Postal Service
Progress in Implementing Supply Chain Management Initiatives Gao ID: GAO-04-540 May 17, 2004The Postal Service is on the cusp of a major transformation to improve its fiscal outlook. One part of this transformation involves procurement. The Postal Service is homing in on supply chain management, a process that has helped successful private-sector companies leverage their buying power and identify more efficient ways to procure goods and services. To assist congressional efforts to enact fundamental postal reform, GAO was asked to determine (1) the extent to which the Postal Service has been successful in implementing and realizing savings from its supply chain management initiatives and (2) whether these initiatives have had an effect on small businesses.
The Postal Service has had mixed success in implementing the supply chain management initiatives we reviewed: the bulk fuel program; reverse auctions for transportation contracts; and national contracts for boxes, custodial supplies, labels, retail packaging, and tires. The Postal Service reported over $78 million in fiscal year 2003 savings and revenue from these initiatives. However, the Postal Service has been unable to recover millions of dollars in potential savings because of implementation problems with the bulk fuel program. For other savings initiatives, baseline data used to calculate savings were, in some cases, inaccurate or could not be validated because the Postal Service lacks a system for harnessing annual spending data. Since the Postal Service started using the national contracts GAO reviewed, the number of small business suppliers has dropped dramatically. Acquisition plans for most of these contracts did not address small business participation, either at the prime or subcontractor level. GAO could not determine the effect that the bulk fuel program and reverse auctions have had on small businesses because Postal Service contracting officers and contractors have been using incorrect business size standards, and, as a result, the reported small business accomplishments are not accurate. Further, the Postal Service's new supplier diversity policy does not establish targets for contracting with small businesses. Therefore, the Postal Service will have difficulty gauging the effect of supply chain management initiatives on these businesses and holding contracting officers accountable for implementing the policy's objective of ensuring improvement in the Postal Service's relationships with small businesses.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-540, Postal Service: Progress in Implementing Supply Chain Management Initiatives
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Report to the Chairman and Ranking Member, Special Panel on Postal
Reform & Oversight, Committee on Government Reform, House of
Representatives:
United States General Accounting Office:
GAO:
May 2004:
Postal Service:
Progress in Implementing Supply Chain Management Initiatives:
GAO-04-540:
GAO Highlights:
Highlights of GAO-04-540, a report to the Chairman and Ranking Member,
Special Panel on Postal Reform & Oversight, Committee on Government
Reform, House of Representatives
Why GAO Did This Study:
The Postal Service is on the cusp of a major transformation to improve
its fiscal outlook. One part of this transformation involves
procurement. The Postal Service is homing in on supply chain
management, a process that has helped successful private-sector
companies leverage their buying power and identify more efficient ways
to procure goods and services.
To assist congressional efforts to enact fundamental postal reform, GAO
was asked to determine (1) the extent to which the Postal Service has
been successful in implementing and realizing savings from its supply
chain management initiatives and (2) whether these initiatives have had
an effect on small businesses.
What GAO Found:
The Postal Service has had mixed success in implementing the supply
chain management initiatives we reviewed: the bulk fuel program;
reverse auctions for transportation contracts; and national contracts
for boxes, custodial supplies, labels, retail packaging, and tires. The
Postal Service reported over $78 million in fiscal year 2003 savings
and revenue from these initiatives. However, the Postal Service has
been unable to recover millions of dollars in potential savings because
of implementation problems with the bulk fuel program. For other
savings initiatives, baseline data used to calculate savings were, in
some cases, inaccurate or could not be validated because the Postal
Service lacks a system for harnessing annual spending data.
Three Major Savings Initiatives Have Encountered Difficulties:
Initiative: Bulk fuel program;
Intended benefit: Leverage Postal Service‘s buying power of millions of
gallons of diesel fuel purchased by highway contractors who deliver
mail to U.S. distribution centers;
Challenges: Postal Service projected $18 million in annual savings but
reported only $1.1 million in savings for fiscal year 2003; many
highway contractors have been reluctant to participate in the program;
millions of dollars will not be recouped due to lack of automated
system to accurately adjust fuel prices.
Initiative: Reverse auctions;
Intended benefit: Enable highway contractors to compete for contracts
by using Web-based bidding;
Challenges: Over $5.9 million in savings were reported for fiscal year
2003; $2.1 million of this amount is questionable because of incorrect
baseline data; some auction procedures may not elicit best price;
Initiative: National contracts;
Intended benefit: Consolidate smaller contracts for goods and services
into large, nationwide contracts;
Challenges: $71.1 million in savings and revenue were reported for
fiscal year 2003 under the national contracts GAO reviewed; GAO could
not validate this amount because the Postal Service has no accurate
baseline information on how much was spent on these commodities prior
to the supply chain management initiative.
[End of table]
Since the Postal Service started using the national contracts GAO
reviewed, the number of small business suppliers has dropped
dramatically. Acquisition plans for most of these contracts did not
address small business participation, either at the prime or
subcontractor level. GAO could not determine the effect that the bulk
fuel program and reverse auctions have had on small businesses because
Postal Service contracting officers and contractors have been using
incorrect business size standards, and, as a result, the reported small
business accomplishments are not accurate. Further, the Postal
Service‘s new supplier diversity policy does not establish targets for
contracting with small businesses. Therefore, the Postal Service will
have difficulty gauging the effect of supply chain management
initiatives on these businesses and holding contracting officers
accountable for implementing the policy‘s objective of ensuring
improvement in the Postal Service‘s relationships with small
businesses.
What GAO Recommends:
GAO is recommending that the Postal Service improve implementation of
its bulk fuel program, consider adjustments to reverse auction
procedures, and focus more attention on small businesses in carrying
out supply chain management initiatives. In written comments on a draft
of this report, the Postal Service generally agreed with our
recommendations and stated that it will consider reestablishing small
business targets if current achievements begin to slip. GAO believes
the Postal Service should have a mechanism in place to ensure
accountability and transparency in its small business contracting.
www.gao.gov/cgi-bin/getrpt?GAO-04-540.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Cooper at (202)
512-4841 or cooperd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Success of Savings Initiatives Has Been Mixed, and Some Reported
Savings Cannot Be Validated:
More Attention Needed to Ensure Small Business Participation in Supply
Chain Management Initiatives:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the U.S. Postal Service:
Tables:
Table 1: Reported Savings/Revenue for Fiscal Year 2003 from Five
National Contract Initiatives:
Table 2: Effect of National Contracts on Small Business Participation:
Abbreviation:
SBA: Small Business Administration:
United States General Accounting Office:
Washington, DC 20548:
May 17, 2004:
The Honorable John M. McHugh:
Chairman:
The Honorable Danny K. Davis:
Ranking Member:
Special Panel on Postal Reform & Oversight:
Committee on Government Reform:
House of Representatives:
The United States Postal Service faces formidable financial,
operational, and human capital challenges because of unfunded
liabilities, stagnant revenues, inefficient operations, and a business
model that is unsustainable. The increasing popularity of e-mail,
instant messaging, and wireless technology, to name a few, poses a
long-term threat to the Postal Service's core business--First-Class
Mail (primarily letters) and Standard Mail (primarily advertising). In
April 2001, we placed the Postal Service's transformation and long-term
outlook on our high-risk list,[Footnote 1] and we recently reported
that comprehensive Postal Service reform is urgently needed. While the
Postal Service achieved notable success in fiscal year 2003, this
respite is likely to be short-lived because First-Class Mail continues
to decline, key costs are rising, and productivity gains are likely to
slow.[Footnote 2]
In the face of these challenges, the Postal Service has been under
pressure to cut costs while improving overall performance. Part of its
reform strategy is to find more efficient ways to procure goods and
services. In fiscal year 2003 alone, the Postal Service spent over
$11.3 billion on such items as supplies, services, rent, and
transportation. To reduce spending, Postal Service officials have been
focusing on supply chain management, the process used to integrate the
flow of goods and services from the suppliers to delivery of the end
product to the retail customer. Commercial companies use this
management process to help reduce costs and to do business in the most
efficient way possible. Since fiscal year 2000, with the help of supply
chain management initiatives, the Postal Service reported that it has
saved about $866 million by leveraging its buying power and insisting
on continuous improvement.
