The Multiplier Effect: How Supplier Diversity Pays

Governments and large corporations have focused for decades on optimizing their supply chains, not only for profitability but stability and sustainability. With a steady decline in the number of U.S. manufacturing firms and plants over the last 25 years, strategic supply chains have become increasingly dependent on imports, and more susceptible to global shocks and disruptions as a result.

While the pandemic turned supply chains into a household name, it’s not the only supply shock companies continue to face. Shifting consumer trends, material shortages, political pressures and climate change have created a sense of urgency for business leaders to increase the health, resilience, and diversity of company’s supply chains.

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Among these, minority- and women-owned business enterprises (MWBEs) represent enormous untapped opportunities, especially when today’s consumers, investors, and other stakeholders increasingly prioritize companies with a meaningful diversity, equity, and inclusion (DEI) strategy. A diverse business ecosystem has multiple benefits for corporations.

As my McKinsey colleagues Shelley Stewart III, Ken Yearwood and team show in their research, MWBEs offer their corporate partners year-over-year cost savings of 8.5%, considerably more than the 3 to 7% annual procurement savings that most organizations realize, by helping companies access more geographies, demographics, and contracts. MWBE’s can implement cost saving strategies and take advantage of many federal and state tax incentives, and potential rebates. These savings are nothing to scoff at, especially when corporations spend an average of 58 cents of every dollar in revenue on supplier payments.

Furthermore, MWBEs are more likely to hire minority talent at every level of a company. By doubling spend with certified MWBEs to $2 trillion, corporations could drive an additional 4 million jobs for minorities, with approximately 200,000 of those new jobs at the executive and management levels. MWBEs also offer their employees living wages — paying an average of $73,000 a year across roles. When all is said and done, increasing spend with these suppliers could generate up to $280 billion in additional income for minority populations. Simply put: supplier diversity is a fundamental practice to creating an inclusive economy where everyone—and every business—can gain.

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However, a gap remains in some of the fastest-growing sectors: finance, real estate, and engineering remain low priority for even the most mature supplier diversity programs. Many are deemed out of scope: only 9%, 7% and 4% of companies ranked real estate, engineering, and financial services among top supplier diversity spend areas, respectively.

To unlock more value from supplier diversity programs, companies can double down on sectors seeing exceptional growth in the U.S. economy. Using a range of best practices, there is more opportunity than ever to advance traditional supplier diversity efforts. If you’re a business owner and don’t know where to start, take a step back. Examine categories that have traditionally been out of scope or deprioritized for inclusion in your supplier diversity efforts. Also, look at your current partnerships in the broader value chain to identify where you could engage MWBEs. Supplier diversity is akin to business development: Just like your existing relationships took time to develop and grow, not all MWBE partnerships will be quick wins. Commit to building relationships through mutual learning, smaller-scale pilots, and, eventually, broader partnerships.

Also stay focused on the bigger picture: In the business ecosystems of most companies, not all players are direct suppliers. Inviting more MWBEs to compete for your business may increase innovation, competition, and resilience throughout the entire value chain and unlock additional benefits for all. It also showcases your company’s commitment to DEI, fosters goodwill — for instance, employee engagement, satisfaction, and a positive brand reputation — and satisfies regulatory scrutiny, while strengthening your impact and presence among diverse communities.

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No doubt, traditional supplier diversity programs generate considerable corporate and socioeconomic benefits. But the U.S. wealth gap will widen if MWBEs cannot compete in areas that have often been deemed out of scope or deprioritized for them. Best-in-class organizations should consider expanding their focus to MWBEs in sectors related to professional services and forming supplier partnerships with MWBEs across the entire business ecosystem to magnify the benefits to corporations, to MWBEs, and to communities alike.