oversight

General Services Administration: Information on Pricing Retail Packaging Products

Published by the Government Accountability Office on 1999-07-07.

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

                 United States General Accounting Office

      GAO        Report to the Subcommittee on Treasury
                 and General Government
                 Committee on Appropriations
                 U. S. Senate

   luly
     999         GENERAL SERVICES
                 ADMINISTRATION
                 Information on Pricing
                 Retail Packaging
                 Products




                           ccountability   *   Integrity * Reliability

4AO/GGD-99-116
                   United States
GA O               General Accounting Office
                   Washington, D.C. 20548

                   General Government Division



                   B-281901

                   July 7, 1999

                   The Honorable Ben Nighthorse Campbell
                   Chairman

                   The Honorable Byron L. Dorgan
                   Ranking Minority Member
                   Subcommittee on Treasury and General Government
                   Committee on Appropriations
                   United States Senate

                   This report responds to Senate Report 105-251 on the fiscal year 1999
                   Treasury and General Government Appropriations Act, which directs us to
                   examine the General Services Administration's (GSA) retail packaging
                   products program. Retail packaging products include items such as boxes,
                   envelopes, and shipping sacks. GSA sells 27 of these products to federal
                   agencies, with the Postal Service being its largest customer. As agreed
                   with the Committee, our objectives were to determine whether (1) GSA is
                   required by law to set its prices for retail packaging products at levels
                   sufficient to ensure that all selling costs are recovered on each item and
                   (2) GSA's selling prices for these items do recover all costs.

                   GSA is not required to, nor does it set prices to, recover all estimated costs
Results in Brief   associated with selling retail packaging products on an item-by-item basis.
                   The statutory provision related to product pricing and cost recovery, 40
                   U.S.C. 756, specifically identifies the purchase price, transportation, and
                   the direct and indirect costs associated with contracting, handling, and
                   distributing products as the costs that GSA should recover, so far as
                   practicable, through its selling prices. However, the law does not require
                   GSA to use a specific method in recovering its costs or require GSA to
                   establish a price for an individual product that will recover all of the costs
                   associated with selling that product. Accordingly, GSA officials believe
                   that they are complying with the full cost recovery requirement mandated
                   in 40 U.S.C. 756, if the revenues for all products and services sold through
                   its General Supply Fund are at least equal to the total cost of operating the
                   Fund.' In fiscal years 1997 and 1998, GSA's audited financial statements
                   showed that the Fund's revenues exceeded its operating expenses.
                   Because the statute does not specify how GSA should implement full cost
                   recovery, does not require that GSA must recover cost on an item-by-item

                   'The General Supply Fund, under the control and direction of the GSA Administrator, is used to
                   finance, on a reimbursable basis, a national supply system for federal agencies. This system includes
                   four business lines, under one of which retail packaging products are sold.




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               basis, and states that cost should be recovered so far as practicable, we
               believe the method GSA is using to achieve full cost recovery is within its
               discretion.

               Our analysis of the 27 retail packaging products indicates that GSA's
               selling prices for the majority of these products were not sufficient to
               ensure that all estimated costs associated with selling each individual item
               were recovered from the sale of these products. Specifically, we found
               that the!actual pricing markups applied to these products were usually
               lower than the individual product markups calculated by GSA's cost
               allocation model, which, according to GSA officials, is the most accurate
               estimate of how much it costs GSA to sell each item individually. For
               example, in fiscal year 1999, the markups used to determine selling prices
               for 23 of the 27 retail packaging products were less than the markups
               calculated by the cost allocation model. GSA officials told us that this is
               not unusual because their objective is to recover cost on a business line
               level and not on an item-by-item basis. They said that they do not use
               individual product markups when establishing selling prices, and it is not
               their objective to ensure that all costs associated with selling each
               individual product are recovered from the sales of those products.
               Instead, GSA groups similar products into what it calls a federal supply
               class and applies a single markup to each class to determine its product
               selling prices.

               The federal supply class markups are determined through the use of the
               cost allocation model and the professional judgement of supply officials.
               Also, GSA officials said that even after the federal supply class pricing
               markup, has been determined and the recommended selling price has been
               calculated, officials in the commodity center responsible for purchasing
               and managing a particular item can adjust the selling price in order to
               remain competitive. Given this situation, the thousands of products in its
               inventory, and the needed flexibility to manage its diverse products, GSA
               pricing officials said that it would be burdensome and impractical to
               implement a system that tracks each product and ensures full cost
               recovery on an item-by-item basis.

               A primary mission of GSA's Federal Supply Service (FSS) is to ensure that
IBac~kground   the service and supply needs of federal agencies are efficiently and
               effectively met at the least cost to the taxpayer. To accomplish this
               mission, FSS operates four business lines--supply and procurement,
               vehicle acquisition and leasing, property management, and travel and
               transportation. These business lines operate under the General Supply
               Fund, and each is composed of smaller components. For example, the


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supply and procurement line consists of three methods of supply or
programs-schedules, special order, and stock. This report pertains
primarily to the stock program in which FSS purchases about 19,000
common-use products, places them into its inventory, and then resells the
products to federal agencies and other customers. 2 Products sold through
the stock program include tools, paints, photocopy paper, pens, pencils,
cleaning products, boxes, envelopes, and shipping sacks.

Among the boxes, envelopes, and shipping sacks offered through FSS'
stock program are 27 types of these products, which collectively are
referred to as retail packaging products. These products are included in 7
of the 271 classes of products sold under the stock program. FSS' sales of
retail packaging products began to rise several years ago after the Postal
Service approached GSA with a proposal to buy these and other products
from GSA when GSA offered the best value. In fiscal year 1995, FSS sold
$3.4 million in retail packaging products to the Postal Service; and by 1998
this amount had increased to $6.8 million, or about 73 percent of total sales
for these products.

