oversight

Office Supplies: Recent GSA Pricing Study Had Limitations, but New Initiative Shows Potential for Savings

Published by the Government Accountability Office on 2012-06-07.

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

                            United States Government Accountability Office

GAO                         Testimony
                            Before the Subcommittee on Contracting
                            and Workforce, Committee on Small
                            Business, House of Representatives

                            OFFICE SUPPLIES
For Release on Delivery
Expected at 2:00 p.m. EDT
Thursday, June 7, 2012



                            Recent GSA Pricing Study
                            Had Limitations, but New
                            Initiative Shows Potential
                            for Savings
                            Statement of William T. Woods, Director
                            Acquisition and Sourcing Management




GAO-12-705T
                                              June 7, 2012

                                              OFFICE SUPPLIES
                                              Recent GSA Pricing Study Had Limitations, but New
                                              Initiative Shows Potential for Savings
Highlights of GAO-12-705T, a testimony
before the Subcommittee on Contracting and
Workforce, Committee on Small Business,
House of Representatives



Why GAO Did This Study                        What GAO Found
The GSA estimated that federal                In 2010, the General Services Administration’s (GSA) pricing study found that
agencies spent about $1.6 billion             during fiscal year 2009, the 10 largest federal agencies accounted for about
during fiscal year 2009 purchasing            $1.3 billion, or about 81 percent, of the total $1.6 billion spent governmentwide in
office supplies from more than                14 categories of office supplies. About 58 percent of their office supply purchases
239,000 vendors. Concerned that               were made outside of the GSA schedules program—a simplified process to take
federal agencies may not be getting           advantage of price discounts equal to those that vendors offer “most favored
the best prices available, Congress           customers.” Most of these purchases were made at retail stores. GSA also
directed GSA to study office supply           reported that agencies paid an average of 75 percent more (a price premium)
purchases by the 10 largest federal           than schedule prices for their retail purchases and 86 percent more compared to
agencies. GSA delivered the results of        Office Supplies II (OS II) prices.
its study in November 2010. The study
also discussed GSA’s efforts to               While the GSA acknowledged some limitations with the study data, we identified
implement an initiative focused on            additional data and other limitations that lead us to question the magnitude of
leveraging the government’s buying            some of GSA’s reported price premiums and assertions. More specifically, we
power to realize savings when buying          determined that the study may not have properly controlled for quantities, used
office supplies, known as OS II.              two different formulas to calculate price premium estimates, and relied on
Congress directed GAO to assess the           interviews with senior level acquisition officials instead of purchasers to
GSA study, with particular attention to       determine whether buyers compared prices before making purchases. We were
the potential for savings.                    not able to fully quantify the impact of these limitations. Additionally, other
This testimony is based on the findings       agencies questioned the study’s specific findings related to price premiums, but
and conclusions of GAO’s December             their own studies of price premiums support GSA’s conclusion that better prices
2011 report, GAO-12-178, and focuses          can be obtained through consolidated, leveraged purchasing.
on (1) the support for the findings and       Available data show that the OS II initiative has produced savings of $39.2 million
conclusions in GSA’s study, and
                                              from June 2010 through March 2012. According to GSA, the OS II initiative is
(2) how GSA's new office supply
                                              demonstrating that leveraged buying can produce greater savings and has
contracts support the goal of
leveraging the government’s buying            provided improvements for managing ongoing and future strategic sourcing
power to achieve savings.                     initiatives. For example, GSA reports that OS II allowed it to negotiate discounts
                                              with vendors who were selected for the initiative. As governmentwide sales
What GAO Recommends                           surpass certain targets, additional discounts are applied to purchase prices.
                                              Further, OS II has spurred competition among schedule vendors that were not
GAO did not make any
                                              selected for OS II, resulting in decreased schedule prices. The initiative is also
recommendations in its report, and is
                                              expected to lower governmentwide supply costs through more centralized
not making any in this testimony.
                                              contract management. Another key aspect of the initiative is that participating
                                              vendors provide sales and other information to GSA to help monitor prices,
                                              savings, and vendor performance. Finally, GSA is capturing lessons learned from
                                              OS II and is attempting to incorporate these lessons into other strategic sourcing
                                              initiatives.




