Contending with policy and government funding uncertainty, the plateauing of overall charitable giving, and muted investment return expectations, nonprofit organizations are seeking strategies that bring together cost efficiencies and mission advancement, rather than cost reduction at the expense of critical programs. Supplier diversity strategies offer a powerful opportunity to do just that.
What Is Supplier Diversity?
First introduced in 1953, supplier diversity programs were created “to give minority, women, and what has since been classified as underutilized small business owners, an opportunity to secure contracts with government agencies, major companies, and corporations.”* Today, supplier diversity initiatives benefit a spectrum of socially and systemically disadvantaged small business owners, who are often disenfranchised due to ethnicity, race, gender identity, orientation, and class.
The nonprofit sector is widely recognized for the important social role it plays in bettering communities, but it also plays a vital economic role. Nonprofit organizations employ 12.3 million people and spend nearly $2 trillion annually; close to $1 trillion of which is for the procuring of goods and services, ranging from large equipment to office supplies, food, and rent†. This massive purchasing power, if leveraged effectively through supplier diversity strategies, could dramatically shift supply chain dynamics to advance social equity, environmental sustainability, and the financial success of nonprofit organizations themselves.
Harnessing Purchasing Power
Typically, when any company—for-profit or nonprofit—hires employees or procures goods and services, they often reach outside the local community to find these resources. Supplier diversity strategies seek to reverse this outflow. Not only does this benefit the workers and businesses within the community, but it advantages the company as well—by improving the quality of an organization’s efficiency, increasing market share, and providing new revenue sources. In fact, organizations that dedicate 20% or more of their spending to diverse suppliers are seeing as much as 15% of their annual sales derived from these programs.‡ And companies that purchased from diverse suppliers generated 133% greater returns on procured goods and services than with an average supplier.§ That’s because 99% of diverse suppliers have met or exceeded expectations, so return on investment (ROI) from these programs is high.‡
One reason supplier diversity increases market share and revenue steams is the shifting generational demographics of the consumer base. Millennials and Gen Zs are not only today’s largest generations, but also the most diverse. Both are more likely to purchase from companies that advocate social responsibility, support women- and minority-owned businesses, and visibly align with their values.
Driving Equity = Creating Change
Looking to others’ successes can help organizations determine next steps for integrating supplier diversity into their strategic operations. Zack Schrantz, President and CEO of UCAN, a social services organization in Chicago, notes that when building the company’s campus in North Lawndale, the company spent 60.26% of the $42 million project budget with minority- and female-owned suppliers. Schrantz states that it was important that “we live out our brand of unrivaled diversity.” In addition to maintaining a disciplined budget, this focus resulted in significant visibility and awards for the organization. Schrantz attributes success to the following key elements:
Commitment from leadership: UCAN built a Supplier Diversity Advisory Council of corporate and community leaders for guidance and advice.
Prioritizing supplier diversity as a business imperative: UCAN planned for the program, provided adequate resources for execution, and measured and tracked the results.
Linda Zager, Executive Director of the Back Office Cooperative, a group purchasing organization dedicated to reducing procurement and supplier management costs, similarly recognizes the myriad of benefits of inclusive procurement. Like Schrantz, she notes the importance of sustained commitment from leadership to incorporating supplier diversity into its procurement process. She also believes any size company can do it. “Even if you’re small, you can bring lunch to your employees from a woman-owned or minority-owned business… Be aware of who your suppliers are, and be aware and learn about, in your smaller or larger organization, where opportunity lies.”
It All Adds Up
In a world where resources are increasingly scarce and societal and environmental challenges are substantial, every dollar counts. Executing inclusive procurement practices enables nonprofits to use their economic influence to maintain and possibly improve upon quality and cost metrics while supporting the communities they serve.
For more on timely topics for nonprofits, explore “Inspired Investing,” a Bernstein podcast series that covers investing, spending, policy, and more for Endowments & Foundations, and for additional thought leadership, check out the related blogs here.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
*“Focus of the Facts Series: Supplier Diversity Programs,” Office of Veterans Business Development, US Small Business Administration.