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entitled 'Postal Service: Progress in Implementing Supply Chain 
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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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