4 Trends in Supplier Diversity Reporting & Risk Management

 

Author: CEO and Founder Rod Robinson

Rod

You’d be hard pressed to find a major corporation today that doesn’t have some form of supplier diversity initiative. And a key component of supplier diversity programs is the periodic reporting of progress against established goals and objectives. As more organizations move from compliance-driven to market-driven programs, they’re raising the bar in program investment, management, marketing and reporting of performance metrics.

These corporate trendsetters provide their investors, board members, government agencies and other stakeholders real value: a baseline from which to evaluate and benchmark supplier diversity program performance and impact.

In my nearly 20 years in supply chain & procurement as both a management consultant and former CPO, I have had the unique opportunity to witness an evolution in supplier diversity reporting among the best companies. This evolution has resulted in a shift from unsophisticated, manual processes that limited scale and data accuracy to more scalable, technology enabled processes that greatly improve data accuracy and reliability. Based on what I am seeing in the market, I strongly believe this trend will continue.

Here are four key trends driving increased sophistication in supplier diversity reporting:

1. Comprehensive quantitative disclosure requirements will become the norm for domestic publically traded companies.

In April 2014, New York City Comptroller Scott Stringer, on behalf of the New York City Pension Funds, wrote the Funds’ largest holdings, including Apple, Pfizer, Oracle and American Express, asking them to disclose performance figures on their supplier diversity programs. The announcement further stated that 90% of S&P 100 companies have supplier diversity programs, but less than half of that group discloses data on program performance (NYC Comptroller Calls For Greater Supplier Diversity at 20 of NYC Pension Funds’ Largest Holdings).

The letter requested that companies disclose – annually — qualitative and quantitative performance data that sheds light on program effectiveness. Specifically:

  • To disclose their annual spend with diverse suppliers in both real terms and as a percentage of their total supplier spend, preferably by category;
  • To establish and disclose quantitative performance goals for their supplier diversity program and annual progress toward achieving these goals; and
  • To describe ways in which supplier diversity goals are reinforced throughout the organization, including for example, through (a) oversight by senior management and the board of directors and (b) specific compensation incentives for employees, managers and senior executives

My initial reaction to this news was, Wow! That’s strong. But considering the significant diverse representation of pension fund participants, these requests are quite reasonable. Connecticut followed a similar path, but went a step further by recently filing a shareholder resolution demanding that Monster Beverage appoint a female or minority board member.

This isn’t an anomaly. The diversity disclosure demands of large public investors, investment advisors and custodians will continue to increase. Meanwhile, corporate supplier diversity program metrics will be evaluated and benchmarked just like any other key performance indicator. As it should be.

2. Increased focus on supplier diversity spend data integrity.

Increased disclosure requirements come with increased data scrutiny. The Dodd-Frank Act requires six federal regulators, including the Securities and Exchange Commission, to assess the diversity practices of regulated entities, including publically traded companies. As such, the accuracy and reliability of supplier diversity status and spend data will be critical.

3. Diverse supplier relationship management as a model for broader supplier relationship & risk management.

Many best practices supplier diversity companies require diverse suppliers to register on a dedicated portal that is the entry point into a database. This portal captures relevant supplier qualification data including valid diversity certification documents. While this provides companies with great visibility into their diverse supplier base, non-diverse suppliers are typically not required to register on a portal that provides such transparency.

There is no better example of why this level of transparency will be required for all suppliers in the future than the financial services industry. According to an MQ article, the increase in regulatory scrutiny stemming from the global financial crisis has now reached beyond banks, to the companies that supply them. The Consumer Financial Protection Bureau (CFPB) and other regulators are holding financial institutions responsible for the actions of their suppliers. In 2012, several big name banks paid a total of more than $500 million to settle complaints resulting from the actions of third-party suppliers (“Managing when vendor and supplier risk becomes your own,” July 2013).

4. Heightened focus on Tier2 spend tracking & reporting.

Many best practices companies leverage technology applications to collect, track and analyze the relevant diversity spend of several of their prime suppliers. This benefits the company in a couple of key ways. First, the company gets credit for the direct diversity spend associated with its contract with the prime and an allocation of indirect spend. Second, the company gains visibility to new diverse suppliers that may become primes in the future.

In light of expected increased regulatory scrutiny and more focus around supplier risk management, some companies are starting to use their Tier 2 program as a basis for increasing broader supply chain transparency beyond supplier diversity. Some are even looking to track down to the Tier 3 level and beyond.

Why not? The more information that a company can have about its key suppliers (and their suppliers) the better. Technology removes the limitations that may have existed in years past.

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