FSS is industrially funded, which means that generally the costs of the
products and services sold to federal agencies and other customers and
the costs of operating FSS' programs are to be recouped from the prices
charged. GSA's consolidated financial statements, which have received
unqualified opinions from independent auditors, demonstrate whether
revenues exceed expenses. As part of the product pricing process, FSS
considers actual costs and revenues from the accounting system, projected
budgetary costs, and other costs, such as depreciation, that are associated
with operating the overall Supply and Procurement business line and then
assigns these costs to each of the three methods of supply-schedule,
special order, and stock. Prices for products and services sold through
each supply method are determined differently. In the stock program, a
major part of the pricing process involves the use of a computer-based
model that calculates pricing markups for groups of products according to
their procurement, storage, handling, and transportation costs. FSS
centrally calculates recommended selling prices on a semiannual basis for
products sold through the stock program. The prices become effective on
the first day of October and April. However, item managers can adjust the
recommended selling price for any product at any time.

2
 For purposes of the General Supply Fund, the term "federal agency" is defined in 40 U.S.C. 472 as any
executive agency or any establishment in the legislative or judicial branch of the government except
the Senate, House of Representatives, and the Architect of the Capitol. Other entities, such as the
Postal Service, are also authorized to purchase products and services from GSA.




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                         GSA operates four major distribution centers located in Burlington, NJ;
                         Palmetto, GA; Fort Worth, TX; and Stockton, CA; and three smaller centers
                         located in Franconia, VA; Chicago, IL; and Auburn, WA, to receive, store,
                         and ship products purchased by federal agencies through the stock
                         program. In addition, there are 19 GSA Express Stores located throughout
                         the world, where customers can purchase and pick up products. In fiscal
                         year 1998 total sales for the stock program were $817 million. During this
                         same year, retail packaging product sales totalled $9.3 million, and about
                         73 percent of these sales were made to the U.S. Postal Service.

                         To accomplish our objectives, we reviewed the applicable statutory
Scope and                provision, 40 U.S.C. 756, and GSA's pricing policy and practices relating to
Methodology              products sold by GSA through the FSS Supply and Procurement Program.
                         We obtained information on how the computer model was used to
                         establish product prices, including how it assigned direct and indirect
                         costs associated with selling each product. We also discussed the pricing
                         and management of retail packaging products with GSA officials from FSS'
                         headquarters in Arlington, VA, and several field locations involved in
                         pricing or distributing retail packaging products to customer agencies.

                         We did our work between November 1998 and May 1999, in accordance
                         with generally accepted government auditing standards. Appendix I
                         provides more details about our objectives, scope, and methodology. We
                         requested comments on a draft of this report from GSA's Administrator
                         and the Postmaster General. GSA officials orally provided technical
                         comments, which we incorporated in the final report. The Postal Service
                         had no comments.

                         The statutory provision related to product pricing and cost recovery, 40
GSA Is Not Required to   U.S.C. 756, does not require GSA to recover its costs associated with
Recover Costs on an      selling products on an item-by-item basis and does not specify how GSA
Item-by-Item Basis       should implement full cost recovery. The statute gives GSA wide latitude
                         in how to recover its costs. It is GSA's view that as long as the revenues
                         obtained from all products and services sold under the General Supply
                         Fund cover the expenses of operating the Fund, GSA is complying with the
                         law.

                         The full cost recovery requirement became effective in 1988, after
                         Congress amended 40 U.S.C. 756 (a) by adding language that provides for
                         industrial funding of FSS and authorizes full cost recovery of the products
                         and services purchased by federal agencies and other customers.3
                          Public Law 100-202, 101 Stat. 1329-427 (1987) amended 40 U.S.C. 756(a) by adding subsection (a)(3),
                         which states that the general supply fund shall be available for paying other direct costs and indirect




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Subsection (b) of this provision identifies the purchase price,
transportation, and direct and indirect costs associated with contracting,
handling, and distributing products as the costs that GSA should recoup
through its selling prices. 4 However, the law does not require that GSA use
a specific method in recovering its costs or require GSA to establish a price
for individual products that will recover all of the costs associated with
selling each product on an item-by-item basis. The statute provides that
GSA is to fix its product prices at levels to recover, so far as practicable,
the applicable purchase price, transportation, and other direct and indirect
costs associated with selling the products.

Since the inception of industrial funding GSA has interpreted the statute as
providing it with considerable discretion in determining how to achieve
full cost recovery. GSA's 1988 Industrial Funding Implementation Plan5
recognized that the legislation provided a great deal of flexibility. GSA
officials said that the language of the statute, which provides that prices
should be fixed at levels to recover so far as practicable all applicable
purchase price and transportation and other direct and indirect costs
associated with the products it sells, suggests that Congress recognized
GSA should have latitude in establishing product prices and could not, in
all cases, recover the costs associated with selling each product.

Officials from GSA's Office of General Counsel also told us that a private
company challenged GSA's interpretation of the full cost recovery statute
in federal district court and they said GSA won this lawsuit.6 It should be
noted, however, that the court did not address the claim that GSA's pricing
methodology failed to comply with 40 U.S.C. 756(b). The Court dismissed
the complaint on the grounds that the plaintiff had failed to establish that it
had suffered an injury or that it was an intended beneficiary of the statute.
The United States Court of Appeals affirmed the lower court's finding.

costs that are reasonably related to contracting, procurement, inspection, storage, management,
distribution, and accountability of property and nonpersonal services provided by the General Services
Administration.

4 Because 40 U.S.C. 756 identifies the specific costs that GSA should recover when selling products and
services under the General Supply Fund, the statute takes precedence over OMB Circular No. A-25,
which establishes federal policy regarding fees assessed for government services and for sale or use of
government goods and resources.

'The 1987 amendment to 40 U.S.C. 756 required that GSA prepare by Feb. 15, 1988, an Industrial
Funding Implementation Plan that (1) fully described and explained the accounting system (including
the pricing and cost allocation methodology for products and services) to be used for such
implementation and (2) contained a schedule for completing implementation of full cost recovery.

6T &S Products. Inc. v. United States Postal Service. General Services Administration, No. 94-896, 1994
U.S. Dist. Lexis 20751 at *1 (D.D.C. May 26, 1994;) aff.d 68 F. 3d 510 (D. C. Cir. 1995).




