AnchoringOurLocalEconomy:DevelopingaLocalProcurementStrategyfor

PhiladelphiasHigherEducationandHealthcareInstitutions

April2015

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Contents

ExecutiveSummary.......................................................................................................................................3

WhytheControllerundertookthisstudy.....................................................................................................4

Findings.........................................................................................................................................................4

Recommendations........................................................................................................................................5

SECTION1 Background..........................................................................................................................7

SECTION2 SpendingbyPhiladelphiasEdsandMedsInstitutions.......................................................9

SECTION3 TheSupplySide:WhatPhiladelphiaMakes.......................................................................13

SECTION4 BridgingSupplyandDemand.............................................................................................17

SECTION5 AccessingInstitutionalSupplyChains................................................................................22

Conclusion...................................................................................................................................................30

AppendixA..................................................................................................................................................32

AppendixB..................................................................................................................................................33

Acknowledgments.......................................................................................................................................35

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ExecutiveSummary

ControllerAlanL.ButkovitzlaunchedtheAnchorProcurementInitiativeinJanuary2014withthereleaseofSurveyoftheCurrentandPotentialImpactofLocalProcurementbyPhiladelphiaAnchorInstitutions.The2014reportdrewuponpubliclyavailabledatasupplementedbysurveysofprocurementofficersattheCitysmajorhighereducationandhealthcareinstitutions(EdsandMedsanchors).Itidentified$5.3billioninnonpayrollspending,inverygeneralcategories.A$14billionsectorsupportingover100,000employeesandover100,000studentsandvisitors,PhiladelphiasEdsandMedsanchorsprocureawidevarietyofgoodsandservices.Whilemanyifnotmostservicesareprocuredfromlocalvendors,theJanuary2014reportestimatedthatabout$1.14billionincommoditiesareprocuredfromsourcesoutsidetheCity.Thismeansthattheanchorsareexportingasubstantialproportionoftheirprocurementdollars,andthusareprobablynotmaximizingtheireconomicimpactonPhiladelphia.Thecurrentreportdrillsdownintoactualpurchasingdatatoidentifypromisingopportunitiesforprocurementfromlocalmanufacturers.

SincethereleaseoftheJanuary2014report,theControllersOfficehasdeepeneditsengagementwiththeCityslargestEdsandMedsanchorinstitutions.Thankstoexcellentcooperationfromthemajorinstitutions,whichprovidednearly$3billioninfinegrainedprocurementdata,theControllersOfficeisnowpreparedtoofferamuchmoredetailedandspecificanalysisoftheanchorssupplychainswhatsortsofthingsarepurchasedinlargequantitiesacrossinstitutionsandwheretheyarebought.Usingthisdemanddatainconjunctionwiththesupplydataproducedin2013bytheMayorsManufacturingTaskForce,thecurrentreportprovidesananalysisofthegapbetweenwhattheanchorsdemandandwhatthelocaleconomycurrentlysupplies.TheControllersofficehasidentifiedoverhalfabilliondollarsinpromisinggrowthopportunitiesin13manufacturingsubsectors.Thosewiththemostpotentialaresurgicalappliances,medicalsupplies,HVACequipment,andofficesupplies,representing$531millioninannualspending;currentlyonly$102million(19%)islocal.

ThepresentreportcaninformaroadmaptodevelopingclustersofeconomicactivitydrivenbydemandfromtheCityslargestinstitutions.Byleveragingexistinglocaldemand,theControllerbelievesthatPhiladelphiabasedmanufacturerscangrowtoserveregionalandevennationalsupplychains.Wheremanufacturingcapacityislacking,thisreportpointstothetypesofenterprisesthatPhiladelphiamightattempttoattractandnurtureusingitseconomicdevelopmentpolicytools.ThisreportalsobreaksnewgroundinprobingthefunctionofintegratorslikeOfficeDepotandOwens&Minorinthesupplychainoflargeinstitutions,andproposesanimportantroleforthemindevelopingalocalprocurementprogram.Inthefinalanalysis,theControllerunderstandsthatthisapproachmustmakebusinesssenseforallinvolved:itmustnotbecharitableimpulsesthatdrivethisprogram,butwhatrenownedHarvardBusinessSchoolprofessorMichaelPortercallssharedvalue.

Finally,thisreportmakesconcreterecommendationstowardfollowingtheleadofcitieslikeCleveland,Baltimore,Detroit,Newark,andChicagoindevisingaplantoimplementananchorledprocurementstrategy.TheControllersOfficehashadnumerousconversationswithpartnersintheEdsandMedsanchorworld,aswellaswithnumerousotherinstitutionsandorganizationsthatwouldformthenucleusofasupportcoalition,andallseemwillingtogetbehindthisagenda.

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WhytheControllerundertookthisstudy

Sincetakingofficein2005astheCitysfiscalwatchdog,ControllerButkovitzhasfocusedonwaystoraiserevenuesandotherwiseimprovetheCitysfiscalhealthwithoutraisingtaxes.HelaunchedtheAnchorProcurementInitiativein2014toexplorewhetherPhiladelphiaslargesttaxexemptinstitutionsweremaximizingtheirimpactonthelocaleconomy.TheControllersinitialreportestimatedthatPhiladelphiaslargestEdsandMedsinstitutions,criticalanchorsofthelocaleconomy,spendover$5billionongoodsandservicesonanannualbasis.Thecurrentreportbuildsuponandrefinestheinitialanalysis.Utilizingactualprocurementdatasuppliedbythelargestanchorinstitutions,TheControllersofficehasidentifiedhundredsofmillionsofdollarsinpotentialopportunitiestoexpandlocalproductionanddistributiontomeetdemandfromtheseinstitutions.Thisreportisenvisionedasatouchstoneforacitywidestrategythatwillbringtogetherthemajorinstitutionsandothersinasharedcommitmenttoorganizethedemandsidewithaneyetowardlocalization.Whilepotentialopportunitiesexistinmanysectorsofthelocaleconomy,thisreportfocusesprimarilyonmanufacturingopportunities.

SeveralindividualPhiladelphiainstitutionshavealreadydemonstratedcommitmenttolocalpurchasing,andhavedevelopedbasicstructuresforgrouppurchasing.IncitieslikeCleveland,Detroit,Baltimore,Newark,andChicago,however,theanchorsareworkingtogethertoleveragetheircombinedpurchasingpowertocreatenewbusinessesandexpandexistingones.ThisreportrecommendsthecreationofanewentityinPhiladelphia,alongthelinesofChicagoAnchorsforaStrongEconomy(CASE)orEvergreeninCleveland,thatwillfacilitatecoordinationandlinkexistingbusinessestoapurchasingprogram;further,thisentityshouldbechargedwithhelpingdevelopandgrowlocalbusinessesthatcanmeetdemand.Thereismuchupsideandvirtuallynodownsidetothisinitiative.

Findings

TheControllersOfficeanalyzed$3billionofprocurementdatafromfiveofPhiladelphiaslargestanchorinstitutionsanddeterminedthatapproximately$800million(27%)isspentannuallywithPhiladelphiabasedvendors.

Theinstitutionsboughtabout$860millioninmanufacturedgoods,ofwhich$136million(15.8%)wasprocuredlocally.

Theanalysissuggestsmorethan$530millionintotalpromisingopportunityforincreasingmanufacturingoutput.Thetopsectorsaresummarizedinthechartbelow:

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CommodityCategoryAnnualSpend(mil$)

LocalSpend

LocalSpend%

Growthpotential(+25%)

Totalimpact*

SurgicalAppliancesandSupplies $300 $27 9% $68 $186MedicalEquipmentandSupplies $146 $69 47% $19 $53HVAC&CommercialRefrigeration $34 $2 6% $8 $21Manuf&ReproofMagneticMedia $18 $0 2% $4 $12OfficeSuppliesExclPaperProducts $13 $3 20% $3 $7Sporting&AthleticGoods $7 $1 9% $2 $4ScalesandBalances $8 $0 1% $2 $5Printing $5 $1 15% $1 $3

TOTALPROMISINGOPPORTUNITY $531 $102 19% $107 $292

*SeeAppendixB2formultipliers

Iftheanchorinstitutionsincreasedlocalprocurementinthesetargetedsectorsby25%ofwhattheyarecurrentlyimporting,itwouldgenerateanadditional$107millionindirecteconomicimpactand$292millionintotalimpact.Suchashiftwouldcreate1,250directmanufacturingjobsandanadditional4,000indirectjobs.

TheControllersanalysissuggeststhatmanylocalmanufacturersalreadyhavethecapacitytosupplyanchordemandorwouldneedminimalassistancetobecompetitive;thesectorsinwhichtheyoperatearealreadyeithergrowingfasterorhavealargercomparativeworkforcerelativetothenation.

Recommendations

TheAnchorProcurementInitiativeaimstoencouragePhiladelphiaslarge,private,notforprofithealthcareandhighereducationinstitutionstovoluntarilyspendmoreoftheirprocurementdollarslocally.Itaimstodosobyfacilitatingthecoordinationofdemandamongtheanchorinstitutions,aswellasbycoordinatingsupplyamongvendorsandmanufacturersintargetedsectors;italsoidentifiesanimportantroleforsupplychainintegrators.Theparticipatinginstitutionshavealreadydemonstratedgreatcommitmenttolocalprocurement,aswellasawillingnesstodomore,aspossibleandwhereitmakesbusinesssensetodoso.Butitisoutsidethegeneralpurviewofanyparticularinstitutiontohelporganizethedemandside,andevenlesssotoorganizethesupplyside.TheControllerbelievesthatlocalgovernmentcanandshouldplayaroleinfacilitatinganeconomicdevelopmentstrategythatleveragesanchorinstitutiondemand.TheControlleralsobelievesthatsuchastrategyrepresentsperhapsthebestopportunityfortheanchorinstitutionstomaximizetheirlocaleconomicimpactthroughsustainable,deep,marketdrivenengagement.Assuch,theControllerrecommends:

Conveneallconcernedparties.BringtogetherUniversityleadersandprocurementdirectorswithworkforcedevelopers,financialinstitutions,civicleaders,businessgroups,andmanufacturers.Holdaonedayconferencetosharetheresultsofthecurrentstudyandproduceacommitmenttofurtherengagement.

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Formabroadcoalitiontobuildsupportandcapacity.Thecoalitionshouldincludetheanchorinstitutions,workforcedevelopers,communitydevelopmentfinancialinstitutions,businessgroups,andCityofficials.

Buildapermanentorganizationtodrivethework.FollowinginthefootstepsofChicagoAnchorsforaStrongEconomyandClevelandsEvergreenCooperatives,eachmajoranchorinstitutionmightmakearelativelymodestfinancialcommitmentthatcouldleveragephilanthropicsupportforthecreationofPhiladelphiaAnchorsforaStrongEconomy(PHASE).

Facilitatetheorganizationofthedemandside.Workingwithprocurementdirectorsattheanchors,PHASEwouldhelptocreateaninterinstitutioncollaborativepurchasingstructure.

Facilitatetheorganizationofthesupplyside.WorkingwithmanufacturersorganizationssuchastheDelawareValleyIndustrialResourceCenter,theManufacturersAllianceofPhiladelphia,theChamberofCommerce,andtheSustainableBusinessNetwork,aswellastheMayorsOfficeofManufacturing,PHASEshouldperformadeepcensusofwhatisproducedlocally,toserveasabaselinefordevelopment.Thiscouldincludecreatingadatabaseandaportalthatwouldallowprocurementofficerstoreadilylocatelocalsuppliers.

Invitesupplychainintegratorstoplayanactiverole.PHASEwouldworkwithmajorwholesalesupplierssuchasOfficeDepot,Owens&Minor,Aramark,Sodexo,Grainger,andCardinaltocreateopportunitiesforlocalbusinessestogainaccesstoregionalandnationalsupplychains.

Createabusinessdevelopmentprogram.FollowinginthefootstepsofCASE,PHASEshouldcreateaprogramthatconnectslocalbusinessestoopportunitiesintheanchorsector,andprovidestechnicalandcapitalassistancetoenablethemtoscaleuptoearnanchorbusiness.SuchaprogramcouldberunbyacombinationofPhiladelphiasexcellentlocalbusinessschoolsinpartnershipwithexperienceddeveloperslikeDVIRC,Interise,andNextStreet.

Coordinatebusinessdevelopmentwithworkforcedevelopment.Acommoncomplaintamonglocalbusinessesisalackofqualifiedworkers.PHASEwouldworktoaligntheCitysmajorworkforcedevelopmentproviderswiththetrainingneedsoflocalmanufacturersastheyexpandtomeetnewdemand.

