Increasing Local Supplier Spend
Techniques to Keeping Your Organization’s Spend in Your Own Community
Numerous studies continue to show that governments, institutions, utilities, and other businesses generate economic benefits within their communities when they buy products and services directly from local suppliers. When local organizations purchase from one another more money remains in area markets as it transacts which increases the economic impact beyond that of the initial purchase amount, bringing significant positive influence to the immediate community.
Two studies, in particular, demonstrate that more than 70 percent of dollars spent in original purchases remain in the community where spent when purchased through local suppliers. Conversely, less than 30 percent of dollars remain in the community when purchases are made with companies not headquartered in the community even where there is a local office presence. And for companies that have no office presence in the community, less than 20 percent of purchases stay in the community. The clear takeaway is that local spending for products and services equates to more money circulating within the local economy, a fact directly linked to the quantity and quality of employment opportunities in any given community.
Across the United States, at least 45 states Including Indiana have implemented local preference programs which incentivize state and municipal organizations to spend with suppliers located in their states. These preference programs not only recognize local versus nonlocal supply of services and goods but also often drive broader and more diverse spending objectives. Such goals include a measurable increase in purchases from certified small, minority-owned, women-owned, LGBTQ-owned, veteran- and disabled veteran-owned businesses, among other groupings. Also recently, goals related to environmental impact and other sustainability measures are being incorporated into preference programs.
Every organization with purchasing power can determine its own uniquely suitable goals to drive these sorts of economic and social preferences, and help communities realize the positive local impact. Take for example the Sacramento Municipal Utility District, which serves the city of Sacramento. They created the Supplier Education and Economic Development Program (SEED), which awards a 10 percent price preference, along with additional evaluation scoring points, to small businesses that are headquartered within its service territory.
Like SEED, most supplier preference programs encompass a price lever whereby a local supplier may be at a higher price point than non-local competitors yet still be deemed the lowest-cost provider when assessing contract awards. Regardless of the positive local economic benefit, developing and implementing local supplier preference programs are often very politically charged and may result in a direct cost impact on the budgets of the buying organizations.
Consider the following example: Assume there are two competing bids. One bid is for $10,000 from a nonlocal supplier, and the other bid is for $10,900 from a local supplier. The buying organization provides a 10 percent bid preference to local suppliers. Consequently, the local supplier would receive the award at $10,900, even though the buying organization will sustain a $900 higher cost. By spending $10,900 locally, the buying organization believes there is more benefit in awarding work to a local supplier than saving the $900 and buying from the nonlocal supplier. Based on the aforementioned studies, suffice it to say that the additional dollars spent will more likely remain within the community circulation and thus create more local sales, jobs, and tax revenues. However, the direct and immediate impact on the organization’s budget can be significant.
Further, such local preference programs restrict full and open competition. Highly qualified, nonlocal suppliers may be deterred from bidding who would have otherwise infused valuable ideas, products, and services into the buying organization. Clearly, the reader can see why preference programs are perceived as both beneficial and controversial.
There are, however, several techniques and tools that cities, counties, and other organizations can use to increase local spending without providing a price preference. These methods taken together generally lower the costs of goods and services for buyers while also helping local suppliers improve their performance, competitive position, and revenue generation.
This paper will discuss five such techniques:
Gap Analysis
Transparency and Ease of Working with an Organization
Supplier Outreach and Development
Supplier Performance Management
Measurement of Local Spend on a Recurring Basis
1. Gap Analysis
A useful first step for organizations to take is to understand the gap between what they could spend with local suppliers and what they are spending.