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                        GSA asserts that it is complying with the full cost recovery requirement
                        mandated in the law as long as the revenues for all products and services
                        sold through the General Supply Fund are at least equal to the costs of
                        operating the Fund. In the two most recently completed fiscal years-1997
                        and 1998--GSA's audited financial statements, which FSS officials said
                        were prepared in accordance with Federal Accounting Standards Advisory
                        Board accounting principles, show that the General Supply Fund revenues
                        exceeded operating expenses by $119 million and $133 million,
                        respectively.7 These revenues resulted from total sales of $2.8 billion in
                        fiscal year 1997 and $2.7 billion in fiscal year 1998. Because 40 U.S.C. 756
                        does not specify how GSA should implement full cost recovery, does not
                        require GSA to recover costs on an item-by-item basis, and states that
                        costs should be recovered so far as practicable, we believe the method
                        GSA is using to achieve full cost recovery is within its discretion.

                        Notwithstanding GSA's discretion under the statute, it is GSA's objective to
GSA Does Not Set        recover costs on each of the four business lines-supply and procurement,
Prices to Recover the   vehicle acquisition and leasing, property management, and travel and
Costs of Selling Each   transportation-under the General Supply Fund from the activities within
Prodluct Individually   each line. For example, FSS strives to recover the overall costs of
                        operating the supply and procurement business line, which includes retail
                        packaging products, from the sales of products and services provided
                        under this line. However, it is not FSS' goal to recover costs on each of
                        the programs that are operated under this business line-schedules, special
                        order, and stock-or to recover costs on an item-by-item basis. According
                        to FSS officials, if the revenues produced by the schedules, special order,
                        and stock programs are at least equal to the total cost of operating the
                        supply and procurement business line, FSS has achieved its objective. In
                        fiscal year 1998, net income from the supply and procurement business
                        line was $22 million.

                        Because FSS focuses on recovering costs at the business line level and not
                        at the program or product level, FSS officials said that it is not surprising
                        that the price charged for a given product will not always cover all costs
                        associated with providing that product. On the contrary, the officials said
                        that the price charged for many products sold through the stock program
                        might not be sufficient to ensure that all costs associated with providing a
                        7
                         According to FSS officials, 40 U.S.C. 491 authorizes FSS to retain revenues from the General Supply
                        Fund generated from agencies participating in the interagency fleet management system for the
                        purpose of replacing such motor vehicles and related equipment and supplies. Accordingly, FSS
                        estimated that it needed to retain $135 million and $124 million of the revenues generated in 1997 and
                        1998, respectively, for these purposes. Consequently, there was a revenue deficit of $16 million ($119
                        million minus $135 million) in 1997 and a revenue surplus of $9 million ($133 million minus $124
                        million) in 1998.




                        Page 6                                                GAO/GGD-99-116 Retail Packaging Products
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given product are recovered from the sales of those products. Our analysis
found that this was true for most of the retail packaging products sold at
the prices that were in effect at the beginning of fiscal years 1997 through
1999.

We compared the actual markups that FSS used to establish selling prices
for retail packaging products with the individual product markups
calculated by FSS' cost allocation model. The results of our analysis show
that the selling prices established at the beginning of fiscal year 1997 for all
of the 22 retail packaging products for which we could calculate full cost
recovery prices were insufficient to fully recover FSS' estimated costs of
selling these products. At the beginning of fiscal year 1998, 18 of the 27
retail packaging products, 67 percent, were priced at amounts insufficient
to recover all associated selling costs. At the beginning of fiscal year 1999,
23 of 27 (85 percent) product prices were initially established at levels that
would not fully recover all estimated costs.

Our analysis also showed that both the dollar and percentage differences
between the selling prices and the estimated full cost recovery prices for
retail packaging products were generally greater in 1997 than in the next 2
years. A dramatic example was the video cassette mailer. In dollars, the
full cost recovery price was higher than the selling price at the beginning
of each fiscal year for this product by $356.26 in 1997, $0.94 in 1998, and
$2.72 in 1999. FSS officials told us that the difference between a product's
selling price and its full cost recovery price is influenced by several
factors, including the cost price 8 of the product, historical sales, and
projected sales. These officials explained that if a product has low
projected sales, the cost allocation model calculates a higher
recommended markup than it would if that product had higher projected
sales. This occurs because a product with low projected sales has fewer
units sold to help absorb the assigned costs. The FSS officials also said
that in 1997, some retail packaging products may have had low projected
sales and this, in turn, could have caused the products' estimated full cost
recovery prices to be significantly higher than the products' selling prices.
Appendix II provides the selling prices for each of the retail packaging
products offered at the beginning of the 3 fiscal years and the prices that
would have resulted if FSS had used the individual product markups in
determining product prices.


8An item's cost price is the weighted average cost of that item. The weighted average cost is
calculated on the basis of the cost and quantity of a product in inventory or on order and the additional
quantities expected to be ordered during the pricing period.




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 B-281901




According to FSS officials, the price that FSS pays for each product,
referred to as the cost price, is the beginning point of the pricing process.
Once the cost price for each product is known, FSS pricing officials use
the cost allocation model to assign program costs to each product and
calculate an individual product markup. FSS officials explained that
although the individual product markups represent the most accurate
estimate of how much it costs to sell each product individually, these
markups are not used to determine final product prices. Instead, similar
products are grouped into a federal supply class, and the cost allocation
model calculates an average markup for all items included in each class.
These markups are then adjusted on the basis of the professional judgment
of FSS pricing and supply officials, and the resulting markups become the
recommended pricing markups. The recommended markups are applied
to FSS' cost prices to determine the recommended selling prices.

The list of recommended product selling prices, which are set
semiannually, is then sent to the appropriate commodity centers
responsible for purchasing and managing the products. Item managers
within each commodity center can adjust the recommended selling price
for any product in order to be able to offer competitive prices.
Furthermore, item managers can change the selling price for any product
at any time between the semiannual pricing cycles in order to remain
competitive with the private sector. According to a commodity center
official, item managers typically reduce the selling price to stay
competitive and raise the selling price to cover an increase in costs
resulting, for example, from a higher cost charged by an FSS supplier.

