United States General Accounting Office GAO Report to the Chairman and Ranking Member, Committee on Small Business, House of Representatives January 2003 CONTRACT MANAGEMENT Postal Service’s National Office Supply Contract Has Not Been Effectively Implemented GAO-03-230 January 2003 CONTRACT MANAGEMENT Postal Service’s National Office Highlights of GAO-03-230, a report to Supply Contract Has Not Been the Chairman and Ranking Member, Committee on Small Business, Effectively Implemented House of Representatives Over the past 2 years, the The Postal Service has not been successful in implementing its national-level Postal Service has experienced contract to purchase most office supplies from Boise. Although the national growing financial difficulties. contract was intended to be a mandatory source of office supplies, the In an effort to transform the Postal Service purchased less than 40 percent of its office supplies from organization to reduce costs and Boise in 2001. GAO found that the Postal Service did not perform as planned increase productivity, the Postal Service awarded a national-level under the contract because it did not take sufficient actions to ensure that office supply contract to Boise the contract would be used. As a result, the Postal Service has not been able Corporation. In addition, the Postal to realize its estimated annual savings of $28 million. In fact, it was only able Service required Boise to submit a to provide documentation for $1 million in savings for 2001. subcontracting plan, which outlines how small, minority-, and woman- Boise and the Postal Service have not paid sufficient attention to the owned businesses will be reached subcontracting plan. The plan contains obvious ambiguities, and, in fact, through the contract. GAO was Postal Service and Boise officials disagree on its goals. The Postal Service asked to assess the status of the maintains that the goal is 30 percent of Boise’s annual revenue from the Postal Service’s implementation of contract. Boise has fallen far short of this goal, reporting that only the Boise contract and Boise’s 2.6 percent of subcontracting dollars were awarded to small, minority-, achievement of its subcontracting plan. GAO also reviewed the and woman-owned businesses in fiscal year 2001. Postal Service and Boise extent to which the Postal Service officials recognize that the performance on the subcontracting plan is not is buying office supplies directly satisfactory and are taking a number of steps to achieve the plan’s goals. from small, minority-, and Nevertheless, it is highly unlikely that the current subcontracting goals will woman-owned businesses. be met. The Postal Service reported that its small, minority-, and woman-owned business achievements have declined from fiscal years 1999 to 2001. GAO is recommending that Despite the Postal Service’s reported statistics, we could not determine the the Postal Service reexamine extent to which it is buying directly from these businesses because the data the national office supply contract are unreliable. to determine why it is not being used and whether it is an effective tool to achieve savings. If the Total Office Supply Purchases for Fiscal Year 2001 contract is found to be beneficial, the Postal Service should track its employees’ use of the contract. GAO also recommends the Postal Service revise its national contract to reflect realistic goals for small, minority-, and woman-owned businesses. The Postal Service agreed with GAO’s recommendations. www.gao.gov/cgi-bin/getrpt?GAO-03-230. To view the full report, including the scope and methodology, click on the link above. For more information, contact David Cooper at (202) 512-4841 or firstname.lastname@example.org. Contents Letter 1 Results in Brief 2 Background 3 National-Level Office Supply Contract Has Not Been Fully Implemented 6 Boise Is Not Achieving Subcontracting Plan Goals 11 Reports Indicate a Drop in Small Business Dollars, but Data Are Unreliable 15 Conclusions 18 Recommendations 18 Agency Comments 19 Scope and Methodology 20 Appendix I Comments from the U.S. Postal Service 23 Appendix II Comments from Boise Office Solutions 25 Tables Table 1: Boise’s Reported Fiscal Year 2001 Subcontracting Achievements 12 Table 2: Reported Office Supplies Purchased from SMW Businesses 16 Table 3: Reported Office Supplies Purchased through Contracts 16 Table 4: Reported Office Supplies Purchased Using Purchase Card 17 Figures Figure 1: Total Office Supply Spending for Fiscal Year 2001 6 Figure 2: Office Supply Spending (Fiscal Years 1999 to 2001) 7 Figure 3: Postal Service Office Supply Spending with Contract Vendors (Fiscal Years 1999 to 2001) 8 Abbreviations JWOD Javits-Wagner-O’Day Act SMW small, minority-owned, and woman-owned Page i GAO-03-230 Contract Management United States General Accounting Office Washington, DC 20548 January 17, 2003 The Honorable Donald A. Manzullo Chairman The Honorable Nydia M. Velázquez Ranking Democratic Member Committee on Small Business House of Representatives Over the past two years, the United States Postal Service experienced growing financial difficulties and struggled to fulfill its mission of providing affordable, high-quality universal service, while remaining self-supporting. Consequently, GAO reported that the Postal Service’s current business model was at risk and placed its transformation and long-term outlook on our high-risk list in April 2001.1 To transform the organization, reduce costs, and increase productivity, the Postal Service is, among other things, redesigning purchasing and material management functions to capture potential savings through a supply chain management initiative. The supply chain encompasses marketing, distribution, planning, manufacturing, and purchasing. One area of focus for this initiative is office supplies, on which the Postal Service spent $125 million in fiscal year 2001.2 To implement supply chain management for office supplies, the Postal Service awarded a national office supply contract to Boise Office Solutions (Boise) in January 2000.3 Under the terms of the contract, Postal Service buyers are required, with a few exceptions, to purchase all office supplies from this contract. The Postal Service estimated that this contract would enable it to save up to $28 million annually. 