Report to the Chairman and Ranking 

Member, Special Panel on Postal 

Reform & Oversight, Committee on 

Government Reform, House of 

Representatives 

United States General Accounting Office 

GAO

May 2004 POSTAL SERVICE

Progress in 

Implementing Supply 

Chain Management 

Initiatives 

GAO-04-540 
www.gao.gov/cgi-bin/getrpt?GAO-04-540.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David Cooper 

at (202) 512-4841 or cooperd@gao.gov. 

Highlights of GAO-04-540, a report to the 

Chairman and Ranking Member, Special 

Panel on Postal Reform & Oversight, 

Committee on Government Reform, 

House of Representatives 

May 2004

POSTAL SERVICE

Progress in Implementing Supply Chain 

Management Initiatives 

The Postal Service has had mixed success in implementing the supply chain 

management initiatives we reviewed: the bulk fuel program; reverse auctions 

for transportation contracts; and national contracts for boxes, custodial 

supplies, labels, retail packaging, and tires. The Postal Service reported over 

$78 million in fiscal year 2003 savings and revenue from these initiatives. 

However, the Postal Service has been unable to recover millions of dollars in 

potential savings because of implementation problems with the bulk fuel 

program. For other savings initiatives, baseline data used to calculate 

savings were, in some cases, inaccurate or could not be validated because 

the Postal Service lacks a system for harnessing annual spending data. 

Three Major Savings Initiatives Have Encountered Difficulties 

Initiative Intended benefit Challenges 

Bulk fuel program Leverage Postal

Service’s buying power 

of millions of gallons of 

diesel fuel purchased by 

highway contractors 

who deliver mail to U.S. 

distribution centers 

Postal Service projected $18 million in annual 

savings but reported only $1.1 million in savings 

for fiscal year 2003; many highway contractors 

have been reluctant to participate in the program; 

millions of dollars will not be recouped due to lack 

of automated system to accurately adjust fuel 

prices. 

Reverse auctions Enable highway 

contractors to compete 

for contracts by using 

Web-based bidding 

Over $5.9 million in savings were reported for 

fiscal year 2003; $2.1 million of this amount is 

questionable because of incorrect baseline data; 

some auction procedures may not elicit best price. 

National contracts Consolidate smaller 

contracts for goods and 

services into large, 

nationwide contracts 

$71.1 million in savings and revenue were reported 

for fiscal year 2003 under the national contracts 

GAO reviewed; GAO could not validate this 

amount because the Postal Service has no 

accurate baseline information on how much was 

spent on these commodities prior to the supply 

chain management initiative. 

Source: GAO’s analysis of Postal Service data. 

Since the Postal Service started using the national contracts GAO reviewed, 

the number of small business suppliers has dropped dramatically. 

Acquisition plans for most of these contracts did not address small business 

participation, either at the prime or subcontractor level. GAO could not 

determine the effect that the bulk fuel program and reverse auctions have 

had on small businesses because Postal Service contracting officers and 

contractors have been using incorrect business size standards, and, as a 

result, the reported small business accomplishments are not accurate. 

Further, the Postal Service’s new supplier diversity policy does not establish 

targets for contracting with small businesses. Therefore, the Postal Service 

will have difficulty gauging the effect of supply chain management initiatives 

on these businesses and holding contracting officers accountable for 

implementing the policy’s objective of ensuring improvement in the Postal 

Service’s relationships with small businesses. 

The Postal Service is on the cusp of 

a major transformation to improve 

its fiscal outlook. One part of this 

transformation involves 

procurement. The Postal Service is 

homing in on supply chain 

management, a process that has 

helped successful private-sector 

companies leverage their buying 

power and identify more efficient 

ways to procure goods and 

services. 

To assist congressional efforts to 

enact fundamental postal reform, 

GAO was asked to determine 

(1) the extent to which the Postal 

Service has been successful in 

implementing and realizing savings 

from its supply chain management 

initiatives and (2) whether these 

initiatives have had an effect on 

small businesses. 

GAO is recommending that the 

Postal Service improve 

implementation of its bulk fuel 

program, consider adjustments to 

reverse auction procedures, and 

focus more attention on small 

businesses in carrying out supply 

chain management initiatives. In 

written comments on a draft of this 

report, the Postal Service generally 

agreed with our recommendations 

and stated that it will consider 

reestablishing small business 

targets if current achievements 

begin to slip. GAO believes the 

Postal Service should have a 

mechanism in place to ensure 

accountability and transparency 

in its small business contracting.
Page i GAO-04-540 Postal Service Contracting 

Letter 1

Results in Brief 3

Background 4

Success of Savings Initiatives Has Been Mixed, and Some Reported 

Savings Cannot Be Validated 7

More Attention Needed to Ensure Small Business Participation in 

Supply Chain Management Initiatives 15

Conclusions 19

Recommendations for Executive Action 19

Agency Comments and Our Evaluation 20

Appendix I Scope and Methodology 23 

Appendix II Comments from the U.S. Postal Service 25 

Tables 

Table 1: Reported Savings/Revenue for Fiscal Year 2003 from Five 

National Contract Initiatives 13

Table 2: Effect of National Contracts on Small Business 

Participation 15

Abbreviation 

SBA Small Business Administration 

Contents 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-540 Postal Service Contracting 

May 17, 2004 

The Honorable John M. McHugh 

Chairman 

The Honorable Danny K. Davis 

Ranking Member 

Special Panel on Postal Reform & Oversight 

Committee on Government Reform 

House of Representatives 

The United States Postal Service faces formidable financial, operational, 

and human capital challenges because of unfunded liabilities, stagnant 

revenues, inefficient operations, and a business model that is 

unsustainable. The increasing popularity of e-mail, instant messaging, and 

wireless technology, to name a few, poses a long-term threat to the Postal

Service’s core business—First-Class Mail (primarily letters) and Standard 

Mail (primarily advertising). In April 2001, we placed the Postal Service’s 

transformation and long-term outlook on our high-risk list,1

 and we 

recently reported that comprehensive Postal Service reform is urgently 

needed. While the Postal Service achieved notable success in fiscal year 

2003, this respite is likely to be short-lived because First-Class Mail 

continues to decline, key costs are rising, and productivity gains are likely 

to slow.2

In the face of these challenges, the Postal Service has been under pressure 

to cut costs while improving overall performance. Part of its reform 

strategy is to find more efficient ways to procure goods and services. In 

fiscal year 2003 alone, the Postal Service spent over $11.3 billion on such 

items as supplies, services, rent, and transportation. To reduce spending, 

Postal Service officials have been focusing on supply chain management, 

the process used to integrate the flow of goods and services from the 

 1

 The high-risk list identifies federal programs or operations that are highly vulnerable to 

waste, fraud, abuse, and mismanagement or that require urgent attention to ensure that the 

government functions in the most economical, efficient, and effective manner possible. 