According to FSS officials, although several pricing alternatives were
considered when the Industrial Funding Implementation Plan was
completed in 1988, FSS determined that applying a pricing markup to each
federal supply class would provide the preferred pricing solution. FSS
officials said because they offer thousands of products, prices on these
products can change throughout the year, and FSS needs flexibility to
manage its diverse product lines; it would be impractical and burdensome
to monitor each product to ensure that all associated selling costs were
recovered on an item-by-item basis. In 1996, GSA's Office of Inspector
General completed a review of the process FSS used to price products sold
through the stock program. The study concluded that FSS was generally
pricing products in an efficient and effective manner, and no alternative
pricing methods were identified. 9

9 Advisonr Review on Pricing of FSS Stock Program Items, GSA OIG, Audit Report A51844/F/6N96012
(Mar. 19, 1996).




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                            The fact that many retail packaging products were priced at amounts that
                            do not recover all of FSS' selling costs is not unique or unusual under the
                            stock program. FSS pricing officials with whom we spoke estimated that
                            two-thirds of the approximately 19,000 products sold through the stock
                            program are priced below full cost recovery. To test this estimate, we
                            requested that FSS query its pricing data pertaining to the stock program
                            in February 1999. The results showed that on 78 percent of the 18,946
                            products, the individual product markups-which FSS officials said is the
                            most accurate estimate of how much it costs FSS to sell each product-
                            were higher than the markups that were actually used to determine selling
                            prices. In 1992, we reported a similar situation in which many orders for
                            low-value products that GSA was selling through its stock program depots
                            were being subsidized by revenues from other products.' 0

                            FSS management recognizes that the stock program is facing difficult
                            challenges, including declining sales and changes in customers' shopping
                            habits. Therefore, beginning in January 1999, GSA initiated a study to
                            explore strategic options for the stock program. The study group, which
                            includes senior managers, is focusing on several issues regarding the
                            future of its distribution centers' operations. One option is to explore the
                            possibility of having a new FSS business model for the 21't century. As of
                            May 1999, no decisions had been made on what changes should be made to
                            the stock program, and time frames for making these decisions had not
                            been established. In our prior work, we reported that the Department of
                            Defense (DOD) also has examined its distribution system and achieved
                            some success in reducing the costs of providing medical and food products
                            to its customers and in reducing the quantities of these products in its
                            supply and distribution depots. DOD achieved this success by
                            implementing inventory management best practices developed by the
                            private sector. Among these best practices was the use of direct delivery,
                            whereby the private vendor delivers products directly to the customer
                            instead of to a DOD warehouse."

FSS Applies an Additional   Although the costs FSS incurs in transporting products to its customers
                            are included in the pricing process described above, FSS applies an
                            additional 7-percent charge to retail packaging products to cover the
Retail Packaging Products   increased transportation costs incurred on these products. According to
                            FSS officials, FSS sometimes incurs increased transportation costs

                            '0General Services Administration: Increased Direct Delivery of Supplies Could Save Millions
                            (GAO/GGD-93-32, Dec. 28, 1992).

                            " Inventory Management: Greater Use of Best Practices Could Reduce DOD's Logistics Costs (GAO/T-
                            NSIAD-97-214, July 24, 1997).




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because many of the retail packaging products ordered by the Postal
Service are shipped via the mail, and this mode of transportation is not
generally the most economical available to FSS. FSS uses the mail
because a written agreement between GSA and the Postal Service
stipulates that, when possible, orders shipped to Postal installations will
be mailed.

Because the Postal Service was buying most of FSS' retail packaging
products., officials became concerned that the prices charged for these
products were not sufficient to cover the increased cost of shipping them
via the mail. Consequently, a one-time limited study of the transportation
cost on retail packaging products was completed in March 1995. On the
basis of this study, FSS began to apply an additional 7-percent markup to
retail packaging products sold in fiscal year 1997 and thereafter.

We attempted to verify the basis for this surcharge by reviewing the FSS
transportation cost study. However, we found that there was insufficient
documentation to allow us to determine the specific time period of the
study, the sample size, or the methodology that was used. Given that we
could not independently verify the merits of the 7-percent surcharge, we
did a limited analysis of the costs of shipping retail packaging products
using FSS-supplied data on orders that were shipped from three
distribution centers.

 On these orders, we compared the actual shipping costs of retail packaging
products with the costs that FSS would have incurred if a more
economical mode of transportation had been used. Our analysis showed
that at two of the three locations the 7-percent surcharge used by FSS
exceeded the added transportation costs associated with retail packaging
products. Specifically, at the Fort Worth and Franconia distribution
centers, we found that a 4-percent and 6-percent surcharge, respectively,
would have covered the additional transportation costs for the retail
packaging products included in our analysis. However, at the Burlington
Distribution Center, we found that a surcharge of approximately 10
percent would have been necessary to fully cover the additional
transportation costs on the products we reviewed. As noted above, our
analysis of transportation costs was limited and was conducted only to get
a rough idea about the accuracy of FSS' 7-percent surcharge. Therefore,
the results of our analysis cannot be projected to the universe of retail
packaging products shipped by each center or sold by FSS. Appendix I
provides more details on our methodology for analyzing transportation
costs and the orders that we reviewed.



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                  The applicable federal statute gives GSA considerable discretion in
Conclusions       determining how it is to achieve full cost recovery on products and
                  services sold through the General Supply Fund. Consequently, GSA is not
                  required to, nor does it, price all of its products at levels that will ensure
                  that all costs associated with selling each item individually are recovered
                  from the sale of the product. The prices that GSA set centrally for most of
                  the retail packaging products it sold in fiscal years 1997, 1998, and 1999
                  were not sufficient to recover all estimated costs associated with selling
                  each individual product. Nevertheless, we agree with GSA that the method
                  it has chosen to achieve full cost recovery is within its discretion under the
                  statute as long as the revenues obtained from all the products and services
                  sold under the General Supply Fund cover the expenses of operating the
                  fund.

