Moving up: taking advantage of Tier II opportunities can help MBES grow and expand

Black Enterprise, June, 2004 by April W. Klimley

Supplier diversity is changing dramatically. It is back in the spotlight today--as companies scramble to revamp their existing programs or create new ones.

"Supplier diversity is one of the hottest issues right now," says Ralph Moore, diversity expert and head of Chicago-based Ralph G. Moore Associates. "People who understand the impact of changing demographics are trying to put some teeth into their supplier diversity structures."

Changing Demographics

The reason? Today, minorities represent 30 percent of the country's population now and that figure is expected to hit 38 percent by the year 2020. Suddenly, companies are listening. The recession forced them to fight harder for customers--frequently targeting multi-cultural populations with great success.

At the same time, pressure has begun to build from corporate customers that want to know what the largest companies are doing in their supplier diversity programs. Both these factors are resulting in a new attitude and even stronger commitment of the largest corporations to supplier diversity--and the entrance of many new companies that find their industries having to report on their minority purchase spend. This explains why sectors of the economy that may have lagged behind such as entertainment and sports leagues are now jumping on the supplier diversity bandwagon. The Major League Baseball (MLB), for example, has put substantial resources behind an active supplier diversity program in recent years--that breaks the mold of traditional community-based activities.

These factors probably explain why minority purchasing continued to rise steadily through the past economic slowdown. In fact, minority purchasing at America's largest corporations reached $72 billion in 2002, according to the National Minority Supplier Development Council (NMSDC), the last year for which figures are available. That was a jump of 14 percent over the 2001 total.

Nonetheless, it's still a tough world out there. Minority-owned business enterprises (MBEs) are up against many new factors, such as Internet auctions and strategic sourcing. Strategic sourcing has become a permanent part of the purchasing landscape, as corporations have consolidated their supplier base to drive down costs and increase efficiency. This hits MBEs hard, since many are small and medium-sized--not big enough to take on these new national or international mega-contracts.

Corporate Opportunities Increase

Perhaps surprisingly, corporations appear to be well aware of this challenge. And many are taking action to overcome the problem. These activities including providing more management development to MBEs, supporting the creation of alliances and encouraging MBEs to become Tier II suppliers. The ultimate aim, clearly, is to grow the size of MBEs so that they can better compete in this environment and eventually become Tier I suppliers.

"Minority suppliers have three options," says Ralph Moore. "Transformation, consolidation or extinction." Of all of these, Moore believes that consolidation, alliances and partnerships may be the most practical way for many MBEs to survive and grow in today's environment. He has supported and mentored a number of MBEs to create joint ventures in recent years so as to be able to handle larger contracts with national corporations.

Tier II contracting represents a different kind of opportunity. Since these contracts tend to be smaller, they are easier for many MBEs capture. The trick, it seems, is finding the Tier I contractors that needs their service or commodity.

Tier II contracting is a way in which companies can ask their suppliers to ask their customers to meet certain minority purchasing goals. In a certain sense, it expands the responsibility for minority supplier development down to the next one, two or even three levels. Some companies even set minority purchasing goals for their Tier I suppliers, although their primary measuring stick is their own Tier I minority purchasing.

Tier II Contracts Can Be Beneficial

The result, according to observers like Harriet Michel, executive director of NMSDC, is beneficial. "Second Tier keeps minority suppliers in the game. It allows them to be part of what is going on today." She adds that a lot of minority businesses would not be able to participate in supplier diversity programs today if it were not for these lower tier opportunities.

Nonetheless, there is some controversy. Some experts say that Tier I suppliers have a tendency to pass on contracts with lower profit margins. They warn MBEs to beware. "You have to really understand your costs," says Moore, for instance. And even though he sees some good Tier II opportunities, he advises MBEs to "be prepared to say no."

Despite these reservations, the popularity of strong Tier II programs is growing. As a result, a number of organizations are examining ways to use Tier II more effectively. The NMSDC, for instance, is in the midst of updating its 1998 study on the subject, while Lockheed Martin, a government contractor, just conducted a pilot study of the contribution of multi-tier subcontracting.