Diversity is one of the most important issues of our time. As an organization, you may be aware that diversity improves profits and helps your employees feel better about their workplace. But what many companies don’t realize is that diverse suppliers are also more profitable than non-diverse suppliers. And because they’re more profitable, they can provide better goods and services to you at a lower cost! That’s why we recommend measuring your Tier 1 supplier diversity spend as well as Tier 2 supplier diversity spend. We’ve created this guide to explain the details of diversity spend tracking and its value.
Tier 1 supplier diversity spend is a measure of the value of goods and services that an organization procures from minority-owned, women-owned, disabled veteran-owned, lesbian, gay, bisexual, and transgender (LGBT)-owned suppliers.
This includes any tangible goods or intangible services provided by an organization’s prime suppliers as well as prime contractors who hire from diverse suppliers. It does not include subcontractor spending or purchases made through third parties.
Tier 2 supplier diversity spend refers to the value of goods and services that an organization procures through its Tier 1 suppliers with minority-owned, women-owned, disabled veteran-owned, lesbian, gay, bisexual, and transgender (LGBT)-owned suppliers.
Some organizations also choose to track Tier 3 diversity spend to better understand the diversity spend deeper within their supply chain. This kind of supplier spend tracking is becoming a more important part of corporate social responsibility practices as businesses realize how critical it is to support local economies and communities in which they operate by ensuring that some portion of their business goes to minority- and women-owned businesses.
Diverse organizations are more profitable and do more good for the world.
Studies have shown that companies with diverse leadership teams perform better on a variety of metrics, including profitability, customer satisfaction, employee retention rate, and return on investment (ROI).
- A study by McKinsey found that gender-diverse companies were 15% more likely to outperform industry peers on profitability.
- According to a report from Credit Suisse Research Institute LLC’s Gender Diversity Index (GDI), companies with a higher percentage of female executives in their leadership teams had an average market cap that was $2 million higher than their male-dominated counterparts.
How much Diversity Spend is too much?
As a general rule of thumb, Tier 1 suppliers should be selected based on the quality of their goods and services. They should also have an excellent track record in delivering high-quality products and services to customers.
A business can only choose its Tier 1 suppliers. The Tier 1 suppliers actually control the Tier 2 suppliers. Tier 2 suppliers manage the Tier 3 suppliers. Does it mean the business has no control over the Tier 2 and Tier 3 suppliers? It’s true, however, Tier 2 suppliers are responsible for delivering quality goods to Tier 1 suppliers and Tier 1 suppliers are responsible to provide the agreed quality of goods and services to the business.
As a matter of fact, companies can get more out of their Tier 1 supplier diversity relationships by having only a few suppliers that understand the value of this concept and are willing to work with them on it.
The most important thing you should know about supplier diversity spend is:
Owning your data will help you make better decisions about who to work with and what kind of relationship they have with one another.
We hope this post has helped you understand how Tier 1 and Tier 2 supplier diversity spend works, why it matters, and how it can help you build a more diverse workforce. We know that there’s work to be done in all areas of diversity—and we’re excited to see what happens next!
Just getting started with your diversity spend tracking? Gainfront SmartStart can help.