                  On the other hand, a question that remains unanswered is whether GSA
                  should sell the majority of its products at prices that do not recover all
                  associated selling costs. GSA's ongoing study of its stock program may
                  shed some light on this issue, if the study specifically addresses the costs
                  and benefits of the stock program to GSA and its customers.

                  On June 9, 1999, FSS Assistant Commissioners for Business Management
Agency Comments   and Marketing and the Office of Distribution Management, their related
                  staff, and the Special Assistant to the FSS Controller provided oral
                  comments on a draft of this report. They agreed with the results of our
                  analysis and the message of the report. They also provided technical
                  comments, which we incorporated into this report to improve the clarity of
                  our description of the General Supply Fund and the cost allocation model.
                  On June 15, 1999, the U.S. Postal Service's liaison to GAO said that the
                  Service had no comments on a draft of this report.

                  We are sending copies of this report to Senator George V. Voinovich,
                  Chairman, and Senator Richard Durbin, Ranking Minority Member,
                  Subcommittee on Oversight of Government Management, Restructuring,
                  and the District of Columbia, Senate Committee on Governmental Affairs;
                  Representative Jim Kolbe, Chairman, and Representative Steny H. Hoyer,
                  Ranking Minority Member, Subcommittee on Treasury, Postal Service and
                  General Government, House Committee on Appropriations; Representative
                  Steve Horn, Chairman, and Representative Jim Turner, Ranking Minority
                  Member, Subcommittee on Government Management, Information and
                  Technology, House Committee on Government Reform; Senator Kay
                  Bailey Hutchinson; the Honorable David J. Barram, Administrator, General
                  Services Administration; and Mr. William J. Henderson, Postmaster
                  General. We will also send copies to other interested congressional


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committees and subcommittees and make copies available to others on
request.

Major contributors to this report are acknowledged in appendix III. If you
or your staffs have any questions, please contact me on (202) 512-8387 or
at ungarb.ggd@gao.gov.




Bernard L. Ungar
Director, Government Business
 Operations Issues




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Page 13   GAO/GGD-99-116 Retail Packaging Products
Contents


Letter                                                                                                     1
Appendix I                                                                                               16
Objectives, Scope, and
Methodology
Appendix II                                                                                              19
Comparison of Retail
Packaging Products'
Selling Prices With
Prices Calculated
Using Full Cost
Recovery Markups
Appendix III                                                                                             22
GAO Contacts and
Staff
Acknowledgments
Tables                   Table Il:.1: GSA's Fiscal Year 1997 Selling Prices vs. Full                     19
                           Cost Recovery Prices
                         Table 11.2: GSA's Fiscal Year 1998 Selling Prices vs. Full                      20
                           Cost Recovery Prices
                         Table II.3: GSA's Fiscal Year 1999 Selling Prices vs. Full                      21
                           Cost Recovery Prices




                         Abbreviations

                         FSS            Federal Supply Service
                         GSA            General Services Administration
                         USPS           U.S. Postal Service
                         DOD            Department of Defense




                         Page 14                                    GAO/GGD-99-116 Retail Packaging Products
Page 15   GAO/GGD-99-116 Retail Packaging Products
Appendix I

Objectives, Scope, and Methodology


               Our objectives were to determine (1) whether the General Services
               Administration (GSA) is required by law to set its prices for retail
               packaging products at levels sufficient to ensure that all selling costs are
               recovered on each item and (2) whether GSA's selling prices for these
               products do recover all costs. In doing our work, we primarily performed
               audit work at GSA's Federal Supply Service (FSS) headquarters located in
               Arlington, VA. We also performed audit work at the FSS Office Supplies
               and Paper Products Center in New York, NY; the Southwestern
               Distribution Center in Fort Worth, TX; the Northeast Distribution Center in
               Burlingt;on, NJ; and a Forward Supply Point in Franconia, VA. In addition,
               we interviewed an official from T&S Products, a private company that
               competes with GSA to supply retail packaging products to the United
               States Postal Service (USPS).

               To meet the first objective, we reviewed the applicable statutory provision,
               40 U.S.C. 756, relating to the pricing of products and services that FSS sells
               to federal agencies and other customers under the General Supply Fund.
               We also reviewed a court case in which a private company sued GSA
               alleging that GSA's pricing of retail packaging products was in violation of
               40 U.S.C. 756. Additionally, we met with officials from GSA's Office of
               Genera] Counsel to discuss the statutory requirements pertaining to
               product pricing. Finally, we reviewed and summarized a prior GSA Office
               of Inspector General report dealing with the subject of product pricing.

              To meet our second objective, we assessed FSS' pricing policy and
              procedures pertinent to retail packaging products and other items sold
              through the stock and procurement business line. We determined whether
              the pricing policy and procedures were within GSA's discretion under 40
              U.S.C. 756(b), which provides that product prices be fixed at levels so as to
              recover, so far as practicable, the applicable purchase price, and
              transportation and other direct and indirect costs associated with selling
              the products. We examined how FSS determined prices for retail
              packaging products in fiscal years 1997, 1998, and 1999.

              In completing our examination, we reviewed how the cost allocation
              model was used in the product pricing process and the assumptions and
              data that were used in determining the final product prices. We then
              determined whether the prices set for retail packaging products at the
              beginning of fiscal years 1997, 1998, and 1999 were sufficient to recover, so
              far as practicable, the estimated costs associated with selling each item.
              We did this by using FSS accounting and cost data, including the weighted
              average cost price for each product, individual product markups



              Page 16                                  GAO/GGD-99-116 Retail Packaging Products
Appendix I
Objectives, Scope, and Methodology




calculated by FSS' cost allocation model, and the actual product selling
prices, as of the beginning of each fiscal year.

Specifically, we compared the selling prices for each of the retail
packaging products with the prices that would have been charged if FSS
officials had applied the individual product markups. Our analysis
assumed that the individual product markups represent the most accurate
estimates of what it actually costs FSS to sell each product. We used the
individual product markups and selling prices for products ordered
through FSS' Customer Supply Centers because a large majority of retail
packaging products were ordered through these centers. While performing
our price analyses, we conducted limited testing on a sample of the FSS
cost and pricing data to determine the age, accuracy, and reasonableness
of these data. We also verified FSS' cost prices for retail packaging
products by reviewing samples of contracts and inventory information.

