Supplier Diversity

Second-tier Supplier Diversity Reporting as a Drivetrain for First-tier Success

- By Paul Lachhu & Donna BenjamiTier

suppliers are frequently viewed as a path toward compliance with government regulations. Instead, they should be embraced as strategic corporate partners who can bring innovation and greater tier 1 success.

The WBENC National Conference & Business Fair held June 2013 at the Minneapolis Convention Center was a gathering place for some of corporate America’s most innovative businesses, but that is not referring to giants like Avis Budget Group (ABG) or General Motors (GM). Sure, the Fortune 500 companies have excellent track records in innovation, but the reference is to the minority-owned, women-owned and disadvantaged business enterprises (MBE/WBE/DBE) that are increasingly critical to the success of marketplace leaders.

A good example is Appliedinfo Partners (AIP), an MBE/WBE firm built from the ground up by Betty and John Lau. The interrelationship of Avis Budget Group/GM/Appliedinfo Partners is an interesting story of a best practice in supplier diversity that came about naturally, reflecting the power of networking. Just as interesting is the fact that the two corporations now contract with the small diverse business for its powerhouse, next-generation diversity supplier program management system.

Officially, the WBENC seminar was called “Best in Class Supplier Diversity Second Tier Reporting: Criteria, Development & Metrics” and the panel was composed of representatives from ABG, GM and AIP. Yet, the story begins long before the seminar and goes deeper than simply talking about tier 2 suppliers. In fact, Lynn Boccio, Vice President, Strategic Business & Diversity Relations for the Avis Budget Group, began her presentation by talking about the organic growth that led to General Motors signing a contract with Appliedinfo Partners.

Networking Produces…In Its Own Time

In November 2012, Mary Anderson, president of WEConnect Canada, asked Boccio to give a PowerPoint demonstration at the annual Toronto conference on the topic of Avis Budget Group’s best-in-class supplier diversity practices. Believing in the importance of companies having a good diversity supplier tracking system, she invited Betty Lau to demonstrate the DivTRAK® software solution for managing, measuring and marketing diversity supplier programs. Avis Budget Group uses DivTRAK®, so the invitation made perfect sense.

As a result of the conference presentation by Avis Budget Group, Boccio took a call from Linda Ware, her counterpart at GM, who wanted to know more about Lau’s business and products. The result of the networking and follow-up was that GM issued an RFP to follow the Avis Budget Group second tier volume report sent to corporate accounts as a best practice service. GM liked what they saw in the reports, and AIP landed a lucrative contract with the auto manufacturing company. The message: Networking produces in its own time.

There was another message: Tier 2 initiatives can drive tier 1 progress. GM’s new Supplier Manager Reginald Humphrey is clearly not mincing words when he says, “Not everyone is built to be a tier 1. In fact, a lot of the suppliers I have met over the last year don’t want to be a tier 1 supplier for different reasons like payment issues. That is just fine for GM because my company relies on a tiered supply base.”

GM believes in the importance of a strong tier 2 program because it: 1) contributes to the corporate alignment of strategies and priorities through value chain choices; 2) forces accountability because tier 1 suppliers cannot drive diversity on their own; and 3) tiered supply chains that force the pursuit of credible data to connect suppliers to corporate objectives.

Most companies today accept the importance of supplier diversity to business success, but a lot of vague responses are uttered when asked about methods for tracking and measuring tier 1 and tier 2 programs. GM’s supplier diversity managers believed that their partners would accept the challenge to participate in such an important strategic initiative. They asked 250 of their key suppliers to report their tier 2 spend. Tier 1 suppliers achieved 7 percent of the 8 percent tier 2 spend goal in 2012.

Pushing for Results

GM is not alone in its efforts to change the way tier 1 and tier 2 suppliers interact with each other and with their corporate customers. Avis Budget Group has taken a leadership position in supplier diversity and pushes its suppliers to be good corporate partners by supporting diversity initiatives. A strong reporting mechanism is key to successful “pushing” because it gives evidence of effort, success and failure. Avis Budget Group began using AIP’s DivTRAK® system long before GM chose to implement the same diversity supplier management system. DivTRAK® is a browser-based enterprise software that companies can use to manage supplier diversity information, measure program success, and market the program internally and externally.