The example below assumes a municipal utility has a total external outflow of $50 million annually. From this total, deduct any direct cost items (such as fuel and purchased power for electric utilities, wholesale water for water utilities), and other outflows that most likely cannot go to local suppliers (such as pension payments, bond refinancing costs, and the like). The remaining portion is what the organization spends on materials, facilities, equipment, and services. Next, subtract the amount spend for large goods and service purchases where no local suppliers exist, such as fire engine dealers, for example. This leaves the amount of spend available for local suppliers. The difference between this amount and what the organization spends with local suppliers is the gap to close.
| Item | $(000) | $(000) |
|---|---|---|
| Total Expenditures | 50,000 | |
| Less Direct Costs: | ||
| Payroll | 15,000 | |
| Direct commodities | 20,000 | |
| Pension payments | 4,000 | |
| Financial payments | 1,450 | |
| Contributions | 50 | |
| Subtotal | 40,500 | |
| Total Materials and Services Spend | 9,500 | |
| Less spend items not available from local market | 3,000 | |
| Spend available for local market | 6,500 | |
| Less: local spend | 2,500 | |
| Gap - spend available for local market | 4,000 |
In this example, the gap is $4 million. Using a conservative economic multiplier of 1.7 equates to over $6 million in potential economic impact—a strong justification for taking further steps to develop the local supply community.
2. Transparency and Ease of Working with an Organization
Many organizations’ policies and procedures are challenging to deal with from a supplier’s perspective. Complex procedures often put local suppliers at a disadvantage, favoring larger, nonlocal suppliers who have the sophistication to deal with varying customer requirements, complicated bidding procedures, and onerous terms. When evaluating whether your organization is easy to work with, consider how you can make it more supplier-friendly. Imagine you are a supplier and want to sell to your organization. Where would you start? Go to your organization’s website and see if it’s obvious.
Is there a section just for suppliers?
Does it describe your organization’s overall procurement processes and policies?
Does it describe the types of things your organization buys?
Is there an online supplier registration process that is used by your procurement organization to communicate opportunities to suppliers?
Does the site list the names and contact information for procurement persons in the organization for prospective suppliers to call?
Are your organization’s standard terms and conditions available on the site for suppliers to review?
Are the terms and conditions reasonable and written in a manner that business people can understand?
Are your upcoming and active purchases posted?
Are past purchases shown, along with the names of the companies that won the work?
Can suppliers check the status of payments online?
Next, review the requests for proposals that your organization sends to suppliers.
Is it easy to find the scope of work, what’s being purchased?
Are the minimum qualifications and evaluation criteria clearly stated and easy to find?
Are all items requested to be submitted with bids and proposals used in the evaluation process?
Are the documents clearly written and well organized?
Is there a significant cost to suppliers for obtaining supplemental information, such as drawings?
Is the bidding process clearly described and are key dates easily found?
Is there a pre-bid meeting?
If the answers to these questions are mostly NO, there is a good chance your organization is eliminating qualified local suppliers because working with your organization is a complicated affair. Making your procurement process transparent and your organization easy to work with are necessary steps to increasing local spending. In addition, simplifying procurement processes and documents reduces the buying organization’s internal costs of procurement.
Next, through supplier outreach and development, take active steps to reach out to the supply community and help local suppliers become your best suppliers.
3. Supplier Outreach and Development
Supplier outreach and development mean actively recruiting and working with local suppliers, often face-to-face, helping them understand how to serve your organization better. Conducting regular educational sessions for suppliers about how to sell to your organization and using media to help them access those sessions provides the ability to shape the supply market to best serve your needs. Topics for these sessions may include the following:
How your organization conducts purchases, the process, and how you inform suppliers when and what you are buying
Forecasts for goods and services purchases in the coming months
What suppliers can do to best compete in each category
The terms and conditions to which they’ll need to agree
The insurances and bonding capacity suppliers may need and how to obtain bonds and insurances
Material delivery preferences
The safety training and certifications suppliers might need and how to obtain them
Environmental compliance training suppliers may need
Your organization’s expectations in terms of record-keeping and invoicing
Who to contact when suppliers have questions about any aspect of selling to your organization
Organizations can hold periodic web training or on-site conference room training where suppliers and buyers meet, covering one or more relevant and pre-publicized topics during each session.
In addition to informing local suppliers, these sessions provide a means for the buying organization to hear directly from current and prospective suppliers about how their organization can be a better customer, improve efficiencies, and otherwise streamline their supply chain processes.
