The Importance of Diversifying Your Supplier Base

Want to provide more value to customers? Retailers should consider, if they haven’t already, diversifying their supplier network, especially since today’s consumers increasingly purchase goods and services from ethically sourced local, small and minority-owned businesses.

Working with a select group of familiar, reliable suppliers might be working well (why upset the apple cart?). However, expanding your supplier base to include small, local companies, innovative startups, and minority-owned businesses that all embrace sustainable practices brings fresh perspectives and can provide significant business benefits. After all, if Walmart, Google, and Johnson & Johnson have set supplier diversity goals for their procurement efforts, why shouldn’t every retailer?

Corporate social responsibility (CSR) is a big deal these days, and it’s important to ensure your business stays accountable to its goals. By diversifying your supplier base, procurement departments can help improve your brand’s increasingly important environmental, social and governance (ESG) proposition, too. However, if you’re working with tight budgets and a slim procurement team, it can be a challenge expanding both.

Here are some ideas to get started …

Create Awareness

Sometimes retailers forget to communicate the importance of ESG programs to their employees, customers, supplier network and other stakeholders. In today’s business climate, attention to ESG issues is important to long-term competitive success. As such, organizations like The Coca-Cola Company and many other smaller businesses pledge to report annually on their ESG efforts. Bringing awareness to your supplier diversity and ESG initiatives prompts employee buy-in, lets suppliers know why you’re expanding your network, presents opportunities to attract more investors, and benefits your customers, too.

Building out your supplier diversity and ESG programs includes transparency and reinforcement through regular communication. Remember, conscious consumerism is on the rise. People care about what goes into the goods they buy, and whether those products were ethically and/or sustainably sourced. In fact, by 2021, U.S. consumers alone are expected to spend $150 billion on sustainable products.

Set Strategic Procurement Objectives

Consider, too, incorporating ESG parameters into your supplier relationship model and support it through periodic reviews of supplier key performance indicators (KPIs). Be explicit with suppliers, including new ones going through onboarding. By collecting this information during supplier onboarding, you’ll find out about their ESG efforts and communicate the expectations and goals you’re trying to attain.

Are you trying, for example, to reduce your carbon footprint, lower energy consumption, or incorporate more sustainable, ethically manufactured or local products into your mix? What do your diversity goals entail? Are you trying to ensure that a certain percentage of your overall suppliers meet certain ESG standards? Is it important to have suppliers with ethical, organic or fair-trade products be part of your network, or have more women- and minority-owned vendors?

KPIs measure and assess your suppliers based on their value, cost and commitment to diversity and inclusion; their “green” environmental initiatives; and CSR, among other things. Many companies with supplier diversity programs work toward meeting certain quotas — that is, they put a stake in the ground saying X percentage of suppliers should meet X criteria. If you haven’t defined ESG-oriented goals, consider partnering with local non-governmental organizations for suggestions.

A supplier relationship module can help you keep track of suppliers meeting your requirements and KPIs and flag when things change, so you know what terms are being met and which ones are falling short and need improvement.

Invest in Technology

Investing in a reliable supplier management solution enables you to track supplier details in one place, giving you the ability to better control data and gain transparency over your supplier base. Some tools prompt suppliers to self-serve and regularly update their information so data is clean and current. This, in turn, takes the pressure off your organization to be responsible for keeping up with supplier changes.

To help ensure your ESG initiatives are being met, these supplier management tools provide real-time ways to track and measure supplier performance via KPI dashboards. They can also send out automated vendor questionnaires that can be customized to your needs. The solution easily collates the answers and provides a supplier performance review. Such technology enables you to understand your suppliers better as well as quickly see whether you’re meeting your CSR/ESG goals.

Why Supplier Diversification and ESG Matter

The rise of the conscious consumer — including empowered minority groups and a younger generation of consumers — want to know they’re buying from retailers that have a solid ESG program. They want transparency around ethics, the environment, sourcing and so on.

According to McKinsey, getting your ESG program right links to higher value, including:

• Facilitating top-line growth: A strong ESG proposal helps retailers find new, diverse markets and expand into existing ones.
• Reducing cost: A formidable ESG effort can help ward off rising operating expenses. FedEx, for instance, is converting its 35,000-vehicle fleet to electric or hybrid engines. As of 2018, it had reduced fuel consumption by more than 50 million gallons.
• Minimizing regulatory and legal interventions.
• Increasing employee productivity: Studies show positive social impact correlates to higher job satisfaction and can help attract and retain employees.
• Optimizing investment and capital expenditures.

In sum, increasing supplier diversity and incorporating a solid ESG program into your business is more than a public relations ploy. Both are critical to retailers’ success, regardless of whether you’re a retail giant or a regional operation.

The right technology, such as supplier management tools, provide you with the real-time data needed to ensure you’re meeting you’re CSR/ESG goals, while simultaneously educating you about your suppliers. At the end of the day, the conscious consumer — a segment that continues to grow — wants to do business with companies that are doing right by the communities in which they operate.

Jurgita Andrijauskaite is director, customer success, EMEA at Medius, a leading supplier of e-procurement solutions for enterprise and midsize businesses.