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TIER 1 and TIER 2 SPENDING
Corporations, non-profits and government entities spend billions of dollars on goods and services each year. In the past, minority-owned businesses only saw a small fraction of those dollars. However, according to recent trends, spending with minority businesses is on the rise. Organizations are beginning to recognize the benefits that come from incorporating supplier diversity into their procurement decisions. In fact, it is becoming more and more apparent that companies committed to supplier diversity actually gain a competitive advantage.
The growth rate for minority owned businesses has been outpacing that of majority owned firms in the United States, so there is little doubt that minority businesses play a key role in our national economy, creating jobs in minority communities and increasing minority spending power. Given the increase in diverse markets and changing demographics, it only makes sense for companies to implement supplier diversity programs.
According to a 2016 study by The Hackett Group, companies that have a supplier diversity strategy that goes beyond merely improving corporate image and regulatory compliance reap potential benefits in the form of increased revenue and market share. The Hackett Group found that “up to 10% of sales come with supplier diversity requirements, suggesting that the lack of such a program can result in lost revenue.” It also showed “a strong relationship between high levels of diversity spend and increased market share.” The study also dispelled concerns that utilizing minority owned suppliers means sacrificing quality and/or service. Quite the opposite, in fact, with a staggering 99% of all diverse suppliers meeting or exceeding expectations.
One reason for this is that most diverse suppliers are small businesses that can be more flexible and customer-oriented than larger businesses. Small businesses don’t have restrictive corporate guidelines and policies, ensuring matters are resolved quickly. Moreover, working with a small business means working directly with key decision makers who have expertise and a personal connection with customers.
When considering how to best achieve supplier diversity, it is important to know the difference between Tier 1 and Tier 2 suppliers. Incorporating both types of suppliers into a company’s supply chain is the most effective way to increase diverse spending. Tier 1 suppliers are those suppliers or business partners who you have a direct relationship with – they provide products and/or services directly to you. Tier 2 suppliers provide goods and/or services to your Tier 1 suppliers; they are your supplier’s suppliers.
So, why do you need both types of suppliers? Consider, for instance, the federal government – one of the largest buyers of products and services. The government has certain minority spending goals – a percentage of federal contracting dollars that it spends with minority-owned businesses, like small businesses, women-owned businesses, veteran-owned, etc. The government reaches its goals through direct relationships with diverse suppliers but, also, by contracting with companies that subcontract with minority-owned businesses. In fact, supplier diversity is something the government looks for when considering who to partner with.
Other large organizations have similar goals and requirements when it comes to diversity spending and since many of them have well-established Tier 1 suppliers for their larger contracts, they look to Tier 2 spending to help them meet those goals. Tier 2 programs, whereby a company requires its Tier 1 suppliers to spend a certain percentage of revenue or sales with diverse suppliers, are becoming commonplace.
Companies wanting to work with diverse suppliers have to be able to identify them. Some of the diverse categories include woman-owned, veteran owned, small disadvantaged, HUB (historically underutilized businesses) and LGBT owned. There are third parties who specialize in connecting buyers with diverse suppliers. These certification organizations require a rigorous certification process that authenticates the business is owned, managed, and controlled by the qualifying group. Some of the more recognized national certification organizations are the Women’s Business Enterprise National Council (WBENC), the National Minority Supplier Diversity Council (NMSDC), the U.S. Department of Veterans Affairs, Vets First Program, the U.S. Small Business Association and the U.S. Business Leadership Network.
As a woman-owned small business certified by the WBENC as a Women’s Business Enterprise and the U.S. Small Business Association as a Woman Owned Small Business, Macondo Networks can help companies achieve their diversity spending, either directly as a Tier 1 supplier or indirectly as a Tier 2 supplier. Customers of Macondo, who are not themselves diverse suppliers, can still tap into the benefits of supplier diversity by partnering with us and reporting their spending with us to their customers who track Tier 2 spending.
Today’s global marketplace and economy means that supplier diversity is here to stay. Changing demographics, combined with the researching linking increased diversity spending to increased market share and profitability, reveal the importance of supplier diversity. It’s benefits simply can’t be ignored.