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. In turn, this increases the economic impact beyond that of the initial purchase amount, bringing significant positive influence on the community.

Two studies in particular demonstrate that more than 70 percent of dollars spent in original purchases remains in the community where spent when purchased through local suppliers. Conversely, less than 30 percent of dollars remains 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 stays 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. 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 positive local impact. Take for example the Sacramento Municipal Utility District which provides electric service to 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 nonlocal competitors yet still be deemed the lowest-cost provider when evaluating 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 pay an additional $900. 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, although the additional dollars spent will more likely remain within the community, the direct and immediate impact to the organization’s budget can be significant.

Further, since 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 are able to 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:

  1. Gap Analysis

  2. Transparency and Ease of Working with an Organization

  3. Supplier Outreach and Development

  4. Supplier Performance Management

  5. Measurement of Local Spend on a Recurring Basis

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