View GAO-12-705T. For more information,
contact William T. Woods, (202) 512-4841 or
WoodsW@gao.gov.

                                                                                       United States Government Accountability Office
             Chairman Mulvaney, Ranking Member Chu, and the Members of the
             Subcommittee on Contracting and Workforce:

             I am pleased to be here today to discuss the General Services
             Administration’s (GSA) efforts to reduce prices that federal agencies pay
             for office supplies. My statement is based on a report 1 we issued last year
             for the Subcommittees on Financial Services and General Government of
             the Senate and House Committees on Appropriations. Concerned that
             federal agencies may not be getting the best prices available, the
             conferees on the Consolidated Appropriation Act, 2010, directed GSA to
             conduct a study of the office supply purchases made by the top 10 largest
             federal agencies. 2 GSA provided the results of its study to the House and
             Senate Committees on Appropriations in November 2010 and also
             reported on its efforts to implement the Federal Strategic Sourcing
             Initiative—Office Supplies II (OS II), an initiative focused on leveraging
             the government’s buying power to realize savings. The conferees also
             directed GAO to assess the GSA study, with particular attention to the
             potential for savings.

             To conduct our work, we analyzed the data GSA used for its study; met
             with and obtained documentation from officials at GSA and the
             Departments of Homeland Security, Air Force, Navy, and Army, which
             were among the 10 agencies in GSA’s study; and reviewed contract
             documentation associated with the OS II initiative. For purposes of this
             hearing, we updated GSA’s savings estimates for the OS II initiative. We
             conducted our work in accordance with generally accepted government
             auditing standards. Those standards require that we plan and perform the
             audit to obtain sufficient, appropriate evidence to provide a reasonable
             basis for our findings and conclusions based on our audit objectives. We
             believe that the evidence obtained provides a reasonable basis for our
             findings and conclusions based on our audit objectives.


             GSA estimated that federal agencies spent about $1.6 billion during fiscal
Background   year 2009 purchasing office supplies from more than 239,000 vendors.
             Federal agencies can use a variety of different approaches to purchase


             1
              GAO, Strategic Sourcing: Office Supplies Pricing Study Had Limitations, but New
             Initiative Shows Potential for Savings, GAO-12-178 (Washington, D.C.: Dec. 20, 2011).
             2
             H.R. Conf. Rep. No. 111-366, at 918 (2009).




             Page 1                                                                     GAO-12-705T
office supplies. For relatively small purchases, generally up to $3,000,
authorized personnel can use their government purchase cards. For
larger purchases, agencies may use other procedures under the Federal
Acquisition Regulation, such as awarding a contract or establishing
blanket purchase agreements. Alternatively, agencies can use the
Federal Supply Schedule program (schedules program), a simplified
process for procuring office supplies where GSA awards contracts to
multiple vendors for a wide range of commercially available goods and
services to take advantage of price discounts equal to those that vendors
offer their “most favored customers.” The schedules program can
leverage the government’s significant aggregate buying power. In
addition, agencies can make office supply purchases under GSA’s new
initiative, the OS II program. The OS II program is an outgrowth of an
earlier attempt by GSA to offer agencies a simplified process for fulfilling
their repetitive supply needs while obtaining prices that are lower than
vendors’ schedule prices. By July 2010, GSA had awarded 15 blanket
purchase agreements 3 competitively to support the OS II initiative, 13 of
which went to small businesses.

For its study, GSA reviewed office supply purchases in 14 categories of
mostly consumable office supplies, ranging from paper and writing
instruments to calendars and filing supplies. The report did not include
non-consumable items such as office furniture and computers because
they are not part of the standard industry definition of office supplies. The
GSA report estimated that during fiscal year 2009, the 10 agencies 4 with
the highest spending on office supplies accounted for about $1.3 billion,
or about 81 percent, of the total $1.6 billion spent governmentwide in the
14 categories of office supplies. Further, it stated that about 58 percent of
office supply purchases were made outside of the GSA schedules
program, mostly at retail stores. Additionally, GSA reported that agencies
paid an average of 75 percent more (a price premium) than schedule
prices and 86 percent more than OS II prices, for their retail purchases.




