Defense Commissaries: DOD Needs to Improve Business Processes to Ensure Patron Benefits and Achieve Operational Efficiencies
Released: 2017-03-23T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: DOD operates 238 commissaries worldwide to provide groceries and household goods at reduced prices as a benefit to military personnel, retirees, and their dependents. Since 2010, Congress appropriated an average $1.4 billion annually to help fund commissary operations.

Senate Report 114-49 included a provision for GAO to review aspects of commissary operations. This report (1) determines the extent to which DOD has assurance it is maintaining its desired savings rate for patrons and (2) identifies differences in business practices between commissary operations and commercial grocery store practices. GAO analyzed data on savings, sales, and costs. GAO also reviewed leading practices relevant for commissary operations; assessed the costs for service contracts and product distribution options; and conducted site visits to a nongeneralizable sample of 12 commissaries based on, among other things, location and sales.

section_title: What GAO Found
paragraphs: The Department of Defense (DOD) lacks reasonable assurance that it is maintaining its desired savings rate for commissary patrons. The Defense Commissary Agency (DeCA), which manages the commissaries, has a methodology for calculating the annual savings rate that patrons realize by shopping at commissaries rather than commercial grocery stores. In fiscal year 2015, the most recent data available at the time of our review, DeCA's Board of Directors approved a desired average savings rate of 30 percent based on savings calculated for prior years using the methodology. However, GAO found weaknesses in this methodology. For example, the methodology does not use a random sample of overseas commissaries or account for seasonal and geographic variations in item prices. Because of these weaknesses, DOD's methodology can potentially result in an inaccurate calculation of the actual savings rate that commissary patrons experience. DeCA officials stated that the agency plans to revise the savings methodology to address the limitations GAO identified. Because this effort is underway, it is too early to know whether the revisions will address the limitations GAO identified.

Differences exist between certain business processes used at the commissaries and those of commercial grocery stores.

First, DeCA tracks the sale of products at all commissaries but does not assess the contribution of the sale of each product to a given store's total sales in determining which products to sell. According to DeCA officials, because commissaries are focused on providing a benefit rather than on maximizing profits like commercial grocery stores, commissaries do not always adjust products they carry based on customer demand. DeCA officials said that they would like to be more efficient, but have not developed a plan with achievable objectives, goals, and time frames regarding how to improve product management based on sales and customer demand. Without improving the management of products based on sales and customer demand as is done in commercial grocery stores, DeCA may be missing opportunities to increase sales, leverage efficiencies, and achieve savings in commissary operations. Second, DeCA has not conducted cost-benefit analyses for costs associated with (1) the use of stocking and custodial service contracts as compared with the use of in-house staff and (2) product distribution options across all commissaries. For example, DeCA uses services contracts at most commissaries, totaling about $137 million in fiscal year 2015, even though our analysis suggests that using in-house personnel for stocking may be more cost effective. Commercial grocery stores are generally sensitive to the cost of business operations, competition in their market, and the need to generate a profit. In addition, different product distribution options could result in significant savings impacting the price a commissary patron pays for a product. According to DeCA officials, DOD does not require cost-benefit analyses to compare alternative options for service contracts or for the distribution of products to commissaries. However, without conducting such analyses to guide its decision making on these business processes, DeCA is not positioned to determine whether it is using its resources most efficiently.

section_title: What GAO Recommends
paragraphs: GAO is making three recommendations, including that DOD address limitations identified in its savings rate methodology; develop a plan with objectives, goals, and time frames to improve efficiency in product management; and conduct comprehensive cost-benefit analyses for service contracts and distribution options. DOD concurred with GAO's first two recommendations and partially concurred with the third recommendation. GAO continues to believe the cost-benefit analysis recommendation is valid.

section_title: Letter
paragraphs: Defense commissaries are intended to enhance the quality of life of  active-duty personnel, military retirees, and their dependents, and support  military readiness, recruitment, and retention goals. The defense  commissaries comprise a worldwide chain of stores that, as required by  law, provide groceries and household goods to their patrons at reduced  prices. Commissaries are not expected to be self-supporting, and  Congress appropriated an average of $1.4 billion annually from fiscal  years 2010 through 2015 to help fund their operations. The Department  of Defense (DOD) estimates that a family of four can save about $4,400  annually (or approximately 30 percent) by shopping at a defense  commissary instead of at a commercial grocery store. This savings is  considered a noncash benefit.

The Defense Commissary Agency (DeCA) manages defense  commissaries. DeCA reports to the Office of the Secretary of Defense,  and is governed by a Board of Directors comprising representatives from  each of the military services. As of April 2016, DeCA operated 238  commissaries worldwide—177 in the United States and 61 overseas— and its total annual sales for fiscal year 2015 were about $5.5 billion.

DeCA has about 15,000 employees, some of whom are part-time  employees, and total labor costs accounted for about $1 billion, or 73  percent, of the operating costs covered by the annual appropriation in  fiscal year 2015. The 2015 National Defense Authorization Act required  DOD to conduct a review of commissary management and determine the  potential impact of any changes on patron savings. Following up on the  2015 National Defense Authorization Act, there was an additional interest  in exploring the possibility of privatizing a portion of commissary  operations. Also, DOD proposed that Congress reduce annual  appropriations in fiscal year 2017 by $1 billion over the course of the 5- year period from fiscal year 2017 through fiscal year 2021 and that  Congress allow the department to adopt some business practices  commonly used by commercial grocery stores that would enable  commissaries to be at least partially self-sustaining, thus reducing  taxpayer costs.

Senate Report 114-49 accompanying a bill for the National Defense  Authorization Act for Fiscal Year 2016 included a provision for us to  analyze and review certain aspects of commissary operations.  Accordingly, this report (1) determines the extent to which DOD has  assurance it is maintaining its desired savings rate (nonpay cash benefit)  for patrons and (2) identifies differences in business practices between  commissary operations and commercial grocery store practices.

To address both objectives, we assessed information provided by DeCA  headquarters and conducted site visits to a nongeneralizable sample of  12 commissaries. We selected these commissaries to reflect various  characteristics such as location, sales, operating costs, and the  representation of all military services. Results from this nongeneralizable  sample cannot be used to make inferences about all commissaries but  provide insight into the costs and management of commissaries.

To determine the extent to which DOD has assurance it is maintaining its  desired savings rate for patrons, we reviewed DeCA’s guidance and  methodology for calculating the patron savings rate from fiscal years 2010  through 2015, the most recent fiscal year for which data were available at  the time of our review. We compared DeCA’s savings methodology with  relevant leading practices for cost estimating and sampling, such as  sampling standards established by the American Association for Public  Opinion Research Report Task Force on Non-Probability Sampling, and  with federal standards for internal control, which states that management  should have relevant and reliable information to run an agency’s  operations and the data should be reasonably free of error and bias and  represent what they were purported to represent. We interviewed DeCA  officials responsible for collecting, tracking, and analyzing sales, prices,  costs, and savings information at DOD commissaries to corroborate our  understanding of DeCA’s methodology for calculating the patron savings  rate.

