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Supplier Diversity Effectiveness

Author(s):

D. Steven Wade
D. Steven Wade is director of benchmarking programs for CAPS Research in Tempe, Arizona.

March 2011, Inside Supply Management® Vol. 22, No. 1, page 34

CAPS Research: Promoting Supply Management's Best Practices
A new CAPS Research benchmark study details the effectiveness of tier two supplier diversity programs.

Differentiating between tier one and tier two diversity spend appears to be increasingly more important in meeting an organization's overall diversity spend goals. Technology, bundling, cost savings pressures, outsourcing, offshoring and the like, when all taken together, make it more difficult to find qualified tier one suppliers that are also qualified minority-owned or women-owned businesses. Many organizations have established tier two supplier diversity programs with formal reporting requirements, while others are just beginning.

Defining Tier One and Tier Two

Tier one is defined as purchasing directly from a supplier qualified as an acceptable minority-owned or women-owned business. In turn, payment is made directly to the tier one supplier. Tier two suppliers invoice the tier one supplier for goods and services provided to the tier one supplier's customer.

Many organizations define tier two spend as being either direct spend (goods and services which are specific to an organization's direct spend requirements) or indirect spend (goods and services including supplies necessary for day-to-day operations, such as office supplies, MRO goods, services, furniture or capital expenditures). There are no standard guidelines about setting tier two diversity spend goals and objectives, but information on individual company goals and standards is readily available on company websites or by searching for "tier two diversity spend."

Tier Two Diversity Spend Targets

Setting tier two diversity spend goals often means that tier one suppliers need to overhaul their own diversity spend programs to meet their customers' requirements. CAPS Research wanted to know whether companies that have initiated tier two supplier diversity spend programs include language specific to diversity spend in their procurement agreements (contracts, service level agreements, and the like). And, if so, is language included stipulating penalties or other actions when a tier one supplier's performance does not meet agreed-upon levels? Here are the results from those and several other survey questions.

What percent of your organization's procurement agreements (contracts, service level agreements, etc.) include language specific to diversity spend? We expected most of the survey population to report that a majority of their procurement agreements would include language specific to diversity spend. The chart below shows few organizations take the middle ground when it comes to including diversity spend language in their procurement agreements. At one extreme, about 70 percent of the manufacturers and 52 percent of the nonmanufacturers reported that only one-fourth (or less) of their procurement agreements included diversity spend language. At the other extreme, 20 percent of the manufacturers and 32 percent of the nonmanufacturers reported that three-fourths (or more) of their procurement agreements included diversity spend language.

Percent of Procurement Agreements That Include Language on Diversity Spend

How are tier one suppliers penalized if they repeatedly fail to meet their diversity spend goals? Less than 50 percent reported that they penalize tier one suppliers for repeatedly failing to meet their diversity spend goals. We asked how penalties were awarded, and received answers including: "suppliers who do not meet requirements risk losing their contracts"; "liquidated damage clauses"; and "they pay a penalty which is equivalent to 2 percent of the contract value and are considered unfavorable for future contracts."

We also asked the survey participants if they accepted performance credits from tier one suppliers that do not meet their diversity spend goals with tier two suppliers. Not surprisingly, only 8 percent reported they do accept performance credits from tier one suppliers.

Does your organization track diversity spend at the tier two supplier level and, if "yes," how are goals and achievements reported? Although less than half (45 percent) reported they track tier two supplier diversity spend, those companies are more likely to have tier one suppliers report their goals and achievements quarterly.

Full Study Results

The full report, Measuring Supplier Diversity Program (Tier Two) Effectiveness, is available at www.capsresearch.org. You'll find additional information along with firsthand commentary about specific penalties assigned to tier one suppliers that repeatedly fail to meet their goals and tier two diversity spend goals and objectives. E-mail research@capsresearch.org to receive a list of participating companies.

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