Strategic Sourcing: Office Supplies Pricing Study Had Limitations, but New Initiative Shows Potential for Savings
Published: 2011-12-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Concerned that federal agencies may not be getting the best prices available, Congress directed the General Services Administration (GSA) to study office supply purchases by the 10 largest federal agencies. GSA delivered the results of its study in November 2010. The study also discussed GSAs efforts to implement an initiative focused on leveraging the governments buying power to realize savings when buying office supplies, known as Office Supplies II (OS II). Under this initiative, GSA entered into agreements with vendors based on discounted prices to be offered to all federal agencies.
Congress directed GAO to assess the GSA study, with particular attention to the potential for savings. Accordingly, GAO assessed (1) the support for the findings and conclusions in GSAs report and (2) how GSA's new office supply contracts support the goal of leveraging the governments buying power to achieve savings.
To conduct this work, GAO analyzed the data GSA used for its study; met with and obtained documentation from officials at GSA and the Departments of Homeland Security (DHS), Air Force, Navy, and Army, which were among the 10 agencies in GSAs study; and reviewed contract documentation associated with GSAs new office supplies initiative.
GSA and DHS commented on a draft of this report. GSA said it appreciated our recognition that leveraged purchasing can produce savings and also provided technical comments, which we incorporated as appropriate. DHS provided additional information on its strategic sourcing initiatives.
section_title: What GAO Found
paragraphs: GSA estimated that federal agencies spent about $1.6 billion during fiscal year 2009 purchasing office supplies from more than 239,000 vendors. GSA concluded that agency buyers paid higher prices when they bought office supplies outside GSAs Multiple Award Schedule program than they would have using the schedules or OS II. According to GSA, the price premiums averaged 75 percent compared to the schedule prices and 86 percent compared to OS II. GAO identified data and other limitations in GSAs study, such as not always controlling for variation in quantities of identical items when comparing prices. GAO was not able to fully quantify the impact of these limitations. Officials from other agenciesAir Force, Army, Navy, and DHSalso questioned the studys specific findings on price premiums, believing them to be overstated, but their own studies support GSAs general conclusion that better prices can be obtained through consolidated, leveraged purchasing. The GSA study also concluded that buyers compared prices before making purchases, but this conclusion was based on interviews with senior-level acquisition officials and not on information obtained from any of the approximately 270,000 government purchase cardholders who made the purchasing decisions.
According to available data, GSAs new office supplies sourcing initiative, OS II, has produced savings. GSA estimated that the government saved $16 million from June 2010 through August 2011 through this initiative. According to GSA, the OS II initiative is demonstrating that leveraged buying can produce savings and has provided improvements for managing ongoing and future strategic sourcing initiatives. GSA reports that OS II allowed it to negotiate discounts with vendors who were selected for the initiative, and has spurred price competition among schedule vendors that were not selected as they react to the OS II pricing, resulting in decreased schedule prices. The initiative is also expected to lower government-wide office supply costs through more centralized contract management. Another key aspect of the initiative is that participating vendors provide sales and other information to GSA to help monitor prices, savings, and vendor performance. Finally, the OS II initiative offers lessons learned for other strategic sourcing initiatives, including the importance of identifying agencies goals and needs and ensuring buying agency participation.

section_title: Letter
paragraphs: The General Services Administration (GSA) estimated that federal  agencies spent about $1.6 billion during fiscal year 2009 purchasing  office supplies from more than 239,000 vendors. Concerned that federal  agencies may not be getting the best prices available when making these  purchases, the conferees on the Consolidated Appropriation Act, 2010,  directed GSA to conduct a study of office supply purchases by the 10  largest federal agencies. GSA provided the results of its study to the  House and Senate Committees on Appropriations in a November 2010  report. The report also discussed a GSA initiative to realize savings and  other benefits when buying office supplies. Under this initiative, known as  Office Supplies II, GSA entered into agreements with 15 vendors offering  discounted prices that will be available to agencies across the  government.
The conferees also directed us to assess the GSA study, with particular  attention to the potential for savings. Accordingly, we assessed the  support for the key findings and conclusions in GSA’s report. To address  the potential for savings, we also assessed how GSA’s new initiative for  buying office supplies supports the goal of leveraging the government’s  buying power.