Determineareasonablebenchmarkandtimeframeforincreasinglocalprocurement.Itisimportanttosetaninitialgoalandhowthisgoalcangrowinthefuture

UsetheCityspolicytoolstocreatetargetedincentivesforinvestmentinproductionformanufacturers.Amongtheobstaclestosignificantlyincreasedlocalizationistheabilityoflocalmanufacturerstocompeteonpriceandqualitywithexistingsuppliers.Whileguaranteeddemandwillhelp,theCityshouldprovideperformancebasedfinancialincentives.Theseincentivesneedtobeflexible,growandadapttothedifferentstagesafirmwillgothrough.Theincentivesneedtodriveinvestmentratherthanreducecosts.Theymustbetiedtojobcreation.

Trackinputcommoditiessosecondtiercommoditymanufacturerscangrowinthefuture.Itisimportanttodevelopthesupplychainbothverticallyaswellashorizontally.

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SECTION1 Background

Philadelphiaisblessedwithaveryhighconcentrationofmajorhighereducationandhealthcareinstitutions.Morethan30universities,colleges,andacademicmedicalcenterscalltheCityhome.Theyemploymorethan150,000peopleandeducateover100,000students,mostofwhomresideintheCity;thehealthcentersserveover170,000patientsannually.Intotal,theEdsandMedsanchorinstitutionsrepresentabout30%oftheCity'seconomy.Bydefinition,anchorinstitutionsarerootedinPhiladelphia.Eachhasmajorphysicalinfrastructurebuiltoverdecades;eachconsidersitselftohaveamissiontoimproveitscommunity,andtheirlargelytaxexemptstatusderivesfromtheirpublicpurpose.Inshort,theyallhavebothamoralandaneconomicstakeinthevitalityoftheirlocalcommunities.

TheUniversityofPennsylvaniaandDrexelUniversityhavelongbeenconsiderednationalleadersininvestingintheirWestPhiladelphiacommunities.Formanyyears,PennandDrexelhavedevotedsubstantialresourcestorealestatedevelopment,cleaning,greeningandpublicsafety,supportingneighborhoodbasedpubliceducation,andcreatingdirectemploymentopportunitiesforWestPhiladelphiaresidents.Morerecently,DrexelhasbeenthedrivingforceinattainingPromiseZonedesignationforthechallengedMantuaneighborhoodinWestPhiladelphiaandhasembarkedonadeepprocessofengagementaroundcommunityeconomicdevelopment.Templehasmadehugestridesinincreasinglocalanddiversehiringonitsmajorconstructionprojects,andispartneringwithorganizedlabortoincreaseemploymentopportunitiesforNorthPhiladelphiaresidents.Jeffersonisrecognizedintheareaoflocalfoodprocurementandmeasuresitsannuallocalimpactat$130million.TheChildrensHospitalofPhiladelphiahasprioritizedlocalprocurementinitsneighborhoodbasedprojects.Insum,theseeffortsadduptoamajoreconomicimpactontheCity,directlyandindirectly.1

Despitethislaudablework,theeconomichealthoftheneighborhoodssurroundingmanyoftheseinstitutionslagstheCity.EveninstitutionsaslargeasPenn,Drexel,Temple,CHOP,andJeffersonhavelimiteddirectemploymentopportunitiesforPhiladelphians,especiallythosewholackcollegedegrees.Thelongtermsolutionis,ofcourse,toincreasetheproportionofPhiladelphiansintheseneighborhoodswithcollegedegrees;intheshortandmediumterm,though,itmakessensetoconsiderotherwaystheeconomicvitalityoftheanchorscancreatejobs.TheControllersOfficehasfoundthatafocusedprogramoflocalizingprocurementcanformthecoreofafeasiblecitywidedevelopmentstrategythatleveragesalreadyexistingcircumstancesthefactthattheanchorinstitutionspurchaselargeamountsofgoodsandservices.Manyservicesarealreadyprocuredlocally,howeveronlyafewmanufacturedgoodsare.

Afewinstitutionsalreadyprivilegelocalpurchasing,albeitmostlyindividuallyandwithoutchallengingfundamentalsupplychainrelationships.Pennhaslongprioritizedlocalspending:about$100millionofits$1billionprocurementbudgetisspentinWestPhiladelphia,andPennPurchasing

1PhiladelphiaCityController,SurveyoftheCurrentandPotentialImpactofLocalProcurementbyPhiladelphiaAnchorInstitutions,January2014(http://www.philadelphiacontroller.org/publications/AnchorInstitutions_January2014.pdf).ForimpactofhigherEdinstitutions,seePhiladelphiaHigherEducationGovernmentRelationsOfficersGroup,TheCityofPhiladelphiaanditsHigherEds:SharedGoals,SharedMissions,SharedResults,October2013(http://www.econsultsolutions.com/?wpdmdl=35740).WhatDoestheWestPhiladelphiaPromiseZoneMeanforDrexel?DrexelNow,May7,2014(http://www.drexel.edu/now/archive/2014/May/Promise%20Zone%20QandA/)

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Servicesprovidesincentivestoitspurchasingagentstofindandutilizelocalsuppliers.2Therehavebeenafewattemptstocreatenewsupplychainrelationshipsthathelpdeveloplocalsuppliers.Inawellpublicizedcase,PennandDrexeltogetheractivelyhelpeddevelopalocalofficesupplyvendorfromaTierTwodiversesubcontractorintoaTierOnesupplier.3Thiscasedemonstratesanappetitefortheapproachadvocatedinthisreport.Reachingthenextlevelrequirescooperationandcoordinationacrossmultipleinstitutions.Itrequiressophisticatedanalysisanditrequiresleadership.

TheControllersJanuary2014SurveyofthePotentialofAnchorProcurementrevealedmuchabouttheeconomicpotentialoftheanchorsectorandhowleveraginganincreasedproportionofits$5billionprocurementspendingcouldbenefitPhiladelphiaseconomy.ThankstograciouscooperationonthepartofPhiladelphiaslargestanchorinstitutions,inthepastyeartheControllersofficehascollectedandanalyzednearly$3billioninactualprocurementdata.Thedatasuggestthatapproximately25%ofgoodsandservicesaresuppliedbylocalvendors.TheControllersanalysisdemonstratesthatintermsofmanufacturedcommodities,localsupplierscomprisebetween9.4%and15.8%oftotalprocurement.Sincesuppliersaremorelikelytobedistributersthanactualproducers,thisnumberoverstatestheproportionofgoodsthataremanufacturedlocally.Inshort,about5%ofthegoodstheanchorspurchasearemanufacturedinsidetheCityofPhiladelphia.Todeterminewhetheritisplausibletoincreasetheproportionoflocallymanufacturedproductsintheanchorssupplychains,thisreporthastakenasectoralapproachtothedata,using4,5,and6digitNAICScodestoattempttomatchanchordemandwithlocalmanufacturingoutput,bothactualandpotential.

Thustheanalysisinthisreportbeginsbycompilingtheanchorprocurementdataandcategorizingitbymanufacturingsector.ThereportidentifiesthespecificcommoditiesthataremostcommonlypurchasedbyPhiladelphiasanchorinstitutions,andmatchthisinformationwiththecurrentoutputofthelocalmanufacturingsector.Mappingsupplyanddemandinthismannergeneratesamarketanalysisthatelucidatestheexistinggapswhichmightbefilledwithanintentionalcombinationofrelativelyminorchangesintheanchorinstitutionssupplychainsandtheapplicationofpolicytools.

Inshort,thereporthasidentifiedpotentialities:Specificsectorsinwhichitseemsplausiblethatexistinglocalmanufacturingcapacitycouldbedevelopedtomeetexistinganchordemand,andwhereanchordemandcouldinturn,helptogrowparticularmanufacturingsectorssothattheymightbecomeexporterstobroadermarkets.Someeconomistshavecalledthisapproachalocalversionofimportsubstitutionindustrialization(ISI)usinglocaldemandtospurdeepereconomicdevelopmentbyincreasingtheexportoftradablecommodities.4

Therearenumerousreasonswhytherearecurrentlygapsbetweenanchordemandandthelocaleconomysabilitytoprovidesupply.Theseincludeinformationasymmetry,wheresupplierandpurchaserareunawareofeachothersneedsandcapacities,marginsthataretoosmallorneedforcapitalinvestmenttoolargethataparticularcommodityisnotmanufacturedintheCity,lackofanappropriatelyskilledworkforce,wellwornsupplychainsthatarentorientedtowardlocalprocurement,andsoon.Thusthereisawidespectrumofopportunityfordevelopment,fromconnectingexistingsupplyanddemandontheonehandtothecreationofentirelynewlocalindustriesontheother.This

2RitaAxelrothandSteveDubb,TheRoadHalfTraveled,UniversityEngagementataCrossroads,2010.3AthenaMerritt,BigDeal,SmallFirm,PhiladelphiaBusinessJournal,Apr21,2008;interviewwithToddRose,Sept23,20144SeeJosephPersky,DavidRanneyandWimWiewel,ImportSubstitutionandLocalEconomicDevelopment,EconomicDevelopmentQuarterly,1993,vol.7,issue1,pp.1829.

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reportwillalsofocusontheroleofaheretoforeunderstudiedaspectofinstitutionalprocurement,namelythatofthelargesupplychainintegratorslikeOfficeDepotandOwens&Minor.

SECTION2 SpendingbyPhiladelphiasAnchorInstitutions

TheControllersOfficeaskedeachofPhiladelphiaslargestanchorinstitutionstoprovidearecentandtypicalyearsworthofprocurementdataenumeratingtheirmostfrequentlypurchasedcommoditiesandthebillingzipcodeforthesupplierofeachcommodity.Philadelphias5largestinstitutionscomprising4highereducationinstitutionsand4healthsystemssuppliedusabledata.5Itbecameclearratherquicklythatdespitedifferencesindatasystems,themajorinstitutionsoperatemoresimilarlythandifferently.Thedataprovidedbytheseinstitutionsamountsjustover$3billioninprocurementspending,ofwhich$798.1million(27%)wasidentifiedaslocal.6

Forpurposesofanalysis,thedatahasbeendividedinto3generalcategories:Constructionrelatedexpenditures,Healthcarerelatedexpenditures,andOtherexpenditures.Asummaryofthedataisfoundbelow.

ConstructionRelatedExpenditureSummary

ThelargestcategoryofanchorspendingisinConstructionandConstructionrelatedexpenditures.Itaccountedfor$1.13billionofthe$3billion,andthedataindicatethat$420.8million(37.3%)wasspentlocally.

Drillingdownfurther,constructionrelatedcategorieswiththehighestproportionoflocalspendingareelectricalequipment,furniture,andgeneralconstruction.Localspendinginthesecategoriesrangesfrom35%to50%.Includedundergeneralconstructionarematerialssuchaswood,steel,cement,finishing,andpaint.Becauseoftheirsize,theanchorsaccountforasizeablepercentageofthePhiladelphiamarketsoveralldemandforthesecommodities.In2011,theentirePhiladelphiamarketwas$4.3billioninelectriccommoditiesand$588millioninfurniture;inbothcategories,spendingbytheanchorsisequaltoapproximately5%ofaggregateCitydemand.7

Amongconstructionrelatedexpenses,thesubcategorydemonstratingthesmallestproportionoflocalspendingisHeatingVentilationAirConditioning(HVAC)equipment:with$58.7millionintotalspending,just$3.6million(6.1%)wasprocuredlocally.ThereisasubstantiallocalmarketforHVACequipment:overalldemandintheCityforHeating,AirConditioning,RefrigerationandVentilation

5DatawasreceivedfromTheChildrensHospitalofPhiladelphia,DrexelUniversity,TempleUniversityandTempleHospital,ThomasJeffersonUniversityandHealthSystems,UniversityofPennsylvaniaandPennHealthSystems.6TheJanuary2014reportexamined34PhiladelphiaEdsandMedsanchorinstitutions.Thesampleusedinthisreport,comprisedofthe5largestanchorinstitutions,isbothrepresentativeandconstitutesthevastmajorityofprocurementintheEdsandMedsspaceintheCity.Allclaimsarebasedonlyuponthecommoditydataprovidedbyoursampleinstitutions.Itispossiblethatprocurementpatternsamongthesmallerinstitutionsaresignificantlydifferent.Becausesomeinstitutionsprovidemorecompletedatathanothers,someextrapolationwasnecessarytoderivecomparabledata.SeetheAppendixfordetailsregardingtheprojectionmethod.7Intermsofprocurement,thelocalspendnumberislikelylowerbecausethemajorityofreportedconstructionspendingisaccountedforbycontract,notspecificitems.