To assist congressional efforts to enact fundamental postal reform, you
asked us to determine (1) the extent to which the Postal Service has
been successful in implementing and realizing savings from its supply
chain management initiatives and (2) whether these initiatives have had
an effect on small businesses. The Postal Service is an independent
establishment of the government's executive branch that is expected to
act like a business and is not subject to the Small Business
Act.[Footnote 3] Nevertheless, the Postal Service has developed
a 3-year plan to maintain a supplier base that includes small,
minority-owned, and woman-owned businesses and tracks contracts awarded
to those businesses.[Footnote 4] As agreed, we focused our work on
three major supply chain management initiatives:
* bulk fuel program, an effort to leverage the Postal Service's buying
power for the millions of gallons of fuel purchased by highway
contractors who transport mail;[Footnote 5]
* reverse auctions, a Web-based tool that enables highway contractors
to compete for contracts in an electronic bidding format; and:
* national contracts, the consolidation of smaller contracts for goods
and services into large, nationwide contracts.[Footnote 6]
We conducted our review from July 2003 to April 2004 in accordance with
generally accepted government auditing standards. Details on our scope
and methodology are discussed in appendix I.
Results in Brief:
The Postal Service has had mixed success in implementing the supply
chain management initiatives we reviewed, as discussed below. Although
the Postal Service reported over $78 million in fiscal year 2003
savings and revenue from these initiatives, in some cases the baseline
data used to calculate the savings are inaccurate or unverifiable.
* Bulk fuel program: This savings initiative has gotten off to a slow
start and has been plagued by implementation problems that became
apparent during a pilot program that ended two years ago. The Postal
Service originally projected $18 million in annual savings under this
program, but reported only $1.1 million in savings for fiscal year
2003. The Postal Service has repeatedly scaled back its projections
after realizing that some highway contractors have a strong preference
for buying fuel from their own suppliers instead of from national
suppliers designated by the Postal Service. The Postal Service has also
been unable to increase the number of fueling locations available for
highway contractors under the bulk fuel program. Further, the Postal
Service has not yet implemented an automated system for adjusting fuel
prices, which fluctuate on a weekly basis and can be significantly
higher or lower than the values specified in highway contracts. Thus,
the Postal Service must go through a tedious manual process to make
accurate fuel price adjustments to the contract prices in order to
recoup savings. The process is so labor-intensive and time-consuming
that the Postal Service has thus far been unable to capture millions of
dollars in potential savings.
* Reverse auctions: The Postal Service has had some success with this
bidding tool and has used it increasingly in the past year. In some
cases, however, the Postal Service may not have obtained the lowest
prices possible because only one bid was received or competing
contractors may not have had sufficient time to submit their final
bids. Fiscal year 2003 savings were reported as over $5.9 million. We
found that $2.1 million of these savings are questionable, however, due
to such factors as inadequate baseline data and lack of competition
during the auctions.
* National contracts: The Postal Service has begun to take steps to
consolidate its spending on selected commodities in an effort to
leverage its buying power, reducing the number of suppliers for the
commodities we reviewed and directing employees to purchase their
supplies from national contracts. It claimed $71.1 million in savings
and revenue in fiscal year 2003 from the national contracts we
reviewed: boxes, custodial products, labels, retail packaging, and
tires. However, because the Postal Service lacked accurate baseline
data on what it had spent on these commodities prior to the supply
chain management initiative, we were unable to validate the reported
savings and revenue. The lack of accurate baseline data is not a
problem unique to the Postal Service; in our prior work, we found that
commercial companies also struggled to establish reliable baseline data
when their spending on goods and services was highly decentralized.
According to Postal Service reports, the national contract initiative
has resulted in a decrease in small business prime contracts for the
commodities we reviewed. In planning these purchases, Postal Service
officials did not in most cases proactively explore options for keeping
small businesses involved, either as prime or subcontractors. This
situation runs counter to the intent of the Postal Service's supplier
diversity program, which states that each purchase plan must
demonstrate active efforts to use small, minority-owned, and woman-
owned businesses. We were unable to determine the effect of the bulk
fuel and reverse auction initiatives on small businesses because Postal
Service contracting officers and contractors have consistently used
incorrect small business size standards. Thus, the Postal Service's
report that small highway contractors received $2.3 billion,
representing a majority of the Postal Service's fiscal year 2003 small
business contracts, is unreliable. As the Postal Service continues to
implement its supply chain management initiatives, it will be unable to
measure the effect of these initiatives on small businesses because its
new supplier diversity policy no longer includes targets for contract
dollars awarded to these businesses.
We are recommending that the Postmaster General of the United States
take actions to improve implementation of the bulk fuel program, refine
reverse auction savings estimates and procedures, and focus more
attention on small business issues in carrying out supply chain
management initiatives. In written comments on a draft of this report,
the Postal Service generally agreed with our recommendations. While the
Postal Service does not plan to establish small business targets at
this time, it stated that it would consider reestablishing targets for
small business contracts if its current achievements begin to slip.
Background:
The Postal Service, an independent establishment of the executive
branch of the U.S. government,[Footnote 7] is a $68-billion
organization[Footnote 8] consisting of more than 37,000 post offices
and 350 major mail-processing and distribution facilities. We recently
reported that the Postal Service's current business model is outdated
and inflexible and, in April 2001, we placed the agency's long-term
financial outlook and transformation efforts on our high-risk list. We
suggested that the Postal Service work with Congress and other
stakeholders to develop a comprehensive plan that would address its
financial, operational, and human capital challenges. In response, the
Postal Service issued its Transformation Plan in April 2002.
Also in 2002, the President's Commission on the United States Postal
Service was appointed to examine the Postal Service's current
operations and propose recommendations for a more viable future while
minimizing the costs to U.S. taxpayers. The commission's July 2003
report recommended several fundamental changes, some of which involve
procurement reform. The commission said that the Postal Service could
save hundreds of millions of dollars by adopting practices that have
substantially lowered costs for private-sector retailers. Our prior
work has shown that commercial companies have achieved significant
savings by leveraging their buying power through taking a strategic
approach to acquisition.[Footnote 9] The Postal Service operates more
as a business than as a government agency. For example, it is
responsible for generating revenue to cover its operating expenses and
is not subject to the Federal Acquisition Regulation that guides most
federal agencies' procurement practices.
In recent years, the Postal Service has undertaken a number of supply
chain management initiatives intended to streamline acquisitions and
save money. A January 2002 revision to its purchasing manual added a
section on the supply chain management philosophy and its importance to
Postal Service purchasing.[Footnote 10] According to the Postal
Service's Comprehensive Statement on Postal Operations, supply chain
management depends on close interaction among end users, buyers, and
suppliers, with a focus on creating long-term contracts, as well as
ongoing analysis and improvement of operating and administrative
processes and costs.
Two of these initiatives, the bulk fuel program and reverse auctions
for highway contracts, are targeted at efforts to save on
transportation costs. Fueling the Postal Service's transportation
network is no small feat. Diesel fuel is a major Postal Service
expense, totaling almost $340 million in fiscal year 2003 for the
thousands of highway contractors who consumed about 225 million gallons
of fuel.[Footnote 11] With this volume of fuel purchasing, even a 1-
cent difference in price per gallon can result in millions of dollars
in savings for the Postal Service. Recognizing the potential for
savings, the Postal Service launched the bulk fuel pilot program in the
late 1990s. The Postal Service negotiated a discounted fuel price with
a national supplier and directed a small number of highway contractors
to purchase their fuel from this supplier rather than from various
local and regional sources. In fiscal year 2001, the Postal Service
expanded the program to two national suppliers.