In examining the transportation costs associated with retail packaging
products, we attempted to evaluate the FSS study that was completed in
1994 and its corresponding conclusion that an additional 7-percent markup
should be applied to these products. Our evaluation of this study was,
however, severely limited because we could not independently determine
the specific time period, sample size, or methodology that was used in the
study. Consequently, we tested the accuracy of the additional markup by
analyzing orders provided to us by FSS officials that included retail
packaging products. These orders were shipped from distribution centers
located in Burlington, NJ; Fort Worth, TX; and Franconia, VA. We verified
the accuracy of these orders before conducting our analyses. We examined
57 orders from Fort Worth that were shipped from January 28 through
January 31, 1999, and 50 orders shipped from Franconia, VA, from January
4 through January 29, 1999. We also examined 436 orders placed with the
Burlington center from February 1 through February 5, 1999. We used the
placement date in analyzing the Burlington data because some files
provided by FSS for this location did not specify shipping dates for the
orders.

Using the data from each distribution site, we determined the total dollar
value of sales, transportation costs, and the costs of using an alternative
transportation method for retail packaging products. We used this
methodology because GSA has an agreement with USPS that it will, when
possible, ship all mailable items to Postal facilities by the U.S. mail.
According to GSA officials, this method of transportation was frequently
used for retail packaging products, and it is often more expensive than
other methods of transportation. In analyzing the Fort Worth and


Page 17                                 GAO/GGD-99-116 Retail Packaging Products
Appendix I
Objectives, Scope, and Methodology




Burlington shipments we allocated the total actual and alternative
transportation costs to each item on a per pound basis. For the orders
shipped from Franconia, we did not have to complete this allocation
because the actual transportation costs could be reconstructed from
existing data. To enable us to calculate the alternative transportation cost,
FSS officials provided the lowest transportation cost that FSS would have
incurred if the USPS shipping requirements did not apply. We then
determined the difference between the actual and alternative
transportation costs and calculated the markup needed to recover the
additional transportation costs for each distribution center. Because of the
way the! locations were selected and orders were obtained, we could not
combine the results of our analysis or project them to the population of
retail packaging products sold by each center or by FSS overall.

We did our work between November 1998 and May 1999, in accordance
with generally accepted government auditing standards. We did not,
however, validate the accuracy of all data that are included in the FSS cost
allocation model, and the results of our price analysis are not projectable
to all products sold by GSA. We requested comments on a draft of this
report from GSA's Administrator and the Postmaster General. GSA
officials orally provided technical comments, which we incorporated in the
final report. The Postal Service had no comments.




Page 18                                 GAO/GGD-99-116 Retail Packaging Products
Appendix II

Comparison of Retail Packaging Products'
Selling Prices With Prices Calculated Using
Full Cost Recovery Markups
Table 11.1: GSA's Fiscal Year 1997 Selling Prices vs. Full Cost Recovery Prices
                                                                                                           Full cost                          Percent
National stock number     Item description--quantity                         FSS sell price' recovery priceb Difference' differenced
7510-01-383-7967          Tape, with dispenser 2"X22'-6/package                         $7.37                  $8.40           $(1.03)              (14)
7520-01-368-3499          Stamp dispenser, plastic-25/box                                 3.51                   3.92           (0.41)              (12)
7530-01-372-3098          White envelope 6"X9"-50/box                                     4.51                 10.25            (5.74)             (127)
7530-01-372-3099          White envelope 9"X12"--50/box                                   5.47                   9.78           (4.31)              (79)
7530-01-372-3100          Green border envelope 10"X13"-50/box                            5.66                 14.37            (8.71)             (154)
7530-01-372-3104          White envelope 6"X9"-250/box                                  14.97                  22.46            (7.49)              (50)
7530-01-372-3113          White envelope 9"X12"-250/box                                 18.14                  21.64            (3.50)              (19)
7530-01-372-3114          Green border envelope 10"X13"-250/box                         22.54                  24.72            (2.18)              (10)
8105-00-281-1169          Shipping sack 14-1/4"X20"-50/package                          17.93                  21.79            (3.86)               (22)
8105-00-281-1436          Shipping sack 10-1/2"X16"-100 sacks                           23.12                  28.03            (4.91)               (21)
8105-01-385-7246          Shipping sack 6"X10"-50/package                                 8.60               258.18          (249.58)           (2,902)
8105-01-385-7396          Shipping sack 8-1/2"X12"-1 00/package                         19.79                 112.03           (92.24)             (466)
8105-01-385-7584          Shipping sack 10-1/2"X1 6"-50/package                         16.58                  67.22           (50.64)             (305)
8105-01-386-2181          Video cassette mailer-25/package                              15.16                371.42          (356.26)           (2,350)
8105-01-386-2189          Audio cassette mailer-25/package                                5.66                102.57           (96.91)          (1,712)
8105-01-386-2202          Diskette mailer-25/package                                      9.65        Not available Not available Not available
8105-01-386-2209          Shipping sack 6"X10"-250/package                              37.20                 115.37           (78.17)             (210)
8105-01-386-2217          Shipping sack 8-1/2"X1 2"-50/package                           10.48                270.45         (259.97)           (2,481)
8105-01-434-3492          Photo mailer 9-3/4"X12"--25/package                   Not available         Not available Not available Not available
8110-01-386-2192          Square mailing tube 24"X3"X3"-15/bundle                       19.24         Not available Not available Not available
8110-01-386-2214          Square mailing tube 36"X3"X3"-15/bundle                       20.75         Not available Not available Not available
8115-01-357-9995          Shipping box 18"X12-1/2"X3"--15/bundle                         14.84                  16.93           (2.09)               (14)
8115-01-357-9996          Shipping box 8"X8"X8"--15/bundle                                8.00                  11.64           (3.64)               (46)
8115-01-357-9997          Shipping box 15"X12"X10"-15/bundle                            17.18                   19.26           (2.08)               (12)
8115-01-364-9492          Shipping box 20"X14"X10"-15/bundle                            22.39                  25.29            (2.90)               (13)
8115-01-386-2238          Shipping box 20"X20"X20"-1 5/bundle                           35.91         Not available Not available Not available
8135-01-381-6525          Bubblewrap 16"X108'X3/16"--12/package                         18.67                  23.56            (4.89)               (26)
                                             Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that
                                             product during the fiscal year because each of the products may have been sold at different prices
                                            throughout the year, and the quantities of products sold at these different prices were not readily
                                            available.
                                             Note 2: Parentheses denote the number is negative.
                                             'Sell price effective beginning on October 1,1996, for products sold through the Customer Supply
                                             Centers. All product selling prices are subject to change inApril of each year and may be changed
                                             throughout the year by item managers.
                                             bThe full cost recovery price represents the cost price plus the individual product pricing markup as
                                             calculated by FSS' cost allocation model. According to FSS, the individual product markup
                                             represents the most accurate estimate of how much it costs FSS to sell each item individually.
                                            'According to FSS, the higher difference between a product's sell price and its full cost recovery price
                                             may be due to low projected sales volume. The costs allocated to each unit are higher on a product
                                             with low projected sales than on a product with high projected sales because the product with low
                                             projected sales has fewer units sold to absorb the costs. As a result, a low sales projection for a
                                             product could cause that product's full cost recovery price to be significantly higher than its selling
                                             price.
                                             dThe difference as a rounded percentage of the FSS sell price.
                                             Source: GAO analysis of FSS' cost and sell prices and markups for retail packaging products.