2

 U.S. General Accounting Office, Major Management Challenges and Program Risks: 

U.S. Postal Service, GAO-01-262 (Washington, D.C.: Jan. 2001); U.S. Postal Service: Bold 

Action Needed to Continue Progress on Postal Transformation, GAO-04-108T

(Washington, D.C.: Nov. 5, 2003); U.S. Postal Service: Key Elements of Comprehensive 

Postal Reform, GAO-04-397T (Washington, D.C.: Jan. 28, 2004). 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-540 Postal Service Contracting 

suppliers to delivery of the end product to the retail customer. 

Commercial companies use this management process to help reduce costs 

and to do business in the most efficient way possible. Since fiscal year 

2000, with the help of supply chain management initiatives, the Postal 

Service reported that it has saved about $866 million by leveraging its 

buying power and insisting on continuous improvement. 

To assist congressional efforts to enact fundamental postal reform, you 

asked us to determine (1) the extent to which the Postal Service has been 

successful in implementing and realizing savings from its supply chain 

management initiatives and (2) whether these initiatives have had an effect 

on small businesses. The Postal Service is an independent establishment 

of the government’s executive branch that is expected to act like a 

business and is not subject to the Small Business Act.3

 Nevertheless, the 

Postal Service has developed a 3-year plan to maintain a supplier base that 

includes small, minority-owned, and woman-owned businesses and tracks 

contracts awarded to those businesses.4

 As agreed, we focused our work 

on three major supply chain management initiatives: 

• bulk fuel program, an effort to leverage the Postal Service’s buying power 

for the millions of gallons of fuel purchased by highway contractors who 

transport mail;5

• reverse auctions, a Web-based tool that enables highway contractors to 

compete for contracts in an electronic bidding format; and 

• national contracts, the consolidation of smaller contracts for goods and 

services into large, nationwide contracts.6

We conducted our review from July 2003 to April 2004 in accordance with 

generally accepted government auditing standards. Details on our scope 

and methodology are discussed in appendix I. 

 3

 15 U.S.C. section 632(b). 

4

 Minority- and woman-owned businesses can be large or small. 

5

 The bulk fuel program for highway contractors is one component of the Postal Service’s 

fuel management program. The fuel management program is intended to provide quality 

fuel for postal contractors and Postal Service-owned vehicles and to reduce postal 

expenses associated with purchase and delivery of fuel. 

6

 In an earlier report, we addressed one of those national contracts—an office supply 

contract awarded to Boise Corporation. U.S. General Accounting Office, Contract 

Management: Postal Service’s National Office Supply Contract Has Not Been Effectively 

Implemented, GAO-03-230 (Washington, D.C.: Jan. 17, 2003). 
Page 3 GAO-04-540 Postal Service Contracting 

The Postal Service has had mixed success in implementing the supply 

chain management initiatives we reviewed, as discussed below. Although 

the Postal Service reported over $78 million in fiscal year 2003 savings and 

revenue from these initiatives, in some cases the baseline data used to 

calculate the savings are inaccurate or unverifiable. 

• Bulk fuel program: This savings initiative has gotten off to a slow start and 

has been plagued by implementation problems that became apparent 

during a pilot program that ended two years ago. The Postal Service 

originally projected $18 million in annual savings under this program, but 

reported only $1.1 million in savings for fiscal year 2003. The Postal 

Service has repeatedly scaled back its projections after realizing that some 

highway contractors have a strong preference for buying fuel from their 

own suppliers instead of from national suppliers designated by the Postal 

Service. The Postal Service has also been unable to increase the number of 

fueling locations available for highway contractors under the bulk fuel 

program. Further, the Postal Service has not yet implemented an 

automated system for adjusting fuel prices, which fluctuate on a weekly 

basis and can be significantly higher or lower than the values specified in 

highway contracts. Thus, the Postal Service must go through a tedious 

manual process to make accurate fuel price adjustments to the contract 

prices in order to recoup savings. The process is so labor-intensive and 

time-consuming that the Postal Service has thus far been unable to 

capture millions of dollars in potential savings. 

• Reverse auctions: The Postal Service has had some success with this 

bidding tool and has used it increasingly in the past year. In some cases, 

however, the Postal Service may not have obtained the lowest prices 

possible because only one bid was received or competing contractors may 

not have had sufficient time to submit their final bids. Fiscal year 2003 

savings were reported as over $5.9 million. We found that $2.1 million of 

these savings are questionable, however, due to such factors as inadequate 

baseline data and lack of competition during the auctions. 

• National contracts: The Postal Service has begun to take steps to 

consolidate its spending on selected commodities in an effort to leverage 

its buying power, reducing the number of suppliers for the commodities 

we reviewed and directing employees to purchase their supplies from 

national contracts. It claimed $71.1 million in savings and revenue in fiscal 

year 2003 from the national contracts we reviewed: boxes, custodial 

products, labels, retail packaging, and tires. However, because the Postal 

Service lacked accurate baseline data on what it had spent on these 

commodities prior to the supply chain management initiative, we were 

unable to validate the reported savings and revenue. The lack of accurate 

Results in Brief 
Page 4 GAO-04-540 Postal Service Contracting 

baseline data is not a problem unique to the Postal Service; in our prior 

work, we found that commercial companies also struggled to establish 

reliable baseline data when their spending on goods and services was 

highly decentralized. 

According to Postal Service reports, the national contract initiative has 

resulted in a decrease in small business prime contracts for the 

commodities we reviewed. In planning these purchases, Postal Service 

officials did not in most cases proactively explore options for keeping 

small businesses involved, either as prime or subcontractors. This 

situation runs counter to the intent of the Postal Service’s supplier 

diversity program, which states that each purchase plan must demonstrate 

active efforts to use small, minority-owned, and woman-owned businesses. 

We were unable to determine the effect of the bulk fuel and reverse 

auction initiatives on small businesses because Postal Service contracting 

officers and contractors have consistently used incorrect small business 

size standards. Thus, the Postal Service’s report that small highway 

contractors received $2.3 billion, representing a majority of the Postal 

Service’s fiscal year 2003 small business contracts, is unreliable. As the 

Postal Service continues to implement its supply chain management 

initiatives, it will be unable to measure the effect of these initiatives on 

small businesses because its new supplier diversity policy no longer 

includes targets for contract dollars awarded to these businesses. 

We are recommending that the Postmaster General of the United States 

take actions to improve implementation of the bulk fuel program, refine 

reverse auction savings estimates and procedures, and focus more 

attention on small business issues in carrying out supply chain 

management initiatives. In written comments on a draft of this report, the 

Postal Service generally agreed with our recommendations. While the 

Postal Service does not plan to establish small business targets at this 

time, it stated that it would consider reestablishing targets for small 

business contracts if its current achievements begin to slip. 

The Postal Service, an independent establishment of the executive branch 

of the U.S. government,7

 is a $68-billion organization8 consisting of more 

than 37,000 post offices and 350 major mail-processing and distribution 

 7

 39 U.S.C. section 201. 

8

 As reported in the Postal Service’s 2003 Annual Report. 

