Postal Service: Progress in Implementing Supply Chain Management Initiatives
Published: 2004-05-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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.

section_title: Letter
paragraphs: 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, 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.
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  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. 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. 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;  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.
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.
subsections: section_title: Background
paragraphs: The Postal Service, an independent establishment of the executive branch  of the U.S. government, is a $68-billion organization consisting of more  than 37,000 post offices and 350 major mail-processing and distribution  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. 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. 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  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. 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. 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  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.
section_title: Success of Savings Initiatives Has Been Mixed, and Some Reported Savings Cannot Be Validated
paragraphs: 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.
subsections: section_title: Bulk Fuel Implementation Difficulties Have Prevented Projected Savings from Being Realized
paragraphs: 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  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. 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  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  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. After further analysis,  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. 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.
section_title: Some Success with Reverse Auctions, but Procedures and Reported Savings Could Be Improved
paragraphs: 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  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, 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,  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.
section_title: National Contract Initiative Under Way, but Lack of Accurate Baseline Data Renders Reported Savings and Revenue Questionable
paragraphs: 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.
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. 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. 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.
section_title: More Attention Needed to Ensure Small Business Participation in Supply Chain Management Initiatives
paragraphs: 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.
subsections: section_title: Small Business Participation Has Been Reduced as a Result of National Contracts
paragraphs: 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.
In planning most of these initiatives, contracting officers and other Postal  Service officials did not consider ways to ensure that small businesses  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. 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.
section_title: Incorrect Application of Small Business Size Standards Makes It Difficult to Measure Impact of Other Initiatives
paragraphs: 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.
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. 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.
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. The contractor stated that it identified itself as a small  business because the individual subsidiary has fewer than 500 employees.
section_title: New Supplier Diversity Plan Lacks Targets to Measure Small Business Participation
paragraphs: 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  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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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    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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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  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.
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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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, pressure- sensitive 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 contract 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;  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.  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.
section_title: Appendix II: Comments from the U.S. Postal Service