In fiscal year 2002, the Postal Service began to use reverse auctions,
a Web-based bidding tool, for emergency highway transportation
contracts (short term, temporary routes during the December holidays,
for example). The Postal Service has hired a firm to conduct the
auctions on its behalf.[Footnote 12] Before this online tool became
available, contracting officials solicited bids from potential
contractors by fax and telephone. Utilizing the Web, the Postal Service
can now seek contract bids on a reverse auction site, where competitors
can see one another's bids in real-time and take this information into
account when deciding on the price they will offer. The Postal
Service's intent in using this tool is to obtain the lowest price
possible by garnering increased competition.
A third initiative, national contracts, is intended to consolidate the
Postal Service's spending on certain commodities. Postal Service
employees have typically purchased supplies in a highly decentralized
manner, from local, regional, or national businesses. Millions of
dollars are spent using cash or purchase cards or through contracts. By
negotiating contracts with selected suppliers based on volume discounts
and directing employees to use these contracts, the Postal Service
plans to leverage its buying power and save money.
Success of Savings Initiatives Has Been Mixed, and Some Reported
Savings Cannot Be Validated:
The Postal Service has had mixed success in implementing the supply
chain management initiatives we reviewed. The bulk fuel program has
been hampered by implementation difficulties, but the Postal Service
has had some success using reverse auctions and has used this tool
increasingly. The Postal Service has also begun to consolidate its
spending on boxes, custodial products, labels, retail packaging, and
tires through the use of national contracts. However, some of the
claimed savings from reverse auctions were overstated, and we could not
validate the $71.1 million in reported savings and revenue from the
national contracts we reviewed because the Postal Service lacked
accurate baseline data on what had been spent on the commodities before
the supply chain management initiative.[Footnote 13]
Bulk Fuel Implementation Difficulties Have Prevented Projected Savings
from Being Realized:
The bulk fuel program has gotten off to a slow start, beset by a number
of implementation difficulties. Only 600 of the roughly 17,000 highway
routes are involved in the program, although the Postal Service had
expected a much greater level of participation. Consequently, the
Postal Service is far from realizing its originally projected savings
of $18 million per year, capturing only about $1.1 million in savings
in fiscal year 2003. It may forgo collecting over $3 million in
potential savings due to the implementation problems.
The difficulties the Postal Service has encountered are primarily due
to (1) resistance from many highway contractors; (2) setbacks in the
Postal Service's plans to expand the number of fuel delivery locations
under the program; and (3) lack of an automated system to accurately
capture fuel prices, which means that inaccurate and burdensome manual
calculations must be used.
First, some highway contractors have refused to participate in the bulk
fuel program. A few have gone as far as filing court actions
challenging the Postal Service's right to direct them to certain
fueling sites. This resistance is due to a number of factors. One has
to do with profit. Contractors' fuel costs are intended to be "pass-
through" costs, with the Postal Service reimbursing the contractors for
the fuel costs specified in their contracts. The contract prices are
based on an estimated price per gallon and an estimated number of
gallons to be consumed annually. If the contractors' actual price per
gallon paid deviates from the contract's estimated price per gallon by
5 cents or more, they may submit a request for a contract price
adjustment.[Footnote 14] Updated fuel cost information from the
contractor can be required if the contracting officer suspects that the
contractor is being allowed reimbursement for fuel costs greater than
those actually being incurred. However, given the volume of contracts,
it is difficult and resource intensive to keep up with the fuel price
changes, and therefore contracting officers primarily rely on the
contractors to submit fuel adjustments. In practice, however, according
to Postal Service officials, contractors are typically quick to submit
an adjustment when they are paying more than the contract price, but
slow to do so when they are able to obtain the fuel more cheaply. For
highway contracts not under the bulk fuel program, contractors have
been able to retain the difference between their actual expenditures
for fuel and their contract price. The procedures for contract price
adjustments under the bulk fuel program do not allow contractors this
opportunity.
Contractors have cited other reasons for resisting the program. They
say they have built strong business relationships with their local fuel
suppliers and that those suppliers are more responsive than the major
suppliers designated in the bulk fuel program. They also believe that,
as a business decision, they should be able to elect where to purchase
their fuel. Some have shown that they can buy fuel more cheaply from
their local suppliers than under the bulk fuel program. Postal Service
officials point out that, while it is true that in certain cases the
bulk fuel price may not be the lowest, the only way that the savings
can be achieved is if a large number of contractors participate in the
program. They also note that fuel is supposed to be a pass-through cost
and, therefore, contractors should not be concerned that the bulk fuel
price may be higher than a discount rate they may be able to obtain on
their own.
Second, effective implementation has been hampered by the Postal
Service's lack of success in bringing new fueling locations into the
bulk fuel program. Postal Service officials recognize that, with only
44 locations available to contractors to buy fuel under the program,
the Postal Service's anticipated savings cannot be achieved. In a
solicitation issued April 8, 2003, the Postal Service requested
proposals from fuel suppliers in an effort to add 22 locations to the
program. The intention was to increase the number of gallons highway
contractors purchase at bulk fuel prices by having these additional
suppliers distribute fuel purchased from the two national bulk fuel
companies. However, the Postal Service received no acceptable offers
from suppliers for new fueling sites and is now considering additional
approaches to expand the number of fueling locations.
Third, the Postal Service does not have an automated system for
gathering information on the number of gallons of fuel highway
contractors purchase and the price they pay under the bulk fuel
program. Therefore, manual procedures must be used to adjust contract
prices in order to secure savings for the Postal Service. During the
pilot program, the Postal Service recognized the need to automate its
fuel adjustment system but expanded the program before the system was
in place. We found that manual price adjustments have been inaccurate.
Contrary to Postal Service procedures, which direct contracting
officers to adjust contract prices based on the quantity of fuel
purchased by contractors as well as the price they pay, contracting
officials are simply adjusting the contract price based on the
contractors' average weekly price per gallon paid at bulk fuel sites--
without factoring in the number of gallons purchased. This approach
could result in lost savings for the Postal Service and, in some cases,
contractors being shortchanged. In addition, we found that the price
per gallon under the bulk fuel program did not include a special sales
tax that some states require highway contractors to pay for diesel
fuel. For example, one contractor paid $1,656 to cover this tax in a
3-week period, which the contracting officer's adjustment did not
include. Although the contractor brought the situation to the attention
of the Postal Service contracting officer, the contracting officer took
no action to fix the problem until we called it to the Postal Service's
attention. According to postal officials, because of our finding, they
have updated all of the state tax information with the information
received from a national fuel tax consultant and are working with the
bulk fuel suppliers to obtain reports that detail taxes charged at each
delivery site.
Manual adjustments also pose an administrative burden for Postal
Service contracting personnel and highway contractors. A study
conducted for the Postal Service shows that fuel adjustments can take
as long as 30 minutes per contract. Contractors must submit invoices or
other documentation to show how many gallons of fuel they purchased and
at what price. Without this information, the Postal Service cannot make
accurate fuel cost adjustments and achieve savings. However, one of the
primary reasons for the bulk fuel program was to reduce the
administrative burden associated with manual adjustments. The program's
intention was not to require highway contractors to submit receipts for
every single fuel transaction at the pump or to have Postal Service
contracting officers wade through daily transactions in order to make
monthly adjustments in highway contracts.
Postal Service officials recognize that, until an automated system is
implemented for capturing transaction data at the pump, the bulk fuel
program will not be as successful as they had hoped. They are taking
steps to automate the process. In a pilot effort involving three bulk
fueling locations, the Postal Service created an electronic system that
automatically adjusted contract prices based on the actual gallons
purchased and prices paid at the pump. Because of the success of this
pilot effort, the Postal Service plans to use the system for all
contracts under the bulk fuel program. However, a program official said
the system is behind schedule and will not be even partially available
until the end of fiscal year 2004, and full implementation is not
expected until at least a year later.