To identify differences in business practices between commissary  operations and commercial grocery store practices and their implications  for operational efficiencies and costs, we reviewed pricing methods,  product management, and certain business processes such as those  pertaining to stocking and custodial services and distribution. We  compared DeCA’s pricing method as required by statute with practices  used in the private sector. We identified private sector practices by  reviewing pertinent studies that describe operational efficiencies achieved  in the private sector and through discussions with representatives of  commercial grocery stores and retailer associations. We also reviewed  DeCA’s plans to change the current pricing method.

With regard to stocking and custodial services, we reviewed DeCA’s  guidance related to these business processes and obtained information  on how DeCA decides whether to contract for these services or use in- house staff. For distribution processes, we reviewed costs associated  with DeCA-owned or leased vehicles and DeCA warehouses both  domestically and overseas, as well as other options for product  distribution. We also compared DeCA’s guidance for reviewing contracts  against DeCA acquisition regulations, federal government guidelines, and  federal standards for internal control. We interviewed DeCA  headquarters officials and officials at local commissaries responsible for  contracting to identify and assess the implementation of contracts at the  local level.

We assessed the reliability of data on savings rates, sales, and  contracting information provided by DeCA by (1) reviewing related  documentation, such as recent studies, and (2) interviewing DeCA  officials who were knowledgeable about the data. We asked the officials  questions intended to assess the reliability of the data, including  questions about the purpose for which the data were collected, the source  of the data, and how the data were compiled. On the basis of procedures  performed, we have concluded that these data were sufficiently reliable  for the purposes of reporting on data related to savings, sales, and  salaries used for contracting and custodial services. See appendix I for  additional details on our scope and methodology.

We conducted this performance audit from September 2015 to March  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient and 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
subsections: section_title: DOD Guidance for Establishing and Closing Commissaries
paragraphs: By law, DOD’s primary consideration for establishing and closing  commissaries is the needs of the members of the armed forces on active  duty and their dependents. DOD Instruction 1330.17 outlines  requirements for establishing and closing commissaries. Under the  instruction, DOD can establish commissaries only where (1) the location  has a military mission and a minimum active-duty population of at least  500 active, reserve, or National Guard personnel and (2) the location is  part of DOD’s real property inventory. For commissaries in locations that  DOD considers to be remote and isolated, the Assistant Secretary of  Defense (Readiness and Force Management) may grant an exception  from the requirement to have a minimum active-duty population of 500  personnel. DOD Instruction 1015.10, which defines remote and isolated,  lists factors to establish and maintain a location’s remote and isolated  status, which must be documented and updated if circumstances change  substantially. According to DeCA, as of April 2016, there were 29 commissaries that are located in remote and isolated areas. DOD’s  instruction also provides specific requirements for closing commissaries,  including if the location (1) no longer is managed as part of DOD’s real  property inventory, such as if the site is closed under a Base Realignment  and Closure round recommendation and (2) no longer has a military  mission or an active-duty population—specifically if there are not at least  100 active, reserve, or National Guard personnel on active duty  permanently assigned to the installation or location.

section_title: Our Prior Work on Defense Commissaries
paragraphs: We have previously reported on DOD’s commissary operations as well as  other privatization efforts within the department. For example, in  November 2016, we reported that DOD’s budget neutrality report for the  commissaries and exchanges did not include any assumptions,  methodology, or specific time frames related to cost savings initiatives  totaling $2 billion in reductions over a 5-year period from fiscal year 2017  through fiscal year 2021. We also found that DOD’s report did not define  specific metrics for benchmarks for customer satisfaction, quality of  products, and patron savings. We recommended that DOD provide  information to Congress to support the department’s conclusion about  budget neutrality, develop a plan for achieving alternative reductions to  appropriations, and identify specific metrics for customer satisfaction,  quality of products, and patron savings. DOD concurred with our  recommendations.

In April 2011, we reported that some of the general and economic criteria  in DOD’s instruction were not clear on when to establish or continue a  commissary versus when to discontinue commissary operations at Naval  Air Station Brunswick, Maine. For example, DOD’s instruction stated  that the primary consideration in assessing the need for a commissary  and selecting the location of the store—including whether to operate  commissaries on closed installations—is the effect on active-duty  personnel and their dependents. However, the instruction did not specify  how this effect should be measured and used as decision criteria.  Additionally, at the time of our review, the instruction stated that “as a  general rule, commissary operations are discontinued when an  installation is completely closed and no active-duty or reserve component  personnel remain on the installation.” However, we found that it was  unclear what conditions would warrant an exception to the general rule  and how the general rule relates to the other criteria for closing a  commissary. As a result, we recommended that DOD revise and clarify its  guidance. DOD concurred with and implemented our recommendation.

In July 2010, we reported that the Army experienced challenges with its  efforts to privatize its lodging facilities. Specifically, the Army pursued  privatization to obtain private-sector financing in order to address poor  conditions of its facilities. We made recommendations related to the Army  needing to assess the costs and benefits of future privatization efforts and  to the need for DOD to incorporate lessons learned in future privatization  efforts within the department. DOD concurred and implemented our  recommendations.

section_title: DOD’s Annual Appropriation
paragraphs: DeCA is required by law to use appropriated funds to cover commissary  operating costs, which subsidizes the price of groceries and household  goods for patrons shopping at commissaries. In fiscal year 2015, DeCA  received $1.3 billion in appropriations. DeCA also is governed by  regulations that may limit its ability to control costs and allocate funds in  the same way as commercial grocery stores, which do not operate under  such regulatory requirements. For example, under law, DeCA employees  are subject to civil service rules, including the General Schedule pay  scales and Office of Personnel Management regulations on personnel  policies such as hiring, pay, and retention, but that are not sensitive to  local market conditions such as local labor costs as would be true for a  commercial grocery store. Figure 1 shows how DeCA allocated $1.3  billion in appropriated funds by labor and non-labor operating costs in  fiscal year 2015.

section_title: Private Business Concepts at the Commissaries
paragraphs: When DOD established DeCA in 1991, it consolidated the management  of separate grocery stores run by the Army, the Air Force, the Navy, and  the Marine Corps. According to DeCA officials, the consolidation helped  reduce costs by combining buying power and sharing overhead. In recent  years, several studies reviewed the potential impact of employing  business concepts normally used in commercial grocery stores, such as  variable pricing and improvements in product management, in  commissary operations. For example, in 2015 the Military Compensation  and Retirement Modernization Commission (Military Commission) and  Boston Consulting Group both recommended ways to reduce annual  appropriated funds of commissaries by implementing private business  concepts. Specifically, the Military Commission recommended several  operational efficiencies, including consolidating commissaries with  exchanges, which are retail stores not funded with appropriations and  comprise a mix of department stores; convenience stores; and fast food  outlets, among others, and are managed by each of the military  services. The Boston Consulting Group made recommendations related  to employing variable pricing and to product management.