                                                Page 19                                                GAO/GGD-99-116 Retail Packaging Products
                                               Appendix II
                                               Comparison of Retail Packaging Products' Selling Prices With Prices Calculated Using Full
                                               Cost Recovery Markups




Table 11.2: GSA's Fiscal Year 1998 Selling Prices vs. Full Cost Recovery Prices
                                                                                                        Full cost                            Percent
National stock number    Item description--quantity                         FSS sell price' recovery priceb               Difference' differenced
7510-01-383-7967         Tape, with dispenser 2"X22'--6/package                        $7.61                $6.23               $1.38                 18
7520-01-368-3499         Stamp dispenser, plastic-25/box                                 3.99                 6.63              (2.64)             (66)
7530-01-372-3098         White envelope 6"X9"-50/box                                     8.98                10.20              (1.22)             (14)
7530-01-372-3099         White envelope 9"X 12"-50/box                                 10.18                 12.20              (2.02)             (20)
7530-01-372-3100         Green border envelope 10"X13"--50/box                           9.84                13.44              (3.60)             (37)
7530-01-372-3104         White envelope 6"X9"-250/box                                  27.30                24.58                 2.72                10
7530-01-372-3113         White envelope 9"X12"-250/box                                 33.35                28.39                 4.96                15
7530-01-372-3114         Green border envelope 10"X13"-250/box                         37.69                 32.60                5.09                14
8105-00-281-1169         Shipping sack 14-1/4"X20"--50/package                          19.93                20.78              (0.85)                (4)
8105-00-281-1436         Shipping sack 10-1/2"X16"--100 sacks                          28.13                 28.81              (0.68)                (2)
8105-01-385-7246         Shipping sack 6"X10"-50/package                                 8.89                12.63              (3.74)              (42)
8105-01-385-7396         Shipping sack 8-1/2"X12"-100/package                          16.46                 16.67              (0.21)                (1)
8105-01-385-7584         Shipping sack 10-1/2"X16"--50/package                         16.08                 23.72              (7.64)              (48)
8105-01-386-2181         Video cassette mailer-25/package                               11.18                12.12              (0.94)                (8)
8105-01-386-2189         Audio cassette mailer-25/package                                5.03                  6.32             (1.29)              (26)
8105-01-386-2202         Diskette mailer-25/package                                      7.55                  8.83             (1.28)              (17)
8105-01-386-2209         Shipping sack 6"X10"-250/package                              29.32                 28.14                 1.18                 4
8105-01-386-2217         Shipping sack 8-1/2"Xl2"-50/package                            10.58                16.91              (6.33)              (60)
8105-01-434-3492         Photo mailer 9-3/4"X1 2"-25/package                           12.27                 11.49                 0.78                 6
8110-01-386-2192         Square mailing tube 24"X3"X3"-15/bundle                       17.49                 21.35              (3.86)              (22)
8110-01-386-2214         Square mailing tube 36"X3"X3"-15/bundle                       18.85                 23.21              (4.36)              (23)
8115-01-357-9995         Shipping box 18"X12-1/2"X3"-15/bundle                         10.82                 10.78                 0.04                 0
8115-01-357-9996         Shipping box 8"X8"X8"-1 5/bundle                                5.32                  7.58             (2.26)              (42)
8115-01-357-9997         Shipping box 15"X12"X10"--15/bundle                             9.90                11.56              (1.66)              (17)
8115-01-364-9492         Shipping box 20"X14"X10"--1 5/bundle                           14.05                15.27              (1.22)                (9)
8115-01-386-2238         Shipping box 20"X20"X20"--1 5/bundle                          27.36                 26.07                 1.29                 5
8135-01-381-6525         Bubblewrap 16"X108'X3/16"-12/package                           17.45                16.14                 1.31                 8
                                            Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that
                                            product during the fiscal year because each of the products may have been sold at different prices
                                            throughout the year, and the quantities of products sold at these different prices were not readily
                                            available.
                                            Note 2: Parentheses denote the number is negative.
                                            'Sell price effective beginning on October 1, 1997, for products sold through the Customer Supply
                                            Centers. All product selling prices are subject to change inApril of each year and may be changed
                                            throughout the year by item managers.
                                            bThe full cost recovery price represents the cost price plus the individual product pricing markup as
                                            calculated by the FSS' cost allocation model. According to FSS, the individual product markup
                                            represents the most accurate estimate of how much itcosts FSS to sell each item individually.
                                            'According to FSS, the higher difference between a product's sell price and its full cost recovery price
                                            may be due to low projected sales volume. The costs allocated to each unit are higher on a product
                                            with low projected sales than on a product with high projected sales because the product with low
                                            projected ,sales has fewer units sold to absorb the costs. As a result, a low sales projection for a
                                            product cculd cause that product's full cost recovery price to be significantly higher than its selling
                                            price.
                                            dThe difference as a rounded percentage of the FSS sell price.
                                            Source: GAO analysis of FSS' cost and sell prices and markups for retail packaging products.




