Large companies obsess over their supply chains. Every item or component must be sourced from a producer, transported quickly and cheaply, and delivered on time. Maximizing a supply chain’s efficiency can lead to massive savings for a company.
In past years, large nongovernmental organizations and aid agencies have been taking a line from international corporations and improving their supply chains through local and regional procurement (LRP). Instead of purchasing their suppliers and goods in developed countries and shipping them where they are needed, organizations have started to carefully source their purchases from the country in which they’re operating or from neighboring countries.
This has several advantages. First, it cuts down on costs by minimizing transportation; USAID estimates that purchasing food through LRP would cost about 30% less per metric ton than purchasing it in the United States and shipping it abroad. Second, it sharply reduces the time it takes to have a purchase delivered where it is needed. Third, the economy of a region benefits from having a large organization purchasing large quantities of goods. With that impetus, farmers and producers have an incentive to increase the quality of their goods and bring them to market.
Of course, there are concerns with LRP. Often, organizations can’t procure everything they need locally or regionally. Some goods, like advanced electronics or therapeutic foods, are not produced in the region and must be brought in from the developed world. Also, in some unusual cases it is actually more expensive to procure something locally than it could be to buy it and ship it from a another country. Organizations must do research to determine where it makes sense to avoid LRP.
There are also concerns that a large organization can swamp a small local market with its demands for a good, driving prices up for local consumers or leading to sellouts of that product. This is of special concern in times of famine or disaster, when an organization might actually harm the people of an area by attempting to procure food and goods there for its relief programs. For this reason, organizations must be careful to procure exclusively from markets able to handle their demands, and procure goods only from a crisis area’s unaffected neighboring regions to avoid making crises worse.
For a large organization to do LRP well, it can’t be ad-hoc and disorganized. There must be some sort of strategy or plan to guide an organization’s purchases and make sure the organization always has the goods it needs in the places they are needed.
The World Food Programme is an excellent example of an aid organization with a carefully planned LRP model. In fact, it procured 77% of its food from developing countries in 2012. To procure the food it uses in its aid programs, WFP typically uses a competitive bidding process to purchase from pre-qualified suppliers from the region where it will be distributing its aid, looking at both the cost of the commodity and the cost of transport to determine the best price. In the past, WFP has procured most of its food from large agribusinesses or farms. Recently, though, WFP has been testing a model of smallholder procurement through its Purchase for Progress (P4P) program, in which it has partnered with over 1,000 farmers’ organizations with a total membership of over 1 million smallholder farmers. The steady demand of the P4P program offers smallholder farmers an assured market that rewards them with better prices for investments which increased their quantity or quality, which helped farmers grow and overcome some of the barriers initially keeping them from the formal market. While WFP has found that it is unlikely to ever switch to a procurement model based only on smallholder farmers, it has demonstrated that it is very possible for a large aid organization to rely on LRP and even incorporate small producers into its supply chain.
Now, USAID also wants to use LRP to procure its food aid. The Obama administration has proposed that USAID use LRP to purchase 45% of the food for its Food for Peace aid program. This would save $105-165 million and speed up food aid distribution by up to 14 weeks. This reform is currently held up in Congress, where it must be approved as part of the Farm Bill. If USAID is permitted to start LRP, it must carefully plan its procurement models to ensure that it will be able to get enough goods from local markets without negatively affecting those markets.
There is great potential for LRP to both reduce aid organization costs and improve markets in developing countries. Large aid organizations should look to the private sector to determine how to improve their supply chains by moving to an LRP model.