Supplier diversity provides opportunities for diverse businesses to participate in competitive bidding, setting the stage for supply chain inclusivity and economic parity. Competitive bidding is the first step in giving diverse businesses a chance to compete.
However, having the best solution is not always enough to win the contract. That decision is based on many factors weighted based on importance — including company size, scale, years in business and capacity. Other factors like insurance requirements, safety standards or business continuity can present barriers to entry.
So, often diverse suppliers are introduced further down the supply chain through another avenue: Tier-2 programs, contracting with Tier-1 suppliers. While Tier-2 programs are designed to encourage Tier-1 suppliers to use diverse vendors, they can become even more impactful through strategy and oversight.
Managing Tier-2 reporting involves tracking spend with diverse suppliers. Companies ask selected Tier-1 suppliers to report their spend with diverse suppliers, which would seem a simple request, but is complicated by the absence of oversight.
When accepting Tier-2 submissions, supplier diversity managers blindly trust their Tier-1 suppliers to identify and provide valid diverse suppliers. Data quality can be a concern — since there is little transparency, submissions are not reconciled. There is no established protocol for handling submissions that appear suspect. Yes, the submitting supplier affirms its input is accurate and acknowledges any significant difference, but is that enough?
There are no rules governing spend classification — which means there’s no enforcement. So, spend with a minority- and women-business enterprise (MWBE) could be categorized as either. Or the classification could be overlooked entirely because a supplier’s profile is incomplete. Or worse, it could be double-counted as a minority- and women-owned business.
Other considerations:
Finding Tier-1 suppliers who can and will report. Tier-2 programs are viewed tactically. The pool of Tier-1 suppliers that will report is limited — because (1) not all companies track diversity spend and (2) even those that do may not report it. Some view Tier-2 reporting as an inconvenience, delegating responsibility to business analysts or account representatives. It may not be viewed as a desirable competitive advantage. Even worse, the reluctance to report has no negative consequence.
Business benefit and strategy. Tier-2 spending does not replace contracting directly with diverse suppliers. It is typically positioned as diversity-spend augmentation, that is, adding Tier-2 spend to your direct spend with diverse suppliers. While a Tier-2 program is generally a component of a mature supplier-diversity initiative, it should have its own defined business benefit and strategy.
How Tier-2 spending provides business value:
- It can be reported on a project basis, which tracks specific Tier-1 suppliers’ use of diverse suppliers as a contract requirement. If a bid requires 20-percent spend with diverse suppliers, that commitment can be met with Tier-2 spending.
- Tier-2 relationships can help diverse suppliers build capacity or deliver specialized goods and services, especially when they are unable to win a bid, and where the Tier-1 supplier cannot provide the required customization.
A successful Tier-2 program needs a backbone. Changing the positioning of Tier-2 spending requires focus and time. It’s important to clearly articulate your expectations and provide support to make it happen. Establish:
- Accountability and oversight. The person responsible for reporting diversity spend should understand the program and be familiar with the numbers. Transactions should be audited and approved by the submitting Tier-1 supplier and the receiving program manager. Both should be familiar with submission trends and question, rather than celebrate, spend figures that are unusually high.
- An understanding of the contractual obligation. A requirement to use diverse suppliers should be built into the contract. Tier-2 reporting guarantees this obligation is met. While the agreement should specify the required spend with diverse suppliers, this is no guarantee that a specific supplier will be selected.
- Visibility and expectation. Tier-2 reporting should be a component of business reviews. Failure to report or to meet targets should be seen as negative performance. Just reporting is not enough: Tier-1 suppliers should be encouraged to use diverse suppliers to perform work directly for your company.
Reporting Tier-2 spend should not be a contractual obligation — it should, like tracking diverse spend, be an expectation.