1 The high risk list identifies a federal program or operation that is highly vulnerable to waste, fraud, abuse, and mismanagement or that requires urgent attention to ensure that our national government functions in the most economical, efficient, and effective manner possible. U.S. General Accounting Office, U.S. Postal Service: Major Management Challenges and Program Risks, GAO-01-262 (Washington, D.C.: January 2001); U.S. General Accounting Office, U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation, GAO-02-355 (Washington, D.C.: Feb. 28, 2002); U.S. General Accounting Office, U.S. Postal Service: Moving Forward on Financial and Transformation Challenges, GAO-02-694T (Washington, D.C.: May 13, 2002). 2 In this report, “fiscal years” are Postal Service fiscal years, which from 1999 through 2001 began in early- to mid-September. 3 The awardee was formerly known as Boise Cascade Office Products. Page 1 GAO-03-230 Contract Management The Postal Service, which is not subject to the Small Business Act,4 is not required to establish goals for contract awards to small businesses. However, the Postal Service has established a supplier diversity program and tracks dollars awarded to small, minority-owned, and woman-owned (SMW) businesses (minority- and woman-owned businesses can be large or small). One of the ways the Postal Service expects to increase the dollars going to these businesses is through SMW subcontracting. For example, Boise was required to submit a subcontracting plan to reach SMW businesses. In light of the potential impact of the Boise contract on small business vendors, you asked us to assess (1) the status of the Postal Service’s implementation of its national contract with Boise, (2) Boise’s achievement of its SMW subcontracting plan goals, and (3) the extent to which the Postal Service is buying office supplies directly from SMW businesses. The Postal Service has not yet been successful in implementing its Results in Brief national office supply contract. Although the contract was intended, with a few exceptions, to be a mandatory source of supply, in fiscal year 2001 the Postal Service spent over 60 percent of its office supply dollars on items purchased outside the Boise contract through purchase cards, other contracts, money orders, or cash. The lack of success was due in part to insufficient actions taken by the Postal Service to ensure that office supplies are purchased from the Boise contract. The Postal Service was unaware of the extent to which the contract was not being used because it has not adequately tracked or monitored its employees’ office supply purchases. For fiscal year 2001, the Postal Service can document only $1 million in savings from the use of the contract—though it had projected savings of up to $28 million. Boise and the Postal Service have not paid sufficient attention to subcontracting goals. The subcontracting plan was carelessly constructed and contains ambiguities that should have been resolved prior to the contract award. However, to date, Boise and the Postal Service have not taken actions to revise the plan. For example, the categories of SMW businesses in the plan are inconsistent with the way Boise has been reporting its achievements and with the way the Postal Service categorizes its diversity goals. Moreover, Boise and Postal Service officials do not agree on the goals. According to Postal Service officials, the overall goal 4 15 U.S.C. Sect. 637c(2). Page 2 GAO-03-230 Contract Management is 30 percent of annual revenue for the contract—a figure confirmed in a preaward email from Boise. According to a Boise official, the goal is both a percentage of annual revenue for the contract as well as a fixed dollar value. Boise has fallen far short of the 30 percent goal. In fiscal year 2001, Boise reported that only 2.6 percent of its revenue was subcontracted to SMW businesses. Both Boise and the Postal Service now acknowledge that the 30 percent goal may have been unreasonable. Recently, Boise has begun to take actions to improve its performance. Nevertheless, it is highly unlikely that Boise will achieve its subcontracting goal. The extent to which the Postal Service is buying office supplies directly from SMW vendors is unclear. From fiscal years 1999 through 2001, Postal Service data show that office supply purchases from SMW businesses through contracts and purchase cards decreased from 50 percent to 18 percent. However, the data are unreliable. The Postal Service has not tracked SMW business participation in other purchasing mechanisms, such as money orders and cash, and, like other agencies, its information on purchase card merchants contains numerous errors. We are making recommendations to the Postmaster General of the United States concerning the need to re-assess the Postal Service’s national office supply strategy and estimated savings and to revise Boise’s subcontracting plan to accurately and clearly reflect realistic goals. In written comments on a draft of this report, the Postal Service agreed with our recommendations. Boise also provided written comments, offering its perspective on some of the information in the report. The Postal Service, an independent establishment of the executive branch Background of the U.S. government,5 is the largest federal civilian agency, consisting of more than 38,000 post offices, branches, and stations and 350 major mail-processing and distribution facilities. As part of its strategy for better managing its procurement of goods and services, the Postal Service has centralized the procurement of commodities that were previously decentralized. For example, all office supply procurements are now managed by the Office Products and Utilities Category Management Center in Windsor, Connecticut, which is responsible for administering the national contract. Previously, office supply procurement was decentralized, with each area managing its own procurements. 