section_title: DeCA Lacks Reasonable Assurance That It Has Maintained Its Desired Savings Rate
paragraphs: DOD has a methodology to calculate the patron savings rate at  commissaries, but lacks reasonable assurance that it is maintaining its  desired savings rate for patrons because of weaknesses in this  methodology. DeCA’s Board of Directors annually recommends the  patron savings rate that is to be the price differential commissary patrons  are to obtain by shopping in commissaries rather than at commercial  grocery stores. Based on past calculations of the savings rate, the Board  recommended a desired average savings rate of 30 percent for fiscal year  2015. DeCA’s methodology for calculating savings uses weighted  averages of product prices. However, aspects of DeCA’s methodology  are not consistent with leading practices for cost estimating and sampling.  As a result of these weaknesses, DeCA lacks reasonable assurance that  the desired 30 percent rate recommended by the Board reflects the actual  experience of commissary patrons.
subsections: section_title: DeCA’s Savings Calculation Methodology Uses Weighted Averages of Product Prices
paragraphs: DeCA uses weighted averages of product prices to calculate the savings  rate, and DeCA’s methodology differs for commissaries in the  continental United States and for those in Hawaii, Alaska, and overseas.  For commissaries in the continental United States, DeCA divides  products into seven categories ranging from fresh meat and produce to  nonfood items with universal product codes (i.e., bar codes). For  products with bar codes, DeCA compares commissary and commercial  prices for over 38,000 items. Specifically, it compares prices on  commissary items during the first 6 months of the calendar year with  average national product prices provided by a leading survey. For  products lacking a bar code, DeCA conducts physical audits at local  commercial grocery stores with similar products for a selected sample of  30 commissaries. For the meat and produce samples, DeCA collects  price data annually in August and September. The seven categories’  prices are weighted using a consumer expenditure survey published by  the Bureau of Labor Statistics.

For commissaries in Alaska, Hawaii, and overseas, DeCA calculates the  weighted average of savings for a selected sample of commissaries  based on savings by total sales in each geographic region. DeCA  physically collects prices for about 200 items across the same seven  product categories from a sample of commissaries in Alaska and Hawaii.  At other overseas commissaries, DeCA conducts more limited sampling  from 13 commissaries. As shown in table 1, DeCA’s calculation of the  savings rate varies by geographic region.

section_title: DeCA’s Savings Calculation Methodology Has Several Weaknesses
paragraphs: When compared with leading practices for cost estimating and sampling,  DeCA’s savings calculation methodology has several weaknesses that  could lead to an inaccurate calculation of the actual savings rate that  commissary patrons experience. According to leading practices and  federal standards for internal control, management should have relevant  and reliable information to run its operations and the data should be  reasonably free of error and bias and represent what they were purported  to represent. However, our analysis showed that DeCA’s methodology  for determining the savings rate is not fully consistent with leading  practices in five areas. As a result, DeCA lacks reasonable assurance  that patrons are receiving the full desired value of the nonpay cash  benefit represented by the 30 percent savings rate approved by the Board  of Directors.

Seasonal sales prices: DeCA’s methodology does not account for  seasonal differences in prices. DeCA collects its product price  samples during the first 6 months of the calendar year for categories,  such as dairy, grocery food, frozen, and health and beauty products in  the continental United States, which is not representative of the whole  year and omits potentially reduced prices commercial grocery stores  may offer during the winter holidays. DeCA officials acknowledged  that they do not account for winter holiday season price fluctuation,  but stated that 6 months is a sufficient period of time for the sample.  However, according to nonprobability sampling standards published  by the American Association for Public Opinion Research, this type of  omission creates a coverage error by underrepresenting part of the  sample and generates potential bias. By limiting data collection to the  first 6 months of the year, DeCA lacks reasonable assurance that its  methodology results in an accurate comparison between commissary  and commercial prices over the full year.

Sampling overseas commissaries: While DeCA employs a  methodology for randomly selecting 30 commissaries in the  continental United States in its savings market basket analysis, the  agency lacks a similar methodology for selecting overseas  commissaries. Specifically, DeCA officials stated that they ask  regional directors to select the overseas commissaries to be included  in the sample. However, according to the report on nonprobability  sampling by the American Association for Public Opinion Research, a  nonrandom sampling method should be based on procedures to  provide estimates and some measure of their reliability to help avoid  potential sources of bias. Examples of bias include sampling based on  convenience or a sample that is small and unrepresentative of the  total populations. By giving regional directors the discretion to select  overseas commissaries, DeCA is not using a random sampling  method and the results of its savings analysis may be subject to  potential sources of bias and may not be representative.

Geographic price differentiation: DeCA’s methodology does not  account for differences in prices based on geographic location. As  discussed earlier, DeCA uses the Nielsen survey that aggregates  prices nationwide to compare with commissary prices. DeCA does not  compare its prices with prices charged by local competitors near its  commissaries. In contrast, commercial grocery stores generally  compare their prices with prices charged by competitors in the same  market since they are subject to comparable local costs of business  operations. Examples of comparable local costs include the costs of  labor and any applicable property or other taxation. Prices at  commercial grocery stores generally reflect local market conditions,  leading to higher retail prices in higher cost areas and lower prices in  lower cost areas. Conversely, the commissaries are somewhat  insulated from local market conditions since commissaries pay their  employees according to the federal pay system, which is not tied  directly to the local labor market; operate from government-owned  military bases that are not subject to property taxes; and have an  annual appropriation to subsidize operations. Because DeCA’s  methodology does not differentiate from high to low cost areas, the  patron savings rate is potentially inaccurate across different regions.  For example, the savings rate is likely to be lower in areas with a low  cost of operations and higher in areas with a high cost of operations.  In July 2016, DeCA officials stated that they are considering revising  the savings methodology to include more comparisons with local  commercial grocery stores.

Private labels: DeCA’s methodology does not account for lower  priced private labels. DeCA compares prices and savings only across  major name brands and grocery products that are sold by  commissaries and commercial grocery stores and excludes private- label items. However, patrons at commercial stores typically shop  for a mix of private-label and name-brand products, so DeCA’s  exclusion of private labels likely leads to an overstatement of the  savings rate. DeCA officials told us that they are working with the  Boston Consulting Group to conduct a pilot program to implement  private labeling at a select sample of commissaries for a limited time  period. The sample of commissaries and time period had not been  determined at the time of our review. According to DeCA officials,  the pilot would help DeCA to more accurately compare the cost of  shopping at commissaries with commercial grocery stores.

Weighted averages for quantities of items sold: DeCA does not  use weighted averages to account for variance in the quantities of  different products sold at its commissaries. As discussed earlier,  DeCA uses a weighted average to calculate savings at some  locations based on market shares from sales in the previous fiscal  year. However, DeCA does not use a weighted average when  comparing product prices with those of commercial grocery stores.  Instead, DeCA aggregates the prices of all commissary items within a  category (e.g., meat or produce) rather than using a weighted average  that takes into account differences in quantities sold across products.  For example, when DeCA calculates the average savings rate within  the meat category, the agency assumes the same quantities are sold  for all meat products, for example, for T-bone steaks and for ground  beef. This methodology assumes that patrons buy the same quantities  of differently priced products, an approach that is inconsistent with  leading practices. Because DeCA’s methodology does not account  for the variances in the quantities of different products sold within a  category, it can result in an inaccurate calculation of the patron  savings rate.

The 2015 Boston Consulting Group study also noted weaknesses in  DeCA’s savings rate methodology. For example, the study estimated that  the savings rate between commissary and commercial grocery store  prices is lower than 30 percent and ranges from 5 to 25 percent  depending upon the location of the commissary because higher cost of  living areas enjoy greater savings than lower cost of living areas. DeCA  officials told us they have used the same savings rate methodology since  it was introduced in 2008 and acknowledged they have not validated it for  accuracy and consistency.