To assess the findings and conclusions of GSA’s study, we reviewed the  definitions, assumptions, data sources, and methods GSA used to  conduct the study and discussed the report with GSA officials. We did not  independently verify the data GSA used in conducting its study, but did  use the data to analyze price premiums on selected office supply items.  We met with and obtained documentation from officials at the  Departments of Homeland Security (DHS), Air Force, Navy, and, Army,  which were among the top 10 buyers of office supplies in terms of dollars  spent in fiscal year 2009. Additionally, we met with a Department of  Defense (DOD) Defense Procurement and Acquisition Policy official to  obtain an overall DOD perspective on the study. We also contacted a  national organization representing manufacturers to obtain an  understanding of how manufacturers use part numbers. To assess GSA’s  new approach to buying office supplies, we met with GSA officials  responsible for implementing this approach and reviewed the contract  documentation for 6 of the 15 vendors associated with the initiative.
We conducted this performance audit from December 2010 to November  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Federal agencies can use a variety of different approaches to purchase  office supplies. For relatively small purchases, generally up to $3,000,  authorized users can use their government purchase cards. For larger  purchases, agencies may use other procedures under the Federal  Acquisition Regulation, such as awarding a contract. Alternatively, GSA  provides federal agencies with a simplified method for procuring office  supplies through its Federal Supply Schedule program, also known as the  Multiple Award Schedules (MAS) or schedules program. Under the  schedules program, the federal government’s largest interagency  contracting program, GSA awards contracts to multiple vendors for a  wide range of commercially available goods and services. The schedules  program can leverage the government’s significant aggregate buying  power. Also, under the schedules program, to ensure the government is  getting the most value for the taxpayer’s dollar, GSA seeks to obtain price  discounts equal to those that vendors offer their “most favored  customers.”
In November 2007, GSA initiated another approach for buying office  supplies by creating blanket purchase agreements (BPA) under the  schedules program. BPAs are a simplified method of fulfilling repetitive  needs for supplies and services that also provide an opportunity to seek  reduced pricing from vendors’ schedule prices. The approach was part of  the government’s Federal Strategic Sourcing Initiative (FSSI). GSA  officials acknowledged they could have done a better job promoting this  initiative. Ultimately, GSA determined that the initiative did not meet its  expectations and initiated a second strategic sourcing initiative known as  FSSI Office Supplies II (OS II) in 2010. By July 2010, GSA competitively  awarded 15 BPAs to 13 small businesses and 2 other businesses to  support the OS II initiative.
The GSA study on office supply purchases reviewed 14 categories of  mostly consumable office supplies, ranging from paper and writing  instruments to calendars and filing supplies. The report did not include non-consumable items such as office furniture and computers because  they are not part of the standard industry definition of office supplies.
The GSA report estimated that the 10 agencies with the highest spending  on office supplies accounted for about $1.3 billion, about 81 percent of  the total $1.6 billion spent governmentwide on the 14 categories of office  supplies during fiscal year 2009. The amounts spent by the top 10  agencies are shown in figure 1.
The report found that about 58 percent of office supply purchases were  made outside of the GSA schedules program, mostly at retail stores. The  report also found that agencies often paid more—a price premium—than  they would have by using the GSA schedules program or OS II. On  average, GSA found that agencies paid 75 percent more than schedule  prices and 86 percent more than OS II prices for their retail purchases.  Table 1 shows the 14 categories of office supplies, the number of  different items in each of the categories, and the retail price premiums  that GSA calculated for each category when compared to schedule  prices.
