Creating Equity in Supply Chains
According to author and thought leader Verna Myers, “Diversity is being invited to the party. Inclusion is being asked to dance.”
Earlier this month, we were able to sit down with Danya Perry, Vice President of Diversity, Equity, and Inclusion at the Raleigh (N.C.) Chamber of Commerce, to talk about ways to drive positive DEI outcomes in your supply chain and he took Myers’ analogy a step further.
“You could be invited to the party, you certainly could have the opportunity to dance,” said Perry “but equity is about how we get the person to the party to begin with. So for us, when we talk about items like supplier diversity, that’s an equity goal we’re trying to solve. So equity is truly about how do we either build a bridge or remove a barrier to support supplier diversity. How do we remove a barrier or build a bridge to support virtual recruitment and retention? How do we build a bridge or remove a barrier to ensure inclusive suppliers and workforces?”
Small and minority-owned businesses are still underrepresented in our economic ecosystem so investing in them is critical to support equitable and inclusive prosperity, which is a superior growth model. Through supplier-diversity programs, large organizations can use their power, and economic and social influence to support businesses that are essential to the economic, social and cultural fabric of the United States.
That is, large organizations can help minority-owned businesses get to the dance.
“Ultimately, when we talk about inclusive prosperity and those companies being supported by these amazing, diverse supplier programs, what we’re asking is,’“how do we support our small businesses that have been marginalized?’” Perry said. “It becomes an opportunity to say, ‘If we ensure everyone has an opportunity to be prosperous; a superior growth model for all companies within our economic ecosystem.’”
Which, in turn, gets more businesses to the dance.
Supporting Communities with Supply Chain Equity
One of the positive impacts of supplier diversity is there is an opportunity to support the work small and minority-owned businesses do in their communities they represent. Small businesses are important to the local economies and the local economies are important to the economic empowerment of all people in all backgrounds. Especially in a time of dire economic need, investing in small businesses could in turn support job creation on the local level.
A Harvard study by Dr. Raj Chetty on social and economic mobility found where someone grew up is a predictor of growth and prosperity. That is: zip code is actually a predictor of success. Chetty was able to create an actual assessment of the percentage chance if you live in one zip code, to move from the bottom 20 percent of the income quartile to the top 20 percent. In the area where Perry works, the Raleigh-Durham (N.C.) region, the number vacillates between 4.8 and 5.6 percent moving from the bottom 20 percent to the top 20 percent of economic prosperity if you are born in a certain zip code.
Highlighting the importance of zip code – and the inequities associated with certain ones – many small and minority-owned businesses have trouble getting traditional financing due to their location.
“This really speaks to what’s going on in that community, and what we need to do to invest in that community in its small businesses, to ensure your zip code is no longer a predictor to your success,” said Perry. “Supporting small businesses is an important part of that investment.”
The Working Capital Challenge
Diverse suppliers tend to be smaller companies eager for new business, but often lack the working capital to scale. When engaging larger enterprises, small-to-medium businesses are deterred by payment terms that typically stretch out to 90-120 days. Many, despite the cash-flow problems these terms may cause, don’t push back because of fear buyers may question their financial health and charge ahead with contracts to get the business. In the worst cases, companies have to forgo opportunities because the payment terms present too great of a working capital challenge.
In fact, a procurement manager for a large pharmaceutical company stated “he had risk concerns with a supplier who balked at these payment terms, and there was a possibility they might default on their obligations,” while speaking on a Diversity Alliance for Science panel.
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 found firms owned by members of a minority group tend to have weaker banking relationships, experience worse outcomes on credit applications, and are more reliant on personal funds.
These challenges prevent companies from creating equity in supply chains.
Creating Supply Chain Equity Through Working Capital
Having seen the challenges minority businesses face gaining access to funding, one thing is clear: expanding access to working capital is essential to any successful DEI initiative. Obviously a number of things are essential. The right mindset, the right understanding. From a financial perspective, one of the keys to growth is just simply being able to access working capital, or access financing in different mediums, and to make sure that can be done by all the players on the field at the time.
For corporate buyers, it is essential they sponsor programs to better suppliers’ working capital position outside of traditional bank financing and educate sellers on how to use those programs.
Supply Chain Finance
One example of a working capital program for sellers is supply chain finance (SCF). SCF lets buyers utilize a third-party funding source to fund seller early payments. Sellers get paid on demand, so they can improve their cash-flow position to maintain and expand their businesses without adding additional debt.
These programs rely on the credit rating of the buyer, not the seller, leveraging their standing to increase access to all suppliers and reduce the cost of capital, creating equity in supply chains. For buyers, there is the benefit of terms standardization with SCF to boost their working capital position also.
“These conversations (around DEI) weren’t going on 10, 15, 20, 30 years ago,” said Perry. The fact we’re having this conversation, regardless of where we are in this journey is critical. The fact of the matter is the only way we can get to a place to actualize true equitable, inclusive prosperity is to continue having these conversations.
“And back the conversations with real, proactive solutions and investment, creating supply chain equity.”
The entire webinar, Drive Positive DEI Outcomes in Your Supply Chain, is now available on demand.