These implementation difficulties have resulted in significantly lower
savings than expected and a struggle to recoup millions of dollars from
contractors participating in the program. In 1999, the Postmaster
General told Congress that 75 percent of highway contractors' fuel,
about 170 million gallons, would be purchased under the bulk fuel
program and would yield annual savings of over $18 million.[Footnote
15] After further analysis, however, the Postal Service lowered its
estimate to 95 million gallons of fuel and annual savings of
$8.8 million starting in fiscal year 2004.[Footnote 16] Late in fiscal
year 2003, the projected savings were further lowered to $4.7 million,
because highway contractors under the bulk fuel program purchased only
50 million gallons of fuel. However, Postal Service officials realized
that they had failed to recoup $3.9 million of this amount because
contractors were not initiating fuel price adjustments but, rather,
were retaining the difference between the bulk fuel price and their
contract price. The Postal Service subsequently implemented the manual,
monthly adjustment system discussed earlier, retroactively attempting
to collect overpayments from contractors, and has now reported fiscal
year 2003 savings of about $1.1 million. However, the Postal Service
said that it may decide to forgo an additional $3.5 million in
potential 2003 savings because of the administrative burden of
retroactively adjusting contract prices.
Some Success with Reverse Auctions, but Procedures and Reported Savings
Could Be Improved:
The Postal Service has had success with reverse auctions for highway
contracts and has used them increasingly, but some procedures could be
improved to enable it to obtain lower prices. The Postal Service
claimed over $5.9 million in savings from these reverse auctions in
fiscal year 2003, but about $2.1 million of these savings are
questionable. For some auctions the reported savings were overstated,
and in other cases savings were claimed for auctions when no bids were
received.
Since May 2002, reverse auctions have been conducted for 659 of
about 17,000 highway contract routes, and use of the auctions has
been increasing each year; over 400 of these auctions occurred in
fiscal year 2004. In implementing the auctions, however, the Postal
Service may not be getting the lowest price possible in some cases. For
example, we found that 181 of the 659 auctions ended with only one bid
received. In cases where there is only one bidder, we believe that the
Postal Service may not be getting the best price because there were no
other bidders to drive down the price. In these cases, contracting
officers do not attempt to negotiate a lower price with the sole
bidder. According to one of these successful bidders, his only bid was
high and would not have been his final offer had there been competing
bids. To keep the bids within an acceptable range, the Postal Service
establishes a reserve price, or a maximum price it is willing to
accept, based on market research prior to starting the auction. Postal
Service officials stated that, because they establish a low reserve
price, they are confident that the Postal Service is obtaining fair and
reasonable prices even when only one bid is received.
Another area of concern is whether the highway contract reverse auction
procedures provide sufficient opportunity for bidders to submit their
best price. The Postal Service uses a practice known as "overtime" for
reverse auctions for certain goods and services, but not for highway
contracts. Typically, just before an auction comes to a close, there is
a rush of activity from bidders. To ensure that the winning bid is the
lowest possible, the Postal Service's reverse auctions for other than
highway contracts provide the option of an overtime process until
bidding comes to a halt. Rather than have every auction automatically
close at a given time and thereby reward the contractor who waited
until the very last second to place its bid,[Footnote 17] the overtime
process provides all suppliers with an additional increment of time to
react to last-minute bids if they believe they can offer a lower price.
For example, under the overtime process, if a final bid is submitted
within the last minute, the auction can be extended by 5 minutes or
more to allow other bidders a chance to make a better offer. Postal
Service officials noted that they had considered the possibility of
using overtime procedures, but were concerned that some suppliers may
not be available to participate in an overtime event because they lack
the administrative staff to monitor the bidding.
The Postal Service began claiming savings from reverse auctions in
fiscal year 2003, reporting over $5.9 million in savings from 111
auctions held that year. For many of these auctions, data were not
available for making direct comparisons with contracts for prior
highway routes. Therefore, the Postal Service used statistical analysis
to derive the savings, a common practice when historical data are
unavailable. However, for 6 of these auctions--for which the Postal
Service claimed $800,000 in savings--we could not substantiate the
savings. Based on our analysis of the Postal Service's methodology, we
found no statistical evidence to support its approach. Another 24
highway contracts awarded through reverse auctions did have direct
comparisons with previously awarded contracts, making it easier to
project savings. We examined the largest of these contracts, with
claimed savings of $1.2 million, and found that the savings were
derived from incorrect baseline data. The baseline used to calculate
the savings was based on an outdated contract rate of $11.65 per mile,
although a recent modification to the contract had a rate of $4.87.
Thus, the savings from this auction were significantly overstated.
Furthermore, the Postal Service claimed savings from 7 reverse auctions
that expired with no bids received. Subsequently, the Postal Service
faxed the requirements to known suppliers in relevant geographic areas,
requested bids, and eventually awarded contracts. The Postal Service
claimed $108,005 in reverse auction savings for these contracts even
though the contractors did not participate in a reverse auction.
Based on our findings, Postal Service officials agreed to lower their
claimed savings for these reverse auctions.
National Contract Initiative Under Way, but Lack of Accurate Baseline
Data Renders Reported Savings and Revenue Questionable:
In turning to national contracts for certain items, the Postal Service
has attempted to reduce costs and improve efficiency in its acquisition
approach by directing employees to make purchases from designated
suppliers. Prior to its use of national contracts, the Postal Service
purchased corrugated boxes, custodial products, labels, retail
packaging, and tires from a large number of suppliers. The Postal
Service has negotiated contracts for these commodities with a smaller
number of suppliers in order to leverage its buying power. For example,
prior to the initiative, the Postal Service estimates it had over 1,000
suppliers for custodial products and 22 suppliers for labels. It now
has 2 contracts for custodial products and 6 for labels. For fiscal
year 2003, the Postal Service reported $71.12 million in savings and
revenue through the national contracts for the five commodities we
reviewed, as shown in table 1.
Table 1: Reported Savings/Revenue for Fiscal Year 2003 from Five
National Contract Initiatives:
Dollars in millions.
Corrugated boxes;
Reported savings/revenue: $2.96.
Custodial products;
Reported savings/revenue: $16.38.
Labels;
Reported savings/revenue: $5.70.
Retail packaging[A];
Reported savings/revenue: $41.26.
Tires for mail delivery trucks;
Reported savings/revenue: $4.82.
Total;
Reported savings/revenue: $71.12.
Source: U.S. Postal Service.
[A] Unlike the other initiatives, which are intended to generate
savings, this contract is meant to bring additional revenue to the
Postal Service. The Postal Service purchases such items as wrapping
paper and bubble wrap mailers from the contractor and then offers them
for sale in local post offices. The revenue is reported as part of
overall supply chain management savings.
[End of table]
However, we were not able to validate these reported savings and
revenue because they are based on unreliable baseline data. Given the
highly decentralized nature of its procurements and the fact that many
supplies have traditionally been purchased using cash and purchase
cards, the Postal Service could not determine how much had been spent
on these commodities prior to the supply chain management initiative.
Postal Service contracting officers agreed that solid baseline data
were not available, but stated that they did the best they could with
the data they had, such as using accounts payable data where feasible.
The Postal Service is not the only major organization that has had
difficulty in tracking what it is buying. Our prior work has found that
major commercial companies often do not have a good grasp of how much
their individual business units are spending, where their dollars are
going, and whether their purchases are meeting business needs at the
best overall value. To reduce costs, leading companies have
reengineered their approach to acquisition and changed the way they
manage their spending.[Footnote 18] Among other things, they use
information systems to get a clearer picture of what their business
units are spending, rather than taking months to examine individual
purchase orders and piece together data from various financial and
management information systems to get at best a rough idea of what is
being spent.