The report also concluded that buyers engaged in at least some level of  price comparisons before making purchasing decisions. More specifically,  the report stated that buyers may compare prices across different  vendors when ordering through an electronic medium, or across available  items when purchasing directly through a vendor’s online or retail store.
section_title: GSA Report Had Data and Other Limitations
paragraphs: GSA used several sources of data to analyze and compare the prices  paid for 219 items across 14 categories of office supplies through various  purchasing options. The GSA report acknowledged some limitations with  the data, but we identified additional data and other limitations that lead  us to question the magnitude of some of GSA’s reported price premiums.  We were not able to fully quantify the impact of these limitations. Other  agencies also questioned the study’s specific findings related to price  premiums, but their own studies of price premiums support GSA’s  conclusion that better prices can be obtained through consolidated,  leveraged purchasing. The GSA study also concluded that buyers  compared prices before making purchases, but this conclusion was not  based on information from actual purchase card holders.
subsections: section_title: Numerous Data Sources Used to Develop GSA Report
paragraphs: Purchasing of office supplies is highly decentralized with about 270,000  purchase cardholders and others across the government making  purchases in fiscal year 2009. Because of this, GSA obtained data for its  study from multiple government sources, and purchase card information  provided by the commercial banks that issue the government purchase  cards. To determine the funds spent on office supplies and to conduct  related analyses, GSA sorted through data from these various sources,  which included about 7 million purchase transactions involving over   12 million items. GSA took a number of steps to clean the data prior to  using them. For example, because a single purchase might have been  reported in more than one data source, GSA removed duplicate  purchases prior to its analysis. The data were further cleaned to remove  items and their related costs that did not meet GSA’s definition of office  supplies.
section_title: GSA’s Retail Price Premium Analyses Faced Data and Other Limitations
paragraphs: To determine retail price premiums, GSA focused its analyses on 219  office supply items that were purchased in 2009 from retailers and the  GSA schedules. In its report, GSA acknowledged that the data used to  analyze governmentwide purchases of office supplies in 2009 had  limitations, in part due to the decentralized data sources for office supply  purchases and the limited time GSA had to conduct its study. A significant  issue GSA faced was attempting to control for variation in quantities; in  other words, GSA tried to ensure that when comparing prices, it was  using transactions that involved identical quantities. A purchase of pens,  for example, could involve a single pen, a package of three pens, a box of  a dozen, or any other quantity. GSA officials told us that the primary  means they used to control for quantities was the use of the  manufacturer’s part number. They explained that they searched available  databases to identify items with identical part numbers. They told us that  when they found large variations in retail prices for apparently identical  items, they excluded transactions they considered to be outliers.
This approach, however, may not have been adequate to account for  variations in quantity. When we contacted a national organization  representing manufacturers, a senior staff director told us that there is no  consistent approach among manufacturers for assigning part numbers.  Some manufacturers may assign one part number to individual items and  different part numbers to packages of those same items containing  different quantities, while other manufacturers may assign the same part  number both to individual items and to packages of items. In addition,  when we reviewed some of the individual transaction data GSA obtained  for retail purchases, we identified substantial price variations for a number  of drawing and graphic arts supplies and writing instruments that carried  the same manufacturer’s part number.
Specifically, when we reviewed GSA’s retail transaction data for 10 items  within the writing instruments category, we found that retail prices for 6 of  the 10 items varied by more than 300 percent. For instance, for one item  involving black Rollerball pens, GSA’s retail transaction data showed  prices ranging from $9.96 to $44.96 for items listed with the same part  number. These transactions were all with the same nationwide retailer.  When asked about such substantial price differences for items with the  same part number, GSA officials acknowledged that the purchase card  data they used for retail prices did not always accurately identify the  quantity of items involved in each transaction. The existence of  substantial price differences for a number of items indicates that GSA’s  attempts to compare prices may not have adequately controlled for  variations in quantities.
We also identified a weakness with the clarity of the GSA report with  regard to how price premium estimates were calculated. Specifically,  GSA’s study described a specific formula that was used to calculate the  price premiums, but our review of the study’s supporting documents  found that the GSA actually used a different formula to calculate price  premiums for 10 of the 14 office supply categories. In a discussion with  GSA officials, they agreed that the study did involve the use of two  different formulas. When we used the formula described in the study to  recalculate the retail price premiums for those 10 categories of office  supplies, we found the price premiums would have changed from what  GSA reported by less than 5 percentage points for all categories except  drawing and graphic arts supplies. For that category, the recalculated  price premium was 68 percent, as compared to the 278 percent reported  in the study. The use of this unreported formula did not have a substantial  impact on the retail price premium calculations for most categories of  office supplies or the overall conclusions of the study, but the GSA report  could have been more complete had it fully disclosed all the formulas  used for all categories of office supplies.
