Review of the Savings Expected From Centralization of the Procurement and Storage of Vehicles Repair Parts

Published by the Government Accountability Office on 1971-02-17.

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

.   .   -.                            ;7/                     I?
         REPORT,. TO THE S.UB;OMMIT                          2 c ‘l’$
         ON GOVERNMENT PROCUREtiENT                              -

         Review Of The’Savings
         Expected From Centiralizat‘ion ‘.’
         Of’The Procurement. And Storage .-
         Of vehicles Rep&r Parts                  B-114874

         Post Office Department

         BY THE COMPTROLLER GENERAL                            -

                                  ~         FEB.17&371
                          COMPTROLLER           GENERAL     OF      THE   UNITED   STATES
                                              WASHINGTON.    D.C.     20948
                                   .    .   .   -J

% Dear Mr. Chairman:
           Further reference      is made to your letter            of May 6, 1970,
     that transmitted     copies of correspondence           from the House Post
 [Q. Office and Civil Service Committee's Subcommittee on Postal-                         N929/\
 r- Operations,    the National Small Business Associationfind                       theT#G
     Automotive Service Industry Association;'requesting                     that we       3N27
     examine into the Post Office         Department's
                                     _*~.q& r".+-
                                                    &->~    pr9ose.d
                                                         -**td,,,-7%,      plan-,to
                                                                                   L     D, )"74';
  I c                                  and   storage ~~,r~:-lf~**.M~~frlh~~~~~.~~~~~
                                                        of motor vehj&l&wx$PVair
                                       i-hnt-%s.uLljn(i(~~.~-.           wi-3
     P                                 e  were   subsequently         requested to
     limit our examination      to ascertaining        the reasonableness            of the
     Department's    estimated annual savings of $4.7 million                   that
     would be achieved under the plan.
            In accordance with the arrangements made later with your
    office,    we terminated   our review before its completion,    be-
    cause the then-pending      legislation  (the Postal Reorganization
    Act of 1970) granted the Department broad procurement authority.
    We are furnishing      you with a summary of the results   of the lim-
    ited review.
          Our review was conducted at the Post Office Department
    headquarters   and the vehicle maintenance facility     in Washing-
    ton, D.C., and at the office   of the consultant    firm that de-
    veloped the historical   data used by the Department in the de-
    velopment of the proposed procurement plan.

          Because of our limited    review, we cannot conclusively
    state what, if any, savings may result from central procurement
    and storage of motor vehicle     repair parts.    We believe,      however,
    that the estimated savings of $4.7 million       were not realistic,
    because the estimate was based on faulty       comparative-pricing
    data and questionable   estimates of costs to operate a central
    procurement and storage system.

          The Department started   implementing  the centralized    pro-
    curement and storage plan, and, as of December 14, 1970, the
    Department had awarded about 100 contracts      for approximately
    500 different   types of repair parts costing about $1.1 million.
    According to a Department official,     the storage area for the

                                 SOTH ANNIVERSARY                         1921- 1971
.    B-i14874

     vehicle parts    at Topeka has been established  and funds have been
     made available    for employees to operate the facility.

           We have not requested the Post Office Department or the
     consultant  firm to review or formally    comment on the information
     in this report.     We plan to make no further   distribution   of this
     report unless copies are specifically     requested,    and then we
     shall make distribution    only after your agreement has been ob-
     tained or public announcement has been made by you concerning
     the contents of the report.
                                      Sincerely   yours,

                                       Comptroller  General
                                       of the United States
     The Honorable James C. Corman, Chairman
     Subcommittee on Government Procurement  k,biS;Icc,
I;   Select Committee on Small Business
     House of Representatives

                      POST OFFICE DEPARTMENT

       On April 23, 1968, the Department awarded a contract     for
about $260,000 to a consultant     to make a motor vehicle  logistics
study.    According to the contract's   scope of work, this study:

      "Shall include development of mortality     data.   Estab-
      lish inventory  control procedures,  user and depot
      stock levels,  p arts identification including    assign-
      ment of Federal stock numbers, and preparation      of
      repair parts catalogs concerning selected lines of
      repair parts used in the United States Post Office
      Department vehicle fleet."