3
 Blanket purchase agreements are a simplified method of fulfilling repetitive needs for
supplies and services that also can provide an opportunity to seek reduced pricing from
vendors’ schedule prices. See FAR 13.303-1(a).
4
 Departments of the Army, Air Force, Navy, Homeland Security, Veterans Affairs, State,
Health and Human Services, Justice, Commerce, and Agriculture.




Page 2                                                                       GAO-12-705T
                        While the GSA report acknowledged some limitations with the data, we
GSA Report Had Data     identified additional data and other limitations that lead us to question the
and Other Limitations   magnitude of some of GSA’s reported price premiums. We were not able
                        to fully quantify the impact of these limitations. Additionally, other
                        agencies questioned the study’s specific findings related to price
                        premiums, but their own studies of price premiums support GSA’s
                        conclusion that better prices can be obtained through consolidated,
                        leveraged purchasing.

                        Since purchasing of office supplies is highly decentralized, GSA obtained
                        data for its study from multiple disparate sources, such as the Federal
                        Procurement Data System-Next Generation, the Department of Defense
                        (DOD) electronic mall, and purchase card data from commercial banks.
                        To determine the amount of funds spent on office supplies and to conduct
                        related analyses, GSA had to sort through about 7 million purchase
                        transactions involving over 12 million items. The agency took steps to
                        clean the data prior to using them. For example, it removed duplicate
                        purchases and items that did not meet its definition of office supplies. The
                        GSA study noted that the estimated amount of funds and related
                        calculations were to be considered sound and reliable estimates derived
                        from rigorous data analysis techniques.

                        We also identified additional data and other limitations in GSA’s study,
                        including:

                        •   GSA may not have been able to properly control for purchases of
                            different quantities of the same item. Because there is no consistency
                            in how part numbers are assigned, manufacturers may assign the
                            same part number to both individual items and to packages of items in
                            some cases. GSA tried to exclude transactions that had large
                            variations in retail prices for apparently identical items to control for
                            these occurrences. However, when we reviewed data for 10 items
                            within the writing instruments category, we found that retail prices for
                            6 of the 10 items varied by more than 300 percent, such as Rollerball
                            pens, which ranged from $9.96 to $44.96.

                        •   Two different formulas were used for calculating price premium
                            estimates. However, the study only described one of these specific
                            formulas. The use of the unreported formula did not have a
                            substantial impact on the retail price premium calculations for most
                            categories of office supplies or the overall conclusions of the study,
                            but the GSA report could have been more complete had it fully
                            disclosed all the formulas used for all categories of office supplies.



                        Page 3                                                             GAO-12-705T
                          •   GSA did not identify or collect any data about price comparisons
                              conducted by the purchase cardholders. GSA concluded that
                              purchase cardholders compared costs at some level prior to making a
                              purchase based on its interviews with senior-level acquisition officials.
                              While these officials may have had a broad understanding of agency
                              procurement policies and practices, they were not representative of
                              the approximately 270,000 credit cardholders making purchasing
                              decisions. GSA officials said that given the reporting time frame for
                              the study, they did not have the resources or time needed to survey a
                              representative sample of the 270,000 purchase cardholders.
                          Additionally, officials from the Departments of Air Force, Army, Navy, and
                          Homeland Security believed that the price premiums reported by GSA
                          when buying outside the GSA schedule were overstated based upon their
                          own studies. For example, the Air Force determined that the OS II blanket
                          purchase agreements could save about 7 percent in a study of the 125
                          most commonly purchased items. However, these agencies agreed with
                          GSA’s overall conclusion that better prices can be obtained through
                          leveraged buys and that prices available through the new OS II blanket
                          purchase agreements were better than the prices available from their
                          existing agency blanket purchase agreements.


                          According to initial available data, GSA’s OS II blanket purchase
New Strategic             agreements have produced savings. The OS II initiative, more so than
Sourcing Initiative for   past efforts, is demonstrating that leveraged buying can produce greater
                          savings and has provided improvements for managing ongoing and future
Office Supplies Shows     strategic sourcing initiatives. GSA is using a combination of agency and
Potential for             vendor involvement to identify key requirements and cost drivers,
Generating Savings        increase the ease of use, and obtain the data necessary to manage the
                          program.


