Chapter 1. Setting the Stage, Building a Successful Supplier Diversity Program

 

 

Introduction

Collaboration and innovation throughout the healthcare industry is required to lower the cost of care and improve community health. Healthcare expenditures continue to grow within the United States and account for over 18% of the GDP in 20213. From 2019 to 2022, the cost of hospital expenses went up by 17.5% due to workforce shortages, supply issues, and pharmaceutical costs4.

A strong supplier diversity program offers a strategic solution to addressing these challenges by leveraging an organization’s spending to drive economic health, improved supply chain resiliency and increased competition within the marketplace. In this chapter, we will cover the components of best-in-class supplier diversity programs. This resource aims to equip team members with fundamental tools to gain leadership support, build engagement, and set a high-level roadmap to success.

 

Supplier Diversity Defined

Supplier diversity refers to an institution’s vendor base and the degree to which the businesses institutions procure from are owned by diverse suppliers. It has developed as an industry term to refer to working with businesses that are at least 51% owned, managed, and operated by minorities, women, veterans, or other designated groups that have historically been underrepresented in industry supply chains.1

Many institutions require third-party certification for participation in their supplier diversity programs.2 A vendor or business is considered “Diverse” if the vendor is designated as minority-owned, woman-owned, LGBTQ-owned, veteran-owned, a DBE business, or a HUB business per SBA’s guidelines, outlined within the Appendix under
“Supplier Diversity Certification Definitions”3:
Minority-Owned Business Enterprise (MBE): The National Minority Supplier Development Council defines minority-owned businesses as those that are “owned, operated and controlled by minority group members,” which include Asian, Black, Hispanic, and Native American residents. These businesses are referred to as minority-owned businesses (MBE).
Women-Owned Business Enterprises (WBE): Women-Owned Business Enterprises (WBE) is an industry term to refer to businesses owned and operated by women.
Disadvantaged Business Enterprises (DBE) certification is implemented by the U.S. Department of Transportation and is open to small businesses where “socially and economically disadvantaged individuals own at least a 51% interest,” defining this as including African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans, women, and others on a case by case basis.4
Historically Underutilized Businesses (HUB) certifications are generally operated by state governments and refer to enterprises that are at least 51% owned by minorities, including the groups listed above, and disabled-owned business enterprises. Some states have included restrictions on the size of businesses.5
To determine the scope of work, it is recommended that you engage your executive leadership Executive Leaders are the senior leaders of the organization responsible and accountable for budgeting, people management, and operating practices. and evaluate the “why” for supplier diversity. Broader examples of the business case for supplier diversity are below within this chapter.

 

Why Supplier Diversity in Healthcare

Increasingly, leading healthcare institutions are adopting strategies to address the root causes of poor health outcomes beyond the four walls of their organizations. Supplier diversity is one method to address the economic factors contributing to the social determinants of health (SDoH).Social Determinants of Health: The World Health Organization defines the social determinants of health as “the conditions in which people are born, grow, work, live, and age.” They represent the wider set of forces and systems shaping the conditions of daily life that drive health outcomes, such as inequality, social mobility, community stability, and the quality of civic life. Sometimes referred to as “upstream” determinants, research indicates that up to 50 percent of the factors that contribute to health are social and economic. While counterintuitive, it’s estimated that only 20%1 of an individual’s overall health is due to clinical care. Comparatively, it is estimated that up to 50% of an individual’s overall health is due to SDoH including economic mobility, education, income, transportation, and environment2.

Supplier Diversity aligns a healthcare organization’s mission with operations and to address the economic factors of health equity. While the purchasing department is often effective at reducing costs, there are additional factors that inform decision-making such as product or service quality and includes corporate responsibility of an industry partner. A strong supplier diversity program can create a competitive advantage for industry partners seeking to be awarded a contract.

It is often a false assumption that supplier diversity will add costs to an organization. Interlacing supplier diversity into your supply chain and broader health equity work can support the financial rating of the organization. For example, in 2023 Boston Medical Center issued their first ESG Bond for a $232 million capital project, a new endeavor within healthcare. In addition to saving $5.4 million in debt services, the bond funding will be utilized to address health inequities in a variety of ways including economic mobility and supporting local businesses.
More information can be found within BMC’s Health Equity Accelerator report.