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equaled$645millionin2011.8Thus,demandfromthesampleanchorsconstituted9.1%oftheCitysoverallmarketinthissubcategory.

Table1 AnchorConstructionSpending

EstimatedTotalSpend EstimatedLocalSpend LocalSpend%

Furniture $22,023,540 $10,649,163 48.4%

HVAC $58,658,804 $3,561,664 6.1%

GeneralConstruction $573,256,494 $238,619,410 41.6%

MiscFacilityProducts $327,068,008 $110,488,587 36.5%

Electrical $108,050,924 $38,324,062 35.4%

Telecommunications $37,525,391 $10,197,772 27.2%

Total $1,126,583,162 $420,840,658 37.4%

HealthcareExpenditureSummary

Healthcarecommoditiescomprisethenextlargestcategoryofanchorspending.Thedatabrokedownintofourprimaryhealthcareprocurementsubcategories:pharmaceuticals,medicalequipment,laboratoryequipmentandchemicalsubjects.Acrosstheseveninstitutionsexamined,healthcarecommoditiesaccountfor$950.5millioninoverallspending,$154.9million(16.3%)ofwhichisprocuredlocally.

Medicalequipmentisthelargestsubcategorywithinhealthcareaccountingfor$552.1millionofthereportedinstitutionalspending,$133.8million(24.2%)ofwhichwaslocal.Thissubcategoryincludessuchpatientcaresuppliesasadhesivesandbandaging,aswellasspecificmedicalmachineryandinstruments.Sincemedicalequipmentprocurementisoftenlefttoindividualdoctors,thereisawidearrayofbrandsthatthesuppliersoffer.

Laboratorysuppliesarethenextlargestcommoditywithinthehealthcarecategory,accountingfor$144.1millionoftheoverallspend,with$8.7million(6.0%)localspend.Laboratorysuppliesincludeglassproducts,observatoryinstruments,andrelatedequipment.Thechemicalsubjectsandgasessubcategoryincludesbiochemicalcompounds,reagents,oxygen,specialtygases,andtheassociatedresearchcosts.Thissubcategoryamountsto$56.7millionwith$4.5million(8.0%)spentlocally.

Table2 AnchorHealthcareCommoditySpending

EstimatedTotalSpend EstimatedLocalSpend LocalSpend%

Laboratory $144,137,918 $8,662,298 6.0%

Medical $552,115,778 $133,815,331 24.2%

Pharmaceuticals $197,489,368 $7,832,914 4.0%

ChemicalsandGases $56,733,702 $4,543,109 8.0%

Total $950,476,767 $154,853,652 16.3%

8ManufacturingTaskForceManufacturingGrowthStrategyforPhiladelphia,December2013(http://www.manufacturingonline.org/resources/FULL%20REPORT%20Manufacturing%20Growth%20Strategy%20FINAL.pdf)

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OtherExpenditureSummaries

OfficeSupplies

Spendinginthegeneralofficesubcategoryis$82.4millionwith$19.8million(24%)spentlocally.Itshouldbenotedthatcommoditiesthatwouldgenerallybelongunderthissubcategory(writingutensils,storagesupplies,tapes&adhesives,etc)areregularlyaccountedforunderothersubcategoriesbecausethepurchasesarenotcarriedoutbyacentralizedprocurementdepartmenttheyarepurchasedseparatelybyspecificdepartments.Thatbeingnoted,itislikelythatthedataunderestimatesthedemandforthesecommodities.

PaperProductsandPrinting

Acrosstheinstitutionsstudiedherein,spendingforpaperproductsamountsto$5.2million,witha$1.6million(31.1%)localspend.Paperproductsarepervasiveinnearlyeveryindustryandareinheavydemand.In2011,thePhiladelphiamarketforpaperproductswas$3.9billion.Thatamountsto0.13%ofthetotalPhiladelphiamarket.Thesefiguresprobablyunderestimateactualspending,sincepaperproductcostsarealsolikelytofallundermoregeneralpurchasingcategoriessuchasadministrativeservicesorgeneralsupplies.Therobustcitywidedemandforpaperproductsspeakstothemanufacturingopportunity.

Paperproductionhasastrongrelationtotheprintingindustry.In2011,thePhiladelphiamarketforprintingrelatedserviceswasover$1.5billion.Theinstitutionsspent$21.2millionwithapproximately$5.1million(23.2%)spentlocally.Totalspendingacrossthesampleinstitutionsrepresent1.4%ofaggregatedemand.

CleaningProductsandSupplies

AnchorspendingonCleaning,Housekeeping,andCustodialServiceswas$14.1million,$1.7million(12%)ofwhichwasprocuredfromlocalvendors.Approximately40%ofthetotalamountislikelymanufacturedgoodstherestofthespendingwasreportedunderageneralhousekeepingcostslabel.Likemanyothercommoditiesmentionedinthisreport,thereisbroaddemandforcleaningproductsbeyondtheanchorinstitutions.

Citycontractspendingdisplayedsignificantspendinginsnowremovalproducts.Althoughtherearenosnowremovalcostsspecifiedbytheinstitutions,itscertainlyacommoditythattheUniversitieshavetopurchaseandmaybebeneficialtolookintofurther.

FoodRelated

TheAnchorInstitutionsspent$32.5milliononfoodrelatedprocurement,$18.7millionofwhichwasspentlocally.However,morethanhalfofthisamountisattributedtocateringservices,implyingaservicecontract.LargefoodservicecompaniessuchasSodexhoandAramark,andregionalfirmslikeBonApptithaveexplicitcommitmentstobuyinglocal;thebuylocalfoodmovementisbroadandgrowing,andobviously,demandforfoodproductsishugebeyondtheanchorsector,suggestingthatlargerscaleurbanagriculturespurredbyanchordemandcouldbeapromisingmanufacturingopportunity.Theinstitutionalfoodservicesupplychainisalsoreasonablyconsolidated,andthusconducivetoscaling.Inadditiontofood,foodservicecontractorsandinstitutionsalsopurchasekitchen

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productsandvendingmachines;togetherthesecompriseapproximately$3millioninspendingacrossinstitutions.

ComputerTechnology

TheoverallannualInformationTechnologyhardware,software,etcspendamountsto$182.6millionwith$9.9millionspentlocally.Institutionalhardwareandsoftwarepurchasesmakeupthebulkofthisspending,andtheyaregenerallyboundincontractagreements,butthereispotentialopportunityregardingthemanufacturingofsuchcommodities,specificallymagneticsoftwareproducts,andbasichardwaresuchaskeyboardsorspeakers.

SportsRecreation

AnchorInstitutionsspent$16.8milliononSportsRecreationequipmentin2011,ofwhich$1.5million(9.1%)waslocallyprocured.Potentialcommoditiesofinterestincludeathleticapparelandworkoutequipment.ThecitywidemarketforSportsandAthleticproductswas$409millionin2011.Oursamplewouldthusconstituteabout4.1%oftotalcitydemand.9

MiscellaneousResidualCommodities

Unfortunately,asubstantialproportionofthedata,roughly23%,didnotfitneatlyintooneofthe17commoditycategories.Oftheresidual$630.6millioninspending,$169.1million(26.8%)isprocuredlocally.Themajorityoftheresidualisdenotedaspurchasedservices,generalexpenses,orsubcontractservices.TheControllersOfficeishopingtoworkwiththeinstitutionstodrilldownintothesegenericcategoriesinthefuture.

Table3 OtherAnchorSpending

TotalSpend LocalSpend LocalSpend%

Paper $5,182,143 $1,612,952 31.1%

GeneralOffice $113,564,122 $19,834,664 24.1%

CleaningSupplies $14,067,191 $1,691,769 12%

Foodrelated $32,461,823 $18,703,889 57.6%

Technology $182,560,176 $9,960,878 5.4%

Sports&Rec $16,807,372 $1,533,606 9.1%

Uncategorized $630,645,952 $169,105,360 26.8%

Total $964,155,703 $224,443,117 23.1%

Insum,thecategoriesthataccountforthemostspendingbyanchorinstitutionsareconstructionservices($573million),medicalsupplies($552million),facilityrelatedspending($327million),pharmaceuticals($197million),technology($183million),laboratoryspending($114million),generalofficespending($114million)andelectricalservices($108million).Inthreecategories,anchorsspendmorethan40%locallyFoodrelated,FurnitureandConstructionServices.Insixcategories,

9Onlytwoinstitutionsreportedsportsrecreationspending.Anestimatewasmadebasedonaveragesandextrapolatedfromthatpoint

13

anchorsspendlessthan10%locallyHVAC,Laboratory,Pharmaceuticals,Chemicals,Sports&RecreationEquipment,andComputerTechnology.Thesenumberscancutbothways:theremayberoomforgrowthinthosecategoriesthatarealreadywellrepresentedlocally,andinsomecases,lessroominthosecategoriesthatarepoorlyrepresentedinthelocaleconomy.Understandingmorepreciselythegrowthopportunitiesrequiresananalysisofthecitysmanufacturingandsupplysector.

Thesenumberspaintaroughpictureofthedemandsideofanchorprocurement.ThenextsectionwillexaminethemanufacturingsectorsinPhiladelphiathatarebestsuitedtofillanchorinstitutionsdemand.Alargeinstitutionrarelybuysacommoditydirectlyfromamanufacturer.Theinstitutionalsupplychainiscomplex,controlledbyarelativelysmallnumberoflargeintegrators.Understandinghowalocalmanufacturerentersthesupplychainiscritical,thusthiswillcomprisethefinalsectionofthereport.

SECTION3 TheSupplySide:WhatPhiladelphiaMakes

Philadelphiahashistoricallyhadandcontinuestohaveadiversemanufacturingbase.Itproducesbothsecondarycommodities,soldtodistributorsortothefinaluser,aswellasprimarycommodities,soldtoothermanufacturers.Thesecommoditiesincludepetrochemicals,freighters,confectionariesandfurniture.Thesemanufacturessellproductsallovertheworld.

InDecember2013,theMayorsManufacturingTaskForce(MTF)issuedManufacturingGrowthStrategiesforPhiladelphia,areportaimedatunderstandingthenatureofmanufacturingincontemporaryPhiladelphia.TheMTFreportprovidesaninvaluablesetoffoundationalknowledgeaboutwhatiscurrentlymanufacturedinPhiladelphia.Thereportproducedfourstatisticsthatareusefulforthegapanalysisandmarketmapping:SDR,RPC,growthsectors,andsectorsthathavealocationquotientlargerthan1.0.10TheSupplyDemandRatio(SDR)measurestheproportionofwhatisproducedintheCityforlocalconsumption;itisthetotalsupplyavailableintheregioninagivensectordividedbythetotaldemandintheregionforthatsectorsoutput.AlowSDRindicatesthereismorelocaldemandthanlocalsupply.TheRegionalPurchaseCoefficient(RPC)measurestheshareofdemandforaninputbyallusersinaregionthatispurchasedfromproducersintheregion.AnRPCof10%meanscompaniesintheregionrequiringitasaninputpurchaseonly10%oftheirdemandfromproducersintheregion.TheMTFlookedatasectorsgrowthrelativetothenationaleconomy,aswellastherelativesizeoftheworkforceinthatsector,capturedbytheLocationQuotient(LQ);anLQgreaterthan1.0meansthereisalargerpercentageofpeopleworkinginasectorinPhiladelphiarelativetotherestofthecountry.

Thesestatisticsfacilitatethegroupingofsectorsintoclustersandpermitanalysisofwhichsectorsaregrowing,andwhichareuniquetothecity,aswellaswherethegreatestopportunityexistsforwellestablishedsectorstopotentiallycompeteonanationallevel.TheMTFreportalsoprovidesanapproachtocalculatingtheemploymentimpactof100newjobsinasectoronthelocaleconomy,aswellasthemultipliereffectofhowmuchnewsalesincreasetotaloutput.TheMTFreportenumeratedthetoptensectorsthathaveanLQabove1.0andaregrowingfasterlocallythannationally.

10ALocationQuotientlargerthan1.0meansthereisalargerpercentageofpeopleworkinginaparticularsectorinPhiladelphiarelativetothecountry.

