position their companies so that they separate themselves from the crowd. This means moving beyond traditional minority-owned supplier services and moving into new realms for an expanded market.
They must ask themselves a question today, he says.
"What unique value-added opportunities can I offer to my clients?" Williams says. "We've got to move beyond."
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