SMI Supplier Diversity Playbook

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 accounted for over 18% of the GDP in 2021.³ From 2019 to 2022, the cost of hospital expenses went up by 17.5% due to workforce shortages, supply issues, and pharmaceutical costs.⁴

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

Supplier Diversity Defined

Supplier diversity refers to an organization’s supplier base and the degree to which those businesses are owned by diverse suppliers. The industry standard for a supplier to be recognized as diverse is that it has to be 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 large organizations require third-party certification for participation in their supplier diversity programs.² A business is considered “diverse” if the vendor is designated as minority-owned, woman-owned, LGBTQ-owned, veteran-owned, a Disadvantaged Business Enterprise (DBE) business, or a HUB business per Small Business Administration (SBA) guidelines, outlined within the Appendix under Supplier Diversity Certification Definitions ³

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. 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 social determinants of health

(SDoH) including economic mobility, education, income, transportation, and environment.²

Supplier diversity is one method to address the economic factors contributing to the SDoH through reliable contracts to diverse-owned businesses leading to economic mobility and increased income for diverse community members. Supplier diversity aligns a healthcare organization’s mission with operations to address the economic factors of health equity.

A common and false assumption is 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. This highly competitive bond sale was oversubscribed ninefold, indicating the strength and confidence of bond repayment by BMC. When an organization has a strong ESG program, it is an indicator that their business is successful operationally and financially.

Health Equity and Social Determinants of Health

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. More than just the absence of illness, the World Health Organization’s definition of health includes health equity,

and 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.⁵ The primary mission within healthcare is focused on improving health outcomes. This requires acknowledgment of the widening economic gap

and racial divide that are driving health disparities across the country. In 2021, the Centers for Disease Control and Prevention (CDC) issued a press release designating racism as a public health threat.¹¹ Part of this effort includes the CDC Core Commitment to Health Equity,¹² which aligns with and supports supplier diversity efforts within healthcare organizations. The CDC is specifically focusing on community partnerships and building a diverse workforce.

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 (CHNA)

often recognizes unemployment and generational poverty as critical issues. Part of the CHNA includes the development of an implementation plan to address identified community health needs and publicly report on a plan, all of which are subject to review by the IRS.¹³ As a healthcare organization, a structured supplier diversity program with goals formally included in the CHNA implementation plan hardwires supplier diversity into your organization.

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 of which can be found here.

Supply Chain Resiliency

Supporting diverse vendors can help to incubate new community enterprises to fill supply chain demands, drive economic growth, and build a culture of economic health. Reductions in supply disruptions through the addition of diverse suppliers creates economic growth within the communities served while driving supply chain resiliency. The potential benefits of a resilient and diverse supply chain include reliable products closer to the hospital facility, fewer logistics complications due to weather or other factors, and increased competition in the market.

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. Here are several examples of how supplier diversity aligns with supply chain resiliency strategies.

Background & History of Supplier Diversity

While much effort and progress has occurred since the Civil Rights movement that launched supplier diversity in the 1960s, 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” and they found that if minority owned businesses continue to grow at 2018 rates, it would require over 333 years for MBEs to achieve revenue parity with white owned businesses.

Addressing health equity, mission alignment, and competitive advantage are a few reasons to move forward with a supplier diversity program. Supplier diversity efforts of providers and industry partners can directly address economic inequity and improve community health through supply chain spending practices.

Change Management: How to Gain Support for your Supplier Diversity Program

The most successful supplier diversity programs have engaged leadership and a 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. The designated executive champion supports critical elements to a successful program including goal setting and measurement, program operating budget, and resource allocation.

A robust change management plan can be utilized as a guide of where to begin shifting culture, changing hearts and minds to gain buy-in for sourcing from diverse suppliers. Change management is a method to understand the current environment of your organization and the most intentional ways to engage.

Components of Change Management

Change management can help your institution to gain the hearts and minds of your colleagues, improve collaboration, and obtain results. The reason to implement a change management approach is to gain support for your supplier diversity program and make it more likely that the program will be sustained over time. 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 goals, such as the Diversity, Equity and Inclusion department, Population Health, and Community Relations. Designate an executive champion to steward the program and a point of contact that is the program resource within the purchasing department. Define any current efforts underway to purchase from 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 opportunities such as localized contracting or tier two

diverse spend reporting.

Obtain commitment from an early adopter within your organization to remain flexible in contracting by splitting contracts and/or increasing spend commitment with diverse suppliers over time. Identify current and potential partners including entrepreneurial support organizations, chambers of commerce, and other organizations that promote and uplift the diverse business community. NMSDC, WBENC, and 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 diverse businesses and highlight internal champions. Leverage your inclusion resource groups (IRG), community engagement, and diversity and inclusion 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.