5 39 USC Sec. 201. Page 3 GAO-03-230 Contract Management To demonstrate its commitment to reaching SMW businesses, the Postal Service has developed a 5-year supplier diversity plan. The plan focuses on maintaining a strong supplier base that includes SMW businesses. While it does not set specific dollar goals, the plan is intended to ensure that the Postal Service spends an increasing amount of its procurement dollars on goods and services from diverse businesses through fiscal year 2003. To monitor its progress, the Postal Service measures its prime and subcontracting spending achievements with SMW businesses. During fiscal years 1999 through 2001, Postal Service procurement of goods and services (which includes office supplies) decreased from $3.5 billion to $2.6 billion. For the same time period, office supply procurement grew from $107 million to $125 million. Postal Service officials explained that this increase does not necessarily indicate an actual increase in office supply spending, but rather it reflects improvements in the procurement system’s ability to track spending. The officials indicated that the data provided, while not perfect, are the best available information. In October 1999, the Postal Service issued a solicitation for a national-level office supply contract. Four vendors submitted proposals. The solicitation provided that the award would be made to the vendor that offered the best overall value to the government, considering nonprice and price factors. The proposals were evaluated based on several factors, including the vendors’ demonstrated understanding of the solicitation’s (1) technical requirements, including the ability to implement and maintain a Web-based procurement system, and (2) business requirements. As part of their business plan, vendors were required to demonstrate their ability to deliver items within 24 hours of receiving an order, which is considered industry standard. Other factors on which the proposals were evaluated, in descending order of importance, were • the inclusion of a subcontracting plan demonstrating the vendor’s commitment to use SMW businesses, • the ability to address environmental and energy conservation efforts. • An explanation of the price discounts on items offered to the Postal Service, • the ability to provide financial and purchasing reports that are integrated with the Postal Service’s system, and • the ability to provide Postal Service items, other than office supplies, that are used in an office setting. Page 4 GAO-03-230 Contract Management Additional evaluation factors included past performance and Javits-Wagner-O’Day Act (JWOD)6 compliance. The Postal Service awarded the contract to Boise with a start date of April 3, 2000. The contract is a firm, fixed-price modified requirements contract for a 3-year base period, with up to three 2-year options. The contract requires, with a few exceptions, that the Postal Service order from Boise all of the approximately 13,000 items in Boise’s Postal Service office supply catalog. Exceptions to the mandatory requirement are where (1) the item can be found at a lower price (and it is not a JWOD item) or (2) the requirement is urgent and the supplier cannot meet the required delivery date. The Postal Service has since exercised the first 2-year option.7 The JWOD Act requires the Postal Service to comply with its requirements.8 According to Postal Service and Boise officials, Boise has ensured through its ordering process that this compliance occurs. When Postal Service employees place an order with Boise for an item that is also on the JWOD procurement list, Boise substitutes the ordered item with a JWOD item that is essentially the same. 6 The Javits-Wagner-O’Day Act established a Committee for Purchase from People who are Blind or Severely Disabled, which maintains a procurement list of commodities or services that the government must procure from designated nonprofit agencies. These agencies are represented by central nonprofit agencies called the National Industries for the Blind and the National Industries for the Severely Handicapped (41 CFR ch. 51). 7 The new option period expires on January 6, 2005. According to the contracting officer, it was necessary to exercise the option in January 2003, rather than April 2003, to prevent the contract from lapsing. 8 41 U.S.C. sec. 48b(7). Page 5 GAO-03-230 Contract Management The Postal Service has not been successful in implementing its National-Level Office national-level contract to purchase most office supplies from Boise. Supply Contract As shown in figure 1, during fiscal year 2001 less than 40 percent of the $125 million in office supplies was purchased from the contract. Has Not Been Fully Implemented Figure 1: Total Office Supply Spending for Fiscal Year 2001 Note: “Other” is local buys paid by cash, money orders, and district invoices. The Postal Service has not taken sufficient actions to ensure that the contract would be used as anticipated. While fiscal year 2001 data show an improvement over the 6 months that the contract was used in fiscal year 2000, when about 75 percent of office supplies were purchased outside the contract, the Postal Service is concerned that its employees continue to spend a significant percentage of office supply dollars outside the contract. Anticipated savings were based on the assumption that almost all supplies would be purchased from the national contract. The fact that this has not occurred, together with the absence of a benchmark against which to measure savings, has contributed to the Postal Service’s failure to realize estimated savings from its supply chain initiative. Page 6 GAO-03-230 Contract Management Postal Service Did Not Although the Postal Service conducted market research that supported Take Sufficient Actions the implementation of a national-level contract for office supplies, it did to Ensure Contract not take sufficient actions to ensure that the contract would be used as anticipated. Figure 2 shows that Postal Service employees buy office Would Be Used supplies through three mechanisms: contracts (including Boise and non-Boise contracts), purchase cards, and other methods such as cash and money orders. Figure 2: Office Supply Spending (Fiscal Years 1999 to 2001) Postal Service officials stated that the increase in contract dollars from fiscal year 1999 to 2001 indicates that the national contract is being used more extensively. However, they have not determined why employees continue to buy their supplies outside the contract. Postal Service officials did not expect immediate compliance with the contract; they anticipated that some purchasing would occur outside the national contract during the implementation period because the cultural environment of the Page 7 GAO-03-230 Contract Management Postal Service has allowed local buyers to make purchases independently. However, they were unaware of the extent to which the contract is not being used because they did not sufficiently plan its implementation, nor have they adequately tracked and monitored office supply purchases. There are several indications that the Postal Service did not take sufficient action to ensure that the contract was properly implemented. First, the Postal Service continues to maintain a number of non-Boise office supply contracts. Although the number of vendors on these