Background 
Page 5 GAO-04-540 Postal Service Contracting 

facilities. We recently reported that the Postal Service’s current business 

model is outdated and inflexible and, in April 2001, we placed the agency’s 

long-term financial outlook and transformation efforts on our high-risk 

list. We suggested that the Postal Service work with Congress and other 

stakeholders to develop a comprehensive plan that would address its 

financial, operational, and human capital challenges. In response, the 

Postal Service issued its Transformation Plan in April 2002. 

Also in 2002, the President’s Commission on the United States Postal 

Service was appointed to examine the Postal Service’s current operations 

and propose recommendations for a more viable future while minimizing 

the costs to U.S. taxpayers. The commission’s July 2003 report 

recommended several fundamental changes, some of which involve 

procurement reform. The commission said that the Postal Service could 

save hundreds of millions of dollars by adopting practices that have 

substantially lowered costs for private-sector retailers. Our prior work has 

shown that commercial companies have achieved significant savings by 

leveraging their buying power through taking a strategic approach to 

acquisition.9

 The Postal Service operates more as a business than as a 

government agency. For example, it is responsible for generating revenue 

to cover its operating expenses and is not subject to the Federal 

Acquisition Regulation that guides most federal agencies’ procurement 

practices. 

In recent years, the Postal Service has undertaken a number of supply 

chain management initiatives intended to streamline acquisitions and save 

money. A January 2002 revision to its purchasing manual added a section 

on the supply chain management philosophy and its importance to Postal 

Service purchasing.10 According to the Postal Service’s Comprehensive 

Statement on Postal Operations, supply chain management depends on 

close interaction among end users, buyers, and suppliers, with a focus on 

 9

 U.S. General Accounting Office, Best Practices: Improved Knowledge of DOD Service 

Contracts Could Reveal Significant Savings ̧ GAO-03-661 (Washington, D.C.: June 9, 2003) 

and Best Practices: Taking a Strategic Approach Could Improve DOD’s Acquisition of 

Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002). 

10 On March 24, 2004, the Postal Service proposed to amend its purchasing regulations 

in order to implement the acquisition portions of its Transformation Plan and the 

similar recommendations of the President’s Commission on the United States Postal 

Service as they relate to the acquisition of property (except real property) and services. 

69 Fed. Reg. 13786 (Mar. 24, 2004). 
Page 6 GAO-04-540 Postal Service Contracting 

creating long-term contracts, as well as ongoing analysis and improvement 

of operating and administrative processes and costs. 

Two of these initiatives, the bulk fuel program and reverse auctions for 

highway contracts, are targeted at efforts to save on transportation costs. 

Fueling the Postal Service’s transportation network is no small feat. Diesel 

fuel is a major Postal Service expense, totaling almost $340 million in 

fiscal year 2003 for the thousands of highway contractors who consumed 

about 225 million gallons of fuel.11 With this volume of fuel purchasing, 

even a 1-cent difference in price per gallon can result in millions of dollars 

in savings for the Postal Service. Recognizing the potential for savings, the 

Postal Service launched the bulk fuel pilot program in the late 1990s. The 

Postal Service negotiated a discounted fuel price with a national supplier 

and directed a small number of highway contractors to purchase their fuel 

from this supplier rather than from various local and regional sources. In 

fiscal year 2001, the Postal Service expanded the program to two national 

suppliers. 

In fiscal year 2002, the Postal Service began to use reverse auctions, a 

Web-based bidding tool, for emergency highway transportation contracts 

(short term, temporary routes during the December holidays, for 

example). The Postal Service has hired a firm to conduct the auctions on 

its behalf.12 Before this online tool became available, contracting officials 

solicited bids from potential contractors by fax and telephone. Utilizing 

the Web, the Postal Service can now seek contract bids on a reverse 

auction site, where competitors can see one another’s bids in real-time and 

take this information into account when deciding on the price they will 

 11 The Postal Service estimates that it has about 10,000 highway contractors; however, 

this number is not precise because each of the 11 district offices uses a unique reporting 

number to identify their contractors and, therefore, double-counting is likely to occur. In 

addition, we found that the same contractor may be listed under multiple names, each of 

which is considered a separate contractor. 

12 The Postal Service has used reverse auctions on a limited basis for other than highway 

contracts. Our review covered only the reverse auctions for highway contracts. The Postal 

Service’s Office of Inspector General recently conducted a review looking at the 

effectiveness of reverse auctions for goods and services for other than highway contracts. 

Office of Inspector General, U.S. Postal Service, Use of Reverse Auctions, CA-AR-04-001 

(Arlington, VA: Feb. 26, 2004). The Postal Service entered into a contract with Lean 

Logistics on November 21, 2002, totaling $305,000 including contract modifications, to 

conduct reverse auctions for emergency highway transportation contracts. The contract 

was extended by one year on December 12, 2003, for an additional $240,000. 
Page 7 GAO-04-540 Postal Service Contracting 

offer. The Postal Service’s intent in using this tool is to obtain the lowest 

price possible by garnering increased competition. 

A third initiative, national contracts, is intended to consolidate the Postal 

Service’s spending on certain commodities. Postal Service employees have 

typically purchased supplies in a highly decentralized manner, from local, 

regional, or national businesses. Millions of dollars are spent using cash or 

purchase cards or through contracts. By negotiating contracts with 

selected suppliers based on volume discounts and directing employees to 

use these contracts, the Postal Service plans to leverage its buying power 

and save money. 

The Postal Service has had mixed success in implementing the supply 

chain management initiatives we reviewed. The bulk fuel program has 

been hampered by implementation difficulties, but the Postal Service 

has had some success using reverse auctions and has used this tool 

increasingly. The Postal Service has also begun to consolidate its spending 

on boxes, custodial products, labels, retail packaging, and tires through 

the use of national contracts. However, some of the claimed savings from 

reverse auctions were overstated, and we could not validate the 

$71.1 million in reported savings and revenue from the national contracts 

we reviewed because the Postal Service lacked accurate baseline data on 

what had been spent on the commodities before the supply chain 

management initiative.13

The bulk fuel program has gotten off to a slow start, beset by a number of 

implementation difficulties. Only 600 of the roughly 17,000 highway routes 

are involved in the program, although the Postal Service had expected a 

much greater level of participation. Consequently, the Postal Service is far 

from realizing its originally projected savings of $18 million per year, 

capturing only about $1.1 million in savings in fiscal year 2003. It may 

forgo collecting over $3 million in potential savings due to the 

implementation problems. 

The difficulties the Postal Service has encountered are primarily due to 

(1) resistance from many highway contractors; (2) setbacks in the Postal 

 13 The Postal Service recently asked its Inspector General to assess the methodology used 

to calculate savings from supply chain management initiatives. 