section_title: Data from Other Agencies Show Savings of Smaller Magnitude
paragraphs: On the basis of their own studies, Air Force, Army, Navy, and DHS  officials also questioned the specific price premiums and savings reported  by GSA. Officials from these agencies told us they believed that the price  premiums reported by GSA when buying outside the GSA schedule were  overstated. However, the agencies agreed with GSA’s overall conclusion  that better prices can be obtained through leveraged buys.
In addition, all four agencies in our review found that the prices available  through the new OS II BPAs were better than the prices available from  their existing agency BPAs. For example, a DHS study found savings of  about 20 percent when analyzing the prices associated with a mix of 348  items. The Air Force determined that the OS II BPAs could save about   7 percent in a study of the 125 most commonly purchased items. On the  basis of this analysis, the Air Force decided to let its existing office supply  contracts expire. Similarly, the Navy’s comparison of 71 items found that  using the OS II BPAs could save about 6 percent, which led Navy officials  to move purchasing to the OS II BPAs. Army officials did not provide  study results, but they told us their analysis found lower price premiums  than reported by GSA. An Army official said they plan to continue using  existing BPA's while they transition to OS II.
section_title: GSA Conclusion on Buyer Price Comparisons Not Supported by Information from Actual Buyers
paragraphs: GSA interviewed senior-level acquisition officials to determine how office  supply purchasing decisions were made within their respective agencies  and concluded that purchase cardholders compared costs at some level  prior to making a purchase. While these officials may have had a broad  understanding of agency procurement policies and practices based on  their positions in their respective agencies, they were not representative  of the approximately 270,000 credit cardholders making the purchasing  decisions. The GSA report did not identify or collect any data about price  comparisons conducted by the cardholders. Collecting information from  buyers, even through interviews or a survey of government purchase  cardholders who actually made the purchases, could have provided  another perspective on buyer behavior, including the extent to which price  comparisons were made. GSA officials said that, given the reporting  timeframe for the study, they did not have the resources or time that  would have been needed to conduct a study that would have included a  representative sample of the 270,000 purchase card holders.
section_title: New Strategic Sourcing Initiative for Office Supplies Shows Potential for Generating Savings
paragraphs: According to initial available data, GSA’s new OS II BPAs have produced  savings. The OS II initiative, more so than past efforts, is demonstrating  that leveraged buying can produce greater savings and has provided  improvements for managing ongoing and future strategic sourcing  initiatives. GSA is using a combination of agency and vendor involvement  to identify key requirements and cost drivers, increase the ease of use,  and obtain the data necessary to manage the program. For example, a  key aspect of the initiative is that participating vendors provide sales and  other information to GSA to help monitor prices, savings, and vendor  performance.
subsections: section_title: GSA’s Analysis of OS II Data Shows Savings Are Being Achieved
paragraphs: On the basis of the sales data provided by OS II vendors, GSA estimates  the federal government saved $16 million from June 2010 through August  2011 by using these BPAs. These savings were estimated by comparing  the lowest prices of a set of over 400 items available on GSA’s schedules  program contracts before OS II with prices and discounts being offered  for the same items on the OS II BPAs. Importantly, and unlike GSA’s  report, GSA’s conclusions about savings realized under OS II are based  on data from vendors—which they are required to collect and provide in  the normal course of business—and not on data collected after the fact  from sources not designed to produce information needed to estimate  savings.
GSA’s comparison of the market basket of best schedule prices against  the OS II BPA vendors’ prices found that the BPA vendors offered prices  that were an average of 8 percent lower, and the average savings is  expected to fluctuate somewhat as the OS II initiative continues to be  implemented. The expected fluctuation is based on anticipated changes  in the mix of vendors, products, and agencies. For example, GSA found  the savings, as a percentage, declined slightly as agencies with  historically strong office supplies management programs increased their  use of OS II. Conversely, they expect the savings percentage to increase  as agencies without strong office supplies management programs  increase their use. In addition to the savings from the BPAs, GSA  representatives told us that they are also seeing prices decrease on  schedules program contracts as vendors that were not selected for the  OS II program react to the additional price competition created by the OS  II initiative by reducing their schedule prices.