other contracts declined from 49 to 33 from fiscal years 1999 through 2001, the dollar value of supplies bought from these contracts has grown, as shown in figure 3. Figure 3: Postal Service Office Supply Spending with Contract Vendors (Fiscal Years 1999 to 2001) Note: Boise spending in fiscal year 1999 represents business from its existing contract with the Postal Service, prior to the national contract award. Page 8 GAO-03-230 Contract Management The Postal Service did not undertake a systematic review of all office supply contracts when it implemented the national contract. Such an assessment would have provided an indication of which non-Boise contracts should have been continued and which phased out. In fact, some of the items purchased under non-Boise contracts in fiscal year 2001—such as binders, paper, and measuring tape—should have been purchased from Boise, according to the terms of the national contract. According to Postal Service officials, other items—such as printed envelopes and some types of rubber bands—are purchased under separate contracts because the items are not part of the Boise catalog or they are unique and purchased in volume. Postal Service officials told us that the improved oversight they expect as a result of centralized office supply procurement will allow them to phase out some of the existing office supply contracts. Second, Postal Service employees continue to use purchase cards to buy office supplies outside the contract. Because the purchase card cannot be used to order from the Boise contract, none of the $16.8 million spent on office supplies through purchase cards in fiscal year 2001 was spent under the contract. Postal Service officials have not tracked or monitored purchase card procurements to determine why these employees are not using the contract. Postal Service managers indicated that they are able to use quarterly purchase card spending reports to identify errant purchases—office supplies that should have been purchased from the national contract. However, they acknowledge that these reports are not used consistently to monitor employee purchases of office supplies. Finally, Postal Service employees continue to use cash and money orders to buy supplies from local vendors. As with the purchase cards, cash and money orders cannot be used to buy supplies from the Boise contract. Because the Postal Service has limited information about cash and money order purchases, it was unaware that 33 percent of office supply spending in fiscal year 2001 occurred through these methods. Postal Service officials remarked that they are encouraged by the decrease (from about $66 million in fiscal year 1999 to $41 million in fiscal year 2001) in office supply purchasing using cash and money orders. However, until the Postal Service is able to better track and monitor local office spending, it will lack the information it needs to ensure that the national contract is being used as intended. Postal Service officials explained that their ability to track office supply spending—enabling them to better target those employees who are not using the contract—should improve as Boise contract use increases Page 9 GAO-03-230 Contract Management because the contract requires Postal Service employees to use a Web-based purchasing system referred to as e-buy.9 The Postal Service’s expectation is that information about e-buy purchases will be systematically and consistently collected. However, use of the contract is not being enforced, and employees continue to use other methods—such as contracts outside the national contract, purchase cards, cash, and money orders—to buy office supplies. Postal Service is Unable The Postal Service’s decision to award a national-level contract to a to Document Estimated single supplier was based, in part, on an expectation of saving up to Savings $28 million annually. These savings would result from (1) purchasing a large quantity of items from a single supplier, thereby reducing item costs, and (2) implementing the e-buy purchasing process, which would reduce overall transaction costs. To realize the maximum benefits and cost savings under the Postal Service’s acquisition strategy, almost all office supplies must be purchased from Boise. However, the fact that employees continue to buy supplies outside the contract, combined with the lack of an established benchmark to measure savings, prevents the Postal Service from determining whether it is achieving its savings goals. The Postal Service’s reported savings are calculated using a formula established in 1999. The formula is based on market research, Postal Service Annual Report data from 1998, and spending on an office supply contract in existence at that time. This methodology predicted transaction cost savings of up to 70 percent and item price savings of up to 10 percent on a $50 million contract. The Postal Service claimed savings of up to $28 million for fiscal year 2001 using these estimates. However, when we asked for evidence of actual savings to date, the Postal Service could provide documentation for only about $1 million. This amount reflects rebates that Boise agreed to give the Postal Service on all new business and reduced prices negotiated as part of the contract. 9 E-buy requires use of the intranet for placing orders. In the event of a telephone or fax order, a Boise customer service representative inputs the order. Page 10 GAO-03-230 Contract Management Boise and the Postal Service have not paid sufficient attention to the Boise Is Not subcontracting goals under the national office supply contract. The Achieving subcontracting plan was carelessly constructed, and it contains obvious ambiguities. In fact, Postal Service and Boise officials do not agree on the Subcontracting basic subcontracting goals. Notwithstanding this disagreement, for the Plan Goals purposes of this report we have used the Postal Service’s position that the goal is to award 30 percent of annual revenues to SMW businesses. Boise has fallen far short of achieving the 30 percent goal. In fiscal year 2001, Boise reported achievements of only 2.6 percent. Boise has also fallen short of its specific goals for minority and woman-owned businesses. Boise and the Postal Service provided several reasons why Boise is not achieving the subcontracting goals and they have identified actions that they believe will improve performance. However, these actions will not be sufficient to enable Boise to reach its subcontracting plan goals. When Boise initially submitted its