Success of Savings 

Initiatives Has Been 

Mixed, and Some 

Reported Savings 

Cannot Be Validated 

Bulk Fuel Implementation 

Difficulties Have 

Prevented Projected 

Savings from Being 

Realized 
Page 8 GAO-04-540 Postal Service Contracting 

Service’s plans to expand the number of fuel delivery locations under the 

program; and (3) lack of an automated system to accurately capture fuel 

prices, which means that inaccurate and burdensome manual calculations 

must be used. 

First, some highway contractors have refused to participate in the bulk 

fuel program. A few have gone as far as filing court actions challenging the 

Postal Service’s right to direct them to certain fueling sites. This resistance 

is due to a number of factors. One has to do with profit. Contractors’ fuel 

costs are intended to be “pass-through” costs, with the Postal Service 

reimbursing the contractors for the fuel costs specified in their contracts. 

The contract prices are based on an estimated price per gallon and an 

estimated number of gallons to be consumed annually. If the contractors’ 

actual price per gallon paid deviates from the contract’s estimated price 

per gallon by 5 cents or more, they may submit a request for a contract 

price adjustment.14 Updated fuel cost information from the contractor can 

be required if the contracting officer suspects that the contractor is being 

allowed reimbursement for fuel costs greater than those actually being 

incurred. However, given the volume of contracts, it is difficult and 

resource intensive to keep up with the fuel price changes, and therefore 

contracting officers primarily rely on the contractors to submit fuel 

adjustments. In practice, however, according to Postal Service officials, 

contractors are typically quick to submit an adjustment when they are 

paying more than the contract price, but slow to do so when they are able 

to obtain the fuel more cheaply. For highway contracts not under the bulk 

fuel program, contractors have been able to retain the difference between 

their actual expenditures for fuel and their contract price. The procedures 

for contract price adjustments under the bulk fuel program do not allow 

contractors this opportunity. 

Contractors have cited other reasons for resisting the program. They say 

they have built strong business relationships with their local fuel suppliers 

and that those suppliers are more responsive than the major suppliers 

designated in the bulk fuel program. They also believe that, as a business 

decision, they should be able to elect where to purchase their fuel. Some 

have shown that they can buy fuel more cheaply from their local suppliers 

than under the bulk fuel program. Postal Service officials point out that, 

while it is true that in certain cases the bulk fuel price may not be the 

 14 The fuel cost reimbursed to the contractors is based on the estimated annual gallons. 

This estimate is not adjusted based on actual gallons consumed. 
Page 9 GAO-04-540 Postal Service Contracting 

lowest, the only way that the savings can be achieved is if a large number 

of contractors participate in the program. They also note that fuel is 

supposed to be a pass-through cost and, therefore, contractors should not 

be concerned that the bulk fuel price may be higher than a discount rate 

they may be able to obtain on their own. 

Second, effective implementation has been hampered by the Postal 

Service’s lack of success in bringing new fueling locations into the bulk 

fuel program. Postal Service officials recognize that, with only 44 locations 

available to contractors to buy fuel under the program, the Postal 

Service’s anticipated savings cannot be achieved. In a solicitation issued 

April 8, 2003, the Postal Service requested proposals from fuel suppliers in 

an effort to add 22 locations to the program. The intention was to increase 

the number of gallons highway contractors purchase at bulk fuel prices 

by having these additional suppliers distribute fuel purchased from the 

two national bulk fuel companies. However, the Postal Service received 

no acceptable offers from suppliers for new fueling sites and is now 

considering additional approaches to expand the number of fueling 

locations. 

Third, the Postal Service does not have an automated system for gathering 

information on the number of gallons of fuel highway contractors 

purchase and the price they pay under the bulk fuel program. Therefore, 

manual procedures must be used to adjust contract prices in order to 

secure savings for the Postal Service. During the pilot program, the Postal 

Service recognized the need to automate its fuel adjustment system but 

expanded the program before the system was in place. We found that 

manual price adjustments have been inaccurate. Contrary to Postal 

Service procedures, which direct contracting officers to adjust contract 

prices based on the quantity of fuel purchased by contractors as well as 

the price they pay, contracting officials are simply adjusting the contract 

price based on the contractors’ average weekly price per gallon paid at 

bulk fuel sites—without factoring in the number of gallons purchased. 

This approach could result in lost savings for the Postal Service and, in 

some cases, contractors being shortchanged. In addition, we found that 

the price per gallon under the bulk fuel program did not include a special 

sales tax that some states require highway contractors to pay for diesel 

fuel. For example, one contractor paid $1,656 to cover this tax in a 3-week 

period, which the contracting officer’s adjustment did not include. 

Although the contractor brought the situation to the attention of the Postal 

Service contracting officer, the contracting officer took no action to fix the 

problem until we called it to the Postal Service’s attention. According to 

postal officials, because of our finding, they have updated all of the state 
Page 10 GAO-04-540 Postal Service Contracting 

tax information with the information received from a national fuel tax 

consultant and are working with the bulk fuel suppliers to obtain reports 

that detail taxes charged at each delivery site. 

Manual adjustments also pose an administrative burden for Postal Service 

contracting personnel and highway contractors. A study conducted for the 

Postal Service shows that fuel adjustments can take as long as 30 minutes 

per contract. Contractors must submit invoices or other documentation to 

show how many gallons of fuel they purchased and at what price. Without 

this information, the Postal Service cannot make accurate fuel cost 

adjustments and achieve savings. However, one of the primary reasons for 

the bulk fuel program was to reduce the administrative burden associated 

with manual adjustments. The program’s intention was not to require 

highway contractors to submit receipts for every single fuel transaction at 

the pump or to have Postal Service contracting officers wade through daily 

transactions in order to make monthly adjustments in highway contracts. 

Postal Service officials recognize that, until an automated system is 

implemented for capturing transaction data at the pump, the bulk fuel 

program will not be as successful as they had hoped. They are taking steps 

to automate the process. In a pilot effort involving three bulk fueling 

locations, the Postal Service created an electronic system that 

automatically adjusted contract prices based on the actual gallons 

purchased and prices paid at the pump. Because of the success of this 

pilot effort, the Postal Service plans to use the system for all contracts 

under the bulk fuel program. However, a program official said the system 

is behind schedule and will not be even partially available until the end of 

fiscal year 2004, and full implementation is not expected until at least a 

year later. 