After the first year the OS II BPAs were in use, GSA extended the BPAs  for an additional year after negotiating additional price discounts. As a  result of these discussions, 13 of the 15 BPA vendors decreased their  prices by an additional 3.9 percent on average. Additionally, the BPAs  included tiered discounts, which apply when specific sales volume  thresholds are met. Sales realized by one of the BPA vendors reached  the first tier discount level in September 2011, and the vendor has since  adjusted its prices to provide the corresponding price discounts. GSA  anticipates additional vendor sales to exceed the first tier discount  threshold in the first option year, which will trigger additional discounts.
GSA expects that OS II will result in lower government-wide costs for  office supplies as more agencies move from their agency-specific BPAs  for office supplies to the OS II BPAs. Many agencies that had their own  BPAs for office supplies did not renew their BPAs and have opted to use  the OS II instead. As these agencies move to OS II, their contract  management costs should decrease. For example, according to Air Force  officials, instead of having personnel in every agency administer their own  BPAs for office supplies, personnel at GSA will administer the OS II  program on behalf of other agencies. While this may create some  additional burden for GSA, officials believe the overall government costs  to administer office supply purchases should decrease.
section_title: OS II Includes Key Management Goals to Enhance Oversight and Manage Suppliers
paragraphs: GSA has incorporated a range of activities representative of a strategic  procurement approach into the OS II initiative, including aspects of  managing the suppliers. These activities range from obtaining a better  picture of spending on services, to taking an enterprisewide approach, to  developing new ways of doing business. All of these activities involve  some level of centralized oversight and management. In addition, this  approach involves activities associated with the management of the  supply chain, which includes planning and managing all activities involved  in sourcing and procurement decisions, as well as logistics management  activities. These include coordination and collaboration with stakeholders,  such as suppliers or vendors, intermediaries sometimes referred to as  resellers, third party service providers, and customers or buying agencies.  As part of the planning process for OS II, GSA assessed its schedules  program office supply vendor pool and determined a sufficient number of  vendors could meet its critical requirements.
As part of the overall strategy, in addition to savings, GSA through its  commodity council also identified five overarching goals for the OS II  initiative, to facilitate overall management, as shown in table 2.
As part of preparing for the competition for OS II, GSA obtained input  from the interested vendors before issuing the request for quotations by  holding an industry day. For example, based on vendor input that  identified shipping as a key cost driver, a $100 minimum order level was  included as part of the BPA. A reverse auction process was used to carry  out the competition for the BPAs, which GSA anticipated would result in  more pricing discounts offered by vendors. As part of the reverse auction  process, the vendors submitted an initial quote. After GSA evaluated the  quotes, the vendors were notified of the lowest quotes and provided at  least one opportunity to revise their quotes, resulting in price reductions.
GSA obtained commitments from agencies and help set goals for  additional discounts to let businesses know that the agencies were  serious in their commitment to the BPAs. This also helped GSA  determine the number of BPAs that would be awarded. Because  government purchase cards were the most common way to purchase  office supplies, OS II includes a point of sale discount, under which BPA  prices are automatically charged whenever a government purchase card  is used for an item covered by the BPA rather than having the buyers ask  for a discount. Additionally, purchases are automatically tax exempt if the  purchases are made using a government purchase card. State sales  taxes were identified by GSA’s report as costing the federal agencies at  least $7 million dollars in fiscal year 2009.
section_title: Capturing Better Data Has Enhanced Oversight of Vendors and OS II Management
paragraphs: To address concerns about vendor oversight and management, OS II has  attempted to clearly define program implementation responsibilities,  including laying out GSA, vendor, and buying agency responsibilities. A  key aspect of a successful acquisition program is managing the vendors  or suppliers to ensure that they are meeting terms and conditions of the  contract or BPA and that the program or initiative is meeting its overall  goals. This includes defining performance metrics, capturing or collecting  data, preparing analysis and related reports, communicating the results of  the analysis, and initiating corrective actions. GSA is capturing data on  purchases and vendor performance that is assimilated and tracked  through dashboards, which are high-level indicators of overall program  performance. The dashboard information is used by the GSA team  members responsible for oversight and is shared with agencies using   OS II.