Postal Service officials have been working for a number of years on a
new system--planned for full implementation by the end of fiscal year
2006--that will enable them to better track contract expenditures, thus
providing them with more accurate data on savings from national
contracts. However, the Postal Service will continue to lack detailed
knowledge of what is being spent outside of contracts, such as through
cash and purchase cards.[Footnote 19] Therefore, it will be difficult
for the Postal Service to know with any degree of certainty whether the
consolidated contracts are producing the desired results and what, if
any, additional improvements are needed to realize the benefits
expected from the national contract initiative.
More Attention Needed to Ensure Small Business Participation in Supply
Chain Management Initiatives:
When the Postal Service consolidated its purchasing under the national
contracts we reviewed, the number of small businesses participating as
prime contractors declined. In planning these acquisitions, Postal
Service officials often did not proactively explore ways in which to
make these contracting dollars available to small businesses, either as
prime or subcontractors. We could not gauge the effect on small
businesses as a result of the other supply chain management initiatives
we reviewed--the bulk fuel program and reverse auctions for highway
contracts--because contracting officers and highway contractors used
incorrect small business size standards and, consequently, the reported
small business dollar amounts are unreliable. As it proceeds with its
supply chain management initiatives, the Postal Service will have
difficulty measuring the effect on small businesses because its new
supplier diversity policy, while indicating a commitment to increasing
contracts to small and diverse businesses, does not establish targets-
-such as dollar amounts or number of contracts--to measure success.
Small Business Participation Has Been Reduced as a Result of National
Contracts:
The number of small business suppliers has dropped in four of the five
commodities we reviewed. Table 2 shows the effect of the national
contract initiative on small business participation.
Table 2: Effect of National Contracts on Small Business Participation:
Type of supply: Corrugated boxes;
Reported number of businesses before consolidation: 3 large, 2 small;
Reported number of businesses after consolidation[A]: 2 large.
Type of supply: Custodial products;
Reported number of businesses before consolidation: Exact number
unknown; estimate is about 200 large and about 800 small;
Reported number of businesses after consolidation[A]: 1 large, 1 small.
Type of supply: Labels;
Reported number of businesses before consolidation: 7 large, 15 small;
Reported number of businesses after consolidation[A]: 3 large, 3 small.
Type of supply: Retail packaging;
Reported number of businesses before consolidation: Exact number
unknown; estimate is about 20, many of which were local businesses;
Reported number of businesses after consolidation[A]: 1 large.
Type of supply: Tires for mail delivery trucks;
Reported number of businesses before consolidation: 4 large;
Reported number of businesses after consolidation[A]: 1 large.
Source: U.S. Postal Service.
[A] As of February 2004.
[End of table]
In planning most of these initiatives, contracting officers and other
Postal Service officials did not consider ways to ensure that small
businesses would have the chance to compete for contracting dollars,
although the Postal Service's supplier diversity plan states that each
purchase plan must consider the use of small, minority-owned, and
woman-owned businesses. Further, Postal Service regulation requires the
contracting officer to manage supplier diversity as a strategic
business initiative. In only one case--custodial products--was full
attention paid to the effect of the consolidated contract on small
businesses. In planning this acquisition, Postal Service officials
recognized that some of these products were being purchased from local
businesses and that there would be a drop in supplier diversity as a
result of the consolidation. Acquisition planning documents show that
market research and outreach were conducted with the intent of
identifying potential small businesses to compete for the contract.
Ultimately, two contracts were awarded--one to a large business and the
other to a small business.
Further, in only one of the five commodities we reviewed was the prime
contractor's intent to subcontract with small businesses considered to
any extent in awarding the contract. For custodial products, small
business subcontracting was one of the evaluation factors in the
solicitation. The large business, when submitting its proposal under
the solicitation, included a supplier diversity plan with a
28.8 percent small business goal; however, this goal was revised to 2.1
percent after the contract was awarded.
Our prior work has found that leading commercial companies take several
steps to ensure that small businesses serve some of their acquisition
needs because they believe it makes good business sense, especially in
the communities where they do business.[Footnote 20] These steps
include considering diverse businesses in acquisition planning,
ensuring that supplier diversity is considered in selecting
contractors, justifying the reason when there is a lack of diverse
supplier participation, and encouraging small suppliers who have
limited resources to form joint ventures so they can compete
effectively for large contracts.
Incorrect Application of Small Business Size Standards Makes It
Difficult to Measure Impact of Other Initiatives:
In fiscal year 2003, the Postal Service reported that $2.3 billion, or
59 percent of its small business dollars, went to highway contractors.
We were unable to gauge the effect of the bulk fuel program and reverse
auctions on these contractors because Postal Service contracting
officers and the contractors themselves had not used the correct size
standard for defining a small business. As a result, the reported small
business dollars for highway contractors are unreliable.[Footnote 21]
Postal Service regulation directs contracting officers to use the Small
Business Administration's (SBA) regulations to ascertain whether a size
standard other than the 500 employee ceiling should be used to
determine whether a business is small. SBA has defined the size
standard for small bulk mail truck transportation businesses as average
annual receipts at or below $21.5 million, rather than the number of
employees.[Footnote 22] However, five Postal Service contracting
officers we spoke with, who together are responsible for almost 60
percent of all highway contracts, routinely define a small business as
one with 500 or fewer employees. Postal Service supplier diversity
officials told us that the criterion of no more than 500 employees is
used virtually without exception.
We also found that the Postal Service has disseminated inaccurate
guidance on small business size standards. Until recently, a form that
highway contractors use to place themselves on the Postal Service
mailing list stated that businesses with 500 or fewer employees are
considered small businesses. Postal Service officials have corrected
this form. In addition, the Postal Service's Web site contains a
document, "Supplier Diversity Terms," that defines a small business as
one with no more than 500 employees. Postal Service officials are
correcting this document.
We selected eight highway contractors who do a substantial amount
of business with the Postal Service--about $390 million in fiscal year
2003--and who were reported as small businesses. We determined that
five of the eight were not small businesses. Each of them had more than
500 employees and average annual receipts exceeding $21.5 million.
When we spoke with these five contractors, we found that they were also
confused about the appropriate small business size standard, believing
it to be 500 employees. Part of the confusion stemmed from the fact
that a form requiring them to self-certify their size when responding
to a Postal Service solicitation states that companies with 500 or
fewer employees are considered small businesses, unless SBA has
established a different size standard.
Further, we found that, in some cases, Postal Service contracting
specialists were filling out the size standard for the contractors
rather than having them self-certify as a large or small business. Two
of the contractors we spoke with had noticed that the Postal Service
had identified their businesses as small when they considered
themselves large. The contractors noted the errors on the form, but the
changes were not made in the Postal Service's records. Postal Service
officials have stated that they have now taken steps to ensure that the
forms are not filled out by the Postal Service for the contractors.
Highway contracts were not the only area where we found
reporting errors. One contractor under the national contract initiative
for corrugated boxes reported that it was a small business and
received the Postal Service's 2002 Quality Supplier Award for "Small
Business-Manufacturing." However, this company is owned by a large
corporation.[Footnote 23] The contractor stated that it identified
itself as a small business because the individual subsidiary has fewer
than 500 employees.
New Supplier Diversity Plan Lacks Targets to Measure Small Business
Participation:
It will be difficult for the Postal Service to measure progress in
small business contracting because its new 3-year supplier diversity
plan, issued in October 2003, does not specify targets for small
business procurement dollars. The prior supplier diversity plan, which
covered the 1999 to 2003 time frame, included such targets, with
increasing dollar amounts for these businesses over the 5-year period.
Without targets in place against which to measure performance, the
Postal Service has no way to determine whether its supplier diversity
policies are being successfully implemented. Further, there is no
mechanism in place to hold Postal Service officials accountable for
implementing the Postal Service's objective of ensuring a continuing
focus on, and improvement in, its relationships with small and diverse
businesses. Our prior work has found that, as part of their diversity
policies, leading commercial companies set specific goals to measure
performance--such as percentage of total contract dollars awarded to
small businesses--and consider gradually increasing the goals on an
annual basis.