DeCA officials stated that they have contracted with the Boston  Consulting Group to assist in addressing a statutorily authorized pilot  program for the commissary system to achieve budget neutrality (i.e., not  continuing to rely on appropriations). The effort includes revising its  methodology to verify that the approved savings rate is being achieved.  Once the savings rate is verified, it will be used as a baseline to assess  pilot programs that would include variable pricing and private label  brands. At the time of this review, DeCA officials could not provide  evidence to support how the revised savings methodology would address  all the limitations we identified, including those related to seasonal bias,  sampling methodology for overseas commissaries, and geographic  differentiation. DeCA officials stated that the agency plans to assess and  revise the savings methodology, which may include addressing some  limitations such as weighted average calculations. As DeCA takes steps  to revise its methodology, an opportunity exists to address the  weaknesses we and others have identified. Doing so would provide  greater assurance that patrons are experiencing the desired 30 percent  savings rate using their commissary shopping privileges.

section_title: DeCA Employs a Business Model That Departs from Practices Generally Employed by Commercial Grocery Stores
paragraphs: DeCA’s business model for defense commissaries departs from practices  generally employed by commercial grocery stores. First, DeCA uses a  statutorily required pricing method that differs from the pricing method  generally employed by commercial grocery stores. Second, while DeCA  tracks products sold in its stores, the agency does not adopt leading  practices such as using product demand to determine which products it  should stock, potentially limiting the stocking and sales of popular items.  Third, DeCA lacks reasonable assurance that certain of its business  processes are cost effective.
subsections: section_title: DeCA Uses a Statutorily Required Pricing Method That Differs from the Method Generally Used by Commercial Grocery Stores
paragraphs: DeCA’s commissaries are subject to statutory requirements to implement  a pricing method that leads to generally uniform prices for the same  product at different locations. By comparison, commercial grocery stores’  prices are sensitive to local market operating costs as noted above and  include a markup on the price of products to cover operating costs and  generate a profit. To address the statutory requirement that DOD plan for  the budget neutrality of commissaries, DeCA is considering changes in its  pricing method that could enable defense commissaries to incorporate  business concepts commonly used by commercial grocery stores.
subsections: section_title: DOD Pricing Method Leads to Mostly Uniform Prices, Whereas Private Sector Prices Are Sensitive to Local Market Costs
paragraphs: By law, DeCA is required to implement a uniform pricing method across  its commissaries. Under this method, DeCA prices products so that  sales of products recoup only the actual product cost from the supplier;  the cost of transportation to the place of sale; and the actual or estimated  cost of the loss of inventory, plus a 5-percent surcharge. The surcharge  can be used to fund specific types of activities, such as commissary  construction, equipment, repair, software acquisition, and facilities  maintenance. As a result, DeCA officials stated that because their  pricing model excludes some costs, such as salaries, benefits, rent, and a  profit margin, commissaries provide patron savings when compared with  shopping at commercial grocery stores.

By contrast, pricing at commercial grocery stores is sensitive to the cost  of business operations, competition in their specific market, and the need  to generate a profit. They typically establish prices that account for the full  cost of grocery products plus the needed markup for profit. According to  private sector guidelines, standard industry practices for pricing include  costs, such as salaries and benefits for employees, rent, marketing, and  other administrative support costs. However, by law, DeCA cannot  include costs such as salaries, employee benefits, and utilities in its retail  product prices, and DeCA instead pays these costs using its annual  appropriation. Also, according to DeCA officials, unlike commercial  grocery stores, DeCA does not pay rent for the use of commissary  buildings because DOD owns the facilities, although the agency pays for  store construction and maintenance with funds from the 5 percent  surcharge. Figure 2 shows DeCA’s pricing practices as compared with  those of commercial grocery stores.

DeCA’s uniform pricing method results in some differences with  commercial grocery stores in how prices are set. Commercial grocery  stores use a variable pricing method by which they charge different prices  for the same product in different locations, even within the same chain of  stores. (Variable pricing is discussed further in the next section of this  report). Conversely, DeCA’s mandate to charge uniform prices means  that prices are generally the same for the same item regardless of local  market business conditions, cost of operations, or the presence of  competition from commercial grocery stores, so commissary prices are  not sensitive to these factors. Moreover, the annual appropriation covers  the cost of operations, which serves as a subsidy, as previously noted.  DeCA officials told us that the current system results in DeCA using high  sales volumes and surcharge revenue collected at some commissaries to  offset lower sales at other commissaries—often those at smaller  commissaries or those located in remote locations, many of which might  be unprofitable if they were commercial grocery stores. For example,  DeCA pools the surcharge revenue collectively across all commissaries  to help pay for commissary construction and maintenance, among other  things.

The uniform pricing method also likely leads to differences in the actual  savings rate commissary patrons experience due to commercial grocery  stores’ sensitivity to local market business operations costs but from  which the commissaries are somewhat shielded. Specifically, while  commissaries share the same prices for the same products regardless of  the market, commercial grocery stores generally price products to recoup  the lower or higher operating costs in a given market and maintain a profit  margin. Thus, DeCA’s uniform pricing method likely results in patrons in  lower cost-of-living areas receiving a lower-than-average savings rate  since competing private retail stores can price products lower based on  the lower local operating costs but the commissary’s product price is  static and not sensitive to local market operating costs. By comparison,  commissary patrons in higher cost-of-living areas (e.g., Hawaii) are likely  to experience a relatively greater savings rate since competing  commercial grocery stores must price their products higher to recoup the  higher operating costs but, as in the previous example, the commissary’s  price is uniform and static.

A comparison of the uniform pricing method and commercial grocery  store practices reveals another key difference between the commissaries  and commercial stores. Commercial grocery store operators are likely to  eventually close an unprofitable store when profit and loss—affected by  prices—are the key considerations. Conversely, because the commissary  business model has a separate funding source (the annual appropriation)  that is not linked to sales and prices, DeCA may keep stores open even if  the cost of operations exceeds sales revenue. For example, a  commissary at Camp Kure, Japan, sold goods totaling $56,655 in fiscal  year 2015 but had operating costs totaling $71,931, which represents  nearly 127 percent of total sales—figures that would be considered  unprofitable for a commercial grocery store. Senior DeCA officials  acknowledged that remote and overseas commissaries are unlikely to be  profitable under the commercial grocery store business model. On the  other hand, some commissaries do generate sales in an amount greater  than their operating costs. For example, the commissary at Fort Belvoir,  Virginia, sold goods totaling $93.3 million in fiscal year 2015 and had  operating costs of $10.2 million. Figures 3 and 4 shows a comparison of  sales and operating costs, which are subsidized through appropriations,  for commissaries with the highest and lowest sales.