Our review of GSA’s OS II vendor files found that GSA has taken a more  active role in oversight and is holding the vendors accountable for  performance. For example, GSA has issued Letters of Concern to four  vendors and has issued one Cure Notice to a vendor. These letters and  notices are used to inform vendors that the agency has identified a  problem with the vendor’s compliance with the terms and conditions of  the BPA.
To support the OS II management responsibilities, GSA charges a   2 percent management fee, which is incorporated into the vendor prices.  This fee, which is higher than the .75 percent fee normally charged on  GSA schedules program sales, covers the additional program costs, such  as the cost of the six officials responsible for administering the 15 BPAs,  as well as their contractor support.
section_title: OS II Initiative Offers Lessons for Other Strategic Sourcing Initiatives
paragraphs: GSA is learning lessons from OS II, its first of the second generation of  strategic sourcing initiatives, and is attempting to incorporate these  lessons into other strategic sourcing initiatives. While some of the lessons  learned as OS II has progressed are not directly transferable to other  initiatives, there are some aspects of it that can be applied to any  strategic sourcing initiative. To this end, GSA established an office  supplies commodity council to identify agencies’ goals and needs. The  input provided by the commodity team was incorporated into all aspects  of the program from the vendor requirements to the selection criteria. This  experience is being applied to other strategic sourcing initiatives. For  example, GSA took a more collaborative approach as it moved to Federal  Strategic Sourcing Initiative Second Generation Domestic Delivery  Services II (DDS2). More specifically, GSA set up a commodity council  that helped identify the program requirements and provide input on how  the program operates. Vendor input was also sought and incorporated  into the requirements.
section_title: Concluding Observations
paragraphs: GSA’s office supplies report contained some data and other limitations,  but it showed that federal agencies were not using a consistent approach  in both where and how they bought office supplies and often paid a price  premium as a result of these practices. The magnitude of the price  premium may be debatable, but other agencies that have conducted  studies came to the same basic conclusion about the savings potential  from leveraged buying. The GSA study helped set the course for a more  strategic approach to buying office supplies—an approach that provides  data to oversee the performance of vendors, monitor prices, and estimate  savings. Additional savings are expected as more government agencies  participate in the OS II initiative and further leverage the government’s  buying power.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to GSA, DHS, and DOD. We received  written comments from GSA and DHS, which are included as appendices  I and II, respectively. DOD had no comments.
In its comments, GSA said it was pleased that our report affirmed that  savings can be achieved through leveraged purchasing and better  understanding of spend data. GSA also provided additional information  on its strategic sourcing initiatives. GSA noted that it would have been  very resource intensive for the agency to obtain information from a  representative sample of the 270,000 purchase card holders for little  added benefit.  We revised our report to reflect GSA’s comment. GSA  provided some suggested language and technical changes to help clarify  the report, which we incorporated as appropriate. We did not use GSA's  suggested language concerning the limitations we identified in its study  because we believe the language in our report accurately reflects our  finding on this issue.
DHS stated that it appreciated our work and provided additional  information on its respective strategic sourcing initiatives. DHS also  stated that it has realized savings from the OS II initiative and expects to  continue to do so.
We are sending copies of this report to the Administrator of General  Services, the Secretaries of the Department of Homeland Security and  Defense as well as the Air Force, Army, and Navy. In addition, the report  is also available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix III.
section_title: Appendix I: Comments from the General Services Administration
section_title: Appendix II: Comments from the Department of Homeland Security
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, James Fuquay, Assistant  Director; Marie Ahearn; Morgan Delaney Ramaker; Joseph Fread; Jean  Lee; Jean McSween; Kenneth Patton; Carol Petersen; Raffaele Roffo;  William Russell; Roxanna Sun; Jeff Tessin; and Ann Marie Udale made  significant contributions to this report.