Buying Practices and Competitive Public Bidding of the Exchange Service

Published by the Government Accountability Office on 1971-10-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


‘!J.   Dear Mrs.     Heck1

           Pursuant       to your request       of June 4, 1971, we have re-
 i viewed the Army and Air Force Exchange Service                              cr,iteria      for       ,1,.I ‘_2 ,:’
1 buying      luggage
                -----       and  the  methods     it   employs        relating         to   competi-
   tive publicbidding.               You have indicated             that the buying
   practices        ofiKe--exchange       service      tend to foster              a preferential
   brand approval           for Samsonite      and American           Tourister          luggage
   without      regard for other highly              qualified        and financially             re-
   sponsible        firms , including       the United         States       Luggage Corpora-
   tion,     Fall River,        Massachusetts.

               The exchange service         obtains    resale    merchandise        by negotia-
       tion,    for the most part,         on a limited-source         basis     and, for the
       remainder,      on a competitive        basis.     Although      the exchange ser-
       vice is an instrumentality            of the Government,           it operates     with
       nonappropriated         funds and is therefore          not required       to use for-
       mal advertising         as prescribed      by law.      However,      even the law
       applicable      to appropriated       funds (10 U.S.C.        2303(a) and 2304(a))
       permits     negotiation      where supplies       are purchased        for resale.

              To obtain     luggage    for stock,      the exchange service          head-
       quarters    negotiates      consolidated       procurement
                                                              -__._.   contracts     for its
       regions,    or the regions        separately      negotiate      contracts   with
       vendors   not under consolidated            procurement       contracts    but ap-
       proved by exchange service            headquarters.         During 1970 consoli-
       dated procurement        contracts      for luggage accounted           for $19.9 mil-
       lion   of total    procurement       of $24.7 million.

              Manufacturers      of Samsonite   and American   Tourister      brands
       alone have been given an opportunity          to negotiate      consolidated
       procurement     contracts    for “hardside”   and certain     “softside”
       luggage.     These luggage items account        for the largest       purchase

              The purpose  of the consolidated      procurement      program is to
       reduce procurement    costs by consolidating        worldwide      require-
       ments.    Selection  of items for the consolidated           procurement    pro-
       gram is currently    based on the following        policy.

                                      50 TH ANNIVERSARY 1921- 1971

       “Headquarters     AAFES [Army and Air Force Exchange
       Service],     when identifying         items to be included         in
       the program,     will      give full     consideration       to brand
       when brand is a factor            in customer      preference,     and
       where such preference           is established,         the request
       for procurement       will     specify    brand name procure-
       ment. ”

        The criteria          applied       for selecting         items     for    the   con-
solidated    program          require       that they

       --be      common to most            exchanges,

       --be sold       or consumed           in quantities         large enough to rea-
          sonably      expect cost           reduction     if     purchased  on a fixed-
          quantity      basis,

       --have      reasonably           predictable       requirements,           and

       --be      reasonably       stable       in design        or model.

        The exchange regions            relied     primarily      on their     past sales
data in responding          to a headquarters            request     for a survey of
hardside     luggage requirements              by brand.       The data were used as
a basis for consolidated               procurement.          Customers     were not di-
rectly    asked for their           brand preferences.            This procedure       placed
two manufacturers         at an advantage           over United        States   Luggage
and other firms        that had relatively             few prior       sales to the ex-
change service.          Similarly,         with respect       to the award of con-
solidated      procurement       contracts       for softside        luggage,     brand
preference      was not established             by a survey of customers’             de-

       Details       by type      of luggage          follow.


       Although   hardside              luggage accounts    for the greatest      pur-
chase volume,     suppliers               of only two brands have been given an
opportunity     to negotiate               consolidated  procurement   contracts.


United States Luggage and 13 others,   however, are approved
sources for local  exchange region purchases.    United States
Luggage was added to the approved list   on July 9, 1971.

       In 1968 the exchange service              considered     use of consoli-
dated procurement        contracts       for hardside      luggage to reduce
costs and selling        prices.       To obtain requirements         data as a
basis for decision,          the headquarters        in August 1968 requested
its regions       to provide     data on the quantities,          by brand, of
hardside     luggage they expected to sell in the ensuing year.
Although    we were informed         that exchange service          headquarters
requested      region officials        to provide      brand preferences       and
requirements        based on customer acceptance             and sales history,
we found that the regions            based their       responses essentially
on past sales of luggage stocked and customers were not di-
rectly    asked about their         preferences.

