“Buy Local” is a
catchphrase used ubiquitously throughout the country. Virtually every
community has initiated their own buy local campaign. Here in Little
Rhody, we have “Buy Local RI,” a little website set up by Lt. Governor Roberts that has
since become irrelevant.
There are other initiatives too, such as It’s All in Our Backyard, Buy with Heart, Union Bucks, and Small Business Saturday, that seek to direct spending to small and
locally-owned businesses rather than “large box” retailers.
This all makes sense
and I can appreciate the importance. Fundamentally, when local dollars
are spent locally, they recirculate in the economy. Or to put it
conversely, every dollar that is spent outside of the state is a net loss of
overall wealth for Rhode Island. Similarly, every dollar spent at a
national chain (even if local) suffers from leakage as our economic system
peels off layers of surplus value to pay shareholders, CEOs, advertising, etc.
that drains wealth from a community. You get the picture.
Many people choose the latter in these scenarios. With
limited take-up of “buy local,” the benefits remain small.
What can work much
better is strategic sourcing from large local institutions. This can
include universities, hospitals, large corporations (I’m looking at you CVS,
Fidelity, and GTECH), and city and state governments. [Note: it’s important to
remember that all this can be done without a local purchasing preference policy
which Rhode Island policymakers rejected a few years ago at the request of
large contractors due to the danger of reciprocity in other states.]
A lot of my work
involves strategic sourcing and when done right the results are hugely
beneficial for local, small, minority, and women owned businesses. And it
benefits the state too as more purchasing done locally = more tax
revenue. It’s not easy to do (nothing is), but if one looks at a hospital
(or system like Lifespan), the amount of money they spend in any given year is
huge, similarly for universities, for city governments, and for corporations.
The state can be a
partner in the strategic sourcing process by helping identify local businesses
that can serve as vendors for large institutions that currently buy large
quantities of goods and services out of state or overseas. Imagine if the RIEDC RI Commerce Corporation convened a roundtable of all the
executive leadership from each of the state’s hospitals, sought to understand
their purchasing needs, identified mutual pain points, and proactively
identified, recruited, and scaled local businesses to serve the needs of these
institutions. Linking local suppliers to local buyers is a low cost way
to boost the economy.
Sounds far-fetched,
but I do this often at work. Recently, I assisted with Johns Hopkins
University’s initiative to increase their local spend by 10% in Baltimore,
developed a local sourcing plan for a Los Angeles Hospital, and analyzed the
success of Source Detroit, a program to transfer a portion of the $1.6 billion
dollars spent annually by Wayne State University, the Detroit Medical Center,
and the Henry Ford Health System to locally owned businesses.
The process is
basically to find out what an institution buys and then identify local
businesses that can supply it instead. There are challenges,
however. First and most importantly, you need commitment and buy-in from
the senior executive leadership at the institutions. There are lots of
good ideas out there and quick-win solutions that would boost the state’s
economy, but without the commitment, nothing is going to happen.
Second, not everything
can be sourced locally so you need to be selective. This is the
fundamental difference between a generic buy local campaign and strategic
sourcing. Identifying the high-spend categories that are available in the
local market is important and will make the process flow smoother. Not
everything is made here, and if it’s not made here, it can’t be purchased
here. Luckily though, Rhode Island still makes a lot of stuff.
Third, you have to
overcome the existing practices of the purchasing managers. Relationships
take time to build, and switching to a new vendor can involve some risks.
These risks can be partially alleviated by starting slow and by identifying
quality local supplies used by other institutions. There is a process
that works to change the purchasing habits and long-standing relationships, but
it takes time.
Fourth, sometimes
local suppliers don’t have the cheapest per product cost. When businesses
operate with a shortsighted focus on low prices, local suppliers lose even
though they may still have the lowest overall cost. There are many hard
and soft procurement costs that are often ignored such as transportation fees,
legal fees, late deliveries, damaged product, etc. that would not accrue from
local vendors.
Finally, many small
businesses need help building their capacity to be able to handle the
procurement needs of a large institution. Here is another role for the
state and partners to play to ensure that the local businesses can effectively
provide the goods and services needed by large institutions. Small
business support organizations like the Small Business Development Center and
SCORE can offer the training and resources needed.
Why is strategic
sourcing important for the state? There are three key reasons.
1. It benefits the local community. When institutions source locally,
local revenues increase, resulting in higher tax revenue for the state, and the
increased demand may lead to the creation of new jobs. By identifying
minority and women-owned firms, or firms located in low-income areas of the
state, strategic sourcing can have profound positive impact for some of the
most economically marginalized folks among us.
2. It benefits the institution. Local goods and services can reduce
delivery times, allow for lower overhead costs (you don’t need to store as much
when the supplier is 15 minutes away), and reduce potential disruptions in the
supply chain.
3. It strengthens the entire
business community. By shifting
spending to local vendors, large institutions improve the local business ecosystem
and generate a more robust and competitive network of suppliers. Having
local suppliers also means interactions are easier and quicker, and the
partnerships can develop new ways to identify and rectify supply chain
problems, create new products and processes, and add innovation to the whole
system. Also, by shifting to local purchasing, local vendors become more
adept, more responsive, and more stable over the long-term.
If I was a Mayor or
Governor, I would create a position in my administration specifically tasked
with building and supporting these relationships. There is a net benefit
to the state with the minimal cost of an FTE position in the budget. The
benefit to a city is less, although new business expansion would provide
additional property tax revenue. To do it right, you need someone
competent who can facilitate these connections, hold conferences and
convenings, and identify the local businesses that can act as vendors.
Alternatively, this
could be done outside of government by any trusted third-party (i.e. RI
Foundation, Chamber of Commerce, RI Black Business Association, etc.).
This is the 2nd in my
ongoing economic development series called “Rebuilding Rhode Island’s
Economy.”
Brian Hull received
his Master's Degree in Public Policy from the Kennedy School of Government at
Harvard. He is Senior Consultant with the leading research and strategy firm on
U.S. inner city economies. Professionally, he is lead advisor to municipalities
and county governments on key trends impacting inner city economies and
businesses, works on urban-based economic development projects for
organizations and institutions across the country, identifies how large
institutions can better provide local economic opportunities for low-income
urban residents, and explores innovative workforce development systems to
create a more productive local labor force.