Specifically, DeCA plans to pilot changes to the uniform pricing method in  response to a statutory provision. DeCA is working with the Boston  Consulting Group to address a provision directing DOD to report on its  plan to achieve budget neutrality for the commissaries and the  exchanges, and authorizing pilot programs, including the use of variable  pricing, among other things. As noted above, variable pricing is a  common practice used by commercial grocery stores. It allows them to  price some goods below cost, which generates a loss on that product but  increases customer traffic to the store and potentially higher sales of  other products. According to recent studies contracted by DOD, variable  pricing could allow DeCA to price goods and compete more directly with  private grocery stores nearby, which could increase commissary  revenues. For example, the 2015 Boston Consulting Group study found  that variable pricing would allow DeCA to correct for imbalances under  uniform pricing that lead to some patrons in low cost-of-living areas  receiving a lower than average savings benefit. The study concluded  that variable pricing would allow DeCA to provide a more consistent level  of savings across regions and categories. This approach would help  ensure a more uniform distribution of the desired savings rate among  commissary patrons regardless of location. At the time of our review,  DeCA officials could not confirm the time frames regarding when the pilot  will be implemented.

section_title: DeCA Tracks Products Sold but Does Not Manage Products in a Manner Consistent with Practices Generally Employed in Commercial Grocery Stores
paragraphs: DeCA tracks the sale of products at all commissaries but does not assess  the contribution of the sale of each product to a given store’s total sales in  determining which products to sell. In 2015, DeCA launched a system for  scanning patron identity cards, which officials said has helped DeCA track  shopping behavior at the commissaries. DeCA officials stated that they  are also taking steps to analyze consumer shopping behavior to  understand general trends at commissaries. For example, DeCA plans  to better understand consumer preferences by age, income, job position,  and a variety of other demographics, to better target products that are  sold at commissaries. Senior DeCA officials further stated that the agency  conducted reviews of products on a regular basis to understand which  products are top sellers and which are not performing well. DeCA officials  explained how they use these product reviews to help assess customer  demand and interest for new products. However, officials said that they  do not consider the contribution of each product to a store’s total sales in  determining which products to sell. Similarly, according to the 2015  Boston Consulting Group study, DeCA could improve its management  of products based on a deep understanding of consumer preferences,  shopping behavior, and product category management.

According to DeCA officials, because commissaries are focused on  providing a benefit rather than on maximizing profitability or sales like  commercial grocery stores, commissaries do not have clear goals or  objectives related to customer demand. For example, commissaries do  not always adjust products that commissaries carry based on customer  demand. Conversely, according to studies of commercial grocery store  practices and National Grocers Association officials, efficient product  management includes focusing on the contribution of products to the  store’s sales and providing products driven by customer demand so that  stores are selling what their customers want to buy. In addition, according  to commercial grocery store officials, the retail industry typically  determines how many different brands of the same item (such as brands  of ketchup or tuna) and how many different size containers of each brand  that is most cost effective to stock. They generally include avoiding  offering too many similar brands and sizes of similar products; instead,  they typically limit the number of similar products offered to increase  efficiency and sales margins.

Commissaries, on the other hand, may stock too many different brands  and sizes of the same product, according to the Boston Consulting  Group’s 2015 study. This practice, known as “product proliferation” in the  retail industry, can tie up funds in inventory without generating revenue,  particularly for those brands or sizes that do not sell well at a given  commissary. During site visits to 12 commissaries, we found some  evidence of product proliferation. For example, we found five brands of  mayonnaise with 36 different sizes and flavors at one commissary. By  comparison, a nearby commercial grocery store had just three different  brands of mayonnaise and 18 different sizes and flavors.

DeCA officials said that they would like to be more efficient and improve  product management based on store sales and customer demand, but  DeCA does not have a plan with time frames and could not provide  additional information about how it would achieve this goal. According to  federal standards for internal control, management should design control  activities to achieve objectives, and management should formulate plans  to achieve its objectives and have oversight of control activities  depending on the level of precision needed so that the entity meets its  objectives. Further, according to leading practices in project  management, the establishment of clear, achievable objectives, goals,  and time frames can help ensure successful project completion. Without a  plan that clarifies the objectives, goals, and time frames DeCA will take to  improve management of products based on store sales or customer  demand as generally employed in commercial grocery stores, DeCA risks  managing products inefficiently and missing opportunities to generate  greater revenue streams and possibly cut costs.

section_title: DeCA Lacks Reasonable Assurance That Certain of Its Business Processes Are Cost Effective
paragraphs: DeCA lacks reasonable assurance that its business processes for  stocking shelves, providing custodial services, and distributing products to  its stores are cost effective. The agency has not conducted a cost-benefit  analysis to review operational costs related to decision making on using  in-house commissary staff for stocking and custodial services versus  contractors. Similarly, the agency has not conducted a cost-benefit  analysis to understand the costs associated with different distribution  options across all commissaries. Employing cost-effective business  processes is important to DeCA’s ability to reduce its reliance on the  annual appropriation while maintaining the desired patron savings rate.
subsections: section_title: DeCA Has Not Compared Costs and Benefits of Using In- House Staff or Contractors for Shelf Stocking and Custodial Services
paragraphs: DeCA uses in-house staff to stock shelves and provide custodial services  at some of its commissaries and contracts out for these services at other  commissaries, but the agency could not provide a cost-benefit analysis to  determine which approach results in lower operating costs. According to a  recent study and private retailers with whom we spoke, most commercial  grocery stores use in-house stocking because it allows for more flexibility  and control over the management of inventory and staffing, which can  lead to lower operating costs. We analyzed DeCA data for fiscal year  2015 and found that 154 commissaries had used service contracts for  stocking and custodial services totaling $137 million, about $900,000 per  commissary per year. During the same year, 81 commissaries used in- house staff for stocking and custodial services, and DeCA estimated the  cost for in-house DeCA staff for these commissaries at about $39 million,  about $500,000 per commissary per year. Thus, at the time of our  review, in-house stocking and custodial services cost on average about  $400,000 less. For example, based on our analysis of 49 small  commissaries, 23 of the 49 stores had service contracts totaling $7.5  million, or just over $327,000 per commissary per year. By comparison,  the remaining 26 stores used in-house stocking totaling $6.6 million, or  almost $255,000 per commissary per year, a difference of almost  $72,000 on average. We provided this analysis to DeCA and they  acknowledged that contracting for stocking and custodial services cost  more on average. Table 2 and figure 5 show the total and average costs  of in-house stocking and custodial services compared with service  contracts at commissaries of various sizes.

Federal standards for internal control and Office of Management and  Budget (OMB) guidance state that management is responsible for  establishing and maintaining internal control to achieve the objectives of  effective and efficient operations. Further, these federal government  guidelines also state that management should establish and monitor  activities to evaluate costs associated with contracts. OMB guidance also  promotes efficient resource allocation through well-informed decision  making and provides guidance for a federal agency to perform sound  cost-benefit and cost-effectiveness analyses. These analyses should  include elements such as comprehensive estimates of the expected  benefits and costs of the program and alternative means of achieving  objectives.

However, DeCA is continuing to implement service contracts for many of  its stocking and custodial services without conducting cost-benefit  analysis to determine whether this approach will reduce operating costs  when compared with using in-house staff. Although DeCA conducted cost  comparisons for two commissaries, DeCA has not performed cost  comparisons or cost-benefit analysis for the remaining 238 commissaries.  According to DeCA officials, the cost comparisons for the two  commissaries were conducted because the service contractor had  defaulted, and the cost comparison found that in-house stocking was  more cost effective. According to some DeCA officials, there are several  reasons for using in-house stocking at a commissary, such as the lack of  availability of a contractor, the location and size of commissaries, as well  as staff experience, but the agency did not identify savings as a reason  for using in-house stocking.