GSA’s Analysis of OS II   On the basis of the sales data provided by OS II vendors, GSA estimates
Data Shows Savings Are    the federal government saved $39.2 million between June 2010 and
Being Achieved            March 2012 by using the 15 blanket purchase agreements established for
                          this program. These savings were estimated by comparing the lowest
                          prices of a set—or market basket—of over 400 items available on GSA’s
                          schedules program contracts before OS II with prices and discounts being
                          paid for the same items on the OS II blanket purchase agreements.
                          Importantly, and unlike GSA’s report, GSA’s conclusions about savings
                          realized under OS II are based on data from vendors—which they are



                          Page 4                                                            GAO-12-705T
required to collect and provide in the normal course of business—and not
on data collected after the fact from sources not designed to produce
information needed to estimate savings.

GSA’s comparison of the market basket of best schedule prices against
the OS II blanket purchase agreement vendors’ prices found that prices
offered by OS II vendors were an average of 8 percent lower. The
average savings, however, is expected to fluctuate somewhat as the OS
II initiative continues to be implemented and the mix of vendors, products,
and agencies changes. For example, GSA found that savings, as a
percentage, declined slightly as agencies with historically strong office
supplies management programs increased their use of OS II. Conversely,
they expect the savings percentage to increase as agencies without
strong office supplies management programs increase their use. In
addition to the savings from the blanket purchase agreements, GSA
representatives told us that they are also seeing prices decrease on
schedules program contracts as vendors that were not selected for the
OS II program react to the additional price competition created by the OS
II initiative.

The agency decided to extend the OS II blanket purchase agreements for
an additional year after negotiating additional price discounts of about
3.9 percent on average with 13 of the 15 vendors in the program. The
blanket purchase agreements also include tiered discounts, which apply
when specific sales volume thresholds are met. Sales realized by 5 of the
vendors reached the first tier discount level as of April 2012, and the
vendors have since adjusted their prices to provide the corresponding
price discounts. GSA anticipates that additional vendors will reach sales
volumes that exceed the first tier discount threshold in the first option
year, which will trigger additional discounts.

An additional benefit of OS II may be lower contract management costs,
as agencies can rely on GSA to administer the program instead of their
own staffs. While this may create some additional burden for GSA,
officials believe the overall government costs to administer office supply
purchases should decrease.




Page 5                                                           GAO-12-705T
OS II Includes Key     GSA has incorporated a range of activities representative of a strategic
Management Goals and   procurement approach 5 into the OS II initiative. These activities range
Practices to Enhance   from obtaining a better picture of spending on services, to taking an
                       enterprisewide approach, to developing new ways of doing business.
Oversight and Manage
                       They also involve supply chain management activities. All of these
Suppliers              activities involve some level of centralized oversight and management.
                       GSA is capturing lessons learned from OS II and is attempting to
                       incorporate these lessons into other strategic sourcing initiatives.

                       GSA obtained commitments from agencies and helped set goals for
                       discounts to let businesses know that the agencies were serious in their
                       commitment to the blanket purchase agreements. This also helped GSA
                       determine the number of blanket purchase agreements that would be
                       awarded. As part of the overall strategy, a GSA commodity council
                       identified five overarching goals, in addition to savings, for the OS II
                       initiative. These goals and the methods used to address them are in
                       table 1.




                       5
                        See GAO, Best Practices: Taking a Strategic Approach Could Improve DOD’s Acquisition
                       of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002), for more information on
                       strategic sourcing.




                       Page 6                                                                   GAO-12-705T
Table 1: Goals for Office Supplies II

 Goal                               Methods to address the goal
 Capture data                       Vendors are required to provide monthly sales data
                                    including at the line-item level at no additional charge.
                                    Line-item-level data provide details on the transactions,
                                    such as the manufacturer’s part number, freight amount,
                                    small business category (if applicable), product codes,
                                    and product description.
 Enable achievement of socio-       GSA awarded 13 of the 15 blanket purchase
 economic goals                     agreements to small businesses to assist agencies in
                                    meeting the statutory requirement that the
                                    governmentwide small business contracting goal be
                                    established at not less than 23 percent of the total value
                                    of all prime contracts awarded for each fiscal year.
 Drive compliance with statutes Vendors are required to be in compliance with statutes
 and mandates                   and executive orders.
 Conform with agency business Vendor administration requirements include maintaining
 practices                    a current catalog conforming to the terms and conditions
                              of agency portals; meeting catalog requirements;
                              providing no restriction on payment methods; offering
                              training; and having a dedicated agency manager.
 Increase ease of use               Vendors are required to make the OS II prices available
                                    through government portals, vendor websites, retail
                                    stores, and by phone; include a point of sale discount,
                                    where blanket purchase agreement prices are
                                    automatically charged and tax exempted whenever a
                                    government purchase card is used for all items covered
                                    by the blanket purchase agreement; and apply blanket
                                    purchase agreement prices unless the ordering agency
                                    specifically opts not to use OS II.
Source: GAO analysis of GSA data.