proposal, its subcontracting goal was to provide 12 percent of its Postal Service business to SMW subcontractors. This proposed subcontracting plan included 4 percent goals for minority- and woman-owned businesses. However, after Boise was selected as the intended awardee—but before the contract was awarded—the goal for SMW businesses was increased to 30 percent based on negotiations with the Postal Service. At the same time, Boise increased its goals for minority- and woman-owned business from 4 to 6 percent. Subcontracting Plan The subcontracting plan contains obvious ambiguities that should have Contains Inconsistencies been addressed prior to contract award. For example, because the plan is not clearly written, Postal Service and Boise officials disagree on the overall SMW subcontracting goal. Postal Service officials maintain that the goal is 30 percent of overall revenue for the contract, a figure confirmed in a preaward email from Boise. A Boise official, however, asserts that there is both an overall 30 percent goal and a fixed dollar value goal of $3,300,000. Despite this disagreement, neither Boise nor Postal Service officials have taken steps to revise the plan. Further, the subcontracting plan misstates two of the three reporting categories for which there is a contractual goal. The language in the plan includes goals for “small, disadvantaged businesses” and “small, woman-owned businesses.” In practice, however, the Postal Service and Boise report achievements for “minority” and “woman-owned” firms, which may be small or large. There is no clear linkage between the Page 11 GAO-03-230 Contract Management categories of SMW businesses as stated in the plan and the way Boise is reporting its achievements. A Boise official explained that the subcontracting plan reflects the categories the firm typically uses when contracting with federal agencies, and it did not revise the reporting categories to reflect the Postal Service’s supplier diversity categories. In responding to our questions, the Postal Service officials acknowledged that the plan is inconsistent with the way Boise’s achievements are measured and that it needs to be revised. Boise’s Reported Despite its disagreement with the Postal Service about the subcontracting Achievements goals, Boise reports the dollars and percentages that went to SMW businesses based on the annual total revenues under the contract. Table 1 reflects reported achievements for fiscal year 2001. Table 1: Boise’s Reported Fiscal Year 2001 Subcontracting Achievements Percent of Percent of Percent of Total dollars to dollars to Total dollars to dollars to Total dollars to dollars to SMW SMW minority minority woman-owned woman-owned businesses businesses businesses businesses businesses businesses Reported 2.6% $1,245,161 0.7% $345,556 1.9% $899,625 achievements Source: Boise. Note: Boise’s total sales to the Postal Service on the national contract for fiscal year 2001 were $47 million. Postal Service and Boise officials stated that 30 percent was a stretch goal to demonstrate the Postal Service’s commitment to supplier diversity. A Boise representative stated that Boise agreed to the 30 percent goal because Boise understood the goal to be negotiable. Even though the Postal Service has no plans to renegotiate the goal before the end of the initial contract performance period of 3 years, Boise and the Postal Service have started discussions to renegotiate the subcontracting goal in the event that the Postal Service decides to exercise an option to extend the contract. Postal Service officials noted that they realize, in hindsight, that the 30 percent goal may have been unreasonable. Page 12 GAO-03-230 Contract Management Several Reasons Boise and Postal Service officials provided several reasons why the Offered for Failure to subcontracting goals have not been achieved. First, a Boise official said Meet the Goals that Boise agreed to the 30 percent goal based on its earlier achievements under the General Services Administration’s Federal Supply Schedules program.10 In fiscal years 1999 and 2000, Boise awarded small businesses 24.6 percent of its Schedules program sales. In retrospect, Boise and Postal Service officials explained that the Schedules program was not a reliable source for an estimate because Boise’s contract under the Schedules program included 1,800 items, compared to about 13,000 items in the Postal Service contract. Moreover, the total dollar sales in Boise’s Schedules contract—$14.3 million in fiscal year 2000—were considerably lower than the total sales on the Postal Service contract—$47 million in fiscal year 2001. Second, while Boise has a corporate supplier diversity strategy, a Boise official stated that the company’s ability to achieve the subcontracting plan goals has been hampered by the fact that the Postal Service does not require its employees to target SMW businesses when ordering from the catalog. In fact, officials at one district we visited had the impression that by simply purchasing from the contract they were complying with the Postal Service’s SMW business initiatives. At another district we visited, employees were not aware that the Postal Service had SMW subcontracting goals in the contract. All of the district officials we spoke with stated that they base their purchasing decisions on the lowest available price and do not search the catalog for SMW businesses. Third, one of the primary reasons Boise and Postal Service officials offered for the low subcontracting achievements was that compliance with the JWOD Act is taking away dollars from small businesses. However, Boise records show that of the 47 Boise vendors whose items were replaced with JWOD items in fiscal year 2001, only 7 were small businesses. These 7 vendors supply 26 out of the 404 Postal Service office supply items that are subject to the automatic JWOD replacement. Moreover, financial data from Boise show that in calendar year 2000, while total sales on JWOD items were just over $3 million, the impact of JWOD compliance on these 7 vendors was relatively small. These vendors potentially lost $167,629 in business due to the automatic substitution of 10 The Schedules program provides federal agencies with a simplified process for obtaining commonly used commercial supplies and services, ranging from office supplies to information technology services, at prices associated with volume buying. Page 13 GAO-03-230 Contract Management JWOD items for their items. In calendar year 2001 (representing one full year of contract