Racial Bias in Sourcing—and What Can Be Done to Address It

Entrepreneurship is considered to be an important tool in efforts to address the racial wealth gap. But until recently, little was known about whether and to what degree racial discrimination impacts decision making in sourcing—even though the survival of small minority-owned businesses depends on their ability to win contracts from corporate buyers.

Assistant Professor of Supply Chain Management Karca Aral and Luk Van Wassenhove, emeritus professor of technology and operations management at INSEAD, tackle this issue in an article forthcoming in Production and Operations Management.

“On the surface, sourcing looks like an interaction between two companies,” Aral says. “But this is also an interaction between individuals, the procurement manager of the buying firm and the sales managers of the suppliers. That made me wonder how potential racial bias can impact that personal interaction between the two managers and, ultimately, the buyer’s supplier selection decision.”

The researchers ran a controlled experiment with 565 subjects (buyers) who all had managerial job functions. Most of these happened to identify as white.

The buyers were randomly assigned into two groups in controlled experiments facing two supplier offers: one more expensive, the other cheaper. In the control group, the sales managers of both of the suppliers had distinctively white names. In the treatment group, sales manager for the less expensive supplier had a distinctively Black name, whereas the sales manager for the more expensive supplier had a distinctively white name.

The results showed that buyers were less likely to select the cheaper supplier in the treatment group where the cheaper supplier had a sales manager with a Black name compared to the control group where the sales manager had a white name. The difference, nearly 7%, was statistically significant.

“This is concerning for diversity, equity and inclusion purposes, but also for companies whose procurement managers may be choosing more expensive suppliers due to their personal racial biases,” Aral says.

What can be done? At the company level, Aral suggests implementing supplier diversity programs committing a certain percentage of sourcing budgets for businesses owned and operated by individuals from underrepresented and underserved groups, as well as diversity and bias training programs designed for the sourcing professionals. At the legislative level, states and the federal government can launch equal-opportunity legislation designed for the sourcing context.

Thanks to a grant from the Lender Center for Social Justice, Aral and two colleagues, Erasmo Giambona and Ricardo Lopez, both professors of finance, are pursuing a follow-up project on how companies can best implement supplier diversity programs.

Aral, K.D., and L. Van Wassenhove, Racial Discrimination in Sourcing: Evidence from Controlled Experiments, Production and Operations Management, forthcoming.