There is evidence to show that governments, institutions, utilities and other businesses realize an economic benefit to their community when they buy from local suppliers. More money stays in local markets as it changes hands, producing an economic impact greater than the initial purchase amount.
Many state governments recognizes the potential benefits of local spending at the state level and have implemented programs whereby businesses located in-state get preferential treatment for state contracts.
Although it’s easy to understand the benefits, putting local supplier preference programs in place can be politically charged and ironically, result in increasing costs for buying organizations. Further, since such policies restrict full and open competition, they can deter highly qualified non-local suppliers who otherwise would infuse valuable ideas, products and services into the buying organization
Here is a typical example of how local supplier preference programs work. Assume there are two competing bids. One is for $10,000 from a non-local supplier and the other is for $10,200 from a local supplier. The buying organization gives a 3 percent bid preference to local suppliers. Consequently, the local supplier would receive the award at $10,200, even though it will cost the buying organization $200 more. By spending $10,200 locally, the buying organization believes there is more benefit in awarding work to a local supplier, than saving the $200 and buying from the non-local supplier. In times of tight budgets, this can be a challenging argument for the buying organization to make.
What is missed with the arguments for and against local supplier preference programs is that there are useful techniques that buying organizations can implement to ensure they fully engage the local supplier community in their buying activities without having to provide financial preference. These techniques, in addition to benefitting local suppliers and the community in general, often lower the costs of goods and services for the buyers while improving supplier performance.
We divide these techniques into four areas:
Transparency and ease of working with your organization
Supplier outreach and development
Supplier performance management
1. Gap Analysis
Understanding the gap between what could be spent with local suppliers and what is being spent is a good first step. This metric provides the justification for further action.
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 is spent on materials, equipment, and services. Further, there are likely some large goods and services purchases where there are no local suppliers. Deducting this amount leaves the spend amount available for local suppliers. The difference between this amount and what is spent with local suppliers is the “gap.” The table below shows these calculations.
Calculating the Gap In Local Spend
In this example, the gap is $4 million. Using a conservative economic impact multiplier of 1.5
equates to a $6 million potential economic impact—a strong justification for taking further steps to develop the local supply community.
2. Transparency and Ease of Working with Your Organization
Many organizations make themselves a challenge to deal with from a supplier’s perspective. This item, by itself, often favors larger, non-local suppliers who have the sophistication to deal with varying customer requirements, complicated bidding procedures, and onerous terms. When evaluating your own organization, consider how you can make it more supplier-friendly. Pretend 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 active and potential suppliers?
- Does the site invite suppliers to learn more about your organization and how they can best serve its needs?
- Does it describe the types of things your organization buys?
- Is there a meaningful registration process and names of real people who can be called?
- Are your organization’s standard terms and conditions available to be read on the site and download?
- 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 the names of the companies that won the work?
- Are there no items requested in the bid process that are superfluous or meaningless to the selection decision or otherwise unnecessarily burdensome?
- Is there a way that suppliers can check status of payments online?
If the answers to these questions are mostly “no” there is a good chance that your organization is eliminating qualified local suppliers because of the complexity of doing business with your organization.
Making your procurement process transparent and your organization easy to work with is an important step to increasing local spend. Next, 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 means actively working with local suppliers, often face-to-face, helping them understand how to better serve your organization. This is not much different than what most purchasing departments already do, however, instead of on a contract-by-contract basis, these activities are done proactively. Conducting regular educational sessions for suppliers and using media to get local suppliers to those sessions provides the ability to shape the supply market to best serve your organization. Topics for these sessions may include the following:
- How your organization purchases, the process, how you let suppliers know when and what you are buying.
- Forecasts of 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.
- Materiel delivery preferences.
- The safety training and certifications suppliers might need and how to attain them.
- The environmental compliance training and reporting 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.
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.
These sessions can be achieved by putting on periodic web-training or on-site conference room training where the suppliers and buyers meet covering one or more topics during each session.
Such supplier outreach and development encourages suppliers to compete for awards. It also can lower their perceived risk of doing business with our organization, allowing them to offer more competitive pricing.
4. Supplier Performance Management
The fourth set of techniques that can help drive spend to local suppliers is by implementing a supplier performance management program. Simply stated, conduct evaluations of supplier performance during and at the conclusion of contracts. More than the value of the scores, having a defined supplier performance management process provides suppliers with the specific metrics on which they will be evaluated and ensures ongoing communication on all metrics. Regular performance evaluations provides for two-way communication where the supplier can hear specifically what they are doing right and where they need to improve, and the buying organization can learn how it can help the supplier improve.
Such supplier performance metrics are more commonly used for materials purchases. However, it is very possible to craft metrics that are applicable to services purchases.
As with local supplier preference policies, rewarding top performing suppliers with preferential treatment for awards can become politically charged. Rather, simply recognizing top performing suppliers through quarterly or annual events along with media releases, use of “Blue Ribbon Supplier” awards and other means of highlighting top performing suppliers is inexpensive and has been shown to drive suppliers to perform better.
By calculating spend that could go to local suppliers, but is not, an organization can readily determine the value of implementing procedural techniques to keep more spend in their community. Such techniques address making buying organizations easier to work with and more transparent, thereby encouraging local suppliers to compete for the business and build new capabilities into their businesses to win more awards. By regularly conducting supplier performance evaluations, you can be sure that you have the attention of your organization’s suppliers and are driving them to be top performers.
All of these techniques can be implemented by management, primarily through purchasing departments. They encourage the local supply community to be more engaged, competitive and innovative. Further, they provide the buying organization with stronger, lower cost, higher quality local suppliers. All of this is realized without the need to stir political waters.
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. N.p., n.d. Web. 28 Feb. 2013. <http://www.state.in.us/idoa/2467.htm>
4 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>.
5 Avalos, Antonio, p.6.