14

Inthissectioneightofthecommoditycategoriesdescribedabovewillbeinvestigated:HVACproducts,ElectricalEquipment,Furniture,FacilityCommodities,MedicalEquipment,LaboratoryEquipment,PaperProducts,andOfficeSupplies.11Thesebroadcommoditycategoriesarerepresentedbythirteen4digitNAICScodes.These13sectorsarestillrelativelygeneralandincludesomesubsectorsthatdonotderivemuchdemandfromEdsandMedsanchorinstitutions;howeverthevastmajorityofthesesectorsmanufacturecommoditiesthatallanchorinstitutionspurchase.These13sectorsalsoconstitutealargeproportionofthetotalmanufacturingsectorinPhiladelphia,with250firmsemploying4,636people,withanaverageyearlywageofnearly$55,000.WithintheCitylimitsthereareroughly750manufacturingfirmswith23,000employees,atanaveragewageofnearly$59,000;the13sectorsdiscussedrepresentonethirdofallfirmsand20%ofallmanufacturingemployees.12

Withinthese13sectorsthereare51subsectors,ofwhich41containfirmsthatmanufacturecommoditiesthatarepurchasedbyanchorinstitutions.13These41subsectorsrepresent15%ofallthemanufacturingsubsectorsdefinedbyNAICS.Thesubsectorsvarygreatlyintermsofscale,capacityoffirms,andproportionofbusinessdonelocally.In28ofthesesubsectors,morethan50%oflocalsupplyisconsumedbylocaldemand;ofthese,11subsectorshaveaSDRover100%.Thisimpliesthereismoresupplyintheregionthandemand.However,thereareonlytwosubsectorswithaRegionalPurchaseCoefficientgreaterthan50%.Thisimpliesamajorityofwhatisbeingpurchasedinthecityisnotbeingmadehereinthecity.Putanotherway,therecouldbelargepotentialforexpandingcapacitytofulfilllargeamountsoflocaldemandwithhighqualitylocalsupply.

11ThesesectorsareidentifiedbycodesassignedbytheNorthAmericanIndustryClassificationSystem,thestandardusedbyFederalstatisticalagenciesinclassifyingbusinessestablishmentsforthepurposeofcollecting,analyzing,andpublishingstatisticaldatarelatedtotheU.S.businesseconomy.TheNAICScodesinquestionare:3221Pulp,Paper,PaperMills;3222ConvertedPaperProduct;3231PrintingandRelatedSupport;3256SoapandCleaningSupplies;3272Glass&GlassProducts;3333CommercialandServiceIndustryMachinery;3334HVACandCommercialRefrigerationEquipment;3345ElectronicInstruments;3351ElectricLightingEquipment;3371HouseholdandInstitutionalFurniture;3372OfficeFurniture&Fixtures;3391MedicalEquipment&Supplies;3399OtherMiscellaneousManufacturing.12ManufacturingGrowthStrategyforPhiladelphia.13Thereare515and6digitNAICScodeswithinthese13sectors

15

Table4 CommoditySubSectorswith Supply/Demand Ratio>50%

NAICS CommodityDescriptionCommodityOutput

(InMillions)

GrosscommodityDemanded(InMillions)

SDR RPC

NetCommoditySupply

(InMillions)32223 Stationeryproduct $152.8 $147 100.0% 30.7% $155.3322291 Sanitarypaperproduct $906.7 $389 100.0% 33.3% $495.732312 Supportactivitiesforprinting $190.4 $140 100.0% 21.7% $207.932562 Toiletpreparation $1,894.3 $771 100.0% 19.3% $1,460.3327215 Glassproductmadeofpurchasedglass $228.3 $55 100.0% 19.2% $97.6333311333313

Vending,commercial,industrial,andofficemachinery

$160.3 $113 100.0% 14.8% $134.5

333319Othercommercialandserviceindustrymachinery

$552.1 $475 100.0% 17.1% $572.3

334514 Totalizingfluidmetersandcountingdevices $110.4 $72 100.0% 13.5% $114.5334611334612

Software,audio,andvideomediareproducing $313.3 $124 100.0% 21.3% $311.3

32221 Paperboardcontainer $1,112.0 $952 100.0% 59.9% $1,069.6327213 Glasscontainer $173.0 $92 100.0% 50.6% $165.0339114 Dentalequipmentandsupplies $174.6 $144 99.3% 13.7% $143.132311 Printing $1,861.1 $1,406 88.2% 16.9% $1,240.2339116 Dentallaboratories $77.0 $88 86.1% 15.8% $75.833512 Lightingfixture $292.5 $299 85.9% 14.0% $257.332561 Soapandcleaningcompound $1,088.6 $1,243 85.4% 17.2% $1,060.8333411333412

Airpurificationandventilationequipment $159.5 $162 78.6% 9.0% $127.7

327211 Flatglass $71.7 $41 77.7% 20.2% $31.6339112 Surgicalandmedicalinstrument $836.0 $811 75.1% 6.8% $609.8334513 Industrialprocessvariableinstruments $640.1 $537 75.1% 10.7% $403.4322299 Allotherconvertedpaperproduct $69.4 $82 71.4% 26.0% $58.8334516 Analyticallaboratoryinstrument $581.8 $365 69.0% 8.8% $251.432212 Papermills $756.0 $1,478 68.1% 19.8% $1,005.9334515 Electricityandsignaltestinginstruments $304.7 $272 66.8% 6.9% $181.8

333415Airconditioning,refrigeration,andwarmairheatingequipment

$314.5 $386 66.2% 11.0% $255.4

339113 Surgicalapplianceandsupplies $644.5 $920 60.3% 10.0% $554.7334517 Irradiationapparatus $527.3 $502 51.8% 9.3% $260.0339115 Ophthalmicgoods $192.5 $313 51.4% 4.6% $160.9

BesidesthosesubsectorswithSDRsabove50%,thereare13whicharebelow50%.HoweverallbutthreeofthesesubsectorshaveanSDRgreaterthan10%,whichmeanstheiroutputisatleast10%oflocaldemand.NoneofthesesubsectorshaveanRPCgreaterthan19%andalmostallareunder10%.Thismeansthereisahighlocaldemandforwhatthesesubsectorsproduce;butitalsomeansthatitisnotbeingproducedatalargeenoughscaletofulfilltheexistingdemand.

16

Table5 CommoditySubSectorswith Supply/Demand Ratio

17

manufacturingproduces322newjobsinothersectors,andoveralloutputincreasesby1.64timesforeachadditional$1millioninsales.14Thereareninemanufacturingsectorsofatotalof15thatstrongdirectsupporttotheAnchorInstitutions.TheseNinesectorsareabovethemedianintheoutputpersalesmultiplierandallninesectorshaveahigheroutputmultiplierthantheCitywidemanufacturingaverage.15

SECTION4 BridgingSupplyandDemand

FollowingtheleadoftheManufacturingTaskForce,theControllersanalysissuggeststhatdevelopingamechanismtobringingtheCitysanchorinstitutionstogethercollaborativelywiththemanufacturingsectorcouldcreateanopportunityformajorleveragethatcould,inturn,createagreatdealofeconomicgrowth.Fordecades,localandstateeconomicdevelopmentpolicyhasfocusedprimarilyonbusinessattractionorthedevelopmentofstartups;whiletheseareimportantelementsofagrowthstrategy,Philadelphiahaslargelymissedtheopportunityrightunderourproverbialnoses:theexistingdemandofourlegacyinstitutions.AstheControllersOfficedemonstratedinitsworkontheKeystoneOpportunityZoneProgram,untargetedbusinessattractionandretentionprogramproducesmallmultipliereffectsandgenerallyfailtoproducesustainedgrowth.16Theapproachadvocatedinthisreporthasbecomecommoninmanysocalledlegacycities,fromDetroitandClevelandonthemostdistressedend,toBaltimore,Pittsburgh,andChicagoonthemoredevelopedend.Itisimportanttonotethatfewcitiespossessthenumber,comparativequality,orscaleofanchorinstitutionsasPhiladelphia.Utilizingtheirdemandtobolsterandgrowthemanufacturingsectorcanhelpshapethelocaleconomybycreatingclusters,whichinturnhavelargespilloveragglomerationeffects.Moreover,byworkingwithnationalsupplychainintegrators,localfirmsthathaveheretoforebeenfocusedonaverysmallmarketcanbeinducedtoscaleuptobuildexportcapacityandtherebygrowexponentially.

Extractedfromtheinstitutionalprocurementdata,approximately$860millionworthofcommoditypurchaseswerematcheddirectlywithmanufacturingNAICScodes.17Ofthis$860million,just$136millionor16%wasprocuredlocally.18GroupingthecommoditiesintocategoriesbyNAICScodeshelptoelucidatethosesectorsuponwhichlocalanchorinstitutiondemandmighthavethegreatestimpact.Italsoallowsforadirectcomparisontowhatisactuallybeingmanufacturedinthecity.

Atpresent,thedatasuggestthatPhiladelphiasanchorinstitutionsalreadyprocureamajorityofcommoditieslocallyinthreecategoriesFood,ElectricalEquipment,andFurniture.Therehasbeenconsiderableresearchandinvestmentonhowtoexpandlocalfoodprocurementfromanchorinstitutionsandthisisapromisingareaforinvestment.19TherearelocalmanufacturersofbothelectricalequipmentandfurniturewithinPhiladelphia.Anotherpossibilityforgrowthismiscellaneous

14ManufacturingGrowthStrategyforPhiladelphia.15SeeAppendixforChartofmanufacturingsectormultipliers16PhiladelphiaCityControllerAnAnalysisoftheKeystoneOpportunityZoneProgram,19992012,March2014(www.philadelphiacontroller.org/publications/KOZReport_March2014.pdf).17SeeAppendixA2formoreinformation18Thesenumbersarenotprojected,andonlyreflecttheinstitutionsthatsupplieddata.19E.g.,InitiativeforaCompetitiveInnerCity(ICIC),AnchorInstitutionsandFoodSystems,April2014(http://www.icic.org/ee_uploads/publications/ICIC_whatworks_anchors_food.pdf).

18

manufacturing,asTable6belowshows,NAICScode339(MiscellaneousManufacturing)accountsfor$479million,whichis56%ofthetotalspending.Thisisbecausethemedicalequipmentmanufacturingsector,whichaccountsfor$458million,iscapturedunderNAICSCode339.ThiscategoryalsoincludesSportsRecreationEquipmentandOfficeSupplies,whichaccountfor$6.7millionand$13millioninspending,respectively.ThemanufacturingsubsectorsofMachinery,ComputerElectronics,andChemicalsalsofeatureasignificantamountofreportedspending. ThedurablemanufacturedgoodswiththemostpotentialforlocalprocurementappeartobeFabricatedMetal,ElectricalEquipment,andFurniture;asshownintheTablebelow,theserangefrom38%to48%local.Thesesectors,alongwithPaperProductsandMiscellaneousManufacturing,alreadyhaveastrongbaseinPhiladelphia.AsindicatedbythelowRegionalPurchaseCoefficientsforthesesectorsshowninTable5above,mostofthedemandforthesecommoditiesiscomingfromoutsideoftheregion;atthesametimetheSupply/DemandRatioforthesecommoditiesiscloseto100.Thissuggestssufficientlocalcapacitytosupplythesecommoditiestolocalinstitutions,aswellassufficientsizetocompeteonaregionalnationalorglobalscale.