sales), these 7 vendors potentially lost $297,036 of sales, while the total sales on JWOD items for the year doubled to almost $6 million. This trend continued in the first 6 months of 2002. Finally, Postal Service officials also explained that Boise could not reach its goal because it had planned to subcontract with a woman-owned enterprise that provided cash register tapes, a technology that the Postal Service decided to phase out. They stated that although Boise had relied on this business to reach its subcontracting goal, a change in technology resulted in significantly less business with this vendor than was expected. However, neither Postal Service nor Boise officials could provide us with specific estimates of expected sales. In fact, sales to this woman-owned firm increased in 2001 and 2002. Boise records show a growth in sales of the cash register tapes from this business of approximately $283,000 in 2000 to $455,000 in 2001. Sales for the first half of 2002 indicate a dollar amount in sales similar to the total sales in 2001. Moreover, Boise was notified of the changes to the new technology as far back as 1998; therefore, this was not new information received during the negotiations regarding the subcontracting goals. Actions to Improve The Postal Service and Boise recognize that the performance on the Subcontracting subcontracting plan is not satisfactory and have started to take some Performance actions to improve Boise’s achievements under the current contract. While Boise is responsible for its contract performance, the coordinated actions of the Postal Service and Boise can assist Boise’s ability to achieve the subcontracting plan goals. Although the following steps are being taken to improve performance, it is highly unlikely that these actions will enable Boise to reach its 30 percent subcontracting goal. • Boise is working with the Postal Service to include additional SMW businesses as subcontractors. For example, Boise continues to work with the Postal Service to identify small business suppliers of recycled toner cartridges, who in many cases provide their products at half the price of new toner cartridges. District officials received a listing of small businesses supplying recycled toner cartridges in October 2001. However, neither the Postal Service nor Boise has determined the extent to which this information will increase Boise’s subcontracting achievements. • Boise is working with the Postal Service to reflect indirect services provided to Boise by small businesses in its reporting of subcontracting plan achievements, as it is allowed to do under the Postal Service contract. Indirect services include data entry and information management services, Page 14 GAO-03-230 Contract Management such as invoicing and tracking sales information. However, Boise estimates that including indirect services provided by SMW businesses will have minimal impact on subcontracting plan achievements. Currently, there is no time frame for implementing this change in Boise’s reporting of its subcontracting achievements. • In October 2001, the Postal Service and Boise teamed up to design a quarterly report that tracks SMW business purchases at the Postal Service districts. The Postal Service expects to finalize and distribute these reports in January 2003. • The Postal Service and Boise are expanding the education of Postal Service employees on the benefits of seeking out SMW suppliers when they order office supplies from the national contract. Since initial office supply contract training was provided in the fall of 2000, Postal Service efforts to educate employees about SMW suppliers have been through informal channels, such as e-mail. Boise’s educational efforts focus on providing more information to the Boise sales representatives that work with the Postal Service. While Boise expects some improvements in its subcontracting achievements as a result of the educational efforts, their impact is unknown. Postal Service data show that office supply purchases made directly from Reports Indicate SMW businesses—using contracts and purchase cards—decreased from a Drop in Small about 50 to 18 percent from fiscal year 1999 through 2001. However, the extent to which the Postal Service is buying office supplies from SMW Business Dollars, but businesses is unclear because its purchase card information is unreliable Data Are Unreliable and because the Postal Service has not tracked purchases by employees using mechanisms such as money orders and cash. Our review, as well as a report by the Postal Service Inspector General,11 found that incomplete and unreliable diversity statistics on suppliers resulted in the Postal Service overstating or incorrectly classifying dollars awarded to SMW businesses. The Inspector General’s report made nine recommendations to correct the reporting of diversity statistics.12 11 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). 12 The Postal Service has addressed only one of these recommendations, noting in its April 2002 Purchasing Assessment Report that fiscal year 1999 and 2000 data contained errors in SMW data. Page 15 GAO-03-230 Contract Management Table 2 shows the decline in the percentage of SMW purchases from fiscal years 1999 through 2001, based on Postal Service data. Table 2: Reported Office Supplies Purchased from SMW Businesses Office supplies 1999 2000 2001 Total purchases $ 107,181,787 $ 107,392,563 $ 125,047,235 SMW purchases $ 20,207,461 $ 16,939,654 $ 15,002,143 SMW purchases as percent of total purchases 19% 16% 12% Total purchases using contracts and purchase cards only $41,211,956 $49,714,964 $83,748,545 SMW as percent of total purchases using contracts and purchase cards 49% 34% 18% Source: GAO analysis of U.S. Postal Service data. Note: “Total purchases” reflects contracts, purchase cards and other purchasing mechanisms such as money orders and cash. During the same 3-year period, SMW business participation has decreased as a percentage of contract spending (excluding spending through purchase cards, cash, and money orders), while the overall dollar value of office supplies purchased through contracts increased from $14.5 million to almost $67 million. In addition, the number of SMW vendors selling office supplies to the Postal Service decreased during this period. Postal Service district officials told us that they are no longer attempting outreach to local SMW businesses—such as participating in small business conferences or trade shows to attract new vendors—because of the emphasis on buying