      We were told that,        in reply to the inquiry,         requirements
for nearly    653,000 pieces of luggage were established:
516,000,    Samsonite;    96,000, American Tourister;          and 41,000,
other specific     brands.      These data prompted the exchange ser-
vice to negotiate      consolidated       procurement   contracts      with the
manufacturers     of Samsonite and American Tourister              brands.      For
the 1969-70 contract       year, the Samsonite contract            amounted to
about $15 million,      including      both hardside    and softside       lug-
gage.    The  American    Tourister     contract    amounted   to   about
$2.1 million,     for hardside      luggage only.

         Exchange service       officials       stated that their         decision  to
purchase only Samsonite and American Tourister                       luggage through
consolidated        procurement       contracts      was sound because (1) space
limitations       in the exchanges prohibited              stocking      numerous
brands,       (2) Samsonite and American Tourister                brands were more
popular      than other brands, and (3) negotiating                  the consolidated
purchases resulted          in cost reductions          estimated      to be over
$800,000 the first          contract      year.

       The contracts   with Samsonite and American Tourister       were
extended,    with minor modifications,     for a year beginning    April
1970.     At that time the exchange service     headquarters    did not
make a customer preference       or any other type of survey.       In



    November 1970, however, before award of contracts          to begin in
    April    1971, the exchange service     conducted another    survey by
    contacting     its exchange regions,    but customers  were not di-
    rectly    asked for their   brand preferences.


           The exchange service           purchased only one brand of tongue-
    and-groove     softside      luggage under consolidated       procurement
    contracts     and performed         no customer preference    survey as a
    basis for awarding the contracts.                The Samsonite Fashionaire
    tongue-and-groove        line was added to the Samsonite consolidated
    procurement     contract       during    the 1969-70 contract    year on the
    basis of price savings,             according  to exchange service     officials.
    United States Luggage and 17 other firms are approved sources
    for exchange region purchases.


           Attache    cases first   came under consolidated            procurement
    contracts      in July 1968.    Exchange service       officials       stated
    that vendors for these contracts            were selected       from samples
    and prices obtained       by solicitations.

           We examined an August 1969 memorandum on the selection             of
    hardside    cases from Samsonite and leather        cases from another
    manufacturer     for contracts  effective     in April   1970.    The mem-
    orandum did not state reasons why these two products              were se-
    lected   or why 13 other vendors'       cases were not.     According   to
    exchange service     officials,  the records supporting        this memo-
    randum were not retained.

           Follow-on     consolidated    procurement     contracts    for the year
    beginning     in April    1971 were negotiated       with the same compa-
    nies.     In addition,      the exchange regions may stock two brands
    from 17 other approved sources,            including    the United States
    Luggage Corporation.

         The exchange service     did       not use consolidated         procure-
    ment contracts  for zipper-type          softside luggage,        leather       toilet


kits,    garment bags, wig and fall          cases,   footlockers,       and pack-
ing trunks;       the regions     can purchase    these items from approved
sources.       Furlough,    club,   and flight    bags and nylon and vinyl
toilet    kits   currently     are under consolidated         procurement      con-
tracts    which were awarded on the basis of lowest                 proposals.


       We recognize      that the exchange service        cannot carry     all
acceptable     brands of luggage due to space limitations.              It
seems reasonable,        however,  that customer     preferences    should
be given consideration         in selecting     the brands to be stocked,
and we believe       that the exchange      service  should ask customers
their   preferences.

       An objective      survey of customers      might reveal    that many
prefer   low-cost,     good-quality    luggage rather       than any partic-
ular brand.        In which case, it would seem that all qualified
luggage manufacturers          should be given an opportunity        to com-
pete for future       consolidated    procurement     contracts   to satisfy
this demand.

          Please   advise   us if     we can assist     you further   on this

                                            Sincerely    yours,

                                            Comptroller   General
                                            of the United   States

The Honorable  Margaret             M. Heckler
House of Representatives