Table6:SpendLocationby3DigitNAICSCode

Code NAICSDescriptor Total Local Local%311 Food $4,505,150 $3,114,880 69.1%313 TextileMills $353,382 $9,562 2.7%314 TextileProductMills $4,484,318 $344,790 7.7%322 Paper $5,401,168 $695,230 12.9%323 SupportPrinting $6,706,481 $1,137,387 17.0%324 PetroleumCoal $33,418 $17,522 52.4%325 Chemicals $232,981,586 $13,858,797 5.4%332 FabricatedMetal $3,786,368 $1,455,084 38.4%333 Machinery $60,076,664 $3,812,810 6.3%334 ComputerElectronics $52,838,972 $4,529,460 8.6%335 ElectricalEquipment $1,639,986 $632,716 38.6%336 TransportationEquipment $369,787 $26,264 7.1%337 FurnitureRelated $7,789,427 $3,692,295 47.4%339 MiscManufacturing $479,233,950 $104,093,385 21.7%3133 TotalManufacturing $860,200,657 $136,160,292 15.8%

Chart1:ProcurementSpending,LocalvsNonLocal,TopCategories

$0 $200,000,000 $400,000,000 $600,000,000

MiscManufacturing

ChemicalsNonlocal

Local

19

Chart2:ProcurementSpending,LocalvsNonLocal,by3DigitNAICSCategories

Insum,assumingthatlocalmanufacturersareabletocompeteonpriceandquality,ashiftbytheanchorinstitutionsofsomeoftheirspendingcouldhaveasubstantialimpactonthelocaleconomy.Table7belowestimatestheimpactofa10%,25%,and40%shiftineachsector.A25%increaseinspendingtowardslocalprocurementfromthesampleinstitutionswouldresultinatleast$46.6millioninadditionaleconomicactivityfromdirectspending,andanother$76.5millionfromindirectspending.20

Table7 DirectEffectofIncreased AnchorSpendingbySector

NAICSCode

NAICSDescriptorCurrentLocalProcurement

10%increase 25%increase 40%increase

311 Food $3,114,880 $3,253,907 $3,462,448 $3,670,988313 TextileMills $9,562 $43,944 $95,517 $147,090314 TextileProductMills $344,790 $758,743 $1,379,672 $2,000,601322 Paper $695,230 $1,165,824 $1,871,715 $2,577,605323 Support $1,137,387 $1,694,296 $2,529,660 $3,365,024324 PetroleumCoal $17,522 $19,112 $21,496 $23,880325 Chemicals $12,598,906 $34,637,174 $67,694,576 $100,751,978332 FabricatedMetal $1,455,084 $1,688,212 $2,037,905 $2,387,597333 Machinery $3,812,810 $9,439,195 $17,878,774 $26,318,352334 ComputerElectronics $4,529,460 $9,360,411 $16,606,838 $23,853,265335 ElectricalEquipment $632,716 $733,443 $884,534 $1,035,624336 TransportationEquipment $26,263 $60,616 $112,145 $163,673337 FurnitureRelated $3,692,294 $4,102,008 $4,716,578 $5,331,148339 MiscManufacturing $104,093,385 $141,607,442 $197,878,527 $254,149,6113133 TotalManufacturing $136,160,282 $208,564,328 $317,170,383 $425,776,438

20SeeAppendixBformultipliers

$0 $20,000,000 $40,000,000 $60,000,000 $80,000,000

FurnitureRelated

TransportationEquipment

ElectricalEquipment

ComputerElectronics

Machinery

FabricatedMetal

PetroleumCoal

SupportPrinting

Paper

TextileProductMills

TextileMills

Food

Nonlocal

Local

20

Chart3: Direct Effect ofIncreased AnchorSpendingbySector

A25%increaseinlocalprocurementamongtheanchorinstitutionswouldgenerate$181millionadditionaldollarsinmanufacturingrevenue.UtilizingthesamemetricsusedintheControllersJanuary2014reportandtheManufacturingTaskForceReport,thisadditionalspendingwouldcreate1,250newmanufacturingjobsandanadditional4,000indirectjobs.21

Thechartsbelowsummarizetheanalysisbasedonthedataathand,omittingcategoriesthatsuggestlittleornoopportunityforimprovementregardinglocalprocurement.Thesectorsshownbelowrepresentthemostplausibleopportunitiesforleveragingalmosthalfabilliondollarsinanchorprocurementspendingtocreatelocaleconomicactivity.22

21IntheJanuary2014report,EconsultSolutionsmodelassumesthatforevery$145,000inredirectedanchorprocurement,1newdirectlocaljobiscreated.IndirectjobfiguresarecalculatedusingthesamemultiplierutilizedbytheManufacturingTaskForce:forevery100manufacturingjobscreated322otherjobsarecreated;SeeTableB2intheappendixformoredetailedinformationonmultipliers.22Themostnotablecategoryomittedispharmaceuticalspending,whichaccountsfor$197milliondollars.DespitethefactthatsomanypharmaceuticalcompaniesareheadquarteredintheGreaterPhiladelphiaregion,veryfewmanufacturetheirproductshere.ThedatainTable8abovecorrelatescommoditiespurchasedbytheanchorswith5or6digitNAICSCodes,andtherebyalmostassuredlyfiltersoutspendingonhumanresources.Thisreducesthelocalprocurementfigurebelow10%,suggestingthatthereismuchroomforgrowth

$0 $20,000,000 $40,000,000

Food

TextileProductMills

Paper

SupportPrinting

FabricatedMetal

Machinery

ComptuerElectronics

ElectricalEquipment

FurnitureRelated

Local

10%increase

25%increase

40%increase

$0 $200,000,000 $400,000,000

Chemicals

MiscManufacturingLocal

10%increase

25%increase

40%increase

21

Chart4: PromisingOpportunities>$100 million23

Chart5: PromisingOpportunities

22

atonlythosecategoriesinwhichthedatacouldbebrokendownthisway,thelocalspendingproportiondropsbelow10%.Thissuggeststhatthereismuchroomforgrowth.

Table9belowpresentsselecteddatabySupplyDemandRatios,toillustratepossibleopportunitiesforsectoralexpansion.AlargerSDRindicatesthereismorelocalsupplythanlocaldemand.ParticularlypromisingopportunitiesarefoundinPrinting(32311),LightingFixtures(33512)andSurgicalAppliancesandSupplies(339113).Thelatter,accountingfor$300millioninannualanchorspending,representsfarandawaythelargestopportunity.Additionally,thedatasuggestthatitmakessensetoexplorefurtherthepotentialforlocalizingprocurementofMedicalEquipment&Supplies(3391)aswellasHVAC&CommercialRefrigeration(33341).

Additionally,therearealsosectorswithlowerSDRsthatmaybeworthexploring;thesearesectorsinwhichlocaldemandoutstripslocalsupply.TheseincludeManufacturing&ReproducingofMagneticMedia(33461),Sporting&AthleticGoods(339920),andOfficeSuppliesExcludingPaperProducts(33394).Thefirstcategory,MagneticMedia,isassociatedwiththemanufacturingofcompactdiscsforcomputersoftware,accountingfor$18millioninanchorspending,only1.9%ofwhichislocal.

Table9PromisingOpportunitieswithComplementarySDR&RPC

Code Commodity SDR TotalSpent Locallyspent Local%

33913 SurgicalAppliancesandSupplies 60.3% $300,026,086 $28,265,607 9.4%

3391 MedicalEquipmentandSupplies >50% $145,638,328 $68,598,395 47.1%

33341 HVAC&CommercialRefrigeration >50% $34,640,412 $1,991,485 5.7%

33461 Manufacturing&ReproducingofMagneticMedia 100.0% $18,886,964 $360,602 1.9%

33394 OfficeSuppliesExcludingPaperProducts 44.5% $12,981,707 $2,572,735 19.8%

339920 Sporting&AthleticGoods 19.4% $6,722,949 $613,442 9.1%

32311 Printing 88.2% $4,573,571 $705,320 15.4%

33512 Lightingfixtures 85.9% $55,822 $0 0.0%

TOTAL $523,525,839 $103,107,586

AllofthecommoditiesinTable9alsohaveaRegionalPurchaseCoefficient(RPC)oflessthan20%,andmostareunder10%.Inotherwords,despiteextantlocaldemandfromtheanchors,lessthan20%ofthesecommoditiesarebeingpurchasedlocally.Thereareanumberofpossiblereasonsforthis,ofcourseinformationasymmetry,inabilitytocompeteonpriceorquality,barrierstoentryintoinstitutionalsupplychains,lackofaccesstocapital,amongothers.Insum,thischartrepresentsanoutlineofperhapsthefirstcutofopportunity.

SECTION5 AccessingInstitutionalSupplyChains

Itisrareforalargemedicaloreducationalinstitutiontopurchasecommoditiesdirectlyfromamanufacturer;alargeproportionofanchorprocurementhappensthroughlargeregional,national,andinternationalsuppliers,calledintegratorsoraggregatorsinindustryparlance.Integratorsreduceprocurementcostsbyincreasingefficiencythroughprovidingonestopshopping,verifyingthequalityofamanufacturersgoods,ensuringthereliabilityofdistribution,andminimizingpriceasymmetries,

23

amongotherfactors.Thereporthasheretoforefocusedonidentifyingdatadrivenopportunitiestogrowanddeveloplocalmanufacturingfirmsdrivenbyanchordemand,growthbothwithinandbeyondthelocalmarketisdependentupongainingaccesstothesesupplierscatalogs.Liketheircounterpartselsewhere,Philadelphiasanchorinstitutionsrelyonavarietyofwholesalesuppliersbothdiverseandcommodityspecific;however,thedatashowsthatmostanchorsutilizeasmallnumberofmajorsuppliers,includingOfficeDepot,Grainger,Premier,Owens&Minor,Cardinal,Aramark,Sodexo,andafewothers.Whilethereisconsiderablegrowthpotentialsimplysupplyingtheneedsoflocalanchorinstitutions,theeconomicimpactwouldbemuchgreateriflocaldemandservedasacatalystorgatewaytoprovideaccessforlocalfirmstoregionalandnationaldistributionnetworks.

ManyofPhiladelphiasinstitutionshavedevelopedwhatMichaelPorterwouldcallsharedvaluepartnershipsdirectlywithlocalbusinessesorprogramsdesignedtofosterthem.DrexelUniversitypartnerswithTheEnterpriseCenter(TEC)inWestPhiladelphiatoprovidementoringservicestohelplocalsupplierscompeteforuniversityprocurementdollars;therecentestablishmentoftheDornsifeCenterwillgreatlyexpandDrexelseffortsalongtheselines.TemplesFoxSchoolofBusinesshassmallconsultancythatfocusesondevelopingthecapacityofminorityandwomenownedbusinesses.PerhapsthemostwelldevelopedoftheselocalanchoreffortsisattheUniversityofPennsylvania,wherethecombinedworkoftheNetterCenter,WhartonsSmallBusinessDevelopmentCenteranditseffortstodevelopasmallminorityownedofficesupplyfirm,TelroseCorporation,intoaTierOnesupplier,hasgarnerednationalattention.Pennsfoodserviceprovider,BonApptit,buysbakedgoodsfromlocalentrepreneursoperatingoutofthecommercialkitchensatTECsCulinaryEnterpriseInitiative.Additionally,areauniversitiesorganizedthemselvesintothePhiladelphiaAreaCollegiateCooperative(PACC),throughwhichtheybulkprocurealimitedbasketofgoodsatlowercost,withaneyetowardlocalanddiversepurchasing.In2013,PACCinstitutionscollectivelyprocured$23millionfromtheirsuppliers.

Anumberofmodelshaveemergedasanchorinstitutionsacrossthecountryincreasinglydecidetopursuelocalizationstrategies.Insomecases,asingleinstitutionhastakenuponitselftodevelopprogramstoexpandlocalpurchasing;oneofthemoresuccessfuloftheseinitiativesistheStreetwiseMBAprogramrunbyInteriseatColumbiaUniversityinNewYorkCity.SmallbusinessesreceivedirectguidancefromtheexpertsatInterise,whoalsoworkcloselywithuniversityprocurementofficialstoensurethatthebusinessesareproducingwhatColumbianeeds.24Asecondmodel,adoptedinCleveland,startedwithaninitiativebytheClevelandFoundationtoincreaselocalemployment;theDemocracyCollaborativeworkedwithanchorsandtheFoundationtocreatetheEvergreenCooperatives,whichhasinturnedspawnedseveralworkerownedfirmsdrivenprimarilybydemandfrominstitutionsliketheClevelandClinic,UniversityHospital,andCaseWesternReserveUniversity.TheGreaterClevelandUniversityCircleInitiativehascreatedoverahundrednewjobsandgenerated$14.3millioninannualeconomicimpact.25ChicagoAnchorsforaStrongEconomy(CASE)providesathirdmodel,insomewaysahybridoftheColumbiaandtheClevelandapproaches.MorethanadozenChicagoinstitutionshavecometogethertointentionallycreatenewopportunitiesforlocalsuppliersbyanalyzing

24InterviewwithInterisestaff,January6,2015.25ClevelandFoundation,ClevelandsGreaterUniversityCircleInitiative,2013Report(http://www.clevelandfoundation.org/wpcontent/uploads/2014/01/ClevelandFoundationGreaterUniversityCircleInitiativeCaseStudy2014.pdf)

24

theirspendingandidentifyingthepotentialforlocalization.ThemostinnovativeaspectoftheCASEapproachisanacceleratorprogramrunbyNextStreet,aBostonbasedmerchantbankforurbanenterprisethatprovidesguidancetobusinessesaswellasaccesstocapital.Theprogramisfundedbycontributionsfromeachanchorinstitution,whichhavebeensupplementedbylocalfoundations.26

Despiteallofthisgreatwork,theControllerknowsofnoconcertedattempttouseorganizeddemandonthepartofanchorinstitutionstofacilitatepartnershipsbetweenlocalmanufacturersandmajornationalintegrators.27Thissortofcollaborationwouldprovideavehicleforlocalmanufacturerstoenternationalsupplychains,theattendantscaleupgreatlyincreasingthemultipliereffectonthelocaleconomy.ThusthisreportproposesthecreationofamodelthatsynthesizesthebestoftheotherstargetedlocalbusinessdevelopmentstrategiesalongthelinesofwhatDrexelandPennarealreadydoing,scalingupandcollaboratinginthespiritofCASE,themarketwideapproachandworkforcedevelopmentemphasisofClevelandbutwiththeaddedelementofworkinginpartnershipwithintegratorstocreatepathwaystoexportoftradeablegoods.