office supplies only through the Boise contract. Table 3 shows the decline in contract activity with small businesses from fiscal years 1999 through 2001. Table 3: Reported Office Supplies Purchased through Contracts 1999 2000 2001 Purchase of office supplies using contracts $ 14,500,475 $ 25,148,837 $ 66,930,690 Contract purchases from SMW businesses $ 5,440,943 $ 9,150,457 $ 9,938,844 SMW businesses as percent of total contract spending 38% 36% 15% SMW vendors 27 29 17 Source: GAO analysis of U.S. Postal Service data. Page 16 GAO-03-230 Contract Management Similarly, the Postal Service reports that office supply procurements from SMW businesses through purchase cards decreased from fiscal years 1999 through 2001. Table 4 shows the decline in the percentage of purchases from SMW businesses using purchase cards from fiscal year 1999 through 2001. Table 4: Reported Office Supplies Purchased Using Purchase Card 1999 2000 2001 Total purchase card spending $26,711,481 $24,566,126 $16,817,855 Purchase card purchases from SMW businesses $14,766,518 $7,789,198 $5,063,299 SMW businesses as percent of total purchase card spending 55% 32% 30% Source: GAO analysis of U.S. Postal Service data. Despite the Postal Service’s reported statistics, we could not determine the extent to which the Postal Service is buying from SMW businesses. First, because the Postal Service does not track or report socioeconomic data when payments are made to vendors using cash or money orders, it is not possible to assess SMW business achievements when those payment methods are used. Second, the Postal Service, like other federal agencies, relies on reports from banks for annual purchase card transaction and vendor information. This information is ambiguous and contains numerous errors because socioeconomic categories are often inaccurate. For example, the Postal Service’s purchase card data for fiscal years 1999 through 2001 included over $40 million dollars in office supply purchases from businesses that were identified as both small and large. The Postal Service is aware of the problems with the purchase card transaction information and has been working with Visa Corporation to improve the data. Because banks and payment card associations, such as Visa, control the transaction databases, the Postal Service must rely on the information provided by these institutions. We recently reported on the issue of unreliable and incomplete socioeconomic data on purchase card merchants.13 13 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). Page 17 GAO-03-230 Contract Management The Postal Service has not achieved its goal of using a single supplier for Conclusions office supplies and, as a result, has not achieved its anticipated savings. Because the Postal Service has not analyzed how its employees buy office supplies, it does not know why the national contract is not being used as extensively as planned. In fact, the Postal Service has no assurance that the national strategy is effective because it has not adequately tracked its employees’ office supply purchases. Implementing a national-level office supply contract through a single supplier makes the realistic development and measurement of Boise’s subcontracting goals and achievements critical to the Postal Service’s efforts to achieve its supplier diversity objectives. The failure to establish an effective subcontracting plan and the lack of oversight and enforcement has created an environment where participation by SMW businesses is minimal. The fact that the Postal Service and Boise cannot agree on the levels of SMW participation established in the contract is evidence of the lack of attention Boise and the Postal Service have paid to this issue. While Boise and the Postal Service have taken some actions to address SMW achievement, it is highly unlikely that Boise will be able to reach its subcontracting goal. We recommend that the Postmaster General of the United States Recommendations • determine why the national contract is not being used as a mandatory source of office supplies; • reassess the cost effectiveness of a national office supply contract and measure actual savings from using the contract rather than applying the outdated estimating formulas initially established; • develop mechanisms to track employees’ compliance with the mandatory use of the contract, if analysis indicates that the national-level contract is beneficial; and • direct that the contract be modified to include a revised subcontracting plan that accurately and clearly reflects realistic goals for small, minority, and woman-owned businesses, consistent with the Postal Service’s supplier diversity program. Page 18 GAO-03-230 Contract Management In written comments on a draft of this report, the Postal Service agreed Agency Comments with our recommendations and indicated that our report will help it develop and enforce policies aimed at improving performance under the national office supply contract. Recognizing that the success of a contract such as this requires continuous management, the Postal Service has established a new supply management organization that will use our findings and recommendations to determine why the contract is not being used as fully as anticipated. The Postal Service indicated that it will continue to seek cost-effective ways to expand its oversight efforts and expects that increased use of the Web-based purchasing system will assist in these efforts. Regarding the savings from the contract, the Postal Service stated that its internal analysis has validated $5.3 million in cost reductions during fiscal year 2002. This analysis was not shared with us during our review. Finally, the Postal Service stated that it has corrected the ambiguities in the subcontracting plan and is working with Boise to establish more realistic subcontracting goals. The Postal Service’s letter appears in appendix I. We also received a written statement from Boise expressing its opinion on federal subcontracting involving SMW businesses and offering several comments on our findings. Boise stated that actual sales under the contract (approximately $50 million) far exceeded its expected contract amount of $11 million. Boise uses this information as a rationale for its failure to achieve its subcontracting goals, which it asserts were based on the $11 million expected contract amount. However, the contract did not guarantee a minimum or maximum level of sales to Boise and, as noted in our report, a 30 percent goal was confirmed by Boise in a pre-award