The current state of supply chains

The past two years have been a perfect storm for supply chains. First came the empty shelves and equipment shortages in the early days of the pandemic. Then came the container ships idling offshore (or stuck) and long sourcing delays affecting everything from used cars to critical minerals, followed by an even darker turn into oil and gas embargoes, formula airlifts and the threat of a global food crisis.

Meanwhile, as investors and stakeholders sharpen the focus on environmental, social and governance (ESG), corporations are scrutinizing their suppliers—and their suppliers' suppliers—to an unprecedented degree, revealing massive ESG blind spots and, in some cases, hazardous working conditions and environmental offenses in their supply chains. The ESG risk, combined with the pandemic and our fraught geopolitics, is fueling talk of supply-chain risk management and, in some instances, moving sourcing and manufacturing to "friendly" shores.

As corporations rethink the future of supply chains, diversity, equity and inclusion (DE&I) must be part of the conversation. In fact, inclusion is central to supply chain sustainability, yet business leaders have largely confined its role in supply chains to a single area: supplier diversity, a loose set of policies and programs focused on public-sector contracting, procurement, compliance and community outreach.

Supplier diversity: moving up the ESG agenda

Spurred by the global outcry that followed the murder of George Floyd in 2020, many corporations have stepped up their commitment, publicizing ambitious targets for their procurement spend with diverse suppliers.

In the fall of 2020, researchers at MIT's Center for Transportation & Logistics surveyed more than 2,400 executives and supply chain professionals across multiple industries and identified four areas of investment that had significantly increased in priority over the previous year. "Supplier diversity, equity and inclusion" was at the top of the list, on par with human rights protections and just ahead of energy savings/renewable energy and employee welfare and safety.

"Procurement and supply chain functions have always been aware of supplier diversity," says Cheryl D'Cruz-Young, a senior partner in Korn Ferry's ESG practice who has more than two decades of experience in strategic procurement roles with multinational companies. "Now boards are aware of it. There's greater scrutiny. You're starting to see supplier diversity spend defined in ESG reports."

Expanding the definition of supplier diversity

Organizations on the leading edge of supplier diversity are expanding the scope of their efforts under the banner of business diversity, a broader category that places inclusive supplier and vendor networks at the core of ESG strategy. More than just a rebrand, business diversity provides a timely framework for understanding the convergence of DE&I, ESG and modern supply chains. The labels are evolving, but the trend is clear: organizations can no longer afford to address these issues in isolation.

Business diversity in practice

As ESG reporting moves further down the supply chain, the impact of vendors and suppliers on ESG performance is becoming clearer than ever. Take greenhouse gas emissions: emissions produced in the supply chain are 11 times higher, on average, than those tied to direct operations, according to an analysis of more than 150 companies and 8,000 suppliers conducted by the nonprofit CDP. Carbon emissions from freight transportation alone—all those idling ships—already account for 7% of the world's total and are projected to increase fourfold by 2050.

Organizations seeking to reduce their carbon footprint by localizing supply chains may be overlooking opportunities to elevate their ESG performance if they focus exclusively on environmental measures, says Kim Waller, senior client partner in Korn Ferry's Organizational Strategy and DEI practices. Leaders with a business diversity mindset, Waller says, would also consider inclusion and engage with diverse suppliers as part of their localization efforts, in turn addressing several areas of ESG at once.

The shift from supplier diversity to business diversity is "part of elevating the dialogue and helping make those connections," Waller says. "Organizations are reacting to ESG. They're still early in the journey. Some have made those connections—or are moving to make those connections."

ESG & Sustainability

For a sustainable future, you must change for good

Business and supplier diversity: thinking outside the box

Supplier diversity is an American export. The supplier diversity programs now found across the world are an outgrowth of decades-old U.S. government programs designed to support small businesses owned by women, racial minorities and other specially designated categories. While the objective remains as relevant as ever, the definitions of minority that made sense in the U.S. in the 1960s don't always translate in a global context.

Business diversity keeps ESG objectives in focus even when the conventional supplier diversity categories start to break down. For instance, multinational companies embracing business diversity might broaden their horizons to include not just marginalized groups but also regions that have been historically marginalized, says Nadia Quarles, assistant vice president of business diversity at the University of Chicago.

Corporate leaders should ask themselves how they're engaging ethnic minorities—however that's defined—throughout their global footprint, as Quarles put it during a recent webinar hosted by Korn Ferry. "Where are you investing globally? Are you exploring investment opportunities in infrastructure in Africa, for example? Thinking about your global footprint also falls into [the] environmental and social part of ESG."

Though it may not check the typical supplier diversity boxes, a small African-owned business, for example, that is focused on renewables is relevant across a broad spectrum of ESG. In fact the continent has become a leader in sustainable energy, with eight countries deriving more than 90% of their electricity from renewable sources.

Making a social and economic impact

Regardless of location, small- and medium-sized businesses are a key engine of innovation and economic development, and they face shared barriers to growth including limited access to finance and mentorship opportunities. Often, these barriers are rooted in—and exacerbated by—racism, sexism and systemic bias of all kinds.

To date, corporate efforts to address systemic bias have skewed heavily toward HR functions including hiring, recruitment, professional development and promotions. Diversifying the workforce and leadership ranks remains an urgent ESG priority, with important consequences for individuals, households and communities. Organizations that bring the same concerted effort to their business partnerships—by providing technical assistance and mentorship to diverse entrepreneurs, for instance—can scale their impact much further and faster.

Business diversity creates a ripple effect in communities and regions. Research, such as a recent survey of UK-based startups from 10x10 and Google, has found that minority-owned businesses are more likely to hire locally, build diverse teams, and invest in the surrounding community. For every $1 million Microsoft spends with diverse suppliers, for instance, 75% is retained by the local community and more than 17 jobs are created.

Southern Company, a U.S. gas and electric utility that has launched an initiative to clean up hazardous waste at coal power plants, illustrates the ESG potential of a business diversity mindset, says D'Cruz-Young. In addition to consulting contractors who specialize in this low-tech, capital-intensive work, Southern has also engaged a diverse community of existing vendors and local entrepreneurs to build their capabilities and foster long-term relationships.

"They'll have 10- or 20-year contracts, it's local community jobs—and it links an E requirement to the S," says D'Cruz-Young. "That's business diversity."

Business and supplier diversity and the bottom line

The impact of business diversity goes beyond ESG performance. As the links between DE&I, ESG and supply chains continue to strengthen, business diversity can make substantial contributions to the bottom line through its impact on customer relationships, talent acquisition and retention, product innovation and more.

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