By Brittany Hooper
In part one of a series on improving corporate social responsibility, Brittany Hooper of LSQ looks at diversity, equity and inclusion in the supply chain and how working capital solutions like supply chain finance can help create more diverse, efficient and equitable supply chains.
No matter the name or acronym the initiatives take, companies across the world are investing heavily in being better global citizens. You don’t have to look too far down the organizational charts of large corporations to see titles relating to corporate social responsibility, primarily in the areas of diversity, equity and inclusion and environmental and social governance.
In addition, while it’s impossible to nail down investments in DE&I initiatives, anecdotally, it’s easy to see companies taking steps, at least nominally, to improve representation within their businesses, and for good reason. Customers, investors and government regulators expect companies to understand and manage the impacts their operations have on the environment, the communities they serve and society as a whole. Beyond that, there is an expectation that companies can create greater value for the benefit of the collective. That is, they put more back into society than they take out.
Many of the initiatives companies put in place to support corporate social responsibility focus on internal operations, like hiring practices supporting diversity or more environmentally-friendly manufacturing processes. But that inward focus can leave a blind spot for companies looking to further improve their DE&I and ESG outcomes: the supply chain.
Few companies operate within a vacuum; they require upstream and downstream partners to do business. From the manufacturers of inputs to distributors, there are other business enterprises relying on each other to be successful. When looking at DE&I practices, the questions become, “How diverse is the supply chain?” and “What can be done to increase the participation of businesses owned by members of minority communities in the supplier base?”
DE&I In the Supply Chain
Companies like Walmart, Intel, Verizon, AT&T, Microsoft and McDonalds have programs to promote diversity and inclusion among their suppliers. These companies often have large staffs and budgets devoted to supply chain diversity. On the other hand, according to recent data from the Association for Supply Chain Management, a large portion of small businesses are overlooking DE&I in the supply chain, which could be detrimental to success, meaning DE&I initiatives are no longer nice-to-have initiatives for public relations campaigns or buzzwords to make investors feel good; they are hallmarks of successful, responsible businesses.
For companies making major investments in supply chain diversity, there are benefits both at the reputational level and to the bottom line. In fact, healthy, resilient supply chains rely on supplier diversity. Some of the benefits of a diverse, equitable and inclusive supply chain include:
A CVM solutions report measuring the success of supplier diversity programs found minority business enterprise sales are growing twice as fast as the national average. In addition, a study by the Conference Board of Canada found companies that adopt supplier diversity programs experience higher ROI from their procurement, lower operating costs and less risk to their supply chains. Similarly, findings from a 2015 Hackett Group report found supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement costs.
Meeting Customer Expectations
Changing demographics mean more customers are concerned about true DE&I action at enterprises and these concerns drive their choices as consumers. When customers see companies in tune with their needs and also serving as a positive reflection of society, they are more likely to provide greater support to those companies.
Talent Attraction and Retention
When DE&I is woven into a company’s fabric and represented in its practices, employees feel the business supports their ideas and individual and cultural needs. Since 2008, the National Association of Colleges and Employers has asked new graduates to rank the importance of diversity. In the first year, diversity ranked 12th out of 15 options, but by 2020, it had risen to seventh out of 19 options, with more than 79% of respondents calling it “very important.”
Widening the Pool of Suppliers
When looking more broadly at potential suppliers, focusing on DE&I initiatives promotes competition in the supply base, and greater competition leads to an improvement in the quality of work.
Faster Rate of Innovation
Many minority-owned suppliers are small businesses, which means they can often be nimbler and enact changes more quickly than larger companies that may be dealing with onerous internal processes and bureaucracies.
Solving Supply Chain DE&I Challenges With Working Capital
While there are many social and financial advantages of a diverse supply chain, actually including businesses owned by people of color, women, armed services veterans, people with disabilities and members of the LBGTQ+ community in your seller pool comes with a myriad of challenges.
These suppliers tend to be smaller companies that are eager for new business, but they can sometimes lack the working capital to scale. When engaging larger enterprises, they can be deterred by payment terms typically stretching out to 90 to 120 days. Many, despite the cash-flow problems these terms may cause, agree anyway and charge ahead with contracts to get the business and don’t push back due to the fear of buyers questioning their company’s financial health. In the worst cases, companies have to forgo opportunities because the payment terms present too great of a working capital challenge.
This challenge is exponentially greater for minority-owned businesses. These companies are traditionally underbanked and face structural barriers that place them at a competitive disadvantage. The 2021 Small Business Credit Survey Report on Firms Owned by People of Color from the Federal Reserve found “firms owned by people of color tend to have weaker banking relationships, experience worse outcomes on credit applications and are more reliant on personal funds.”
The data from the report is stark and proves there is an uneven playing field for minority businesses. Below are some examples from the report:
- To address a financial hardship with their business, 74% of Black business owners utilized their personal funds compared with 65% of Hispanic business owners, 65% of Asian business owners and 61% of white business owners.
- Black-owned businesses got only 43% of the Paycheck Protection Program funding they applied for, while white-owned businesses received 79%.
- 13% of Black-owned businesses, 20% of Hispanic-owned businesses and 31% of Asian-owned businesses got the total financing amount they applied for when seeking more “traditional forms of financing,” while the rate for white owned firms (40%) was higher.
- Only 24% of Black-owned businesses with good credit scores got the total financing amount they applied for compared with 48% of white-owned businesses with good credit scores.
Data supports similar credit challenges for women-owned businesses compared with those owned by men. A 2020 study conducted by WEConnect International showed women-owned companies face a $1.5 trillion credit gap annually. This gap prevents these companies from scaling their businesses, leaving larger buyers out of reach and further stunting growth, causing them to lose ground with potential investors.
All of this amounts to financial constraints for minority-owned sellers within buyers’ supply chains. While the systemic challenges are immense — and the COVID-19-impacted downturns created another wrinkle to the issue — there are answers to drive DE&I forward by making access to working capital easier for all suppliers.
The first step is for suppliers to be proactive with buyers in discussing payment terms and the constraints long payment terms put on sellers’ cash flows. According to participants in a Diversity Alliance for Science panel, more often than not, buyers are oblivious to the challenges extended payment terms cause their smaller sellers.
For buyers, it is essential they sponsor programs to better suppliers’ working capital positions outside of traditional bank financing and educate sellers on how to use those programs.
One example of a working capital program for sellers is supply chain finance, which lets buyers utilize a third-party funding source to fund early payments from sellers. Supply chain finance also allows sellers, who are often underbanked and have trouble gaining access to traditional sources of credit, to get paid on demand so they can improve their cash-flow positions to maintain and expand their businesses without adding additional debt.
Instead of relying on the credit of the seller, supply chain finance programs rely on the credit rating of the buyer, leveraging its standing to increase access to all suppliers and reduce the cost of capital. For buyers, there is the benefit of terms standardization with supply chain finance that can also boost their working capital position.
For DE&I to go beyond saying the right things publicly to concrete initiatives, companies have to create and embrace actions that have positive, measurable results. Evaluating the diversity of your supply chain is a good starting point and taking steps to ensure a level funding playing field for all potential suppliers is a great way to turn those words into meaningful action for your company. •