Conclusions:
Leveraging buying power through the use of supply chain management can
lead to significant savings, and the Postal Service is on the right
track in starting to focus on these opportunities. However, the Postal
Service can improve aspects of the initiatives, such as working out
implementation problems that have plagued its bulk fuel program. While
the lack of accurate baseline information against which to measure
savings is, to some degree, an inherent problem in an environment of
decentralized spending--and a problem not unique to the Postal Service-
-the Postal Service can take steps to capture more reliable information
on its supply chain management initiatives so that it knows whether the
initiatives are producing the desired results.
The Postal Service also faces the challenge of achieving necessary
savings while following its own diversity policies. More attention
needs to be paid to the effect of supply chain management initiatives
on small businesses. As the Postal Service moves forward with its
supply chain management initiatives, reliable data and an emphasis on
the importance of small business participation are the key factors
needed to make its supplier diversity policy work. Given the lack of
targets for small business participation in the new supplier diversity
policy, however, it will be difficult to hold contracting officers and
other key officials accountable for improving the Postal Service's
relationships with small businesses.
Recommendations for Executive Action:
We recommend that the Postmaster General of the United States take the
following seven actions:
To move toward an accurate and less burdensome method of recouping
savings under the bulk fuel program:
* place a high priority on automating the fuel price adjustment system,
and:
* develop a time-phased plan for expanding the number of fueling
locations.
* To capture accurate savings from its reverse auctions for highway
contracts and ensure that the Postal Service gets the best possible
price:
* encourage contracting officers to try to negotiate further price
reductions when only one bid is received, and:
* conduct an analysis to determine whether reverse auction overtime
procedures would result in the Postal Service's achieving additional
savings.
To improve small business reporting and participation:
* train contracting officers on the appropriate size standards for
different types of businesses and direct them to post the proper
standard in the solicitation;
* direct contracting officers and other acquisition personnel to
(1) explore during acquisition planning ways that small business
participation can be addressed in a supply chain management environment
and (2) document their decisions; and finally,
* establish targets for small business participation in Postal Service
contracts.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, the Postal Service
generally agreed with our recommendations. It stated that, while many
improvement plans were in place prior to receiving the results of our
review, it welcomed the additional information and recommendations and
plans to use them to further refine its supply chain management
efforts. The Postal Service agreed with our recommendations on the bulk
fuel program and reverse auctions for highway transportation contracts.
The Postal Service noted that the auctions covered by our report
represent a relatively small amount of total reverse auction spending
volume; however, the highway transportation auctions we reviewed also
account for the vast majority--over 90 percent--of auctions held. On
the issue of small business reporting and participation, the Postal
Service stated that it would conduct random sampling to check small
business certifications, provide training to reinforce existing
policies that require supplier diversity to be addressed in acquisition
plans, and focus attention on subcontracting plans and reporting. It
also noted that the more recent acquisition plans under supply chain
management initiatives place stronger emphasis on addressing supplier
diversity issues. The Postal Service stated that our findings on the
national contract initiatives would help drive further improvement by
ensuring that contracting officers continue to address supplier
diversity in their acquisition plans.
The Postal Service stated that, while it understands our recommendation
to establish targets for contracting with small businesses, its current
approach is to establish baselines from achievements obtained in the
previous year so that purchasing units can advance their
accomplishments in successive years. By monitoring results quarterly
and tracking small business participation throughout the process, the
Postal Service believes it can effectively identify and focus its
improvement efforts. It stated that it would consider reestablishing
targets for small businesses if results start to slip. The Postal
Service's response implies that the current achievement level is a
baseline against which improvements to small business contracting will
be measured. However, we believe that the Postal Service needs to have
in place a mechanism to ensure that contracting officers and other key
officials are held accountable for improving small business contracting
and to provide transparency into the Postal Service's improvement
efforts.
The Postal Service also provided technical comments, which we
incorporated as appropriate.
We are sending copies of this report to other interested congressional
committees and the Postmaster General of the United States. We will
also make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at http://
www.gao.gov.
Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309
if you have any questions regarding this report. Other major
contributors to this report were Lily Chin, Eric Fisher, Paul Greeley,
Judy Lasley, MacDonald Phillips, Russ Reiter, and Sylvia Schatz.
David E. Cooper:
Director, Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To determine the extent to which the Postal Service's supply chain
management initiatives have resulted in savings, we reviewed the
highway contractor bulk fuel program and reverse auctions for
transportation services and selected five commodities that have been
consolidated into national contracts: corrugated boxes, custodial
products, pressure-sensitive labels, retail packaging, and delivery
vehicle tires. We selected these contracts because they had large
projected savings and represented a range of Postal Service
commodities. We reviewed our prior report on the Postal Service's
national office supply contract[Footnote 24] and Postal Service
Inspector General reports on the bulk fuel pilot program and reverse
auctions.
In reviewing the bulk fuel program and reverse auctions, we interviewed
Postal Service officials in headquarters as well as 5 of the Postal
Service's 11 transportation contract managers. We selected these
managers because they were large users of the bulk fuel program and
reverse auctions. We also met with a representative of the National
Star Route Mail Contractors Association, which represents a number of
large and small highway contractors. For the bulk fuel program, we
reviewed program documentation regarding the Postal Service's projected
savings per gallon and program implementation. For the reverse
auctions, we obtained Postal Service May 2003 policy guidance and
information on each of the 659 reverse auctions held since May 2002.
Drawing data from the Lean Logistics reverse auction Web site, we
analyzed information on when the Postal Service posted the requirement,
the name of the contractors placing bids, bid amounts, and the dates
and times these bids were placed. We did not compare the information
drawn from the Web site with Postal Service contract files, but we
verified the overall number of auctions with Postal Service officials.
We also reviewed the methodology supporting the Postal Service's
reported reverse auction savings. Using Postal Service data, we
performed various statistical analyses, including replicating the
Postal Service's methodology, to determine whether the estimated
savings were reasonable. We also conducted a literature review of
studies and research concerning the benefits of using reverse auctions.
For the national contracts, we interviewed the responsible program
officials and contracting officers in Dallas, Texas; Denver, Colorado;
Memphis, Tennessee; Philadelphia, Pennsylvania; and Washington, D.C.,
and reviewed the contract files. We also obtained the Postal Service's
initial projected savings for these national contracts and their actual
claimed savings from the Postal Service Supply Chain Management Office.
We did not validate these reported savings or determine the extent to
which Postal Service buyers were using the contracts.
To determine whether supply chain management initiatives have had an
effect on small businesses, we compared prior suppliers' business sizes
with those of current suppliers under the national contracts, based on
information from the contracting officers. We did not validate the
reported business sizes. We also reviewed the individual acquisition
plans for each commodity to determine if small business participation
was considered in the acquisition planning. For the bulk fuel program
and reverse auctions, we interviewed Postal Service policy officials,
program officials, and contracting officers. We also discussed with
eight highway contractors their business size, including the number of
employees and average annual receipts. We reviewed the Small Business
Administration's small business size standards and obtained concurrence
from a Postal Service policy official that $21.5 million in total
average annual receipts should be used as the size standard for highway
contractors to qualify as a small business. Because the Postal Service
has a commercial business orientation in many respects, we used our
prior work to identify some of the efforts that leading companies have
taken to address the issue of supplier diversity.[Footnote 25] During
that review, we identified leading commercial companies and discussed
with them their policies and procedures for ensuring that small or
minority-owned contractors had the opportunity to participate in their
contracts.