Several new business practices have been incorporated in the OS II
program to meet the goals. For example, to meet the capture data goal,
GSA is collecting data on purchases and vendor performance that are
assimilated and tracked through dashboards, which are high-level
indicators of overall program performance. The dashboard information is
used by the GSA team members responsible for oversight to ensure that
the vendors are meeting terms and conditions of the blanket purchase
agreements and that the program is meeting overall goals. The
information is also shared with agencies using OS II. Our review of GSA’s
OS II vendor files found that GSA has taken a more active role in
oversight and is holding the vendors accountable for performance. For




Page 7                                                                            GAO-12-705T
               example, GSA has issued Letters of Concern to four vendors and has
               issued one Cure Notice 6 to a vendor. These letters and notices are used
               to inform vendors that the agency has identified a problem with the
               vendor’s compliance. To support the OS II management responsibilities,
               GSA charges a 2 percent management fee, which is incorporated into the
               vendors’ prices. This fee, which is higher than the 0.75 percent fee
               normally charged on GSA schedules program sales, covers the additional
               program costs, such as the cost of the six officials responsible for
               administering the 15 blanket purchase agreements, as well as their
               contractor support.

               In addition, to increase savings and ease of use, OS II includes a point of
               sale discount, under which blanket purchase agreement prices are
               automatically charged whenever a government purchase card is used for
               an item covered by the blanket purchase agreement rather than having
               the buyers ask for a discount. Additionally, purchases are automatically
               tax exempt if the purchases are made using a government purchase card.
               State sales taxes were identified by GSA’s report as costing the federal
               agencies at least $7 million dollars in fiscal year 2009.

               GSA’s experience with OS II is being applied to other strategic sourcing
               initiatives. For example, GSA set up a commodity council for the Federal
               Strategic Sourcing Initiative Second Generation Domestic Delivery
               Services II program. The council helped identify program requirements
               and provide input on how the program operates.


               GSA’s office supplies report contained some data and other limitations,
Concluding     but it showed that federal agencies were not using a consistent approach
Observations   in both where and how they bought office supplies and often paid a price
               premium as a result of these practices. The magnitude of the price
               premium may be debatable, but other agencies that have conducted
               studies came to the same basic conclusion about the savings potential
               from leveraged buying. The GSA study helped set the course for a more



               6
                 A cure notice is issued by the government to inform the contractor that the government
               considers the contractor’s failure to perform a contractual provision a condition that is
               endangering performance of the contract. The cure notice specifies a period (typically 10
               days) for the contractor to remedy the condition. If the condition is not corrected within this
               period, the cure notice states that the contractor may face the termination of its contract
               for default.




               Page 8                                                                            GAO-12-705T
                  strategic approach to buying office supplies—an approach that provides
                  data to oversee the performance of vendors, monitor prices, and estimate
                  savings. Additional savings are expected as more government agencies
                  participate in the OS II initiative and further leverage the government’s
                  buying power.


                  Chairman Mulvaney, Ranking Member Chu, and the Members of the
                  Subcommittee on Contracting and Workforce, this completes my
                  prepared statement. I am happy to answer any questions you have.


                  For future questions about this statement, please feel free to contact me
GAO Contact and   at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of
Staff             Congressional Relations and Public Affairs may be found on the last page
                  of this statement. Individuals making key contributions to this statement
Acknowledgments   include: Cheryl Andrew, Assistant Director; Jean K. Lee; and Marie
                  Ahearn




(121073)
                  Page 9                                                         GAO-12-705T
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