According to DeCA officials, cost-benefit analyses were not completed for  all commissaries because it was not a requirement when DeCA was  established in 1991. Further, officials stated that DeCA continued to use  contracts inherited from the prior commissary system. Although DeCA’s  acquisition regulations require DeCA to review its service contracts  annually to ensure contract performance, it has not compared the use of  service contracts with the use of in-house DeCA staff for stocking and  custodial services and instead continues to renew the contracts. Without  conducting a cost-benefit analysis to guide decisions about using in- house or contractor staff for stocking and custodial services at its  commissaries, DeCA is not positioned to determine whether it is using its  resources efficiently and effectively and is reducing operational costs.

section_title: DeCA Lacks Reasonable Assurance That It Is Using the Most Cost-Effective Product Distribution System
paragraphs: DeCA has not conducted a cost-benefit analysis to fully understand the  costs associated with different product distribution options across all  commissaries and to use in selecting the most cost-effective option  available for each commissary. After it was established in 1991, DeCA  consolidated its logistics supply chains and transportation operations  decisions at its headquarters based in Fort Lee, Virginia. Generally,  DeCA headquarters decided to rely on product manufacturers to transport  products to commissaries. The product manufacturers decide how to  transport their products to DeCA commissaries, and they either deliver  the products themselves or hire a third-party broker to arrange for  deliveries. According to DeCA officials, although DeCA headquarters  makes contracting decisions, local commissary officials have some  discretion to consult with manufacturers on product distribution options.  For example, some commissaries have distribution capabilities and,  instead of direct delivery from the manufacturer, the products are  delivered to a DeCA central distribution center. If products are delivered  to a central distribution center, DeCA uses its own trucks to deliver  products to commissaries. Figure 6 shows the different distribution  options for delivering products to commissaries.

Although contracting decisions for commissary products are made at  DeCA headquarters, some local commissary officials stated that they  have been able to negotiate directly with manufacturers and achieve  some cost savings in the quantities purchased and directly delivered. For  example, according to DeCA officials, some commissaries can reduce the  price of products by leveraging high-selling nonperishable items (e.g.,  water and energy drinks) and achieving economies of scale by buying  large amounts of such items directly from a manufacturer rather than  receiving those items in smaller quantities from third-party brokers.  Specifically, DeCA officials stated that commissaries could negotiate with  manufacturers by leveraging the volume of a truckload of specific  products, thereby reducing the wholesale price of that product—a savings  that would be reflected in a lower retail price for patrons. According to  some DeCA officials, in addition to larger stores receiving truckloads of  items, a truckload of products can also be split among several smaller  stores located close to each other. Based on an example from a senior  DeCA official from a large commissary, we found that if the commissary is  able to accept a truckload of bottled water on a weekly basis there is a  potential of $552,500 annual savings on the cost of such water, compared  with relying on a third-party distributor to provide individual pallets of  water in separate deliveries. Although there could be potential cost  savings, DeCA has not conducted a cost-benefit analysis to understand  product distribution options and potential cost savings.

Another product distribution option that could provide cost savings is to  use a central distribution center or larger commissary. Specifically, some  commissaries use a central distribution center or larger commissary to  receive products from manufacturers and then distribute products directly  to or between commissaries, rather than receiving direct delivery from a  manufacturer to a commissary. Specifically, DeCA currently operates five  product-delivery vehicles located at larger commissaries that support one  or two smaller commissaries that are unable to receive large truckloads of  products. The total cost for five vehicles is approximately $64,000 to  operate annually, not including driver salaries. DeCA uses these vehicles  to leverage storage space and reduce costs for other smaller  commissaries located nearby. In addition to providing manufacturer  products to the smaller commissaries, DeCA could use its trucks to  provide meat to smaller commissaries. According to a senior DeCA  official, a smaller commissary may not need staff to operate certain in- store departments such as a meat department if a nearby larger  commissary can deliver meat products on a regular basis using DeCA’s  truck. Further, according to DeCA officials, some other commissaries also  have the potential to leverage their size and location to provide meat for  commissaries located nearby, which would eliminate the need for a meat  department at each of the smaller, co-located commissaries. Based on  the example from a DeCA commissary official, we found that five  commissaries in a regional zone could source their meat from a central  commissary, and DeCA could potentially avoid the cost of 50 full-time  equivalent salaries to operate a meat department in those five  commissaries. Based on this example, we estimate that the potential cost  avoidance at five commissaries is about $2 million annually.

According to federal government guidelines, management should  establish and monitor activities to evaluate the costs associated with  contracts. Furthermore, federal guidelines promote efficient resource  allocation through well-informed decision making and provide guidance  for a federal agency to perform sound cost-benefit and cost-effectiveness  analyses. These analyses should include elements such as  comprehensive estimates of the expected benefits and costs of the  program and alternative means of achieving objectives.

However, DeCA has not conducted cost-benefit analysis to fully  understand the costs associated with different distribution options across  all commissaries. According to DeCA officials, DeCA did not conduct  such cost-benefit analysis because it was not required by DOD or  Congress. Further, DeCA officials stated that DeCA was accustomed to  using the existing distribution network established when DeCA was  created in 1991. Without a cost-benefit analysis, however, DeCA lacks a  data-driven rationale for choosing product distribution options that could  be more efficient and beneficial for commissary operations and patrons.

section_title: Conclusions
paragraphs: Although DeCA is implementing or considering business process  improvements at defense commissaries, the agency continues to use  certain business processes that are not consistent with those generally  employed by commercial grocery stores. First, DeCA states it is achieving  its desired 30 percent savings rate for commissary patrons; however,  DeCA’s methodology for calculating this rate has certain limitations. By  relying on a process that does not include a random sampling method  and does not account for seasonal or geographic differences in price,  among other limitations, DeCA cannot be assured that the commissary  system is delivering the desired savings rate to all commissary patrons.  Second, DeCA collects information to help manage the products sold at  commissaries, but there are weaknesses to this approach that can limit  DeCA’s ability to operate efficiently. In particular, DeCA has not focused  on improving the management of products based on consumer demand  and consequently may be missing potential opportunities to improve  sales, leverage efficiencies, and achieve savings in commissary  operations. Third, DeCA has not conducted a cost-benefit analysis for its  service contracts for stocking and custodial services and for distributing  products to commissaries. For example, DeCA uses service contracts for  stocking at most commissaries, even though in-house stocking has been  shown to be less costly. Without analyzing the costs and benefits of its  stocking, custodial, and distribution processes, the agency lacks  reasonable assurance that it is identifying potential operational  efficiencies and costs savings.

As a result of using certain business processes that depart from those  used by commercial grocery stores, DeCA is missing opportunities to  reduce its operating costs and potentially to reduce its reliance on the  annual appropriation while providing the patron savings rate that  constitutes the noncash benefit provided by the commissary system.  Moreover, should the Congress wish to privatize in whole or in part the  defense commissary system, the continued reliance on business  processes not used by commercial grocery stores can make the  commissaries less attractive to potential private-sector businesses that  might be interested in operating the defense commissaries.

section_title: Recommendations for Executive Action
paragraphs: To provide greater assurance that defense commissaries are achieving  the desired savings rate for patrons, we recommend that the Secretary of  Defense direct the Chief Executive Officer of DeCA, as DeCA revises its  methodology for calculating the savings rate, to address the limitations  that we identified, including those related to seasonal differences in  prices, the sampling methodology for overseas commissaries, geographic  differentiation, and the calculation of the weighted average.