We conducted our review from July 2003 to April 2004 in accordance with
generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the U.S. Postal Service:
UNITED STATES POSTAL SERVICE:
KEITH STRANGE:
VICE PRESIDENT, SUPPLY MANAGEMENT:
May 10, 2004:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
United States General Accounting Office:
Washington, DC 20548-0001:
Dear Mr. Cooper:
Thank you for providing the Postal Service with the opportunity to
review and comment on the draft report entitled, Postal Service:
Progress in Implementing Supply Chain Management Initiatives (GAO-04-
540). Your report confirms issues that we have also recognized and are
working to address. In addition, the report identifies some
implementation issues that we need to improve upon.
We appreciate the General Accounting Office (GAO) recognizing the
importance of the implementation of commercial supply chain management
best practices at the Postal Service. Doing so is consistent with our
Transformation Plan and the recommendations of the President's
Commission on the United States Postal Service. As the report
indicates, GAO has documented the success of private sector companies
in implementing the same practices that the Postal Service has started
to implement over the past three years. By expanding and improving upon
our supply chain management (SCM) initiatives, we will continue to
lower costs and further the business objectives of the Postal Service.
Your report highlights just a few of our programs. Since the middle of
Fiscal Year 2000, when our SCM initiatives really started, we have
realized savings, cost avoidance, and net revenue generation totaling
over $1 billion from more than one hundred SCM initiatives. This level
of success provides clear support for our SCM business philosophy and
attendant business practices.
While our success to date is positive, there are challenges. In fact,
your report highlights that many of the implementation challenges
facing the Postal Service are similar to those faced by major
companies. Your report also identifies several aspects of our programs
that can be improved, and we certainly agree that monitoring and
continuous improvement will lead us to even greater success. While many
improvement plans were in place prior to receiving the results of this
review, we welcome the additional information and recommendations that
your report provides and will use them to further refine our efforts.
Bulk Fuel Program:
The bulk fuel program presents a significant savings opportunity for
the Postal Service. When fuel is purchased under the program (versus
through individual highway transportation contractor reimbursement),
we achieve a savings of over nine cents per gallon. When compared to
the Department of Energy's fuel index price, the savings is
approximately eleven cents per gallon. Yet, as your report points out,
there are both stakeholder and operational challenges in
implementation. We understand your concern regarding our interim
recoupment process; however, until full implementation of our automated
Fuel Asset Management System (FAMS) later this year, our interim
process will allow us to garner substantial savings. Further, it will
only cost the Postal Service $130,000 to perform the adjustments
necessary to achieve savings of $4.7 million. We believe this is a
reasonable business investment pending full automation of our fuel
adjustment process. In accordance with your recommendation, we have
placed a high priority on implementation of FAMS. We are also
developing a time-phased plan to expedite the implementation of new
fueling sites to enable a larger number of highway contractors to
participate in the bulk fuel program, resulting in an increased number
of gallons for which savings can be captured.
Highway Transportation Contract Reverse Auctions:
Our highway contracting reverse auction tool generally compresses
pricing, reduces cycle time and enhances competition. While the
auctions covered by this report represent a relatively small amount of
our total reverse auction spending volume (about 5%), we agree with
your recommendation that price negotiation and expanded use of overtime
deserve further investigation and will build on the success you noted.
The importance of maintaining consistency, fairness and integrity in
our processes will be paramount as we proceed with these efforts. In
fact, to reduce overall bid event costs, we plan on transitioning
reverse auction opportunities for highway and other Supply Management
contracts to one standard self-service application that features
overtime functionality. Another area that we take very seriously is
establishing a challenging reserve price to ensure the award amount is
fair and reasonable. Even when only one bid is received, the Postal
Service realizes savings. While we expect that setting the appropriate
reserve rate will yield a fair offer for the requested service, each
contracting officer has the responsibility to determine whether a
particular purchasing situation calls for negotiations. In doing so,
factors such as pricing history, comparisons with results obtained in
similar competitive reverse bid events, performance, delivery
requirements, quality, and the cost-benefit of conducting negotiations
are considered.
Baseline Data:
Your report highlights the need to establish accurate baseline data to
calculate savings for our national contracts, in addition to savings on
reverse auctions. Since this is the same challenge facing many
organizations today, in December 2003 we requested the support of our
Office of Inspector General to identify opportunities for improvement,
and in March 2004 they started their review. In addition, based on
recommendations following their review of our reverse auction process
in February 2004, we are in the process of revising our savings process
guidelines. Also, by Fiscal Year 2006 more detailed data on contract
commodity spending will be available for establishing baseline data. We
also agree that solid baseline data were not universally available when
undertaking national contract initiatives. However, these data were
used to scope spending and transaction volume to assist suppliers with
developing pricing strategies and volume-based discounting, not to
calculate cost savings. Since our initial SCM initiatives, we have
worked to strengthen our process for evaluating cost savings. This
evaluation process requires commodity portfolios to calculate the
difference between historical prices paid and prices paid under the
national contracts. In the absence of reliable historical pricing, the
portfolios are required to use other verifiable baseline data in
calculating savings, such as market benchmark data. Retail pricing is
never used to establish baseline prices. This approach often results in
"true" cost savings being understated. However, we have elected to take
a conservative approach to measuring and reporting cost savings to
ensure that the credibility of our SCM initiatives is maintained.
Further, the methodology and calculations used to claim savings are
reviewed for reasonableness by a unit independent of Supply Management.
The review process is continuous and actual unit volume and prices are
updated annually to assure cost savings estimates are accurate.
Program Initiatives and Supplier Diversity:
The objectives of our national contract initiatives require special
emphasis. The optimization and rationalization process we are using to
re-align our supply base achieves more than just cost reductions and
savings. It is feasible for the Postal Service to communicate and share
resources to sustain continuous improvement and e-procurement
initiatives with only a limited number of suppliers. A more streamlined
supplier base promotes closer cooperation, coordination, and mutual
understanding and trust in order to improve supply chain velocity,
responsiveness to changing requirements, and customer satisfaction.
These efforts will ultimately increase the quality of the goods and
services the Postal Service purchases. Some consolidation of our
supplier base (both large and small businesses) has taken place and
will take place in the future on strategically sourced national
contracts. However, a significant portion of the Postal Service's
spending is not readily conducive to national contracts. While we
continue to explore cost reduction opportunities, local purchasing will
continue to be a source of business opportunity for many small business
suppliers. In addition, we have successfully stepped up our efforts to
ensure second tier subcontracting opportunities for small and diverse
businesses.
We are concerned over the report's implication that the number of our
small business suppliers has dropped. While this statement is accurate
for the five contracts that you reviewed, the overall value and
number of Postal Service prime contract awards to small businesses
actually increased from Fiscal Year 2002 to 2003. The goal for Federal
agencies has been 23% of their obligations. The Postal Service
generally achieves over 40% of commitments to small businesses each
fiscal year.
Last year we requested assistance from our Inspector General to test
the effectiveness of our supplier self-certification approach. Their
report covered a sample of our supplies and services contracts and did
not offer any suggestions for program improvement. Despite the limited
scope of the review, the results revealed that our self-certification
approach is working. We are using these review results as a baseline
for continual assessment of our supplier self-certification process. In
addition, the planned system improvements identified above will also
allow us to move to reporting small and diverse business awards by
actual expenditures, providing data that are both timely and more
accurate.
As you know, the Small Business Administration announced proposed
modifications to its small business size standards in the Federal
Register dated March 19, 2004. Feedback from small firms and recent
studies had indicated that the current standards are too complicated
and confusing. Following their revisions of the standards, we will
launch an awareness campaign to reach our contracting officers to
ensure the proper standards are used when posting our solicitations at
the Federal Business Opportunities web site. Other initiatives for
improvement include random sampling to check small business
certifications; training to reinforce our existing policies that
require addressing supplier diversity in our purchase plans; proper use
of subcontracting plans in the supplier selection process; and the
importance of accurate and timely subcontracting reporting.
