Minority sourcing

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As automakers have successfully increased the amount of work being done by minority-, women-, and veteran-owned businesses, standards for sourcing inclusion are on the rise.

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September 22, 2015

There was a fair amount of fanfare on supplier diversity programs in the early 1990s when the major U.S. automakers publicly committed to procuring 5% of total purchases from minority-owned businesses. These programs and goals have not been as heavily publicized in recent years, but the OEMs continue to be interested in “developing and maintaining a qualified, diverse supply base that is reflective of our customer base,” as Fiat Chrysler Automobiles (FCA) puts it.

The OEMs have used their purchasing power to cascade these expectations down the supply chain. Ford, for example, encourages its Tier 1 suppliers to have a goal of at least 6% of all goods and services coming from certified minority-owned business enterprises (MBE), 2% from women-owned businesses, and 3% from verified veteran-owned businesses. It is a laudable mission, but not without challenges for all parties involved.

Programs are never done – Maintaining the targeted level of minority sourcing requires commitment and vigilance. A variety of factors can complicate the situation, including program life cycle timing, economic conditions, and changes in personnel. During the economic downturn of 2009, General Motors temporarily suspended its 8% diverse supplier procurement objective for Tier 1s, but suppliers are mostly expected to manage around those conditions.

Targets increase with progress – Many automakers have doubled the level to 10% for themselves and their Tier 1s. FCA executives say the automaker was the first to introduce minority spending requirements for Tier 2s. Chrysler and its top two tiers are reportedly sourcing 17% to certified minority suppliers.

Difficulty finding suitable MBE suppliers – The automakers try to help by identifying and grooming qualified candidates for matchmaking events. Other organizations also host activities and resources, but the process is not efficient. The available options took a hit from the recession; the Michigan Minority Supplier Development Council reported that its list of certified companies fell from 1,600 in 2008 to 1,100 in 2011.

Parts suppliers less common – The split in the minority supply base has been estimated at roughly 30% production suppliers, and 70% in services, construction, industrial materials, and logistics. Many diversity programs include a supplier development function that includes training, since increasing the pool of qualified minority-owned companies is critical.

Success can be a paradox – It becomes increasingly difficult to meet the 51% ownership by an ethnic minority as a company grows.

Relaxing the minority ownership percentage requirement to allow minorities to raise capital in the stock market has been discussed from time to time, without resolution.

Customers are not willing to pay a penny more for products from a minority supplier, according to the MBEs, but they do appreciate being able to apply the credit for the purchase to their internal or externally suggested minority sourcing targets. This is particularly true now that FCA announced in 2012 that it was “putting some teeth” into its supplier diversity targets and took a small number of Tier 1s off the bid list in 2013 for failing to increase their minority purchases.

The U.S. military has been a leader in minority integration through drilling in the appropriate behavior needed in order to act as a cohesive unit in the field, regardless of individual thoughts or attitudes. In essence, the automakers are following the same principle, causing suppliers to behave in support of societally disadvantaged enterprises. Automotive suppliers are well advised to get on board and do the right thing, whatever their motivation might be.

 

Melissa Anderson Consulting LLC
mandersonconsultingllc@gmail.com

 

About the author: Melissa Anderson, owner of Melissa Anderson Consulting LLC, has consulted with automotive suppliers extensively since 1986.