e-mail. Further, the Postal Service based its projected savings on an estimated contract amount of $50 million. Boise also noted that sales to SMW businesses with the Postal Service increased from fiscal year 1999 to fiscal year 2001. However, Boise’s analysis relies on a comparison of sales data from a previously existing Postal Service office supply contract, for 200 high-use items, to the sales data from the current contract, which covers almost 13,000 items. Because Boise is comparing sales data from two different contracts, we do not believe that this is a legitimate comparison. Boise indicated that it is working with the Postal Service to correct the inconsistencies we noted in the subcontracting plan. In addition, Boise believes that JWOD items block sales to SMW businesses; however, Boise did not provide sufficient evidence to support this claim. As noted in our report, the potential lost sales to SMW businesses due to JWOD item replacements were relatively small. Page 19 GAO-03-230 Contract Management Boise also commented that because sales of a cash register tape made by a woman-owned business did not increase at the expected rate, its SMW achievements were affected. However, as discussed in our report, neither Boise nor the Postal Service could provide us with documentation on the expected sales of the IRT tapes. Finally, Boise was concerned about our selection of field sites because it was not based on a random sample. We targeted locations that, according to Boise’s data, were low users of the contract. The objective of our field visits was not to identify overall awareness of the contract. Rather, our intent was to gain an understanding of why certain locations were not using the contract as a mandatory source of office supplies. Boise’s letter appears in appendix II. To meet our objectives, we reviewed the Postal Service’s office supply Scope and spending and the related SMW achievements during fiscal years 1999 Methodology through 2001. To examine the status of the Postal Service’s implementation of its national office supply contract with Boise, we reviewed the acquisition planning, contract formation, and contract administration documentation, including market research results, the solicitation, and the contract. Total office supply spending was identified using information from the Postal Service purchasing and materials data warehouse. We determined office supply spending for fiscal years 1999 through 2001 by using the same account codes that the Postal Service used to conduct its market research to justify the national office supply contract. We reviewed the Postal Service’s total office supply spending details for all contract, purchase card, money order, and cash transactions. We did not independently verify the accuracy of the reported spending. We interviewed and obtained information from the Postal Service’s contracting officer and contract administrator. In addition, we interviewed and obtained information from three area offices and three district offices based on data that indicated these locations were not using the national office supply contract. We interviewed purchasing specialists, administrative services managers, financial system coordinators, and administrative personnel with office supply purchasing responsibility. We also held discussions with and acquired information from Boise’s federal business manager. To determine Boise’s achievement of its SMW subcontracting plan, we reviewed the contract’s subcontracting plan and Boise’s quarterly Page 20 GAO-03-230 Contract Management reports on its SMW achievements. We interviewed and obtained information from the Postal Service’s contracting officer, area finance officials, and district finance and purchasing officials. We also held discussions with and acquired information from Boise’s federal business manager, its minority- and woman-owned business development and supplier diversity manager, and two minority-owned subcontractors. To assess the extent to which the Postal Service is buying office supplies directly from SMW businesses, we reviewed Postal Service supplier diversity policy and guidance. We examined the Postal Service’s reported socioeconomic statistics, including the dollar amount and type of vendor for fiscal years 1999 through 2001. We interviewed and obtained information from Postal Service officials in the offices of supplier development and diversity, purchasing and materials, and the Postal Service Inspector General. We determined that the reported purchase card data were unreliable; however, we did not attempt to correct the errors in the data provided. Additionally, we met with representatives from the National Office Products Association and a small, woman-owned business to gain a better understanding of their views with regard to the national contract. We conducted our review from March 2002 to November 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Postmaster General of the United States; and the Senior Vice President and Federal Business Manager, Boise Office Solutions. 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. Page 21 GAO-03-230 Contract Management 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 Penny Berrier, Art L. James Jr., Judy T. Lasley, Sylvia Schatz, and Tatiana Winger. David E. Cooper Director, Acquisition and Sourcing Management Page 22 GAO-03-230 Contract Management Appendix I: Comments from the U.S. Postal Appendix I: Comments from the U.S. Postal Service Service Page 23 GAO-03-230 Contract Management Appendix I: Comments from the U.S. Postal Service Page 24 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Appendix II: Comments from Boise Office Solutions Solutions Page 25 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Solutions Page 26 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Solutions Page 27 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Solutions Page 28 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Solutions Page 29 GAO-03-230 Contract Management Appendix II: Comments from Boise Office Solutions (120129) Page 30 GAO-03-230 Contract Management The General Accounting Office, the investigative arm of Congress, exists to GAO’s Mission support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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Contract Management: Postal Service's National Office Supply Contract Has Not Been Effectively Implemented
Published by the Government Accountability Office on 2003-01-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)