To improve operational efficiencies and reduce costs related to product  management and services that support commissary operations, we  recommend that the Secretary of Defense direct the Chief Executive  Officer of DeCA to take the following two actions:

Develop a plan with objectives, goals, and time frames on how it will  improve efficiency in product management, such as offering products  based on store sales or customer demand.

Conduct comprehensive cost-benefit analyses to guide decisions on  implementing the most cost-effective option as stocking and custodial  services contracts are renewed, and on choosing product distribution  options.

section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, DOD concurred with two  recommendations and partially concurred with one recommendation.  DOD’s comments are summarized below and reprinted in their entirety in  appendix II. DOD also provided technical comments on the draft report,  which we incorporated as appropriate.

DOD concurred with our recommendation to address the limitations that  we identified as DeCA revises its methodology for calculating the savings  rate, including those related to seasonal differences in prices, the  sampling methodology for overseas commissaries, geographic  differentiation, and the calculation of the weighted average. In its  comments, DOD noted that it has established a new baseline for patron  savings as well as a revised methodology that compares regional savings  levels with prices at commercial grocery stores near commissaries. This  action could meet the intent of our recommendation if it helps address the  limitations we identified in our report.

DOD also concurred with our second recommendation to develop a plan  with objectives, goals and timeframes on how to improve efficiency in  product management. DOD stated that it plans to implement two variable  pricing programs and private labeling, which would help improve category  management by using private sector practices to improve product  offerings and reduce costs. DOD also stated that it plans to implement  any changes to product offerings beginning in April 2017. For example,  DOD identified 10 commissaries to participate in an effort to improve  patrons' overall shopping experience by gradually ensuring a more  consistent savings level across categories of products throughout a store  through correcting the prices on key items where patrons experience  lower than expected savings. Additionally, DOD stated that plans to  introduce private labeled products to create incremental cost efficiencies  with the goal of offsetting DECA’s reliance on appropriated funding.

Finally, DOD partially concurred with our recommendation to conduct  comprehensive cost-benefit analyses to guide decisions on implementing  the most cost-effective option as stocking and custodial services  contracts are renewed, and on choosing product distribution options. The  department stated that authorizing legislation would be required to  implement this recommendation.  Specifically, DOD pointed to  requirements in the Javits-Wagner-O’Day Act that DOD acquire certain  services from nonprofit agencies that serve the blind and the disabled and  provisions in the Federal Acquisition Regulation that require DOD to set  aside procurements exclusively for various categories of small business  concerns under specified circumstances.  Finally, DOD cited Office of  Management and Budget Circular A-76 and the Service Contract Labor  Standards as presenting additional impediments to implementing our  recommendation. With respect to product distribution options, DOD stated  that it does not believe there is a demonstrable need to conduct a cost- benefit analysis. DOD stated that DeCA purchases items either delivered  to commissary’s back door or to the commissary shelf, which includes  transportation costs, and is authorized to use appropriated funds for  transportation costs within and outside the United States.

We recognize that DOD operates in an environment that requires strict  adherence to various mandates, both statutory and regulatory. While  DOD has cited a number of laws and regulations that apply once it has  made a decision to contract out for the performance of a function, the  Department did not cite a specific provision that would prevent it from  conducting a cost-benefit analysis to make an informed decision whether  to contract for services or to perform them in-house. For example,  although the Federal Acquisition Regulation requires the use of set asides  for specified socioeconomic categories of contractors, DOD has not  identified any provision in the regulation that would prevent it from  analyzing the costs of using one or more of these contractors to perform a  function compared to the cost of performing the function using in-house  resources. With respect to product distribution options, we found in our  report that DeCA could potentially achieve a total of $2 million annually in  cost avoidances for its product distribution costs at five commissaries. In  its comments, DOD does not provide any rationale for why it should not  pursue such cost avoidances for its product distribution. Therefore, we  continue to believe that our recommendation is valid and that DOD should  use a data-driven approach and conduct a cost-benefit analysis to fully  understand the costs associated with stocking and custodial services  contracts and its different distribution options. Given the constrained  budget environment, we believe DOD needs to explore all available  opportunities to achieve efficiencies.

We are sending copies of this report to the appropriate congressional  committees; the Secretary of Defense; the Chief Executive Officer of the  Defense Commissary Agency; the Secretaries of the Army, the Navy, and  the Air Force and the Commandant of the Marine Corps; and the Director  of the Office of Management and Budget. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at 202-512-4523 or leporeb@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 who made major contributions to this report  are listed in appendix III.

section_title: Appendix I: Scope and Methodology
paragraphs: To address both objectives of this report, we conducted site visits to a  nongeneralizable sample of 12 commissaries to identify information on  commissary operations at the local level. We selected these  commissaries based on location, sales, operating costs, and  representation of all military services. The 12 commissaries we visited  were located at Fort Belvoir, Naval Air Station Oceana, Joint  Expeditionary Base Little Creek-Fort Story, and Fort Lee, Virginia;  Tobyhanna Army Depot, Pennsylvania; Schofield Barracks, Joint Base  Pearl Harbor-Hickam, and Kaneohe Bay Marine Corps Base, Hawaii; and  Naval Base San Diego, Naval Air Facility El Centro, and Marine Corps Air  Ground Combat Center Twentynine Palms, California. In each  commissary, we analyzed product prices and savings and how products  were managed, sold, and stocked. In each commissary, we met with local  commissary staff to discuss our observations, the costs and benefits  associated with contracting for services compared with using in-house  staff for stocking and custodial services, and the product distribution  options used at the commissary. Although the site visits constitute a  nongeneralizable sample, they helped augment information we obtained  from Defense Commissary Agency (DeCA) headquarters and other  sources.

To evaluate the extent to which the Department of Defense (DOD) has  assurance it is maintaining the savings rate for patrons that represents  the nonpay cash benefit, we reviewed DeCA’s current savings  methodology that calculates the savings rate that patrons realize by using  commissaries instead of private retailers from fiscal years 2010 through  2015, the latter being the most recent available fiscal year for which data  were available at the time of our review. We compared DeCA’s savings  methodology with relevant leading practices for cost estimating and  sampling, such as sampling standards established by the American  Association for Public Opinion Research Report Task Force on Non- Probability Sampling, and with federal standards for internal control,  which states that management should have relevant and reliable  information to run an agency’s operations and the data should be  reasonably free of error and bias and represent what they were purported  to represent. We also compared DeCA’s methodology with private sector  practices identified in recent studies, specifically the private sector’s local  pricing strategies, which consider competition from local retail grocery  stores in setting prices rather than nationwide prices and include private- label items. We interviewed DeCA officials responsible for collecting,  tracking, and analyzing sales, prices, costs, and savings information at  DOD commissaries to corroborate our understanding of DeCA’s  methodology for calculating DeCA’s patron savings rate.