These implementation difficulties have resulted in significantly lower 

savings than expected and a struggle to recoup millions of dollars from 

contractors participating in the program. In 1999, the Postmaster General 

told Congress that 75 percent of highway contractors’ fuel, about 

170 million gallons, would be purchased under the bulk fuel program and 

would yield annual savings of over $18 million.15 After further analysis, 

 15 Hearing before the Subcommittee on the Postal Service, Committee on Government 

Reform, House of Representatives, 106th Congress, October 21, 1999. In July 2001, the 

Postal Service’s Inspector General confirmed that the $18 million in projected annual 

savings was reasonable, assuming that the Postal Service was able to expand the program 

as anticipated and obtain 12 cents in savings per gallon. Office of Inspector General, 

U.S. Postal Service, Bulk Fuel Purchase Plan, TR-AR-01-004 (Arlington, VA: July 27, 2001). 
Page 11 GAO-04-540 Postal Service Contracting 

however, the Postal Service lowered its estimate to 95 million gallons of 

fuel and annual savings of $8.8 million starting in fiscal year 2004.16 Late in 

fiscal year 2003, the projected savings were further lowered to $4.7 million, 

because highway contractors under the bulk fuel program purchased only 

50 million gallons of fuel. However, Postal Service officials realized that 

they had failed to recoup $3.9 million of this amount because contractors 

were not initiating fuel price adjustments but, rather, were retaining the 

difference between the bulk fuel price and their contract price. The Postal 

Service subsequently implemented the manual, monthly adjustment 

system discussed earlier, retroactively attempting to collect overpayments 

from contractors, and has now reported fiscal year 2003 savings of about 

$1.1 million. However, the Postal Service said that it may decide to forgo 

an additional $3.5 million in potential 2003 savings because of the 

administrative burden of retroactively adjusting contract prices. 

The Postal Service has had success with reverse auctions for highway 

contracts and has used them increasingly, but some procedures could be 

improved to enable it to obtain lower prices. The Postal Service claimed 

over $5.9 million in savings from these reverse auctions in fiscal year 2003, 

but about $2.1 million of these savings are questionable. For some 

auctions the reported savings were overstated, and in other cases savings 

were claimed for auctions when no bids were received. 

Since May 2002, reverse auctions have been conducted for 659 of 

about 17,000 highway contract routes, and use of the auctions has 

been increasing each year; over 400 of these auctions occurred in 

fiscal year 2004. In implementing the auctions, however, the Postal Service 

may not be getting the lowest price possible in some cases. For example, 

we found that 181 of the 659 auctions ended with only one bid received. In 

cases where there is only one bidder, we believe that the Postal Service 

may not be getting the best price because there were no other bidders to 

drive down the price. In these cases, contracting officers do not attempt to 

negotiate a lower price with the sole bidder. According to one of these 

successful bidders, his only bid was high and would not have been his final 

offer had there been competing bids. To keep the bids within an 

acceptable range, the Postal Service establishes a reserve price, or a 

maximum price it is willing to accept, based on market research prior to 

starting the auction. Postal Service officials stated that, because they 

 16 The lowered estimate was based on an estimated savings of 9.3 cents per gallon. 

Some Success with 

Reverse Auctions, but 

Procedures and Reported 

Savings Could Be 

Improved 
Page 12 GAO-04-540 Postal Service Contracting 

establish a low reserve price, they are confident that the Postal Service is 

obtaining fair and reasonable prices even when only one bid is received. 

Another area of concern is whether the highway contract reverse auction 

procedures provide sufficient opportunity for bidders to submit their best 

price. The Postal Service uses a practice known as “overtime” for reverse 

auctions for certain goods and services, but not for highway contracts. 

Typically, just before an auction comes to a close, there is a rush of 

activity from bidders. To ensure that the winning bid is the lowest 

possible, the Postal Service’s reverse auctions for other than highway 

contracts provide the option of an overtime process until bidding comes to 

a halt. Rather than have every auction automatically close at a given time 

and thereby reward the contractor who waited until the very last second 

to place its bid,17 the overtime process provides all suppliers with an 

additional increment of time to react to last-minute bids if they believe 

they can offer a lower price. For example, under the overtime process, if a 

final bid is submitted within the last minute, the auction can be extended 

by 5 minutes or more to allow other bidders a chance to make a better 

offer. Postal Service officials noted that they had considered the 

possibility of using overtime procedures, but were concerned that some 

suppliers may not be available to participate in an overtime event because 

they lack the administrative staff to monitor the bidding. 

The Postal Service began claiming savings from reverse auctions in fiscal 

year 2003, reporting over $5.9 million in savings from 111 auctions held 

that year. For many of these auctions, data were not available for making 

direct comparisons with contracts for prior highway routes. Therefore, the 

Postal Service used statistical analysis to derive the savings, a common 

practice when historical data are unavailable. However, for 6 of these 

auctions—for which the Postal Service claimed $800,000 in savings—we 

could not substantiate the savings. Based on our analysis of the Postal 

Service’s methodology, we found no statistical evidence to support its 

approach. Another 24 highway contracts awarded through reverse 

auctions did have direct comparisons with previously awarded contracts, 

making it easier to project savings. We examined the largest of these 

contracts, with claimed savings of $1.2 million, and found that the savings 

were derived from incorrect baseline data. The baseline used to calculate 

the savings was based on an outdated contract rate of $11.65 per mile, 

 17 Of the 446 highway contract auctions conducted between October 2003 and 

February 2004, 75 percent received bids in the final minute. 
Page 13 GAO-04-540 Postal Service Contracting 

although a recent modification to the contract had a rate of $4.87. Thus, 

the savings from this auction were significantly overstated. 

Furthermore, the Postal Service claimed savings from 7 reverse auctions 

that expired with no bids received. Subsequently, the Postal Service faxed 

the requirements to known suppliers in relevant geographic areas, 

requested bids, and eventually awarded contracts. The Postal Service 

claimed $108,005 in reverse auction savings for these contracts even 

though the contractors did not participate in a reverse auction. 

Based on our findings, Postal Service officials agreed to lower their 

claimed savings for these reverse auctions. 

In turning to national contracts for certain items, the Postal Service has 

attempted to reduce costs and improve efficiency in its acquisition 

approach by directing employees to make purchases from designated 

suppliers. Prior to its use of national contracts, the Postal Service 

purchased corrugated boxes, custodial products, labels, retail packaging, 

and tires from a large number of suppliers. The Postal Service has 

negotiated contracts for these commodities with a smaller number of 

suppliers in order to leverage its buying power. For example, prior to the 

initiative, the Postal Service estimates it had over 1,000 suppliers for 

custodial products and 22 suppliers for labels. It now has 2 contracts for 

custodial products and 6 for labels. For fiscal year 2003, the Postal Service 

reported $71.12 million in savings and revenue through the national 

contracts for the five commodities we reviewed, as shown in table 1. 

Table 1: Reported Savings/Revenue for Fiscal Year 2003 from Five National 

Contract Initiatives 

Dollars in millions 

Type of supply Reported savings/revenue

Corrugated boxes $2.96

Custodial products 16.38

Labels 5.70

Retail packaginga 41.26

Tires for mail delivery trucks 4.82 

Total $71.12

Source: U.S. Postal Service. 

a

Unlike the other initiatives, which are intended to generate savings, this contract is meant to bring 

additional revenue to the Postal Service. The Postal Service purchases such items as wrapping 

paper and bubble wrap mailers from the contractor and then offers them for sale in local post offices. 