 

Supplier Diversity, Mission Critical Work

To address social determinants of health, healthcare organizations are increasingly looking to their purchasing practices to improve the economic health of the community. An individual’s health is impacted by complex social, economic, and environmental factors that drive health outcomes. The World Health Organization defines the social determinants of health as “the conditions in which people are born, grow, work, live, and age.” They represent the wider set of forces and systems shaping the conditions of daily life that drive health outcomes, such as inequality, social mobility, community stability, and the quality of civic life. Sometimes referred to as “upstream” determinants, research indicates that up to 50 percent of the factors that contribute to health are social and economic5.

The primary mission of hospitals is focused on the health of the communities they serve. This requires acknowledgment of the widening economic gap and racial divide that are driving health disparities across the country.
22 percent of children are living in poverty, a percentage that has not changed since 1960.6
Ignoring racial inequities in income costs the country around $2.1 trillion of lost GDP annually.7
The number of people living in concentrated poverty has doubled from seven to fourteen million since 2000.8
Median white net household wealth is thirteen times greater than African American net wealth and ten times greater than Latino net wealth.9
The average difference in lifespan after age fifty between the richest and the poorest Americans has more than doubled—to fourteen years—since the 1970s.10

While much effort and progress has occurred since the Civil Rights movement that launched supplier diversity in the 1960’s, there is still a significant wealth inequity within the United States. Recently the Michigan Minority Supplier Development Council and Supplier IO created a report “Facilitating Growth for Minority-owned Businesses” how many years are required to fill the gap in pay inequity. ” Using data published by the US Census Bureau, this report analyzes the growth of MBEs in the years from 2014 to 2018, the latest year for which complete data are currently available. If MBEs continue to grow at the current rates, it will take over 333 years for MBEs to achieve revenue parity with White-owned businesses.” There is a strong need to address the economic disparity in diversity of business ownership, a foundational method to gain wealth.

 

Health Equity

In 2021, the Centers for Disease Control and Prevention (CDC) launched a press release designating racism as a public health threat.11 Part of this effort includes the CDC Core Commitment to Health Equity12, which aligns with and supports supplier diversity efforts within healthcare institutions. The CDC is specifically focusing on community partnerships and building a diverse workforce.

More than just the absence of illness, the World Health Organization’s definition of health,
WHO definition of health: is “a state of complete physical, mental, and social well-being, and not merely the absence of disease or infirmity.” Health equity refers to the notion that all people should be able to achieve their highest level of health, regardless of their race, gender, class, sexual orientation, or other identities. Achieving health equity requires addressing the systemic factors shaping the social determinants of health.13

One successful method to integrate supplier diversity into a healthcare organization is to connect procurement activities to identified community health needs. The Community Health Needs Assessment often recognizes unemployment and generational poverty as critical issues.
Community Health Needs Assessment (CHNA) is a research process non-profit hospitals must implement as part of their community-benefit reporting. Instituted by the Affordable Care Act of 2010, CHNAs must be completed by hospitals and health systems every three years and identify the most pressing community health concerns.

One aspect of the CHNA includes the development of an implementation plan to address identified community health needs, public report on plan, and is subject to review by the IRS.13 As a provider healthcare organization, a structured supplier diversity program with goals formally included in the CHNA implementation plan hardwires supplier diversity into your organization.
Industry partners and diverse suppliers of any size can review the public documents to align their supplier diversity strategy with the needs of the communities your customers serve.

 

Create a Competitive Advantage

At the sector level, it’s becoming increasingly clear that the most innovative supply chain departments have supplier diversity programs. Gartner’s Healthcare Supply Chain Top 2514 incorporates ESG metrics including supplier diversity. The U.S. News & World Report’s Best Hospitals ranking includes health equity measures.15 Incorporating these priorities into your institution’s operations can have multiple benefits, examples can be found here.
Address supply chain needs.
Create a more efficient and resilient supply chain.
Generate a thriving local business community and improve the quality of local jobs.
Increase community impact by targeting underserved neighborhoods in alignment with CHNA.
Strengthen your reputation as the provider of choice for your community
For industry partners seeking to be awarded a contract, a strong supplier diversity program differentiates your bid and business from the competition. Align sustainability, diversity, and inclusion, and community benefit priorities
Reduce unnecessary and costly utilization of medical services through improved economic health, a key component of SDoH.