Integrators:TheKeytoScalingUp

WhilethelocaleconomiesinPhiladelphia,Cleveland,NewYork,Detroit,andChicagogetameasurableboostfromincreasedlocalspendingbyindividualinstitutions,andstillmoreofaboostfromcoordinatedspending,theimpactisobviouslylimitedbythelocalinstitutionsaggregatedemandforanyparticularcommodity.Ineconomicterms,theimportsubstitutioneffectongrowthislimitedbythesizeofthedomesticmarket.Theultimategoaloftheimportsubstitutionstrategy,however,isleveragingdomesticdemandtogrowanindustrysuchthatitbecomesanexporterofgoods.FromtheHomespunmovementduringtheAmericanRevolution,whichspurredthedevelopmentoftheAmericantextileindustry,totheemergenceoftheAsianTigersinthelate20thCentury,theimportsubstitutionmodelofdevelopmenthasavenerablehistory.Theimpactonbusinessgrowthandthelocaleconomywouldbeincreasedexponentiallyifalocalbusinessisabletogainaccesstoanationalmarketbyenteringthesupplychainofamajorintegrator.AssumingacollaborativepurchasingorganizationcouldbecreatedamongPhiladelphiasanchorinstitutions,developingapartnershipbetweenthisorganizationandmajorintegratorswouldallowlocalfirmstolearntonavigateinstitutionalpurchaserssupplychains,whileexpandedbusinessopportunitieswouldpermitthemtoscaleupattheappropriatepace.Conversationswithseveralofthemajorintegratorssuggeststhattheyareconstantlyinsearchofinnovativeproductsfromsmallandmediumsizedbusinesses,theydesiresupplierdiversity,andmanyofthememploymoreorlessdevelopedmentorprotgprogramsandotherformsoftechnicalandfinancialassistancetofacilitatepartnershipswithsmallandmediumsizedmanufacturers.

MajornationalintegratorslikeOfficeDepotandOwens&Minor,aswellaslargecorporationslikeComcastandAramarkhaveatrackrecordofdiversifyingtheirsupplychainstoincludewomenandminorityownedfirmsaswellassmallandmediumsizedlocalbusinesses.Overthepastdecade,mostmajorintegrators,corporations,largenonprofits,andgovernmentsalikehavedevotedincreasing

26WorldBusinessChicago:CASE.http://www.worldbusinesschicago.com/case;http://www.nextstreet.com/about_us.27Asmentioned,PennandDrexelcollaboratedwithOfficeDepottohelpdeveloptheTelroseCorporationintoaTierOnedistributor,allowingTelrosetoachieveastoundinggrowth.Assuchitisanimportantinitiativethatdemonstratestheappetiteforandpotentialofthisapproach.Merritt,BigDeal,SmallFirm.

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resourcesandattentiontosupplierdiversityandlocalsourcing.Whetherdrivenbygovernmentincentives,specificgoalsenshrinedinEconomicOpportunityPlans,orleadershiplevelcommitmentstocorporatesocialresponsibility,integratorsareconstantlyseekingopportunitiesforhistoricallyunderutilizedbusinessestobreakintothesupplychainandcompeteonthenationalmarket.TheAnchorProcurementInitiativecouldplugintomanycompaniesalreadyexistingprograms.Wheresuchprogramsdonotformallyexist,CitygovernmentcouldworkwithintegratorsandpartnersamongcommunitydevelopmentfinancialinstitutionssuchasthePhiladelphiaIndustrialDevelopmentCorporation(PIDC),TheReinvestmentFund(TRF),LocalInitiativesSupportCorporation(LISC),andFinanta,businessgroupssuchastheGreaterPhiladelphiaChamberofCommerce(GPCC),theDelawareValleyIndustrialResourceCenter(DVIRC),andtheSustainableBusinessNetwork(SBN),andbusinessdevelopmentcentersatPhiladelphiasacademicbusinessschoolstocreatethem.

Researchsuggeststhatthereisnosimpleformulaforabusinesstosuccessfullyenterandthriveinalargesupplychain,butthatthecommondenominatorsforsuccessincludecommitmentonthepartofbothintegratorandinstitutionalcustomer,aswellastheavailabilityoffinancialandtechnicalassistancetofirms.AsamajorstudyofattemptsbysmallbusinessesinNewYorkCitytoachievescalefound,purchasingdecisionsinmodernsupplychainsareincreasinglycustomized,makingitdifficultforsmallsupplierstoaccesstheprimarydecisionmakerattheendconsumerdirectly.28Thefirstpointofentryisalmostalwaysthroughtheouteredgesofthesupplychain,viaaTierOneorTierTwopartner.Withtherightmixofleadership,innovation,persistence,andassistance,somebusinessesattainthebreakthroughcontractthatallowsthemtoachieveenoughscaletomovebeyondtheirdomesticmarket.ThestrategybeingproposedforPhiladelphiaaimstomoreintentionallycreateapipelineintothemajorintegratorssupplychains.Thiswillrequireworkatthreelevelscollaborationamongtheinstitutionalpurchasers,arelationshipbetweenalocalpurchaserscollaborativeandtheintegrators,andaprogramtorecruitanddevelopbusinessestoscale.ThisispreciselytheuniquerolethatPhiladelphiaAnchorsforaStrongEconomy(PHASE)wouldplay.

Mostintegratorstouttheircommitmenttodiversityandinclusion,andmosthaveamoreorlesswelldevelopedprogramtoattractcertifiedHistoricallyUnderutilizedBusinesses(HUBs)orWomen,MinorityorotherwiseDisadvantagedBusinessEnterprises(W/M/DBEs).Existingsuppliersandprimecontractorscanserveasmentorstosmallbusinessesseekingentryintolargesupplychains.Existingsuppliershaveexperiencedealingwiththelargerentity,andunderstanditsexpectationsanditscorporateculture;sharingthisknowledgecanprovetremendouslyhelpfultoaprospectivesupplier.29Thoughnetworkingandcultivatinglongtermrelationshipsaretimeintensive,thepotentialpayoffcanbetremendousforasmallupstartbusiness.Recommendationsandintroductionsfromanalreadyestablishedsuppliercarryagreaterweightwithalargepurchaserthantacticslikesendingproductsamplesblindly.Subcontractingisalowriskwayforprimecontractorsinasupplychaintoinvestinanewbusinessseekingaccesstoamajordealer,inadditiontoelevatingitsbusinessstatuswithinthatorganizationandthepotentialbenefitsthatstemfromincreasingitsconsumerbase.30

28CenteroranUrbanFuture,SmallBusinessSuccess,2014(https://nycfuture.org/pdf/SmallBusinessSuccess.pdf).29CenterforanUrbanFuture,BreakingintotheCorporateSupplyChain,2010(https://nycfuture.org/pdf/Breaking_into_the_Corporate_Supply_Chain.pdf)30ICIC,UsingProcurementToGrowInnerCityBusinesses,2009(http://www.icic.org/ee_uploads/publications/USINGPROCUREMENTTOGROW.PDF)

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Fosteringarelationshipwiththeintegratorsanddevelopinganimmersionstrategytobreakintothesupplychainfirstentailsarealisticevaluationofacompanysownmanufacturingandeconomiccapacity.Theavenueintoanationaldistributionnetworkcanbeoverwhelmingandbroad.Ultimatelybusinessgrowthdependsonamultitudeoffactorseachsmallbusinessandmajordealerrelationshipisuniqueandtherearecontrollablefactorstoattractamajordealer.Conversationswithsmallbusinessesthathaveestablishedrelationshipswithmajorintegratorsmakeitclearthatfacilitywithcontemporarytechnologyisexpectedlaggingbehindtechnicallyimmediatelydiminishesabusinesssviability.Technologydrivesdowncostandincreasesefficiency.Intodaysmarketplace,abusinessmustbecapableofseamlesslyintegratingintoawholesalersinternetmarketingprogram;oneseniorofficialatamajorintegratortoldusthatecommercehasdemocratizedentrytosupplychains,butmanyvendorsstillfocusonoldretaillikehowtogettheproductontheshelves.Ifavendorwithatrulyinnovativeproductcannothandletherequirementsofecommerceinternally,theintegratormayconnectthecompanytoamoreexperiencedpartnerthatpossessestheappropriatetechnologicalresources.Intodaysmarketcustomershaveaccesstoproductsinatleastthreedistinctways:retail,virtual,andecommercesales.Preparingstrategiesthatacknowledgethisvarietyisessential.Itisalsocriticalthatabusinesssetattainableandrealisticgoalsforgrowth,toavoidthecommonproblemofoverextensioninanunfamiliarmarketspace.MajornationaldistributorsdonothavethebandwidthtofinanciallyoreventechnicallyassistallTierTwosuppliers,oneofmanyreasonsthatmentorprotgprogramsarecritical.CentraltotheroleofPHASEwillbedevelopingmentorprotgrelationshipsforlocalbusinessesthatseektogainaccesstointegratorssupplychainsandprovidingthenecessarytechnicalandfinancialassistance.

CaseStudiesOfficeSupply

Intheofficesupplysector,OfficeDepotboastsanextensivediversesuppliernetwork.Everyyearsince2008,thecompanyhasproduceditsHistoricallyUnderutilizedBusiness(HUB)catalog,featuringhundredsofcommoditiessuppliedbycompaniesownedbywomenandpeopleofcolor;the2014editionfeatures1,800productssuppliedby34companies,14ofwhicharecertifiedminorityownedand15ofwhicharewomenowned.Thecompanyhasspentover$5billionwithdiversesupplierssince1999.31RelationshipswithHUBcompaniesaccountedfor$600millionofOfficeDepots$3.7billioningrossincomeforFiscalYear2014.32Consistentwithanysuccessfulbusiness,OfficeDepotseeksbusinessandeconomicsustainability;thegoalofitsSupplierDiversitymodelistosustaingrowthwithcurrentvendorswhileprospectingadditionalbusinesses,forconstantconsumerexpansionanddiversity.AsurveyoftheHUBcatalogrevealsacomplexsupplychaininwhichsomeproductsaremanufactureddomesticallywhilemanyareprocuredbyTierTwowholesalersfrommanufacturersabroad.OfficeDepotsSupplyDiversityChainmodelhasthreedimensions;VendorDiversity,SupplierDiversity,andTierOne.OfficeDepotpridesitsoverallSupplierDiversityprogramtheexposureandpartnershipsbusinessesgainthroughintegration.Insteadofdirectfinancialassistance,OfficeDepotspartnershipphilosophycultivatesfinancialsustainability.Viaamultitudeofconnectionsandresources,OfficeDepotoffersHUBbusinessesthecapacitytodevelopcapabilitiestobecomeselfreliant.Other

31OfficeDepotHistoricallyUnderutilizedBusinesses201332InterviewwithOfficeDepotstaff;

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integratorsalsoprovidetheirdiversepartnerswithamentorprotgprogram,differinginapproachforeachbusiness,butwiththeultimategoalofestablishingadurablerelationship.RFPcontractrequirementsarecustomizedforeveryproductdependentonsupplyaccessandinnovation.Theefforttoexpandacompanystoolboxareprovidedthroughtrainingsessionswithorganizations,forinstance,theSmallBusinessAdministration(SBA),anddeveloprelationshipswithexistingpartnersandotherpartnernetworksaskeyvaluesintheSupplierDiversityprogram.

AnotherexamplefromOfficeDepotsHUBcatalogisstoragepalletsupplierAddendia,afemaleownedandoperatedcompanythatmanufacturesitsproductinMassachusetts.AcertifiedWBE,Addendiautilizedcertificationasaprimarypathwaytoreachdistributors.Withoutalargeemploymentorbroadnetworkingfoundation,theoutreachopportunitiesaffordedbytheWomen'sBusinessEnterpriseNationalCouncil(WBENC)providedthegreatestopportunitytoreachdealers.SuccesswithOfficeDepotallowedAddendiatoexpanditscustomerbaseandexpanditsmarkettoincludeotherintegrators,suchasGrainger.