The Postal Service continuously benchmarks and incorporates best
practices from both industry and the federal sector to ensure that we
have a world-class supplier diversity process. As a result, our
Supplier Diversity Plan represents the best of both private and federal
sector practices. With the expanded use of SCM, we have stressed the
importance of reaching out to small and diverse businesses through
subcontracting opportunities. We agree that the five purchase plans you
assessed do not all meet our current standards for addressing supplier
diversity issues. These five plans range from two to five years old,
and you did find that the most recent plan was much stronger. We
believe that our focus and access to supply base data has improved
significantly and this finding will help us drive further improvement
by ensuring that contracting officers continue to address supplier
diversity in their purchasing plans.
We understand GAO's recommendation to establish general targets for
contracting with small businesses. However, an approach more consistent
with Supply Management's strategic plan, where the commodities,
stakeholders, environment, and marketplace are considered when
addressing small business participation, renders meaningful
performance indicators and a more direct line of accountability for
purchasing personnel. Our approach requires establishing "effort-based
indicators" and provides the means for our organization to gauge the
effectiveness of our relationships with small businesses in all aspects
of the purchasing process (planning, sourcing, subcontracting, and
quarterly tracking). Under our program we establish baselines from
achievements obtained in the previous year for purchasing units to
advance their accomplishments in successive years. Monitoring our
results quarterly and tracking progress of small business participation
throughout the process enables us to effectively identify and focus our
improvement efforts. We will consider re-establishing targets for small
business if results start to slip.
We appreciate the efforts and professionalism of your review team. This
report will certainly help us with our SCM continuous improvement
efforts. We remain committed to fully achieving the supply chain
management priorities of the Postal Service. If you or your staff would
like to discuss any of these comments further, I am available at your
convenience.
Sincerely,
Signed by:
Keith Strange:
FOOTNOTES
[1] The high-risk list identifies federal programs or operations that
are highly vulnerable to waste, fraud, abuse, and mismanagement or that
require urgent attention to ensure that the government functions in the
most economical, efficient, and effective manner possible.
[2] U.S. General Accounting Office, Major Management Challenges and
Program Risks: U.S. Postal Service, GAO-01-262 (Washington, D.C.: Jan.
2001); U.S. Postal Service: Bold Action Needed to Continue Progress on
Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003);
U.S. Postal Service: Key Elements of Comprehensive Postal Reform, GAO-
04-397T (Washington, D.C.: Jan. 28, 2004).
[3] 15 U.S.C. section 632(b).
[4] Minority-and woman-owned businesses can be large or small.
[5] The bulk fuel program for highway contractors is one component of
the Postal Service's fuel management program. The fuel management
program is intended to provide quality fuel for postal contractors and
Postal Service-owned vehicles and to reduce postal expenses associated
with purchase and delivery of fuel.
[6] In an earlier report, we addressed one of those national contracts-
-an office supply contract awarded to Boise Corporation. U.S. General
Accounting Office, Contract Management: Postal Service's National
Office Supply Contract Has Not Been Effectively Implemented, GAO-03-230
(Washington, D.C.: Jan. 17, 2003).
[7] 39 U.S.C. section 201.
[8] As reported in the Postal Service's 2003 Annual Report.
[9] U.S. General Accounting Office, Best Practices: Improved Knowledge
of DOD Service Contracts Could Reveal Significant Savings¸ GAO-03-661
(Washington, D.C.: June 9, 2003) and Best Practices: Taking a Strategic
Approach Could Improve DOD's Acquisition of Services, GAO-02-230
(Washington, D.C.: Jan. 18, 2002).
[10] On March 24, 2004, the Postal Service proposed to amend its
purchasing regulations in order to implement the acquisition portions
of its Transformation Plan and the similar recommendations of the
President's Commission on the United States Postal Service as they
relate to the acquisition of property (except real property) and
services. 69 Fed. Reg. 13786 (Mar. 24, 2004).
[11] The Postal Service estimates that it has about 10,000 highway
contractors; however, this number is not precise because each of the 11
district offices uses a unique reporting number to identify their
contractors and, therefore, double-counting is likely to occur. In
addition, we found that the same contractor may be listed under
multiple names, each of which is considered a separate contractor.
[12] The Postal Service has used reverse auctions on a limited basis
for other than highway contracts. Our review covered only the reverse
auctions for highway contracts. The Postal Service's Office of
Inspector General recently conducted a review looking at the
effectiveness of reverse auctions for goods and services for other than
highway contracts. Office of Inspector General, U.S. Postal Service,
Use of Reverse Auctions, CA-AR-04-001 (Arlington, VA: Feb. 26, 2004).
The Postal Service entered into a contract with Lean Logistics on
November 21, 2002, totaling $305,000 including contract modifications,
to conduct reverse auctions for emergency highway transportation
contracts. The contract was extended by one year on December 12, 2003,
for an additional $240,000.
[13] The Postal Service recently asked its Inspector General to assess
the methodology used to calculate savings from supply chain management
initiatives.
[14] The fuel cost reimbursed to the contractors is based on the
estimated annual gallons. This estimate is not adjusted based on actual
gallons consumed.
[15] Hearing before the Subcommittee on the Postal Service, Committee
on Government Reform, House of Representatives, 106th Congress, October
21, 1999. In July 2001, the Postal Service's Inspector General
confirmed that the $18 million in projected annual savings was
reasonable, assuming that the Postal Service was able to expand the
program as anticipated and obtain 12 cents in savings per gallon.
Office of Inspector General, U.S. Postal Service, Bulk Fuel Purchase
Plan, TR-AR-01-004 (Arlington, VA: July 27, 2001).
[16] The lowered estimate was based on an estimated savings of
9.3 cents per gallon.
[17] Of the 446 highway contract auctions conducted between October
2003 and February 2004, 75 percent received bids in the final minute.
[18] GAO-02-230.
[19] We discussed the problems the government has faced in collecting
details on purchase card expenditures in two prior reports.
U.S. General Accounting Office, Contract Management: Government Faces
Challenges in Gathering Socioeconomic Data on Purchase Card Merchants,
GAO-03-56 (Washington, D.C.: Dec. 13, 2002) and Contract Management:
Agencies Can Achieve Significant Savings on Purchase Card Buys, GAO-04-
430 (Washington, D.C.: Mar. 12, 2004).
[20] GAO-03-661.
[21] In 2001, the Postal Service Inspector General found that fiscal
year 1999 supplier diversity statistics were incomplete and unreliable
and resulted in the Postal Service's overstating or incorrectly
classifying dollars awarded to small, minority-owned, or woman-owned
businesses. Office of Inspector General, U.S. Postal Service, Supplier
Diversity Program for Supplies, Services, and Equipment Purchases, CA-
AR-01-005 (Arlington, VA: Sept. 6, 2001). In 2003, we reported that
that the Postal Service provided documents showing the actions it had
taken to address the Inspector General's recommendations. However, we
did not independently determine whether the actions taken by the Postal
Service improved the reliability of its supplier diversity data.
U.S. General Accounting Office, U.S. Postal Service: Status of
Inspector General's Recommendations on the Supplier Diversity Program,
GAO-04-57R (Washington, D.C.: Oct. 6, 2003).
[22] 13 CFR 121.201 (subsector 484). SBA has recently proposed
modifications to its small business size standards. It plans to use the
number of employees and eliminate the revenue threshold for most
industries. 69 Fed. Reg. 13129 (Mar. 19, 2004).
[23] Where corporations are affiliates (one controls or has the ability
to control the other), both corporations' receipts or employees count
in determining the small business size. 13 CFR 121.103.
[24] U.S. General Accounting Office, Contract Management: Postal
Service's National Office Supply Contract Has Not Been Effectively
Implemented, GAO-03-230 (Washington, D.C.: Jan. 17, 2003).
[25] U.S. General Accounting Office, Best Practices: Improved Knowledge
of DOD Service Contracts Could Reveal Significant Savings, GAO-03-661
(Washington, D.C.: June 9, 2003).
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