       The consultant's    study covered 5,000 types of repair parts
used by the Department.        Because of low usage of some of the
parts, interchangeability        with other parts, low cost of other
parts, and parts included in sets and/or kits,          the consultant
recommended for initial       stocking at a central   storage facility
in Topeka, Kansas, only 1,011 types of repair parts.            Under
its proposed central procurement system, the Department was in-
terested    in stocking only those parts which have a high
turnover-use     rate and which have large retail    markups.     There-
fore the proposed system would provide only certain parts for
vehicles,     and the vehicle maintenance facilities       (VMFs) would
continue to purchase all other parts directly         from suppliers.

       In April 1969, the consultant          completed its initial     list
of parts and quantities        recommended for central       stockage with-
out giving consideration         to pricing    data.    This was in accor-
dance with contract       terms.    In November 1969, the Department
received pricing      data from the consultant        for the 1,011 re-
pair parts.      We were informed by the contracting          officer's
representative     that the pricing       data had been provided as a
courtesy,    without cost to the Department.
      The Department operates about 270 VMFs throughout         the
country to maintain its fleet of about 83,000 vehicles.            The
VMFs are responsible   for procuring     and storing  the repair
parts needed to service the vehicles       assigned to them. VMFs
procure about half of the repair parts by ordering them under
General Services Administration      contracts   and procure other
repair parts from local vendors.

        According to the pricing    data developed by the consul-
tant, the central procurement of the recommended quantities
of the 1,011 repair parts would cost about $3.3 million       an-
nually,    whereas, under the present system, the VMFs procure-
ment of the same quantities      of repair parts would cost about
$4.9 million.      Therefore central procurement of these parts
would result     in annual savings of about $1.6 million,   or 33
      On the basis of these data, the Department estimated that
savings of about $5.3 million      would be realized    in fiscal year
1972 by centrally     stocking about 3,000 parts to support about
80,000 vehicles.      The Department estimated that the annual
cost of centrally     procuring  such parts would be $10.7 million,
whereas the estimated annual cost for VMFs to procure the
parts locally    would be about $16 million.      After deducting
estimated costs of $600,000 to operate the proposed centralized
procurement system, the Department estimated net annual.savings
of $4.7 million.

          Because the Department's    estimated savings of $4.7 million
    were based on a projection    of the savings computed for 1,011
    parts, we directed  our efforts     to evaluating  the pricing  data
    for these parts.   Any deficiencies     noted in the pricing   of the
    1,011 parts would therefore     be magnified in the Department's
    estimated savings of $4.7 million.
         Following are the deficiencies   noted in the computation  of
    the estimated savings of $1.6 million   on the 1,011 repair parts.

    Pricing   data
           We were advised by the Department that the consultant    ob-
    tained local pricing    data on the 1,011 parts from the records
    at 36 VMFs. At the time of our inquiry,      however, the consul-
    tant had disposed of the supporting     documents relating to the
    pricing   data obtained at 25 of the VMFs.
           The consultant,    in computing the average VMF prices, used
    the Washington, D.C., VMF prices as a guide.       For example, the
    consultant     advised the Department that, when the prices ex-
    tracted    from records at the various VMFs appeared questionable,
    it made adjustments     based on Washington VMF prices.
            To test the savings estimated by the consultant,    we se-
    lected for review 100 parts which we could readily       identify     in
    the Washington VMF parts records and on which sufficient          infor-
    mation had been on the records to enable us to compute reliable
    prices.     Although we could not determine the specific     source of
    the consultant's     prices for most of the 100 selected parts, we
    used the Washington VMF prices in our test because the consul-
    tant said that he had relied heavily on the Washington VMF

          The data we obtained from the Washington VMF parts records
    showed that the average price for most of the 100 parts was
    less than the average VMF price established       by the consultant
    for these parts.    Since the estimated savings to be realized
    through the central   procurement plan were based on the differ-
    ence between the anticipated     central procurement price and the
    VMF price, any such reduction     in the estimated average VMF
    price would also result    in reducing the estimated savings.
 We do not know how many of the consultant’s                                          prices      were based
 solely   on the Washington          VMF prices,      but                       we found        that   the
 prices   of two parts       were.     The following                            table      shows the dif-
 ferences   between    the consultant’s          prices                         for     the two parts        and
 the prices    we obtained        at the Washington                             VMF for       these    parts
 and the resulting       differences       in savings.