To identify differences in business practices between commissary  operations and commercial grocery store practices, we reviewed (1)  DOD’s pricing method, (2) management of products, and (3) cost-benefit  analyses of service contracts and transportation distribution costs. First,  to describe DOD’s current pricing method and any planned changes to  the method, we reviewed DeCA’s pricing method as required by statute,  and compared DeCA’s pricing method with methods used in the private  sector. We identified private sector practices by reviewing studies and  leading practices that describe operational efficiencies achieved in the  private sector through practices such as private labeling and variable  pricing. We also interviewed private sector grocers and retailer  associations to identify private sector practices for operating retail grocery  stores. We also reviewed DeCA’s plans to change its current pricing  method and how that plan compares with private sector practices.

Second, to evaluate the extent to which DOD efficiently manages  products sold at the commissaries, we compared DOD objectives and  guidance to maintain an efficient system of commissaries with practices  generally employed in the private sector. We also reviewed DeCA’s  management of the inventory of products and compared this  management with pertinent studies and leading practices that analyze  private sector grocery retail practices based on operational efficiencies  related to the management of products and customer demand. We also  compared DeCA’s implementation of a new system for category  management with federal standards for internal control, which states that  management should design control activities and formulate plans to  achieve objectives and respond to risk, and management should have  oversight of control activities depending on the level of precision needed  so that the entity meets its objectives. We also interviewed DeCA  officials responsible for managing products sold in commissaries,  including those officials at the 12 commissaries we visited, to assess  product management practices.

GAO-14-704G. commissary we visited did not have a service contract, and stocking was  performed in-house by DeCA commissary staff. For product distribution  costs, we reviewed costs associated with DeCA owned or leased vehicles  and DeCA warehouses both domestically and overseas, as well as other  options for product distribution. We compared DeCA’s practices,  guidance, and policies, for deciding to contract for services with federal  government guidelines in the Office of Management and Budget’s  Guidelines and Discount Rates for Benefit-Cost Analysis of Federal  Programs, federal standards for internal control, and the Office of  Management and Budget’s Management’s Responsibility for Internal  Control. We interviewed DeCA headquarters officials and officials at  local commissaries responsible for contracting to understand the  agency’s contracting practices and policies and to assess the  implementation of contracts at the local level.

We assessed the reliability of the data provided by DeCA by (1) reviewing  related documentation, such as recent studies and (2) interviewing DeCA  officials who were knowledgeable about the data. We asked the officials  questions intended to assess the reliability of the data. On the basis of  procedures performed, we have concluded that these data were  sufficiently reliable for the purposes of reporting on data related to  savings, sales and salaries used for contracting and custodial services.

We conducted this performance audit from September 2015 to March  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit  to obtain sufficient and 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.

section_title: Appendix II: Comments from the Department of Defense

section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, key contributors to this report  were Gina Hoffman (Assistant Director), Pedro Almoguera, Bonita  Anderson, James Ashley, Pat Bohan, Tim DiNapoli, Timothy Guinane,  Amie Lesser, Alice Paszel, Terry Richardson, Sabrina Streagle, Elizabeth  Wood, Bill Woods, and Yee Wong.


Question-summary annotations: questions: question: To what extent does DOD know that it is maintaining the desired savings rate for commissary patrons?
answer: The Department of Defense (DOD) lacks reasonable assurance that it is maintaining its desired savings rate for commissary patrons. The Defense Commissary Agency (DeCA), which manages the commissaries, has a methodology for calculating the annual savings rate that patrons realize by shopping at commissaries rather than commercial grocery stores. In fiscal year 2015, the most recent data available at the time of our review, DeCA's Board of Directors approved a desired average savings rate of 30 percent based on savings calculated for prior years using the methodology. However, GAO found weaknesses in this methodology.
child_questions: question: What weanesses exist in DeCA's methodology for calculating the annual savings rate?
answer: For example, the methodology does not use a random sample of overseas commissaries or account for seasonal and geographic variations in item prices.
child_questions: question: What issues may these weaknesses cause?
answer: Because of these weaknesses, DOD's methodology can potentially result in an inaccurate calculation of the actual savings rate that commissary patrons experience.

question: What is DeCA doing to address these issues?
answer: DeCA officials stated that the agency plans to revise the savings methodology to address the limitations GAO identified. Because this effort is underway, it is too early to know whether the revisions will address the limitations GAO identified.

questions: question: What characterizes DeCA's tracking of sales?
answer: First, DeCA tracks the sale of products at all commissaries but does not assess the contribution of the sale of each product to a given store's total sales in determining which products to sell. According to DeCA officials, because commissaries are focused on providing a benefit rather than on maximizing profits like commercial grocery stores, commissaries do not always adjust products they carry based on customer demand.

question: What is the status of DeCA's effort to improve their product management system?
answer: DeCA officials said that they would like to be more efficient, but have not developed a plan with achievable objectives, goals, and time frames regarding how to improve product management based on sales and customer demand. Without improving the management of products based on sales and customer demand as is done in commercial grocery stores, DeCA may be missing opportunities to increase sales, leverage efficiencies, and achieve savings in commissary operations.

question: To what extent has DeCA conducted cost-benefit analyses for staff and product distribution?
answer: Second, DeCA has not conducted cost-benefit analyses for costs associated with (1) the use of stocking and custodial service contracts as compared with the use of in-house staff and (2) product distribution options across all commissaries. For example, DeCA uses services contracts at most commissaries, totaling about $137 million in fiscal year 2015, even though our analysis suggests that using in-house personnel for stocking may be more cost effective. Commercial grocery stores are generally sensitive to the cost of business operations, competition in their market, and the need to generate a profit. In addition, different product distribution options could result in significant savings impacting the price a commissary patron pays for a product.
child_questions: question: Why would it benefit DeCA to conduct such analyses?
answer: According to DeCA officials, DOD does not require cost-benefit analyses to compare alternative options for service contracts or for the distribution of products to commissaries. However, without conducting such analyses to guide its decision making on these business processes, DeCA is not positioned to determine whether it is using its resources most efficiently.

questions: question: What does this report concern?
answer: Senate Report 114-49 included a provision for GAO to review aspects of commissary operations. This report (1) determines the extent to which DOD has assurance it is maintaining its desired savings rate for patrons and (2) identifies differences in business practices between commissary operations and commercial grocery store practices.
child_questions: question: What data did GAO analyze in this report?
answer: GAO analyzed data on savings, sales, and costs.

question: What other information did GAO consult?
answer: GAO also reviewed leading practices relevant for commissary operations; assessed the costs for service contracts and product distribution options; and conducted site visits to a nongeneralizable sample of 12 commissaries based on, among other things, location and sales.

questions: question: What recommendations does GAO make?
answer: GAO is making three recommendations, including that DOD address limitations identified in its savings rate methodology; develop a plan with objectives, goals, and time frames to improve efficiency in product management; and conduct comprehensive cost-benefit analyses for service contracts and distribution options.
child_questions: question: How did DOD respond to these recommendation?
answer: DOD concurred with GAO's first two recommendations and partially concurred with the third recommendation.
child_questions: question: What is GAO's ongoing stance?
answer: GAO continues to believe the cost-benefit analysis recommendation is valid.