The revenue is reported as part of overall supply chain management savings. 

National Contract 

Initiative Under Way, but 

Lack of Accurate Baseline 

Data Renders Reported 

Savings and Revenue 

Questionable 
Page 14 GAO-04-540 Postal Service Contracting 

However, we were not able to validate these reported savings and revenue 

because they are based on unreliable baseline data. Given the highly 

decentralized nature of its procurements and the fact that many supplies 

have traditionally been purchased using cash and purchase cards, the 

Postal Service could not determine how much had been spent on these 

commodities prior to the supply chain management initiative. Postal 

Service contracting officers agreed that solid baseline data were not 

available, but stated that they did the best they could with the data they 

had, such as using accounts payable data where feasible. 

The Postal Service is not the only major organization that has had 

difficulty in tracking what it is buying. Our prior work has found that 

major commercial companies often do not have a good grasp of how much 

their individual business units are spending, where their dollars are going, 

and whether their purchases are meeting business needs at the best 

overall value. To reduce costs, leading companies have reengineered their 

approach to acquisition and changed the way they manage their 

spending.18 Among other things, they use information systems to get a 

clearer picture of what their business units are spending, rather than 

taking months to examine individual purchase orders and piece together 

data from various financial and management information systems to get at 

best a rough idea of what is being spent. 

Postal Service officials have been working for a number of years on a 

new system—planned for full implementation by the end of fiscal year 

2006—that will enable them to better track contract expenditures, thus 

providing them with more accurate data on savings from national 

contracts. However, the Postal Service will continue to lack detailed 

knowledge of what is being spent outside of contracts, such as through 

cash and purchase cards.19 Therefore, it will be difficult for the Postal 

Service to know with any degree of certainty whether the consolidated 

contracts are producing the desired results and what, if any, additional 

improvements are needed to realize the benefits expected from the 

national contract initiative. 

 18 GAO-02-230. 

19 We discussed the problems the government has faced in collecting details on purchase 

card expenditures in two prior reports. U.S. General Accounting Office, 

Contract Management: Government Faces Challenges in Gathering Socioeconomic 

Data on Purchase Card Merchants, GAO-03-56 (Washington, D.C.: Dec. 13, 2002) and 

Contract Management: Agencies Can Achieve Significant Savings on Purchase Card 

Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004).
Page 15 GAO-04-540 Postal Service Contracting 

When the Postal Service consolidated its purchasing under the national 

contracts we reviewed, the number of small businesses participating as 

prime contractors declined. In planning these acquisitions, Postal Service 

officials often did not proactively explore ways in which to make these 

contracting dollars available to small businesses, either as prime or 

subcontractors. We could not gauge the effect on small businesses as a 

result of the other supply chain management initiatives we reviewed—the 

bulk fuel program and reverse auctions for highway contracts—because 

contracting officers and highway contractors used incorrect small 

business size standards and, consequently, the reported small business 

dollar amounts are unreliable. As it proceeds with its supply chain 

management initiatives, the Postal Service will have difficulty measuring 

the effect on small businesses because its new supplier diversity policy, 

while indicating a commitment to increasing contracts to small and 

diverse businesses, does not establish targets—such as dollar amounts or 

number of contracts—to measure success. 

The number of small business suppliers has dropped in four of the five 

commodities we reviewed. Table 2 shows the effect of the national 

contract initiative on small business participation. 

Table 2: Effect of National Contracts on Small Business Participation 

Type of supply 

Reported number of 

businesses before 

consolidation 

Reported number of 

businesses after 

consolidationa

Corrugated boxes 3 large 

2 small 

2 large 

Custodial products Exact number unknown; 

estimate is about 200 large 

and about 800 small 

1 large 

1 small 

Labels 7 large 

15 small 

3 large 

3 small 

Retail packaging Exact number unknown; 

estimate is about 20, many 

of which were local 

businesses 

1 large 

Tires for mail delivery trucks 4 large 1 large 

Source: U.S. Postal Service. 

a

As of February 2004. 

In planning most of these initiatives, contracting officers and other Postal 

Service officials did not consider ways to ensure that small businesses 

More Attention 

Needed to Ensure 

Small Business 

Participation in 

Supply Chain 

Management 

Initiatives 

Small Business 

Participation Has Been 

Reduced as a Result of 

National Contracts 
Page 16 GAO-04-540 Postal Service Contracting 

would have the chance to compete for contracting dollars, although the 

Postal Service’s supplier diversity plan states that each purchase plan must 

consider the use of small, minority-owned, and woman-owned businesses. 

Further, Postal Service regulation requires the contracting officer to 

manage supplier diversity as a strategic business initiative. In only one 

case—custodial products—was full attention paid to the effect of the 

consolidated contract on small businesses. In planning this acquisition, 

Postal Service officials recognized that some of these products were being 

purchased from local businesses and that there would be a drop in 

supplier diversity as a result of the consolidation. Acquisition planning 

documents show that market research and outreach were conducted with 

the intent of identifying potential small businesses to compete for the 

contract. Ultimately, two contracts were awarded—one to a large business 

and the other to a small business. 

Further, in only one of the five commodities we reviewed was the prime 

contractor’s intent to subcontract with small businesses considered to any 

extent in awarding the contract. For custodial products, small business 

subcontracting was one of the evaluation factors in the solicitation. The 

large business, when submitting its proposal under the solicitation, 

included a supplier diversity plan with a 28.8 percent small business goal; 

however, this goal was revised to 2.1 percent after the contract was 

awarded. 

Our prior work has found that leading commercial companies take several 

steps to ensure that small businesses serve some of their acquisition needs 

because they believe it makes good business sense, especially in the 

communities where they do business.20 These steps include considering 

diverse businesses in acquisition planning, ensuring that supplier diversity 

is considered in selecting contractors, justifying the reason when there is a 

lack of diverse supplier participation, and encouraging small suppliers 

who have limited resources to form joint ventures so they can compete 

effectively for large contracts. 

 20 GAO-03-661. 
Page 17 GAO-04-540 Postal Service Contracting 

In fiscal year 2003, the Postal Service reported that $2.3 billion, or 

59 percent of its small business dollars, went to highway contractors. 

We were unable to gauge the effect of the bulk fuel program and reverse 

auctions on these contractors because Postal Service contracting officers 

and the contractors themselves had not used the correct size standard for 

defining a small business. As a result, the reported small business dollars 

for highway contractors are unreliable.21

Postal Service regulation directs contracting officers to use the Small 

Business Administration’s (SBA) regulations to ascertain whether a size 

standard other than the 500 employee ceiling should be used to determine 

whether a business is small. SBA has defined the size standard for small 

bulk mail truck transportation businesses as average annual receipts at or 

below $21.5 million, rather than the number of employees.22 However, five 

Postal Service contracting officers we spoke with, who together are 

responsible for almost 60 percent of all highway contracts, routinely 

define a small business as one with 500 or fewer employees. Postal Service 

supplier diversity officials told us that the criterion of no more than 500 

employees is used virtually without exception.

