The Postal Service, an independent establishment of the executive branch of the U.S. government, is a $68-billion organization consisting of more than 37,000 post offices and 350 major mail-processing and distribution facilities. We recently reported that the Postal Service’s current business model is outdated and inflexible and, in April 2001, we placed the agency’s long-term financial outlook and transformation efforts on our high-risk list. We suggested that the Postal Service work with Congress and other stakeholders to develop a comprehensive plan that would address its financial, operational, and human capital challenges. In response, the Postal Service issued its Transformation Plan in April 2002. Also in 2002, the President’s Commission on the United States Postal Service was appointed to examine the Postal Service’s current operations and propose recommendations for a more viable future while minimizing the costs to U.S. taxpayers. The commission’s July 2003 report recommended several fundamental changes, some of which involve procurement reform. The commission said that the Postal Service could save hundreds of millions of dollars by adopting practices that have substantially lowered costs for private-sector retailers. Our prior work has shown that commercial companies have achieved significant savings by leveraging their buying power through taking a strategic approach to acquisition. The Postal Service operates more as a business than as a government agency. For example, it is responsible for generating revenue to cover its operating expenses and is not subject to the Federal Acquisition Regulation that guides most federal agencies’ procurement practices. In recent years, the Postal Service has undertaken a number of supply chain management initiatives intended to streamline acquisitions and save money. A January 2002 revision to its purchasing manual added a section on the supply chain management philosophy and its importance to Postal Service purchasing. According to the Postal Service’s Comprehensive Statement on Postal Operations, supply chain management depends on close interaction among end users, buyers, and suppliers, with a focus on creating long-term contracts, as well as ongoing analysis and improvement of operating and administrative processes and costs. Two of these initiatives, the bulk fuel program and reverse auctions for highway contracts, are targeted at efforts to save on transportation costs. Fueling the Postal Service’s transportation network is no small feat. Diesel fuel is a major Postal Service expense, totaling almost $340 million in fiscal year 2003 for the thousands of highway contractors who consumed about 225 million gallons of fuel. With this volume of fuel purchasing, even a 1-cent difference in price per gallon can result in millions of dollars in savings for the Postal Service. Recognizing the potential for savings, the Postal Service launched the bulk fuel pilot program in the late 1990s. The Postal Service negotiated a discounted fuel price with a national supplier and directed a small number of highway contractors to purchase their fuel from this supplier rather than from various local and regional sources. In fiscal year 2001, the Postal Service expanded the program to two national suppliers. In fiscal year 2002, the Postal Service began to use reverse auctions, a Web-based bidding tool, for emergency highway transportation contracts (short term, temporary routes during the December holidays, for example). The Postal Service has hired a firm to conduct the auctions on its behalf. Before this online tool became available, contracting officials solicited bids from potential contractors by fax and telephone. Utilizing the Web, the Postal Service can now seek contract bids on a reverse auction site, where competitors can see one another’s bids in real-time and take this information into account when deciding on the price they will offer. The Postal Service’s intent in using this tool is to obtain the lowest price possible by garnering increased competition. A third initiative, national contracts, is intended to consolidate the Postal Service’s spending on certain commodities. Postal Service employees have typically purchased supplies in a highly decentralized manner, from local, regional, or national businesses. Millions of dollars are spent using cash or purchase cards or through contracts. By negotiating contracts with selected suppliers based on volume discounts and directing employees to use these contracts, the Postal Service plans to leverage its buying power and save money. The Postal Service has had mixed success in implementing the supply chain management initiatives we reviewed. The bulk fuel program has been hampered by implementation difficulties, but the Postal Service has had some success using reverse auctions and has used this tool increasingly. The Postal Service has also begun to consolidate its spending on boxes, custodial products, labels, retail packaging, and tires through the use of national contracts. However, some of the claimed savings from reverse auctions were overstated, and we could not validate the $71.1 million in reported savings and revenue from the national contracts we reviewed because the Postal Service lacked accurate baseline data on what had been spent on the commodities before the supply chain management initiative. The bulk fuel program has gotten off to a slow start, beset by a number of implementation difficulties. Only 600 of the roughly 17,000 highway routes are involved in the program, although the