TheAllianceRubberCompanyofHotSprings,ArkansasalsodemonstratestheimportanceofrelationshipswithintegratorslikeOfficeDepot.AllianceisacertifiedWBE,ledbyCEOBonnieSwayzesince1981;itspartnershipwithOfficeDepotbeganin1987,wellbeforetheexistenceoftheHUBcatalog.AlliancehasleverageditsrelationshipwithODtoformpartnershipswithothermajorwholesalerslikeSPRichardsandUnitedStationers.Foundedin1923,AlliancehasmaintainedsteadygrowthinpartbecauseofthemarketsharetheyhavegrownthroughOfficeDepotssupplychainandexposure.Today,OfficeDepotaccountsfor$3.7millionofAllianceRubberstotalannualrevenuesofabout$35million;accordingtoSwayze,revenueshaveincreasedby35%inthelastdecadeandaregrowingabout5%annually.In2014,Allianceinvested$600,000intheexpansionoftheirHotSpringsheadquarters,whichallowedthecompanytoadd15workersforatotalof165employees.TherelationshipwithOfficeDepotandotherwholesalersallowsacompanylikeAlliancetoplanforsecureandsteadygrowth.33

Finally,althoughitisnotamanufacturingfirm,thestoryoftheTelroseCorporationisinstructive.AXeroxbusinessproductspecialistservicingtheUniversityofPennsylvaniaintheearly1990s,ToddRosedevelopedastrongworkingrelationshipwithkeybusinessadministratorsatPenn,whocametorelyonhim.HebecameadiversitycontractorforXerox,butXeroxlostitsPenncontract;atPennssuggestion,OfficeDepotaskedToddtobecomeadiverseTierTwosupplier,andin1995theTelroseCorporationwasborn.Forthreeyears,Roserecounts,thecompanymadeontimedeliveriestoPennyetownednotasingletruck.DrexelandPenncollaboratedwiththeCitysMinorityBusinessEnterpriseCentertocreatetheDiversitySupplierDevelopmentProgram,whichidentifiedminorityfirmsforcontractswiththeuniversities,andTelrosesportfolioofuniversitybusinessgrewtremendously.TheDSDPexplicitlyaimedtohelpbuildcapacityamongdiversefirms.BecauseOfficeDepotalsohasitsownprogramtodevelopandmentordiversepartners,whenitscontractwithPennwasupforrenewal,OfficeDepotagreedtoflipthecontractandallowTelroseassumetheprimarycontractorrole.ThuswasTelrosecatapultedfromtheranksofaTierTwodeliverycompanytoafullserviceTierOnesupplier.TodayTelrosehas22employees,10trucks,andcountsascustomersnotonlyPennandDrexelbutmajorengineeringand33InterviewwithBonnieSwayze,March18,2015;JamesHaggerty,U.S.RubberBandMakerSurvivesbyStretchingItsPortfolioofProducts,WallStreetJournal,June1,2014(http://www.wsj.com/articles/usrubberbandmakersurvivesbystretchingitsportfolioofproducts1401382522);GlassCeiling.com,PassionDrivenCareers:BonnieSwayze,(www.glassceiling.com).

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constructionfirmDay&Zimmerman,IndependenceBlueCross,andComcast,amongothers.AccordingtoRose,Telrosenowfills1,100ordersaday,afarcryfromthe3personbootstrapoperationof20yearsago.Asthisexampleshows,intentionaleffortonthepartofbothamajorclientsuchasPennorDrexelinpartnershipwithamajorintegratorlikeOfficeDepot,whichrecognizesthediversityspaceasagrowthengine,inRoseswords,canleadtoimpressivegrowth.34

CaseStudiesHealthcare

Inthehealthcarefield,majorsupplierssuchasAmerinet,Owens&Minor,andPremierbandedtogetherin2003toformtheHealthcareSupplierDiversityAlliance(HSDA).MostHSDAmembersproducespecialdiversesuppliercatalogstomakeiteasierforprocurementofficialstomeetdiversitygoals.ThecaseofKermaMedicalManufacturingisinstructiveofthepotentialofanintegratorcenteredgrowthstrategy.FoundedbyEarlReubel,anAfricanAmericanveteranoftheVietnamWar,Kermabeganasasmall,directsuppliertotheVeteransAdministrationinthelate1980s,doingabout$1millioninannualbusiness.Whenthefederalgovernmentchangeditsprocurementpracticesinthe1990stoaprimecontractormodel,Kermalostitsbiggestcontractalmostovernightandwasforcedtoquicklyregroup.InthewordsofReubelsnephewJoe,EarlssuccessorasKermasCEO,EarlthrewaHailMarypassandcoldcalledattheRichmondheadquartersof[majorhospitalintegrator]Owens&Minor.FortuitouslyforReubel,federalprocurementpolicyincentivizedO&Mtoseekdiversesuppliersonitsfederalcontracts;O&MsponsoredKermasentryintoamentorprotgprogramundertheauspicesoftheDepartmentofDefense.O&MalsoprovidedtechnicalandfinancialsupporttoKerma,enablingthe$1millioncompanytoscaleupoverthecourseofadecadeandahalftobecomea$90millionenterpriseemployingabout100peopleinitsSuffolk,VAmanufacturingplant.InitiallydrivenalmostexclusivelybyOwens&Minorsbusiness,todayKermahasabroadlydiverseportfolioofcustomers:itisaprivatelabelmanufacturerforO&M,sellsdirectlytoGroupPurchasingOrganizationsasaTierOnesupplier,andhasarelationshipwithOwens&Minorsmajorcompetitor,Cardinal.WiththenewstructureofincentivesundertheAffordableCareActregardingdemonstrationofcommunityimpact,M/W/DBEfirmsinthehealthcareindustrywilllikelyseegreateropportunitiestotreadthepathblazedbyKermaandothers.AsrenownedhealthcareconsultantandformerDirectorofExternalAffairsattheU.S.DepartmentofHealth&HumanServicesAntonGunnputsit,healthcareisa$3trillionindustrythatisnevergoingaway.35

CenturyHosiery,amedicalsupplymanufacturingcompanyoutofNorthCarolina,builtpartnershipswithexistingsupplierstoachieveitsrelationshipwithOwens&Minor,achievingtheMediChoiceSupplieroftheYearawardin2009,afterjustsixyearsofcollaboration.InitiallyCenturyHosieryconcentratedeffortsonsendingsamplestotheretailsector,whichdeemedinefficient.Afterreworkingtheirmodel,theysoughtexperiencedsupplierswhowereabletodirectlydeliversamplesandshowcasetheproducttothepurchasingandsalesteamofmajordealers.SincethestartofitsrelationshipwithOwens&Minor,CenturyHosieryhasexperiencedgreaterthan130%employmentgrowthandanearcompleteshifttoproductionforthehealthcaresector,whichtodayaccountsfor95%

34Merritt,BigDeal,SmallFirm;interviewwithToddRose,Sept23,2014.35InterviewwithJoeReubel,January22,2015;interviewwithhealthcareconsultantAntonGunn,January23,2015.

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ofthefirmsrevenues.AsaresultofCenturyssuccesswithOwens&Minor,likeKermaithasbeenabletodeveloprelationshipswithothermajorintegratorssuchasCardinalHealthandMedline.

Similarly,MACMedical,awomanownedmedicalsupplymanufactureranddistributorintheChicagoarea,startedwithasmallcontractwithOwens&Minorandleveragedittogrow.Asnoted,healthcareprocurementrulesarelargelystructuredbyfederalmandatesforinclusionofhistoricallydisadvantagedandunderutilizedbusinesses.MACsMillieMaddocksseizedontheopportunitytopartnerwithOwens&Minor,findingatremendousmentorinAngelaWilkes,thelongtimedirectorofsupplierdiversityandsustainabilityforO&MandfounderandchairofHSDA.MAChasposted30%annualgrowthinthepastseveralyears.36

CaseStudy:FoodServices

Thetrendtowardlocalizationisperhapsmostpronouncedandadvancedinthefoodservicesindustry,wheremajorglobalcompaniesseektocapitalizeonthelocavoreandsustainabilitymovementsbyincreasingprocurementfromlocalfarmersandentrepreneurs.In2001,thehugeFrancebasedmultinationalSodexoimplementedacommitmenttosupplierdiversity,focusedonpursuingopportunitiestobuilddiversegrowthanddevelopmentinthecommunity.Sodexoslocalfoodserviceprovidersaccountfor45%oftotalmarketshare,organizedthroughlocaldistributionnetworks.In2014SodexosSupplierDiversityprogramconsistedof1,298diversevendors,totaling$773million,or18.7%ofthecompanystotalspend.Sodexoslocaldistributionnetworksrelyuponthirdpartygatekeeperstoensurequalitycontrol.IntheMidAtlanticregion,J.AmbrogiFoodDistributionservesasSodexosmainproducesupplygatekeeper,aggregatingtheoutputof3dozenfamilyfarmersinNewJersey,Pennsylvania,andDelaware.JerryAmbrogi,theCEOofthe$100millionSouthJerseybasedproducedistributioncompanysaysthatSodexosemphasisonlocalproducehasdefinitelyhelpedusandthesefarmersthrivebynotonlyprovidingaccesstoalargermarketfortheirproducts,butalsobyvisitingfarmsandinspectingprocessestoensurethattheirproduceisgrowninthebestconditionsandtotheirhighstandards.IntheMidwest,diverseTierOnesupplierMidwestFoodsworkswithmorethan90Sodexoaccountstosourcespecialtyproduceandsupportregionalfarmsandcommunitiesthroughnumerousmechanisms,suchastrainingandeducation,freshfarmersmarkets,seasonalitycharts,andstoragetips.37SupplierschanneltheproductsfromlocalfarmersintoSodexossupplychaincreatingaweboflocalbusinessnetworksdrivenbySodexosdemand.OthermajorfoodintegratorssuchasAramarkoperateinmuchthesamemanner.ConversationswithSodexosupplychainofficialsindicateastrongdesiretocontinuallydeveloplocalsources.

Acriticalelementinastrategyofprocurementlocalization,then,shouldincludeunderstanding

thepathwaystoentryintomajorintegratorscatalogs,andatwhatpointinthesupplychainitmakesthemostsensetofocusondistributionoronmanufacturing,forexample.Onitsface,theremightappear

36InterviewwithAngelaWilkes,January21,2015;MarkTaylor,Capitalizingonanopportunity:MACMedicalSupplyCompany,YahooSmallBusiness(https://smallbusiness.yahoo.com/advisor/capitalizingonanopportunitymacmedicalsupplycompany233555301.html)37SodexoSupplierDiversityWhyisitimportant?2014(http://californiadiversitycouncil.org/wpcontent/uploads/2014/11/Supplier_Diversity.pdf);Fiscal2013:InsideSodexo(http://fiscal2013.sodexo.com/boostcommunityeconomies/);RegistrationDocumentFiscal2013(http://exercice20122013.sodexo.com/wpcontent/uploads/2013/09/SodexoRegistrationDocumentFiscal2013_interactif1.pdf)

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tobeapotentialmisalignmentofinterests,oratleastpriorities,amongmajorTierOneintegratorsandanchorinstitutions:theformertypicallyoperateinglobal,national,orregionalmarketsandplaceprimaryemphasisonsupplierdiversity,whilethelatter,asplaceboundinstitutionsbydefinition,operateinparticularlocalcontextsandthusplaceatleastanequalemphasisonsupplierlocation.Fortunately,incitieslikePhiladelphia,localanddiverseareoftencoincident;additionally,theotherpowerfulmarkettrendtowardsustainabilityworksinfavoroflocalization.Further,inaCitywithsomanylargeanchorinstitutions,itseemsplausiblethatconcertedandcollaborativeeffortontheirpartcouldinfluencewholesalerbehaviortoalesserorgreaterdegree.38Butsucharrangementswillnotemergeorganically;theywillrequiretheworkofanintermediaryorganizationlikePHASE.

