Why do firms with diverse suppliers boast greater savings?

Adding more minority and women-owned business enterprises (MWBEs) into a supplier network can increase year-on-year cost savings to 8.5%, a report has claimed.

Research by McKinsey said benchmarking data showed most organisations could claim procurement savings of 3-7%. But a survey of 163 procurement leaders at US corporations found those with corporate partnerships with MWBEs increased savings to 8.5%.

Ken Yearwood, research co-author and associate partner at McKinsey, told Supply Management they had asked procurement leaders about the savings they see from working with MWBEs. “Many leaders in the survey also reported even higher savings,” he added.

Yearwood continued: “MWBEs provide corporations multiple advantages including speed, agility, localization, and innovation of products and services. 

“Partnering with MWBEs also showcases a corporation’s commitment to diversity, equity, and inclusion, fosters goodwill, and can strengthens a company’s impact and presence across diverse populations and communities.”

Forming supplier partnerships with MWBEs across the entire business ecosystem, particularly in the professional services sector, will magnify benefits to corporations, MWBEs, and communities.

Innovation, talent acquisition, and investment can also be aided by expanding supplier diversity, the research found.

The report said separate research showed 64% of millennials in the US won’t work for companies performing poorly on social responsibility and 33% of assets under management from 2016-18 were invested with ESG considerations in mind. 

McKinsey recommended eight “important levers to consider” to advance supplier diversity:

1. Examine deprioritised categories

Everything should be in scope when it comes to inclusion. Identifying current partnerships with MWBEs in the value chain will help understand where your organisation is lacking and how they can be integrated into traditionally overlooked categories.

2. Track the business ecosystem

Individually diverse suppliers are not enough. Understand and, critically, publicise MWBE partnerships throughout your supplier network. This includes both indirect and small suppliers.

3. Rethink governance and resourcing

Your organisation’s operating model should be set up to encourage MWBE partnerships. This will require accountable leadership, clearly-understood targets and priorities, and reporting that encourages diversity across all partnerships.

4. Extend diversity programmes

Taking stock of current programme efforts and impacts will help organisations understand how they can expand these initiatives.

McKinsey suggested increasing expenditures for products and services from MWBE tier-two suppliers.

5. Partner into growth areas

Recent disruption means new economies are developing and changing faster than ever before, creating new opportunities – companies should aim to partner with MWBEs in these growth areas, where new players will be needed.

6. Discuss with wider stakeholders

While procurement is often the locus of supplier diversity programmes, spending decisions are made for the entire organisation. Procurement should invite diversity, equity and inclusion teams to the table, alongside other function leaders, to be the faces of the programme across the company.

7. Form long-term partnerships

Not all MWBE relationships will be quick wins – in order to see effective ROI, procurement should commit to building relationships through mutual learning, smaller-scale pilots, and, eventually, broader partnerships.

8. Review internal barriers

MWBEs come ready to compete, but unintentional roadblocks within your organisation may prevent them from doing so. 

“Smaller MWBEs can satisfy rigorous information security requirements, for example,” McKinsey explained. “But may need more time to do so during the request-for-proposal process.”

The research suggested implementing comprehensive onboarding processes to help vendors early on.

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