Boccio has a different take on second tier supplier diversity. In her opinion, tier 2 initiatives should not be primarily in place to ensure there is enough diverse spend to report for compliance with government regulations, a view held by many businesses. “A comprehensive second tier program creates a significant multiplier effect by encouraging the continual establishment of new supplier diversity programs, which in turn create new incremental opportunities for minority businesses,” as set forth by the National Minority Supplier Development Council Inc.

Here is the interesting twist on the relationship between ABG, GM and AIP. Since GM is one of Avis Budget Group’s corporate customers, the Avis Budget Group tier 1 suppliers are tier 2 for GM. General Motors pushes its suppliers while Avis Budget Group is pushing its suppliers, and the net result is more opportunities for diverse suppliers.

The Avis Budget Group supplier diversity initiative is embedded in its operations. Senior management is involved. There is daily interaction with procurement. There is a standalone supplier diversity department. The tier 2 initiative is a strategy to “increase competitive offerings to our customers and differentiate ourselves by providing best-in-class second tier buying,” in the words of Boccio. That is a far cry from a compliance program. “If we have top dollar in the tier 1 bucket, then by process of demand we must have top dollar in tier 2 to be a leader in the car business. If we boost first tier, the second tier will grow also, if our suppliers are sincere about being strategic partners.”

All too often, supplier diversity programs are left out in the cold, so to speak. As long as the supplier diversity department can report compliant spending levels to the executive level, everyone is satisfied. However, spend totals by themselves do not reflect strategic effort to find and mentor diverse suppliers. Spend totals do not necessarily reflect accurate department accounting or pinpoint weak relationships. It takes quality metrics and in-depth analysis, which is exactly what appliedinfo Partners’ DivTRAK® offers.

Program Sustainability Through Technology

DivTRAK is a comprehensive, next-generation software program that enables best-in-class diversity supplier program management. Naturally, it includes spend reporting, but that is just one function of the system.

DivTRAK®’s searchable database can maintain supplier certifications and supplier industry classifications; store the history of contracts and payments; provide a second tier reporting dashboard for use by first tier suppliers; associate second tier suppliers with contracts; and much more. Data can be summarized in multiple ways for comparison to targeted goals or for the sake of triggering early warning signs that there are weaknesses in certain contract areas. The database is updated in real time, and reports can be distributed electronically to external and internal stakeholders.

As a marketing tool, the reporting system can be used to attract top quality tier 1 and tier 2 suppliers, build internal customer support for the diversity supplier initiative, and develop positive public relations. DivTRAK® even provides online training capabilities. Input by the company and tier 1 suppliers is managed through a dashboard. However, DivTRAK® can be integrated with a company’s existing software programs to minimize the amount of manual input and increase accuracy.

DivTRAK® provides technology-based sustainability for supplier diversity programs. Lau recommends that businesses interested in setting up a tier 2 program, “First get internal buy-in from top management. Next, develop the corporate policies for the tier 2 program, and include tier 1 supplier goals and internal goals for second tier sourcing that are supported by mandatory supplier contract clauses. Third, companies should select a third-party software package to manage, measure and track their tier 2 program.” Once the program is in place, the core group of tier 1 suppliers can be piloted, and the program’s corporate goals can be tuned to reflect realistic achievable goals. Eventually, the program can be expanded to include the next group of tier 1 suppliers.

Lau also offers experience-based advice to share on the key features a second tier reporting system should include. Tier 1 suppliers need to be able to report direct and indirect tier 2 spend. The system should notify the tier 1 supplier when the reporting period is about to open or close and initiate reminders when reporting is not completed. The supplier diversity program needs to provide immediate and constant feedback on the first tier’s performance against client-defined goals. The program should document that certifications are in force and send out certification renewal reminders. A user-friendly system with an easy and convenient onboarding process for tier 1 suppliers is important to the program’s success and reporting compliance.

Networking and technology are two of the most important factors influencing the amount of success a supplier diversity program realizes. Usually, companies focus on tier 1 and, more or less, hope tier 2 suppliers come along for the ride. The reality is that tier 2 suppliers are as important to a company’s success as tier 1 and can have enormous influence on tier 1 suppliers’ performance.

As Lau explains, “A supplier diversity program [that is] able to drill down through the data and produce useful management reports makes it possible to identify the gaps right away.” Those gaps represent opportunity for new suppliers or a need for better internal effort. Either way, the whole system is elevated to a more relevant business model offering a value proposition that increases competitiveness.