Conclusion

Overthepasttwodecades,Philadelphiasanchorinstitutionshaveshowntremendousnationalleadershipintermsofcommunitybaseddevelopmentstrategies.Themajorinstitutionshave,tolesserorgreaterdegrees,playedsubstantialrolesasrealestatedevelopers,employers,andconsumers.NumerouseconomicimpactstudieshaveshownthatPhiladelphiasanchorsmakeenormouscontributionstothelocaleconomy.OtherthanthroughthePhiladelphiaAreaCollegiateCooperative(PACC),theyhavedonesoindividually.Fromconversationswithanchorinstitutionleaders,theControllersOfficeconcludesthereistremendouswilltopursueacoordinatedprogramoflocalprocurement.Researchsuggeststhatthereareample,tangibleopportunitiesforthemtodoso,particularlyinmanufacturing.

Astrategyoflocalizationsucceedsorfailsbasedonwhetherthelocaleconomyproduceswhattheinstitutionsneed,andatcomparablepriceandqualitytoothersuppliers.ResearchsuggeststhatPhiladelphiaseconomyproducesmuchofwhattheanchorsneed,oratleastcloselyrelatedcommodities.Withcoordinationamongthebuyersorganizationonthedemandside,sotospeakaswellascollaborationonthesupplyside,itmaybepossibletosignificantlyincreasetheproportionofanchordollarsspentlocally.Everydollarspentlocallynotonlyincreasesdirectandindirectemployment,butalsoproducestaxrevenuesanddecreasesexpendituresonsocialservices.

Whilemanyotherstudiesinothercitieshavecometosimilarconclusions,andhavebeenthespringboardforinitiativestouseprocurementtogrowlocalbusiness,byfocusingontheroleofintegratorsthisreporthasaddedanewfacettothestrategy.Alocalversionofimportsubstitutionwouldorganizedemandfromanchorinstitutionssothatitbuildslocalmanufacturingcapacity;intheshortandmediumtermthiswillcreatemorelocaleconomicactivity.Inthelongterm,bypartneringwithintegratorslikeOfficeDepot,Owens&Minor,andSodexo,thisinitiativecanhelpfirmsentermuchlargersupplychainsandproducemuchlargermultipliereffects.Becausethereareasmallnumberoflargeintegratorssupplyingtheanchorinstitutions,thismayposebothchallengesandopportunitiesforsmallfirms;growthstartswithsupplyingsomeoftheneedsofoneormorelocalanchors,butthepathtoexponentialgrowthrequiresenteringthesupplychainofalargenationalintegrator.39Thiswillrequireaconcertedbusinessdevelopmentstrategythatshouldincludementorprotgrelationships38Infact,preliminaryconversationswithseveralintegratorssuggestanopennesstoanapproachthatcombineslocalizationanddiversity.39CenterforanUrbanFuture,BreakingintotheCorporateSupplyChain.

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andaccesstotechnicalassistanceandcapital.CASEhasdevelopedsuchaprograminChicago,andconversationswithawidevarietyofbusinessdevelopmentgroupsindicategreatinterestincreatingasimilarprograminPhiladelphia.Withcommitmentandsupportfrommajoranchorinstitutions,thisstrategyseemswellwithinreach.

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AppendixA

1.RegardingDataClassificationMethodsThedataprovidedwasofageneralnature,includedamixofspecificcommoditiesandbasiccategoricalspending.Contractedservicecostspermeatethedata.Thisdatawascompiledthisdatainto17categoriestobegintoidentifythemanufacturingsectorsfromwhichthesecommoditiescame,aswellasdefininghowmuchwaslocalspending.ThemostbasicapproachtodefininglocalspendingwastakenaspurchasesfromamanufacturerorsupplierlocatedwithinoneofPhiladelphias39191xxZIPcodes.Thesecategorieswerethenfurthersortedunderthreeumbrellas:

constructionrelatedincludesthecategoriesofgeneralconstruction,HVAC,Telecommunications,furniture,electrical,andmiscellaneousfacilities.

healthcarerelatedIncludesthecategoriesofmedicalequipment,pharmaceuticals,laboratoryequipment,andchemicalresearch.

otherprocurementIncludesthecategoriesofpaperproducts,officesupplies,cleaningsupplies,foodproducts,technology,sports&recreation,andmiscellaneous.

Itshouldbenotedthatthisreportusesaggregatedataandisnotmeanttoreflectanysingleinstitutionspurchasingpatterns.ThisreportexaminesonlythemanufacturedcommoditiesthatthelargestAnchorInstitutionsinPhiladelphiaconsume.Thoughnotalltheanchorinstitutionsreportedthesamecategoriesofspending,thegeneralnatureofthecategoriesallowsforassumptionstobemadebasedonaveragesofthereporteddata.Itisdifficulttoprojecthowmuchmorethesetotalswouldgrowwhentheother30AnchorInstitutionsprocurementisadded.

2.RegardingNAICSCodesDefinition

TheNorthAmericanIndustryClassificationSystem(NAICS)classifiesbusinessestablishmentsofCanada,MexicoandtheUnitedStatesaccordingtothetypeofeconomicprocessorproductivitytheyareinvolvedin.Itisfrequentlyusedinbusinessandgovernment.NAICScodesareanywherebetween2and6digits.Thelongerthecodeis,themorespecifictheindustry.Thefirsttwodigitsdesignatethelargestbusinesssector.Thisreportfocusesonthemanufacturingsector,NAICScodes3133.

IntheManufacturingSection

Proceedingisalistofthecommoditiesusedtorepresenttheanchorinstitutioninthemanufacturingsectionofthisreport.Commoditiesarerepresentedby4digitNAICcodes:3221Pulp,Paper,PaperMills;3222ConvertedPaperProduct;3231PrintingandRelatedSupport;3256SoapandCleaningSupplies;3272Glass&GlassProducts;3333CommercialandServiceIndustryMachinery;3334HVACandCommercialRefrigerationEquipment;3345ElectronicInstruments;3351ElectricLightingEquipment;3371HouseholdandInstitutionalFurniture;3372OfficeFurniture&Fixtures;3391MedicalEquipment&Supplies;3399OtherMiscellaneousManufacturing.

InTheMergingSupplyandDemandSection

Thisreportanalyzesonly$860millioninspendingratherthantheentire$2.7billionreportedbecausenotallspendingcouldbedirectlyassociatedwithNAICScodesmainlyduetoalackofsymmetrybetweenthewaypurchaseswerereportedandthewaythatNAICSdividesthemanufacturingsector.Ifareasonableassumptioncouldbemadethatrolledupcontractspendingcouldmakeupanypartofa

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reportedcost,itcouldnotcorrelatedwithaNAICScode.Byeliminatingthepossibilityofhumanresourcecosts,abetterideaofwhatpercentageofcommoditiesarebeingpurchasedlocallyisrepresented.Inpracticalreality,thismeansthatprojectionsareconservative,thatactualspendingisunderestimated.

AppendixB

TableB1PromisingOpportunitiesforProcurementLocalization

NAICSCode Description TotalAmount LocalAmount Local%335121 ResidentialElectricLightingFixture $55,822 0 0.00%313310 TextileandFabricFinishingMills $101,975 $9,562 9.40%323117 BooksPrinting $162,507 $50,935.53 31.30%325992 PhotographicFilm,Paper,Plate,andChemical $186,578 $92,736 49.70%313210 BroadwovenFabricMills $251,408 $0.00 0.00%332216 SawBladeandHandtool $573,557 $273,355 47.70%332919 OtherMetalValveandPipeFitting $666,851 $145,513 21.80%333921 ElevatorandMovingStairway $922,126 $363,715 39.40%33721 OfficeFurniture $1,057,777 $605,158 57.20%332618 OtherFabricatedWireProduct $1,408,909 $452,579 32.10%332215 MetalKitchenCookware,Utensil,Cutlery,andFlatware $1,498,040 $583,637 39.00%325510 PaintandCoatingManufacturing $1,996,821 $59,361 3.00%333318 OtherCommercialandServiceIndustryMachinery $3,081,645 $1,362,519 44.20%334310 AudioandVideoEquipment $3,104,992 $21,887 0.70%3256 Soap,CleaningCompound,andToiletPreparation $3,529,333 $1,085,431 30.80%

323113 CommercialScreenPrinting $4,411,064 $654,384 14.80%314120 CurtainandLinenMills $4,484,318 $344,790 7.70%322121 Paper(exceptNewsprint)Mills $4,528,417 $54,063 1.20%339920 SportingandAthleticGoods $6,722,949 $613,442 9.10%333997 ScalesandBalances $7,748,046 $83,848 1.10%334118 ComputerTerminalandOtherComputerPeripheralEquipment $12,424,588 385,324 3.10%339112 SurgicalandMedicalInstrument $12,797,658 $3,654,844 28.60%339940 OfficeSupplies(exceptPaper) $12,981,707 $2,572,735 19.80%333120 ConstructionMachinery $13,968,193 $330,601 2.40%334111 ElectronicComputer $14,636,085 $57,100 0.40%33461 ManufacturingandReproducingMagneticandOpticalMedia $18,886,964 $360,602 1.90%33341 HVACandCommercialRefrigerationEquipment $34,640,412 $1,991,485 5.70%3391 MedicalEquipmentandSupplies $145,638,328 $68,598,395 47.10%

339113 SurgicalAppliancesandSupplies $300,026,086 $28,265,607 9.40%Total $612,493,156 $113,073,609 18.46%

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TableB2 EconomicMultipliersfor3digitManufacturingSector40

NAICCode&DescriptionEmployment

Increaseper100NewJobs

OutputIncreaseper$1MillioninNewSales

311Food 277 1.66

312Beverage&Tobacco 391 1.49

313TextileMills 179 1.63

314TextileProductMills 195 1.88

316Leather&Allied 178 1.78

321WoodProducts 173 1.7

322Paper 321 1.78

323SupportPrinting 193 1.89

324Petroleum&Coal 987 1.34

325Chemical 584 1.76

326Plastics&Rubber 208 1.64

327NonmetallicMinerals 241 1.87

331PrimaryMetal 463 1.79

332FabricatedMetal 223 1.77

333Machinery 256 1.69

334Computer&Electronics 307 1.71

335ElectricalEquipment&Appliances 263 1.67

336TransportationEquipment 275 1.54

337Furniture&Related 206 1.75

339Miscellaneousmfg 233 1.73

TotalManufacturing 322 1.64

40HighlightedAreashowsectorswithsignificantanchorthatsupportanchorprocurement.

35

Acknowledgments

BillRubin,FirstDeputyCityControllerTel:(215)6866696Email:bill.rubin@phila.gov

JeffHornstein,Ph.D.,DirectorofFinancialandPolicyAnalysiswastheprojectmanagerforthisreport.PolicyAnalystLiefEricksonandInternTimCullendidthedataanalysisandPolicyAnalystEmilyMaherdidthecasestudies.

TheControllersOfficewishestothankourpartnersatTheChildrensHospitalofPhiladelphia,DrexelUniversity,TempleUniversity,ThomasJeffersonUniversityHospital,andtheUniversityofPennsylvaniafortheircourteouscooperationduringthisproject.SpecialthanksalsotoJohnGradyandSamRhoadsatPIDC,AndyFrishkoffatLISC,AndyRachlinatTRF,SteveJurashattheManufacturersAllianceofPhiladelphia,TonyGirafalcoandJoeHouldinatDVIRC,MikeCooperattheOfficeofManufacturing,AngelaWilkesatOwens&Minor,JoeReubelatKermaMedical,IrisRubinfieldatMasterManufacturing,BonnieSwayzeatAllianceRubber,ToddRoseatTelrose,JoeGraceandLisaCrutchfieldatGPCC,JamieGauthieratSBN,JeanHorstmanandTanyaPopeatInteriseandShariFrancisandChristineMaguireatOfficeDepotfortheirtimeandinsights.

TheCityControllersOfficeistheindependentwatchdogagencyoftheCityofPhiladelphiathatstrivestopromotehonest,efficient,effective,andfullyaccountablecitygovernment.Weaddressthismissionby:providingtimelyandobjectiveanalysisontheavailabilityoffundsforallcitycontracts;preventinginappropriatespendingofpublicfunds;andprovidingobjective,timely,andrelevantinformationtocityofficials,thepublic,andotherinterestedpartiesaboutfinancialoperationsofthecity,andonwaystoimprovecityoperationsandtheuseofpublicresources.

ThefastestandeasiestwaytoobtaincopiesoftheCityController'sOfficereportsisthroughtheCityController'sWebsiteat(www.philadelphiacontroller.org).

ContactinformationWebsite:http://www.philadelphiacontroller.org/reportcityfraudwastecorruption.aspTelephone:(215)6868888or(215)6863804(automatedline)DownloadtheFreeFraudReportingappforiPhone,iPad,iPodTouchandAndroiddevices

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