We also found that the Postal Service has disseminated inaccurate 

guidance on small business size standards. Until recently, a form that 

highway contractors use to place themselves on the Postal Service mailing 

list stated that businesses with 500 or fewer employees are considered 

small businesses. Postal Service officials have corrected this form. In 

addition, the Postal Service’s Web site contains a document, “Supplier 

Diversity Terms,” that defines a small business as one with no more than 

500 employees. Postal Service officials are correcting this document. 

 21 In 2001, the Postal Service Inspector General found that fiscal year 1999 supplier 

diversity statistics were incomplete and unreliable and resulted in the Postal Service’s 

overstating or incorrectly classifying dollars awarded to small, minority-owned, or womanowned businesses. Office of Inspector General, U.S. Postal Service, Supplier Diversity 

Program for Supplies, Services, and Equipment Purchases, CA-AR-01-005 (Arlington, VA: 

Sept. 6, 2001). In 2003, we reported that that the Postal Service provided documents 

showing the actions it had taken to address the Inspector General’s recommendations. 

However, we did not independently determine whether the actions taken by the Postal 

Service improved the reliability of its supplier diversity data. U.S. General Accounting 

Office, U.S. Postal Service: Status of Inspector General’s Recommendations on the 

Supplier Diversity Program, GAO-04-57R (Washington, D.C.: Oct. 6, 2003). 

22 13 CFR 121.201 (subsector 484). SBA has recently proposed modifications to its small 

business size standards. It plans to use the number of employees and eliminate the revenue 

threshold for most industries. 69 Fed. Reg. 13129 (Mar. 19, 2004). 

Incorrect Application of 

Small Business Size 

Standards Makes It 

Difficult to Measure 

Impact of Other Initiatives 
Page 18 GAO-04-540 Postal Service Contracting 

We selected eight highway contractors who do a substantial amount 

of business with the Postal Service—about $390 million in fiscal year 

2003—and who were reported as small businesses. We determined that 

five of the eight were not small businesses. Each of them had more than 

500 employees and average annual receipts exceeding $21.5 million. 

When we spoke with these five contractors, we found that they were also 

confused about the appropriate small business size standard, believing it 

to be 500 employees. Part of the confusion stemmed from the fact that a 

form requiring them to self-certify their size when responding to a Postal 

Service solicitation states that companies with 500 or fewer employees 

are considered small businesses, unless SBA has established a different 

size standard. 

Further, we found that, in some cases, Postal Service contracting 

specialists were filling out the size standard for the contractors rather 

than having them self-certify as a large or small business. Two of the 

contractors we spoke with had noticed that the Postal Service had 

identified their businesses as small when they considered themselves 

large. The contractors noted the errors on the form, but the changes were 

not made in the Postal Service’s records. Postal Service officials have 

stated that they have now taken steps to ensure that the forms are not 

filled out by the Postal Service for the contractors. 

Highway contracts were not the only area where we found 

reporting errors. One contractor under the national contract initiative 

for corrugated boxes reported that it was a small business and 

received the Postal Service’s 2002 Quality Supplier Award for “Small 

Business–Manufacturing.” However, this company is owned by a large 

corporation.23 The contractor stated that it identified itself as a small 

business because the individual subsidiary has fewer than 500 employees. 

It will be difficult for the Postal Service to measure progress in small 

business contracting because its new 3-year supplier diversity plan, issued 

in October 2003, does not specify targets for small business procurement 

dollars. The prior supplier diversity plan, which covered the 1999 to 2003 

time frame, included such targets, with increasing dollar amounts for these 

 23 Where corporations are affiliates (one controls or has the ability to control the other), 

both corporations’ receipts or employees count in determining the small business size. 

13 CFR 121.103. 

New Supplier Diversity 

Plan Lacks Targets to 

Measure Small Business 

Participation 
Page 19 GAO-04-540 Postal Service Contracting 

businesses over the 5-year period. Without targets in place against which 

to measure performance, the Postal Service has no way to determine 

whether its supplier diversity policies are being successfully implemented. 

Further, there is no mechanism in place to hold Postal Service officials 

accountable for implementing the Postal Service’s objective of ensuring a 

continuing focus on, and improvement in, its relationships with small and 

diverse businesses. Our prior work has found that, as part of their diversity 

policies, leading commercial companies set specific goals to measure 

performance—such as percentage of total contract dollars awarded to 

small businesses—and consider gradually increasing the goals on an 

annual basis. 

Leveraging buying power through the use of supply chain management can 

lead to significant savings, and the Postal Service is on the right track in 

starting to focus on these opportunities. However, the Postal Service can 

improve aspects of the initiatives, such as working out implementation 

problems that have plagued its bulk fuel program. While the lack of 

accurate baseline information against which to measure savings is, to 

some degree, an inherent problem in an environment of decentralized 

spending—and a problem not unique to the Postal Service—the Postal 

Service can take steps to capture more reliable information on its supply 

chain management initiatives so that it knows whether the initiatives are 

producing the desired results. 

The Postal Service also faces the challenge of achieving necessary savings 

while following its own diversity policies. More attention needs to be paid 

to the effect of supply chain management initiatives on small businesses. 

As the Postal Service moves forward with its supply chain management 

initiatives, reliable data and an emphasis on the importance of small 

business participation are the key factors needed to make its supplier 

diversity policy work. Given the lack of targets for small business 

participation in the new supplier diversity policy, however, it will be 

difficult to hold contracting officers and other key officials accountable 

for improving the Postal Service’s relationships with small businesses. 

We recommend that the Postmaster General of the United States take the 

following seven actions: 

To move toward an accurate and less burdensome method of recouping 

savings under the bulk fuel program 

Conclusions 

Recommendations for 

Executive Action 
Page 20 GAO-04-540 Postal Service Contracting 

• place a high priority on automating the fuel price adjustment system, and 

• develop a time-phased plan for expanding the number of fueling locations. 

To capture accurate savings from its reverse auctions for highway 

contracts and ensure that the Postal Service gets the best possible price 

• encourage contracting officers to try to negotiate further price reductions 

when only one bid is received, and 

• conduct an analysis to determine whether reverse auction overtime 

procedures would result in the Postal Service’s achieving additional 

savings. 

To improve small business reporting and participation 

• train contracting officers on the appropriate size standards for different 

types of businesses and direct them to post the proper standard in the 

solicitation; 

• direct contracting officers and other acquisition personnel to (1) explore 

during acquisition planning ways that small business participation can be 

addressed in a supply chain management environment and (2) document 

their decisions; and finally, 

• establish targets for small business participation in Postal Service 

contracts. 

In written comments on a draft of this report, the Postal Service generally 

agreed with our recommendations. It stated that, while many 

improvement plans were in place prior to receiving the results of our 

review, it welcomed the additional information and recommendations and 

plans to use them to further refine its supply chain management efforts. 