 

Supply Chain Resiliency

Supporting diverse vendors incubates new community enterprises to fill supply chain demands, drive economic growth and build a culture of health. Interlacing supplier diversity into supply chain resiliency strategies provides institutions with an advantage in addressing economic and racial disparities that impact operations and community health outcomes. Gartner outlined six strategies to address resiliency, four of which align with purchasing initiatives including multisourcing, manufacturing network diversification, ecosystem partnerships, and nearshoring. Examples of how supplier diversity aligns with supply chain resiliency strategies.
“Multisourcing” creates reliability of product through multiple sourcing options for a product or service. When purchasing from a local business, the risk of product loss is lower due to inclement weather. When multisourcing, there is an opportunity to increase the number of local and diverse suppliers to the supply chain ecosystem. This benefits a smaller company that may not have the initial volume required to support a hospital system.
“Manufacturing network diversification” reduces risk of product or service disruption due to inclement weather by identifying multiple manufacturers. Industry partners, when seeking additional manufacturers, explore diverse and/or local options to become part of the hospital’s supply chain ecosystem. This benefits a smaller company that may not have the capacity required to fill the demand of product requested.
“Ecosystem partnerships” are valuable in the event of major supply chain disruption to identify and support alternative products or services in support of the purchasing institution and collective community. Partnership and collaboration with industry partners, hospitals, entrepreneurial support organizations and organizations like SMI and HAN support innovation, industry growth and help to identify solutions to supply chain disruption.
“Nearshoring” allows for reduction in geographic footprint of supply chain ecosystem leading to a reduction in greenhouse gases from logistics and more control with inventory. It also reduces the risk of supply shortages due to inclement weather and is an opportunity to support local or regional businesses.

Reduction in supply disruptions through the addition of diverse and local suppliers creates economic growth within the communities served while maintaining supply chain resiliency. The potential benefits of a resilient and diverse supply chain include reliable products closer to the hospital facility and fewer logistic complications due to weather and increased competition.

 

Change Management, how to gain support for your supplier diversity program

The most successful supplier diversity programs have engaged leadership and clear identifiable program purpose. For example, supplier diversity programs are often tied to diversity, equity, and inclusion initiatives. Due to the required shift in business practices, leadership engagement is a critical component of programmatic success. With the support of executive leadership, critical elements to a successful program can be implemented including goal setting and measurement, program operating budget, and resource allocation.

A robust change management plan can be utilized as a guide to where to begin in shifting culture, process, hearts, and minds to gain buy-in for sourcing from diverse suppliers. Successful supplier diversity programs leverage change management to understand the current environment of your organization and how to begin the work.

Components of Change Management

A change management plan can help your institution get started to gain the hearts and minds of your colleagues and obtain results. It highlights the concrete steps your health system is taking to shift policies to support local and diverse businesses and institutionalize and build upon these practices going forward. The Harvard Business Review language on change management includes four aspects: 18 (HBR Language)

1. Prepare for change

2. Create a vision and plan

3. Implement change

4. Integrate and sustain change

Prepare for Change

Explore your organization’s current health equity pledges and DEI initiatives. Identify leaders and work groups engaged in DEI initiatives and/or Inclusion Resource Groups. Engage early adopters who are outspoken advocates to collaborate on building the business case for supplier diversity in alignment with your organization. Evaluate the purchasing teams’ readiness to engage in alternative purchasing methods and current purchasing processes to determine barriers to entry for diverse suppliers.

Create a Vision and Plan

Create a supplier diversity work group of volunteers from departments with aligned supplier diversity goals, DEI and supply chain. Gain support within your organization through a designated executive champion to steward the program and point of contact within purchasing department. Establish a baseline of current spending with diverse suppliers. Review the existing supplier base for diverse suppliers to explore capacity for growth. Establish priorities and set clear goals approved by the executive champion.

Implement Change

Create a strategic education plan for internal team members involved in the sourcing process, including the why for supplier diversity at your institution. Engage healthcare providers, industry partners and Group Purchasing Organizations (GPO) to create additional opportunities for learning, potential new connections with diverse suppliers and collaboration such as localized contracting or tier 2 diverse spend reporting.

Obtain commitment from an early adopter within your organization to remain flexible in contracting by splitting contracts and/or increasing spending commitment over time. Identify current and potential partners including entrepreneurial support organizations, chamber of commerce, and other organizations that promote and uplift the diverse business community. NMSDC, WBENC, HSDA, are several examples.

Integrate and Sustain Change

A key to sustained success is through celebrating the wins and cultivating strong relationships. Partner with your marketing department to develop success stories of champions internally and partnerships with diverse businesses. Leverage your Inclusion Resource Groups (IRG), Community Engagement, and DEI team members to extend capacity for networking with diverse businesses. Become a member and/or sponsor organizations that support diverse business development. Consider internal policy changes such as shortened payment terms for small, diverse suppliers.