Study Goals & Methodology

Procurement Matters: The Economic Impact Of Local Suppliers

The goal of this analysis is to quantify the economic impact of both Wist and Office Max Contract in the state of Arizona as a proportion of revenue. Outcomes will allow procurement officials and policymakers to determine if local preferences are justified.

The following section describes in detail the methodology for determining the amount of money Wist Office Products (Wist) and Office Max Contract (Office Max) recirculate in the local economy. As described previously, Office Max does have a physical presence in the Greater Phoenix area as a contract supplier of office supplies. Therefore, the impacts that Office Max have on the local economy would be much greater than that of, for example, Staples which merely delivers products stored, sorted, and administered elsewhere. This is an important distinction to make, as essentially Wist is being compared to the one national chain that keeps the greatest amount of money in the local economy.

A Note on Confidentiality

As in all previous studies, Civic Economics promises its private sector clients a great deal of privacy. For all firms, business practices are a matter of great competitive importance. This analysis, for example, required Wist to provide the firm with a great deal of financial information that is closely guarded in business. The worksheet completed by company officials reveals such things as wage rates, profitability, the cost of goods and services, and a range of other, admittedly intrusive items. Due to the sensitivity of such information, data reporting in this document is limited to aggregated values for all categories of revenue and expenses expressed as a share of revenue.

Methodology

The methodology to calculate the money kept locally for a contract supplier is very similar to that of a retailer. The four main components used to calculate money kept locally for both local retailers and chains remain the same as our previous reports: labor, profit, procurement, and charity. For each of the categories officials with Wist Office Products completed a survey that was supplemented with a phone interview for further clarification. The text box below describes the process that was undertaken to estimate the results for Office Max. Although our confidentiality agreement with Wist Office Products prevents us from divulging answers to specific questions, the following paragraphs describe the major differences between Wist and Office Max for each category.

Labor

In previous studies, local businesses were found to spend a larger percentage of revenue on labor and this was no exception. Wist provides greater employment wages and benefits through two channels. The first is that the entire management and administrative operation is employed by Wist and located in their Tempe headquarters. While Office Max may have a small locally based management team, most of the management team is located in Naperville, Illinois at their headquarters. Another major advantage is that the customer service and sales force for Wist are all located in the Phoenix area. Office Max operates six regional call centers throughout the country. An order placed from central Phoenix for delivery to the region may well be serviced by sales and administrative personnel in Columbus, Ohio, who, of course, spend their paychecks outside Arizona. Civic Economics made no attempt to compare wage and benefit rates on an hourly or per employee basis, only total wages and benefits paid locally.

Profit

The profits earned by Wist remain in the Phoenix area. Whether these profits are used by the firm’s owners to buy retail goods or real estate, give to preferred causes, or even rest in a savings account, it is a good bet that this money resides somewhere in the community and gets recirculated as it is spent or invested. Office Max, as a publicly held corporation, distributes profits to investors throughout the world. Of course, some of these investors are located in the Phoenix region, but that represents an incalculably small portion of the total profit.

Local Procurement of Services

Wist Office Products also has an advantage over Office Max when it comes to retaining Phoenix-based companies to provide administrative services that Wist does not do internally. These include such expenditures as accounting, legal, and marketing work. Wist also has a budget for marketing in local media outlets. Office Max, as a national chain, needs not contract for such services in each market area. Rather, these services are provided in-house or contracted for through corporate headquarters in the Chicago area.

Charity

Even though this represents a small dollar advantage for Wist Office Products relative to Office Max, they are proud of their contributions to a wide range of local causes during the past year. As with other locally-owned businesses, Wist’s owners and managers are invested in the community and are thus more likely to donate to these types of causes in their community.

Preliminary Findings

When taking these factors into account the results are striking. Wist Office Products recirculates 18.96% of their revenue in the local economy whereas Office Max Contract recirculates only 11.56%. Wist, based on these figures, produces 64% greater local economic impact per dollar of revenue than Office Max.

However, these values tell only part of the story, as demonstrated below.

Estimating Results for Office Max

Because Office Max is a publicly traded company, they provide a great deal of information both in annual reports to shareholders and required filings with the Securities Exchange Commission. Office Max’s Contract division covers most of what would be called a contract supply division. Office Max Contract operated 52 distribution centers during 2006 and provided exact revenues and information used to estimate the amount of income that was spent on labor. However, these values included a number of retail stores that operated outside the United States. To remove those retail activities from the total, Civic Economics assumed foreign Office Max retail outlets operated the same as retail operations in the United States and subtracted these from the Office Max Contract results. This provided a clear picture of the supply operation. This is important due to the fact that a retail operation generally spends far more on labor as a percentage of revenue than a contract supply operation does. This adjustment allowed for an apples-to-apples comparison.

Extended Analysis

In prior retail impact analyses, Civic Economics has identified only one instance in which a local firm made substantial purchases of local goods for resale: a record store in Austin, Texas with a substantial in-store catalog of independent local artists sold on consignment. Wist presents an even more dramatic example of extended local impact through reliance on additional Phoenix area operations in its supply chain.

Local Suppliers of Goods

Of the total amount Wist expends on the procurement of goods for resale, over 10% goes through locally-owned suppliers based in the Phoenix area. To estimate the additional economic impact of this spending, Civic Economics assumed that these local suppliers operate very much like Wist itself, recirculating the same proportion of revenue locally through labor, profit, procurement, and charity.

Local Wholesale Distribution Center

Of the total amount Wist expends on the procurement of goods for resale, over half goes through the local distribution center of a national supplier specializing in service to independent office supply firms. To estimate the additional economic impact of this spending, Civic Economics assumed that this distribution center operates very much like Office Max Contract, recirculating the same proportion of revenue locally.

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