                           Estimated                central                                     Overstatement
                           VMF price             procurement           Price savings                    of
 Part     Quantity      Consultant   GAO             price           Consultant     GAO            savings

    A      25,000          $2.15       $1.03         $0.63            $38,000       $10,000          $28,000
    B       6,000           2.26        1.02          0.62              9,840         2,400            7,440

 The overstatement                  of savings    occurred       because    the consultant
 appeared     to have              used the highest       prices     rather    than the aver-
 age of all     prices              paid  for  the same part         over   a period    of
 time o

           By comparing      the estimated         VMF prices     with    the estimated
 central      procurement       prices,      the consultant        computed     a price
 differential        savings      of 30 percent       that    would    be realized      .if
 the parts       were purchased         centrally.

          The consultant               obtained         historical           pricing         data      from VMF
  records       for     about       50 percent          of the 1,011             parts.          For the
  other     parts,        the consultant              estimated          the VMF prices                by adding
  30 percent          to the estimated                central         procurement            prices.           The
  consultantss            representative              advised         us that        the estimated               cen-
,tral     procurement            prices       for     parts       had been obtained                  from      sup-
 pliers’       parts        catalogues          and informal             price       quotations            from
  other     automotive           parts       suppliers.             We were unable               to verify
  the estimated             central        procurement            prices       because         of the lack
 of adequate            supporting           documentation.                The consultant                also
 used the 30-percent                   price      differential--that                   is,     it deducted
  30 percent          from     the VMF prices             --to      estimate         the central             pro-
  curement        price      of certain           parts,        when central             pricing         informa-
  tion    had not been obtained.

Mathematical             errors

       Mathematical         errors       resulted        in overstating      by about
$500,000    the estimated           savings        relating      to the 1,011    parts
proposed    for     initial      central        procurement        and stockage.

    * Costs to operate   and administer   the program
           The Department considered   in its calculation       of annual
     savings of $4.7 million    in 1972 that annual in-house costs of
     $600,000 would be incurred    in operating    the centralized    vehicle
     repair parts program consisting     of centralized    warehousing
     costs of $100,000 (salaries,    $80,000; facility    maintenance,
     $7,000; operating   costs, $13,000) and shipping costs of $500,000.

           On the basis of our limited    review of the Department's

     records and interviews   with a procurement official,     we question
     whether the Department's    estimate of the annual savings was
     reasonable and whether it was based on a consideration        of all
     the cost factors   that would be applicable     to such an operation.
     Our observations   on the Department's    estimate of operation    and
     administrative   costs are as follows:

           Fringe benefits- -The salary cost of $80,000 was based on
           10 employees having an average salary of $8,000.         We did
           not determine the reasonableness     of the staffing    comple-
           ment, however, the Department's     estimate did not include
           fringe benefits.   On the basis of data furnished       by the
           Department, we estimate that fringe benefits       will amount
           to an additional  $18,000 annually.

                             --The Department included an estimated ship-
                             500,000 based on 5 percent of the estimated
           annual cost of repair parts.        A procurement official      told
           us that this cost represented       the cost of shipping by com-
           mercial carrier,      but he did not provide any supporting
           data.   We question whether transportation       costs can be di- "
           rectly  related     to the cost of the parts shipped, since
           most transportation       rates are based on distance,     weight,
           and/or volume.       Department records indicate    that the De-
           partment would use the parcel post system to ship the
           parts.   Since parcel post rates are based on weight and
           the distance shipped, we believe that it was not reason-
           able for the Department to estimate shipping costs as a
           direct percentage of the costs of repair parts.
            The Department did not include other costs of maintaining
     an inventory   of repair parts such as obsolescence,    pilferage,
     and interest   on investment  in the inventory.   Although certain
     of these costs are being incurred under the present system, we
     believe that any differences    in such costs that are related
solely        to the centralized         procurement       system     should    be   recbg-   .
nized       in the cost     comparisons.


        Because       of our limited        review,      we cannot      conclusively
state    what,      if any,   savings       may result        from   the central       pro-
curement       and storage       of the repair         parts.      We believe,       how-
ever,     that    the estimated        savings      of $4.7 million         are not re-
alistic      because      the estimate        was based on faulty           comparative-
pricing      data     and questionable         estimates        of costs    to operate
a central       procurement        and storage        system.

U.S. GAO. Wash., D.C.