Postal Service had expected a much greater level of participation. Consequently, the Postal Service is far from realizing its originally projected savings of $18 million per year, capturing only about $1.1 million in savings in fiscal year 2003. It may forgo collecting over $3 million in potential savings due to the implementation problems. The difficulties the Postal Service has encountered are primarily due to (1) resistance from many highway contractors; (2) setbacks in the Postal Service’s plans to expand the number of fuel delivery locations under the program; and (3) lack of an automated system to accurately capture fuel prices, which means that inaccurate and burdensome manual calculations must be used. First, some highway contractors have refused to participate in the bulk fuel program. A few have gone as far as filing court actions challenging the Postal Service’s right to direct them to certain fueling sites. This resistance is due to a number of factors. One has to do with profit. Contractors’ fuel costs are intended to be “pass-through” costs, with the Postal Service reimbursing the contractors for the fuel costs specified in their contracts. The contract prices are based on an estimated price per gallon and an estimated number of gallons to be consumed annually. If the contractors’ actual price per gallon paid deviates from the contract’s estimated price per gallon by 5 cents or more, they may submit a request for a contract price adjustment. Updated fuel cost information from the contractor can be required if the contracting officer suspects that the contractor is being allowed reimbursement for fuel costs greater than those actually being incurred. However, given the volume of contracts, it is difficult and resource intensive to keep up with the fuel price changes, and therefore contracting officers primarily rely on the contractors to submit fuel adjustments. In practice, however, according to Postal Service officials, contractors are typically quick to submit an adjustment when they are paying more than the contract price, but slow to do so when they are able to obtain the fuel more cheaply. For highway contracts not under the bulk fuel program, contractors have been able to retain the difference between their actual expenditures for fuel and their contract price. The procedures for contract price adjustments under the bulk fuel program do not allow contractors this opportunity. Contractors have cited other reasons for resisting the program. They say they have built strong business relationships with their local fuel suppliers and that those suppliers are more responsive than the major suppliers designated in the bulk fuel program. They also believe that, as a business decision, they should be able to elect where to purchase their fuel. Some have shown that they can buy fuel more cheaply from their local suppliers than under the bulk fuel program. Postal Service officials point out that, while it is true that in certain cases the bulk fuel price may not be the lowest, the only way that the savings can be achieved is if a large number of contractors participate in the program. They also note that fuel is supposed to be a pass-through cost and, therefore, contractors should not be concerned that the bulk fuel price may be higher than a discount rate they may be able to obtain on their own. Second, effective implementation has been hampered by the Postal Service’s lack of success in bringing new fueling locations into the bulk fuel program. Postal Service officials recognize that, with only 44 locations available to contractors to buy fuel under the program, the Postal Service’s anticipated savings cannot be achieved. In a solicitation issued April 8, 2003, the Postal Service requested proposals from fuel suppliers in an effort to add 22 locations to the program. The intention was to increase the number of gallons highway contractors purchase at bulk fuel prices by having these additional suppliers distribute fuel purchased from the two national bulk fuel companies. However, the Postal Service received no acceptable offers from suppliers for new fueling sites and is now considering additional approaches to expand the number of fueling locations. Third, the Postal Service does not have an automated system for gathering information on the number of gallons of fuel highway contractors purchase and the price they pay under the bulk fuel program. Therefore, manual procedures must be used to adjust contract prices in order to secure savings for the Postal Service. During the pilot program, the Postal Service recognized the need to automate its fuel adjustment system but expanded the program before the system was in place. We found that manual price adjustments have been inaccurate. Contrary to Postal Service procedures, which direct contracting officers to adjust contract prices based on the quantity of fuel purchased by contractors as well as the price they pay, contracting officials are simply adjusting the contract price based on the contractors’ average weekly price per gallon paid at bulk fuel sites—without factoring in the number of gallons purchased. This approach could result in lost savings for the Postal Service and, in some cases, contractors being shortchanged. In addition, we found that the price per gallon under the bulk fuel program did not include a special sales tax that some states require highway contractors to pay for diesel fuel. For example, one contractor paid $1,656 to cover this tax in a 3-week period, which the contracting officer’s adjustment did not include.