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Buy Local?
by Richard Sapien
March 2, 2010
This past Sunday, the El Paso Times published an article that discussed the negative impact national contracts have on small local businesses. Many of the interviewees argued that El Paso’s publically funded institutions, such as UTEP, should include smaller local businesses in their business contracts.
One interviewee, Joe Lopez, CEO of Lopez Marketing Group, said El Paso businesses “can compete with national businesses if given the chance.” He also said most El Pasoans would be willing to pay a little more for a product if they knew it was supplied by a local company.
Lopez’s remarks beg the question, if El Paso businesses can compete with national businesses, why aren’t they? Is it because of inefficient UTEP bureaucracy? Possibly, but probably not. It is in an organization’s best interests, especially during a recession, to reduce costs in order to maximize profit. Local businesses do not have the the economies of scale to challenge national competitors, thus local businesses find themselves forced out of the market. Simply put, UTEP contracts nationally because it is cheaper to do so.
Some argue that UTEP, being a state-funded institution, should consider (pricier) local contracts in an effort to help its local economy. Although UTEP’s food service contractor, Sodexo, does buy some local products, “buy local” proponents do not believe UTEP buys enough. Paradoxically, El Paso benefits when UTEP takes on (cheaper) national contracts. Because UTEP seeks cheaper goods and services through Sodexo, the University is able to offer cheaper food to UTEP students. Consequently, since UTEP students spend less on Sodexo’s burritos and pizza, they have more money to spend on local businesses.
Lopez claims El Pasoans would pay more for locally produced goods. Although this may be true for some El Pasoans, this does nothing to influence UTEP business. Until UTEP students protest Sodexo-produced food in favor of local suppliers, UTEP has no incentive to offer more costly products.
If local firms want to compete with national contracts, they must offer a cheaper or a better product or service. If a business can offer neither, frankly, they should not be in competition.
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Tim Collins March 2, 2010, 4:51 am
I cannot speak for the food distribution business, but in Industrial Supplies, small local businesses can sell at the same price as the national firms.
The problem is one of which comes first, the sale or the inventory. Large national or regional firms, with purchasing agreements in place can invest in larger inventories and advanced distribution networks because they know they have an almost guaranteed market through these contracts. Prior to long term and sole source agreements (such as WSCA), local entities put out bids for all to respond. Once multi-state agreements were in place the bidding went away (that is the cost savings sought) and local firms lost the very opportunity to compete.
Another point you should research is the impact of local reinvestment. What percentage of a firms profits are reinvested in the local community? Studies I have read show a significantly larger local reinvestment rate on the part of local business as compared to national and multi state corporations
Richard Sapien March 2, 2010, 7:23 am
Tim,
The problem is one of which comes first, the sale or the inventory. I believe companies that already have larger inventories and distribution networks (see Sysco) are able to wrestle away purchasing agreements from companies who do not.
I am interested to see the local reinvestment studies you have read. Generally, the “buy local because the money stays local” argument is fallacious because it does not address what local is, nor have I seen evidence to support that local firms do a better job to keep the money in the region.
What is local? Canutillo or Socorro? El Paso? Texas? The United States? How do I know local suppliers aren’t purchasing their supplies from national producers? It is an interesting topic to discuss, one which I will eventually follow-up with another blog.
Tim Collins March 2, 2010, 7:48 am
Richard:
Regarding reinvestment in the local community. When a national chain, such as Sysco, Grainger, or take your pick. Rounds up their annual profits and decides where to spend them, they have and exercise the option as to where those profits will be spent. For example Home Depot may choose to take those profits (gathered from all their locations) and open a new store in Peoria.
On the other hand a small local company, that currently does not have locations outside of the local community, will reinvest those profits either in expanding or improving their current location, increasing inventory or advertising, or whatever, thus recirculating the fruits of that labor within the local community.
As to purchasing inventory from other areas, absolutely they do, the procurement of inventory is not the economic multiplier, the profit made from that inventory is the multiplier.
My point of contention is how the current multi-state agreements for procurement, effectively lock out small businesses, not on a price basis, but at times by their terms and conditions. If you would like to review a real world agreement visit this site:
http://www.aboutwsca.org/content.cfm/id/WSCA?CFID=498220304&CFTOKEN=31024656
There are also issues of contract compliance and fraud cropping up across the nation with some of these large contracts. Mostly due to the difficulty in administration. Google Office Depot news to see examples of the multiple law suits regarding failure of compliance and fraud allegations and settlements
Richard Sapien March 2, 2010, 8:08 am
Tim,
Keep in mind that national chains invest in different locations, such as Peoria, as a result of national competition. This isn’t necessarily a bad thing for local economies. Sure, Home Depot may open a new store in Peoria, in part, by El Paso profits, but El Paso also benefits from national chains who open local stores, in part, as the result of company profits from another city.
There is more to be said about the reinvestment of local profits, but first think about this question: Do you think El Paso citizens and businesses would be better off if they only dealt business within the city limits? After all, there would be no money “leaking” from the city and all money would recirculate back into our economy.
Having said that, I get that your point of contention is with the multi-state agreements. I believe the principles I’ve discussed here address some of the reasoning behind these agreements, but I will be sure to read your link to better inform myself.
Out of curiosity, how do you believe these institutions, such as UTEP, should handle these contracts?
Tim Collins March 2, 2010, 8:27 am
I think UTEP and any government entity needs to seek the “best Value” in deciding on suppliers. They should also look closely at the contract requirements to make sure they do not, intentionally or not, create artificial barriers to entry (such as extreme technology requirements etc that add minimu value).
Price is the base decision, other factors such as lead time for delivery, the level of critical need for any particular product, ease of dealing with a supplier in “moments of truth” (when problems arise).
There are many instances now where small businesses are effectively locked out of the bidding process by contract terms that do not really add great value.
I am not advocating throwing out national contracts or 100% set aside for local businesses. I just know from 10 years experience in this field (most working for a Fortune 100 if not 50 Industrial Distributor and holder of many national contracts) that the hurdles in place are substantial.
One possible solution, for small business is the formation of selling alliances on the model of current purchasing alliances.