Such supplier outreach and development encourages suppliers to compete for contracts. It also can lower their perceived risk of doing business with your organization, allowing them to offer more competitive pricing. Once you have local suppliers competing, the next step is to ensure their success in performing the contract.
4. Supplier Performance Management
The fourth technique that allows increasing spend to local suppliers is implementing a supplier performance management program. Simply stated, such a program allows your organization to quantitatively evaluate supplier performance during and at the end of contracts. More than simply the value of the numeric scores, having a defined supplier performance management process provides suppliers with specific metrics on which they will be evaluated and ensures ongoing communication on all metrics. Regular performance evaluations provide for two-way conversations where the suppliers can hear precisely what they are doing right and where they need to improve, and the buying organization can learn how it can work to help suppliers improve.
For poorly performing suppliers that are not improving even after multiple notices, supplier performance programs allow for contract terminations. Effective programs also offer an incentive to become a top-performing supplier. As with local supplier preference policies, rewarding top-performing suppliers with preferential treatment, such as bonuses, or lower bonding requirements, is controversial.
Instead, recognize top-performing suppliers through quarterly or annual events, combined with ample media coverage. Use “Blue Ribbon Supplier” awards and other means of highlighting top-performing suppliers in the community and leverage social media to help promote top suppliers. Supplier performance evaluation programs pay for themselves by driving suppliers to deliver the best value and provide a means to address poor performance early enough to mitigate any resulting losses.
The next step is to regularly measure and report local spending.
5. Measurement of Local Spend regularly
“What gets measured gets managed” is an old and true adage. Tracking and reporting where an organization spends its money will show how well it is leveraging local supplier capabilities. As with any measurement, the information must not cost more to collect and report than the value it provides. If your organization does not currently track local spend, begin by tracking these three classifications of suppliers: (1) locally owned/resident companies, (2) non-locally owned, but with a local presence, and (3) non-locally owned without a local presence. The results may be surprising and show the potential for greater local spending.
Conclusion
Implementing local preference programs is politically challenging. However, several techniques that are relatively easy to implement can also increase local spending. These techniques make buying organizations easier to work with and increase process transparency, thereby encouraging local suppliers to compete for the organization’s business and build new capabilities into their companies. By regularly conducting supplier performance evaluations, you can be sure you have the attention of your organization’s suppliers and are driving them to be top performers.
Management of the buying organization can implement these techniques, primarily through its procurement department, which encourages the local supply community to be more engaged, competitive, and innovative, and for spending to remain in the community. Ultimately, these techniques are straightforward ways that buyers and suppliers can work together to ensure more dollars stay in the local community.
Notes
Sawsan Abutabenjeh, Stephen Gordon, Berhanu Mengistu, (2018) “The impacts of in-state procurement preference policies on the economy of South Carolina,” Journal of Public Procurement, Vol. 18 Issue: 3, pp.240-256, https://doi.org/10.1108/JOPP-09-2018-015
BRUN, LUKAS CHRISTOPH. The Dual-Purpose of Public Procurement Policy: How U.S. Municipalities Are Using Government Purchasing to Achieve Economic, Social, and Environmental Goals. (Under the direction of Dr. Branda Nowell).
Rodriguez, Heather, and Dan Houston. Procurement Matters: The Economic Impact of Local Suppliers. Rep. Civic Economics, 2007. Web. 2013. <http://www.localfirstaz.com/downloads/procurement-matters.pdf>.
Avalos, Antonio, and Edward Birdyshaw. Assessing the Economic Impact of a Local Preference Ordinance in the City of Fresno. Rep. Department of Economics California State University, Fresno, 2007. Web. 2013. <http://www.fresnostate.edu/cerecc/documents/CERECC-2007-02.pdf>.
“IDOA: Buy Indiana.” IDOA: Buy Indiana. Web. 28 Feb. 2013. <http://www.state.in.us/idoa/2467.htm>
Moreland, Elena, ed. In-State Preferences. Issue brief. National Association of State Procurement Officials, Aug. 2012. Web. 2013. <www.naspo.org/documents/1.InstatePreferences8_27_12Updated.pdf>.
1Avalos, Antonio, p.6.