                                               Page 20                                                GAO/GGD-99-116 Retail Packaging Products
                                               Appendix II
                                               Comparison of Retail Packaging Products' Selling Prices With Prices Calculated Using Full
                                               Cost Recovery Markups




Table 11.3: GSA's Fiscal Year 1999 Selling Prices vs. Full Cost Recovery Prices
                                                                                                            Full cost                          Percent
National stock number     Item description--quantity                          FSS sell price' recovery priceb               Difference c differenced
7510-01-383-7967          Tape, with dispenser 2"X22'-6/package                          $7.97                  $6.44              $1.53               19
7520-01-368-3499          Stamp dispenser, plastic-25/box                                 4.35                    7.63            (3.28)             (75)
7530-01-372-3098          White envelope 6"X9"-50/box                                     2.44                    3.42            (0.98)             (40)
7530-01-372-3099          White envelope 9"X12"-50/box                                    4.17                    6.45            (2.28)             (55)
7530-01-372-3100          Green border envelope 10"X13"-50/box                            5.17                    7.22            (2.05)             (40)
7530-01-372-3104          White envelope 6"X9"-250/box                                   10.66                  11.14             (0.48)               (5)
7530-01-372-3113          White envelope 9"X12"-250/box                                  16.73                  17.01             (0.28)               (2)
7530-01-372-3114          Green border envelope 10"X13"-250/box                          18.96                  18.89               0.07                 0
8105-00-281-1169          Shipping sack 14-1/4"X20"-50/package                           20.00                  21.97              (1.97)            (10)
8105-00-281-1436          Shipping sack 10-1/2"X16"-100 sacks                            23.66                  25.64              (1.98)              (8)
8105-01-385-7246          Shipping sack 6"X10"-50/package                                  8.57                  13.28             (4.71)            (55)
8105-01-385-7396          Shipping sack 8-1/2"X12"-1 00/package                          17.25                  18.70              (1.45)              (8)
8105-01-385-7584          Shipping sack 10-1/2"X1 6"-50/package                          17.09                  25.27              (8.18)            (48)
8105-01-386-2181          Video cassette mailer-25/package                               12.34                   15.06             (2.72)            (22)
8105-01-386-2189          Audio cassette mailer-25/package                                 5.01                   7.84             (2.83)            (56)
8105-01-386-2202          Diskette mailer-25/package                                       7.58                   9.16             (1.58)            (21)
8105-01-386-2209          Shipping sack 6"X10"-250/package                               36.24                  35.82                0.42                1
8105-01-386-2217          Shipping sack 8-1/2"X12"--50/package                           10.63                   18.18             (7.55)            (71)
8105-01-434-3492          Photo mailer 9-3/4"X12"-25/package                               8.68                   9.81             (1.13)            (13)
8110-01-386-2192          Square mailing tube 24"X3"X3"-15/bundle                        10.21                   12.41             (2.20)            (22)
8110-01-386-2214          Square mailing tube 36"X3"X3"-15/bundle                        11.51                   13.70             (2.19)            (19)
8115-01-357-9995          Shipping box 18"X12-1/2"X3"-15/bundle                          11.12                   12.80             (1.68)            (15)
8115-01-357-9996          Shipping box 8"X8"X8"-15/bundle                                  6.30                  10.77             (4.47)            (71)
8115-01-357-9997          Shipping box 15"X12"X10"-15/bundle                             12.19                   14.75             (2.56)            (21)
8115-01-364-9492          Shipping box 20"X14"X10"--15/bundle                            16.32                   18.42             (2.10)            (13)
8115-01-386-2238          Shipping box 20"X20"X20"-1 5/bundle                            32.76                   36.74             (3.98)            (12)
8135-01-381-6525          Bubblewrap 16"X108'X3/16"-12/package                           18.98                   18.02               0.96                5
                                              Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that
                                              product during the fiscal year because each of the products may have been sold at different prices
                                             throughout the year, and the quantities of products sold at these different prices were not readily
                                              available.
                                              Note 2: Parentheses denote the number is negative.
                                             "Sell price effective beginning on October 1, 1998, for products sold through the Customer Supply
                                              Centers. All product selling prices are subject to change inApril of each year and may be changed
                                              throughout the year by item managers.
                                              bThe full cost recovery price represents the cost price plus the individual product pricing markup as
                                              calculated by FSS' cost allocation model. According to FSS, the individual product markup represents
                                             the most accurate estimate of how much it costs FSS to sell each item individually.
                                             'According to FSS, the higher difference between a product's sell price and its full cost recovery price
                                              may be due to low projected sales volume. The costs allocated to each unit are higher on a product
                                              with low projected sales than on a product with high projected sales because the product with low
                                              projected sales has fewer units sold to absorb the costs. As a result, a low sales projection for a
                                              product could cause that product's full cost recovery price to be significantly higher than its selling
                                              price.
                                              dThe difference as a rounded percentage of the FSS sell price.
                                              Source: GAO analysis of FSS' cost and sell prices and markups for retail packaging products.




                                                Page 21                                                GAO/GGD-99-116 Retail Packaging Products
Appendix III

GAIO Contacts and Staff Acknowledgments


                  Bernard Ungar (202) 512-8387
GAO Contacts

                  In addition to the individual named above, Gerald Stankosky, James
Acknowledgments   Cooksey, William Dowdal, Jeff Kaser, Alan Belkin, and Susan Michal-Smith
                  also made key contributions to this report.




                  Page 22                              GAO/GGD-99-116 Retail Packaging Products