The Postal Service agreed with our recommendations on the bulk fuel 

program and reverse auctions for highway transportation contracts. The 

Postal Service noted that the auctions covered by our report represent a 

relatively small amount of total reverse auction spending volume; 

however, the highway transportation auctions we reviewed also account 

for the vast majority—over 90 percent--of auctions held. On the issue of 

small business reporting and participation, the Postal Service stated that it 

would conduct random sampling to check small business certifications, 

provide training to reinforce existing policies that require supplier 

diversity to be addressed in acquisition plans, and focus attention on 

subcontracting plans and reporting. It also noted that the more recent 

acquisition plans under supply chain management initiatives place 

stronger emphasis on addressing supplier diversity issues. The Postal 

Agency Comments 

and Our Evaluation 
Page 21 GAO-04-540 Postal Service Contracting 

Service stated that our findings on the national contract initiatives would 

help drive further improvement by ensuring that contracting officers 

continue to address supplier diversity in their acquisition plans. 

The Postal Service stated that, while it understands our recommendation 

to establish targets for contracting with small businesses, its current 

approach is to establish baselines from achievements obtained in the 

previous year so that purchasing units can advance their accomplishments 

in successive years. By monitoring results quarterly and tracking small 

business participation throughout the process, the Postal Service believes 

it can effectively identify and focus its improvement efforts. It stated that 

it would consider reestablishing targets for small businesses if results start 

to slip. The Postal Service’s response implies that the current achievement 

level is a baseline against which improvements to small business 

contracting will be measured. However, we believe that the Postal Service 

needs to have in place a mechanism to ensure that contracting officers and 

other key officials are held accountable for improving small business 

contracting and to provide transparency into the Postal Service’s 

improvement efforts. 

The Postal Service also provided technical comments, which we 

incorporated as appropriate. 

We are sending copies of this report to other interested congressional 

committees and the Postmaster General of the United States. We will also 

make copies available to others upon request. In addition, the report will 

be available at no charge on the GAO Web site at http://www.gao.gov. 
Page 22 GAO-04-540 Postal Service Contracting 

Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309 

if you have any questions regarding this report. Other major contributors 

to this report were Lily Chin, Eric Fisher, Paul Greeley, Judy Lasley, 

MacDonald Phillips, Russ Reiter, and Sylvia Schatz. 

David E. Cooper 

Director, Acquisition and 

 Sourcing Management 
Appendix I: Scope and Methodology 

Page 23 GAO-04-540 Postal Service Contracting 

To determine the extent to which the Postal Service’s supply chain 

management initiatives have resulted in savings, we reviewed the highway 

contractor bulk fuel program and reverse auctions for transportation 

services and selected five commodities that have been consolidated into 

national contracts: corrugated boxes, custodial products, pressuresensitive labels, retail packaging, and delivery vehicle tires. We selected 

these contracts because they had large projected savings and represented 

a range of Postal Service commodities. We reviewed our prior report on 

the Postal Service’s national office supply contract1

 and Postal Service 

Inspector General reports on the bulk fuel pilot program and reverse 

auctions. 

In reviewing the bulk fuel program and reverse auctions, we interviewed 

Postal Service officials in headquarters as well as 5 of the Postal Service’s 

11 transportation contract managers. We selected these managers because 

they were large users of the bulk fuel program and reverse auctions. We 

also met with a representative of the National Star Route Mail Contractors 

Association, which represents a number of large and small highway 

contractors. For the bulk fuel program, we reviewed program 

documentation regarding the Postal Service’s projected savings per gallon 

and program implementation. For the reverse auctions, we obtained Postal 

Service May 2003 policy guidance and information on each of the 659 

reverse auctions held since May 2002. Drawing data from the Lean 

Logistics reverse auction Web site, we analyzed information on when the 

Postal Service posted the requirement, the name of the contractors placing 

bids, bid amounts, and the dates and times these bids were placed. We did 

not compare the information drawn from the Web site with Postal Service 

contract files, but we verified the overall number of auctions with Postal 

Service officials. We also reviewed the methodology supporting the Postal 

Service’s reported reverse auction savings. Using Postal Service data, we 

performed various statistical analyses, including replicating the Postal 

Service’s methodology, to determine whether the estimated savings were 

reasonable. We also conducted a literature review of studies and research 

concerning the benefits of using reverse auctions. 

For the national contracts, we interviewed the responsible program 

officials and contracting officers in Dallas, Texas; Denver, Colorado; 

 1

 U.S. General Accounting Office, Contract Management: Postal Service’s National Office 

Supply Contract Has Not Been Effectively Implemented, GAO-03-230 (Washington, D.C.: 

Jan. 17, 2003). 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 24 GAO-04-540 Postal Service Contracting 

Memphis, Tennessee; Philadelphia, Pennsylvania; and Washington, D.C., 

and reviewed the contract files. We also obtained the Postal Service’s 

initial projected savings for these national contracts and their actual 

claimed savings from the Postal Service Supply Chain Management Office. 

We did not validate these reported savings or determine the extent to 

which Postal Service buyers were using the contracts. 

To determine whether supply chain management initiatives have had an 

effect on small businesses, we compared prior suppliers’ business sizes 

with those of current suppliers under the national contracts, based on 

information from the contracting officers. We did not validate the reported 

business sizes. We also reviewed the individual acquisition plans for each 

commodity to determine if small business participation was considered in 

the acquisition planning. For the bulk fuel program and reverse auctions, 

we interviewed Postal Service policy officials, program officials, and 

contracting officers. We also discussed with eight highway contractors 

their business size, including the number of employees and average annual 

receipts. We reviewed the Small Business Administration’s small business 

size standards and obtained concurrence from a Postal Service policy 

official that $21.5 million in total average annual receipts should be used 

as the size standard for highway contractors to qualify as a small business. 

Because the Postal Service has a commercial business orientation in many 

respects, we used our prior work to identify some of the efforts that 

leading companies have taken to address the issue of supplier diversity.2

During that review, we identified leading commercial companies and 

discussed with them their policies and procedures for ensuring that small 

or minority-owned contractors had the opportunity to participate in their 

contracts. 

We conducted our review from July 2003 to April 2004 in accordance with 

generally accepted government auditing standards. 

 2

 U.S. General Accounting Office, Best Practices: Improved Knowledge of DOD 

Service Contracts Could Reveal Significant Savings, GAO-03-661 (Washington, D.C.: 

June 9, 2003). 
Appendix II: Comments from the U.S. Postal 

Service 

Page 25 GAO-04-540 Postal Service Contracting 

Appendix II: Comments from the U.S. Postal 

Service 
Appendix II: Comments from the U.S. Postal 

Service 

Page 26 GAO-04-540 Postal Service Contracting 
Appendix II: Comments from the U.S. Postal 

Service 

Page 27 GAO-04-540 Postal Service Contracting (120273) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs