Contract Management: Postal Service's National Office Supply	 
Contract Has Not Been Effectively Implemented (17-JAN-03,	 
GAO-03-230).							 
                                                                 
Over the past 2 years, the Postal Service has experienced growing
financial difficulties. In an effort to transform the		 
organization to reduce costs and increase productivity, the	 
Postal Service awarded a national-level office supply contract to
Boise Corporation. In addition, the Postal Service required Boise
to submit a subcontracting plan, which outlines how small,	 
minority-, and woman-owned businesses will be reached through the
contract. GAO was asked to assess the status of the Postal	 
Service's implementation of the Boise contract and Boise's	 
achievement of its subcontracting plan. GAO also reviewed the	 
extent to which the Postal Service is buying office supplies	 
directly from small, minority-, and woman-owned businesses.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-230 					        
    ACCNO:   A05896						        
  TITLE:     Contract Management: Postal Service's National Office    
Supply Contract Has Not Been Effectively Implemented		 
     DATE:   01/17/2003 
  SUBJECT:   Office supplies					 
	     Subcontracts					 
	     Contract administration				 
	     Small business					 
	     Minority businesses				 
	     Women-owned businesses				 
	     Contract terms					 
	     Contract performance				 
	     Postal service contracts				 

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GAO-03-230

Report to the Chairman and Ranking Member, Committee on Small Business,
House of Representatives

United States General Accounting Office

GAO

January 2003 CONTRACT MANAGEMENT

Postal Service*s National Office Supply Contract Has Not Been Effectively
Implemented

GAO- 03- 230

The Postal Service has not been successful in implementing its national-
level contract to purchase most office supplies from Boise. Although the
national contract was intended to be a mandatory source of office
supplies, the Postal Service purchased less than 40 percent of its office
supplies from Boise in 2001. GAO found that the Postal Service did not
perform as planned under the contract because it did not take sufficient
actions to ensure that the contract would be used. As a result, the Postal
Service has not been able to realize its estimated annual savings of $28
million. In fact, it was only able to provide documentation for $1 million
in savings for 2001.

Boise and the Postal Service have not paid sufficient attention to the
subcontracting plan. The plan contains obvious ambiguities, and, in fact,
Postal Service and Boise officials disagree on its goals. The Postal
Service maintains that the goal is 30 percent of Boise*s annual revenue
from the contract. Boise has fallen far short of this goal, reporting that
only 2.6 percent of subcontracting dollars were awarded to small,
minority-, and woman- owned businesses in fiscal year 2001. Postal Service
and Boise officials recognize that the performance on the subcontracting
plan is not satisfactory and are taking a number of steps to achieve the
plan*s goals. Nevertheless, it is highly unlikely that the current
subcontracting goals will be met.

The Postal Service reported that its small, minority-, and woman- owned
business achievements have declined from fiscal years 1999 to 2001.
Despite the Postal Service*s reported statistics, we could not determine
the extent to which it is buying directly from these businesses because
the data are unreliable.

Total Office Supply Purchases for Fiscal Year 2001

CONTRACT MANAGEMENT

Postal Service*s National Office Supply Contract Has Not Been Effectively
Implemented

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 230. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact David Cooper at (202) 512- 4841 or cooperd@ gao. gov.
Highlights of GAO- 03- 230, a report to

the Chairman and Ranking Member, Committee on Small Business, House of
Representatives

January 2003

Over the past 2 years, the Postal Service has experienced growing
financial difficulties. In an effort to transform the organization to
reduce costs and increase productivity, the Postal Service awarded a
national- level office supply contract to Boise Corporation. In addition,
the Postal Service required Boise to submit a subcontracting plan, which
outlines how small, minority-, and womanowned businesses will be reached
through the contract. GAO was asked to assess the status of the Postal
Service*s implementation of the Boise contract and Boise*s achievement of
its subcontracting plan. GAO also reviewed the extent to which the Postal
Service is buying office supplies directly from small, minority-, and
woman- owned businesses.

GAO is recommending that the Postal Service reexamine the national office
supply contract to determine why it is not being used and whether it is an
effective tool to achieve savings. If the contract is found to be
beneficial, the Postal Service should track its employees* use of the
contract. GAO also recommends the Postal Service revise its national
contract to reflect realistic goals for small, minority-, and woman- owned
businesses. The Postal Service agreed with GAO*s recommendations.

Page i GAO- 03- 230 Contract Management Letter 1

Results in Brief 2 Background 3 National- Level Office Supply Contract Has
Not Been

Fully Implemented 6 Boise Is Not Achieving Subcontracting Plan Goals 11
Reports Indicate a Drop in Small Business Dollars, but Data Are

Unreliable 15 Conclusions 18 Recommendations 18 Agency Comments 19 Scope
and Methodology 20

Appendix I Comments from the U. S. Postal Service 23

Appendix II Comments from Boise Office Solutions 25

Tables

Table 1: Boise*s Reported Fiscal Year 2001 Subcontracting Achievements 12
Table 2: Reported Office Supplies Purchased from SMW

Businesses 16 Table 3: Reported Office Supplies Purchased through
Contracts 16 Table 4: Reported Office Supplies Purchased Using Purchase
Card 17

Figures

Figure 1: Total Office Supply Spending for Fiscal Year 2001 6 Figure 2:
Office Supply Spending (Fiscal Years 1999 to 2001) 7 Figure 3: Postal
Service Office Supply Spending with Contract

Vendors (Fiscal Years 1999 to 2001) 8

Abbreviations

JWOD Javits- Wagner- O*Day Act SMW small, minority- owned, and woman-
owned Contents

Page 1 GAO- 03- 230 Contract Management

January 17, 2003 The Honorable Donald A. Manzullo Chairman The Honorable
Nydia M. Velazquez Ranking Democratic Member Committee on Small Business
House of Representatives

Over the past two years, the United States Postal Service experienced
growing financial difficulties and struggled to fulfill its mission of
providing affordable, high- quality universal service, while remaining
self- supporting. Consequently, GAO reported that the Postal Service*s
current business model was at risk and placed its transformation and long-
term outlook on our high- risk list in April 2001. 1 To transform the
organization, reduce costs, and increase productivity, the Postal Service
is, among other things, redesigning purchasing and material management
functions to capture potential savings through a supply chain management
initiative. The supply chain encompasses marketing, distribution,
planning, manufacturing, and purchasing. One area of focus for this
initiative is office supplies, on which the Postal Service spent $125
million in fiscal year 2001. 2 To implement supply chain management for
office supplies, the Postal Service awarded a national office supply
contract to Boise Office Solutions (Boise) in January 2000. 3 Under the
terms of the contract, Postal Service buyers are required, with a few
exceptions, to purchase all office supplies from this contract. The Postal
Service estimated that this contract would enable it to save up to $28
million annually.

1 The high risk list identifies a federal program or operation that is
highly vulnerable to waste, fraud, abuse, and mismanagement or that
requires urgent attention to ensure that our national government functions
in the most economical, efficient, and effective manner possible. U. S.
General Accounting Office, U. S. Postal Service: Major Management
Challenges and Program Risks, GAO- 01- 262 (Washington, D. C.: January
2001); U. S. General Accounting Office, U. S. Postal Service:
Deteriorating Financial Outlook Increases Need for Transformation, GAO-
02- 355 (Washington, D. C.: Feb. 28, 2002); U. S. General Accounting
Office, U. S. Postal Service: Moving Forward on Financial and
Transformation Challenges, GAO- 02- 694T (Washington, D. C.: May 13,
2002).

2 In this report, *fiscal years* are Postal Service fiscal years, which
from 1999 through 2001 began in early- to mid- September. 3 The awardee
was formerly known as Boise Cascade Office Products.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 230 Contract Management

The Postal Service, which is not subject to the Small Business Act, 4 is
not required to establish goals for contract awards to small businesses.
However, the Postal Service has established a supplier diversity program
and tracks dollars awarded to small, minority- owned, and woman- owned
(SMW) businesses (minority- and woman- owned businesses can be large or
small). One of the ways the Postal Service expects to increase the dollars
going to these businesses is through SMW subcontracting. For example,
Boise was required to submit a subcontracting plan to reach SMW
businesses. In light of the potential impact of the Boise contract on
small business vendors, you asked us to assess (1) the status of the
Postal Service*s implementation of its national contract with Boise, (2)
Boise*s achievement of its SMW subcontracting plan goals, and (3) the
extent to which the Postal Service is buying office supplies directly from
SMW businesses.

The Postal Service has not yet been successful in implementing its
national office supply contract. Although the contract was intended, with
a few exceptions, to be a mandatory source of supply, in fiscal year 2001
the Postal Service spent over 60 percent of its office supply dollars on
items purchased outside the Boise contract through purchase cards, other
contracts, money orders, or cash. The lack of success was due in part to
insufficient actions taken by the Postal Service to ensure that office
supplies are purchased from the Boise contract. The Postal Service was
unaware of the extent to which the contract was not being used because it
has not adequately tracked or monitored its employees* office supply
purchases. For fiscal year 2001, the Postal Service can document only $1
million in savings from the use of the contract* though it had projected
savings of up to $28 million.

Boise and the Postal Service have not paid sufficient attention to
subcontracting goals. The subcontracting plan was carelessly constructed
and contains ambiguities that should have been resolved prior to the
contract award. However, to date, Boise and the Postal Service have not
taken actions to revise the plan. For example, the categories of SMW
businesses in the plan are inconsistent with the way Boise has been
reporting its achievements and with the way the Postal Service categorizes
its diversity goals. Moreover, Boise and Postal Service officials do not
agree on the goals. According to Postal Service officials, the overall
goal

4 15 U. S. C. Sect. 637c( 2). Results in Brief

Page 3 GAO- 03- 230 Contract Management

is 30 percent of annual revenue for the contract* a figure confirmed in a
preaward email from Boise. According to a Boise official, the goal is both
a percentage of annual revenue for the contract as well as a fixed dollar
value. Boise has fallen far short of the 30 percent goal. In fiscal year
2001, Boise reported that only 2.6 percent of its revenue was
subcontracted to SMW businesses. Both Boise and the Postal Service now
acknowledge that the 30 percent goal may have been unreasonable. Recently,
Boise has begun to take actions to improve its performance. Nevertheless,
it is highly unlikely that Boise will achieve its subcontracting goal.

The extent to which the Postal Service is buying office supplies directly
from SMW vendors is unclear. From fiscal years 1999 through 2001, Postal
Service data show that office supply purchases from SMW businesses through
contracts and purchase cards decreased from 50 percent to 18 percent.
However, the data are unreliable. The Postal Service has not tracked SMW
business participation in other purchasing mechanisms, such as money
orders and cash, and, like other agencies, its information on purchase
card merchants contains numerous errors.

We are making recommendations to the Postmaster General of the United
States concerning the need to re- assess the Postal Service*s national
office supply strategy and estimated savings and to revise Boise*s
subcontracting plan to accurately and clearly reflect realistic goals. In
written comments on a draft of this report, the Postal Service agreed with
our recommendations. Boise also provided written comments, offering its
perspective on some of the information in the report.

The Postal Service, an independent establishment of the executive branch
of the U. S. government, 5 is the largest federal civilian agency,
consisting of more than 38,000 post offices, branches, and stations and
350 major mail- processing and distribution facilities. As part of its
strategy for better managing its procurement of goods and services, the
Postal Service has centralized the procurement of commodities that were
previously decentralized. For example, all office supply procurements are
now managed by the Office Products and Utilities Category Management
Center in Windsor, Connecticut, which is responsible for administering the
national contract. Previously, office supply procurement was
decentralized, with each area managing its own procurements.

5 39 USC Sec. 201. Background

Page 4 GAO- 03- 230 Contract Management

To demonstrate its commitment to reaching SMW businesses, the Postal
Service has developed a 5- year supplier diversity plan. The plan focuses
on maintaining a strong supplier base that includes SMW businesses. While
it does not set specific dollar goals, the plan is intended to ensure that
the Postal Service spends an increasing amount of its procurement dollars
on goods and services from diverse businesses through fiscal year 2003. To
monitor its progress, the Postal Service measures its prime and
subcontracting spending achievements with SMW businesses.

During fiscal years 1999 through 2001, Postal Service procurement of goods
and services (which includes office supplies) decreased from $3.5 billion
to $2.6 billion. For the same time period, office supply procurement grew
from $107 million to $125 million. Postal Service officials explained that
this increase does not necessarily indicate an actual increase in office
supply spending, but rather it reflects improvements in the procurement
system*s ability to track spending. The officials indicated that the data
provided, while not perfect, are the best available information.

In October 1999, the Postal Service issued a solicitation for a national-
level office supply contract. Four vendors submitted proposals. The
solicitation provided that the award would be made to the vendor that
offered the best overall value to the government, considering nonprice and
price factors. The proposals were evaluated based on several factors,
including the vendors* demonstrated understanding of the solicitation*s
(1) technical requirements, including the ability to implement and
maintain a Web- based procurement system, and (2) business requirements.
As part of their business plan, vendors were required to demonstrate their
ability to deliver items within 24 hours of receiving an order, which is
considered industry standard. Other factors on which the proposals were
evaluated, in descending order of importance, were

 the inclusion of a subcontracting plan demonstrating the vendor*s
commitment to use SMW businesses,  the ability to address environmental
and energy conservation efforts.  An explanation of the price discounts
on items offered to the

Postal Service,  the ability to provide financial and purchasing reports
that are integrated

with the Postal Service*s system, and  the ability to provide Postal
Service items, other than office supplies, that

are used in an office setting.

Page 5 GAO- 03- 230 Contract Management

Additional evaluation factors included past performance and Javits-
Wagner- O*Day Act (JWOD) 6 compliance.

The Postal Service awarded the contract to Boise with a start date of
April 3, 2000. The contract is a firm, fixed- price modified requirements
contract for a 3- year base period, with up to three 2- year options. The
contract requires, with a few exceptions, that the Postal Service order
from Boise all of the approximately 13,000 items in Boise*s Postal Service
office supply catalog. Exceptions to the mandatory requirement are where
(1) the item can be found at a lower price (and it is not a JWOD item) or
(2) the requirement is urgent and the supplier cannot meet the required
delivery date. The Postal Service has since exercised the first 2- year
option. 7

The JWOD Act requires the Postal Service to comply with its requirements.
8 According to Postal Service and Boise officials, Boise has ensured
through its ordering process that this compliance occurs. When Postal
Service employees place an order with Boise for an item that is also on
the JWOD procurement list, Boise substitutes the ordered item with a JWOD
item that is essentially the same.

6 The Javits- Wagner- O*Day Act established a Committee for Purchase from
People who are Blind or Severely Disabled, which maintains a procurement
list of commodities or services that the government must procure from
designated nonprofit agencies. These agencies are represented by central
nonprofit agencies called the National Industries for the Blind and the
National Industries for the Severely Handicapped (41 CFR ch. 51).

7 The new option period expires on January 6, 2005. According to the
contracting officer, it was necessary to exercise the option in January
2003, rather than April 2003, to prevent the contract from lapsing.

8 41 U. S. C. sec. 48b( 7).

Page 6 GAO- 03- 230 Contract Management

The Postal Service has not been successful in implementing its national-
level contract to purchase most office supplies from Boise. As shown in
figure 1, during fiscal year 2001 less than 40 percent of the $125 million
in office supplies was purchased from the contract.

Figure 1: Total Office Supply Spending for Fiscal Year 2001

Note: *Other* is local buys paid by cash, money orders, and district
invoices.

The Postal Service has not taken sufficient actions to ensure that the
contract would be used as anticipated. While fiscal year 2001 data show an
improvement over the 6 months that the contract was used in fiscal year
2000, when about 75 percent of office supplies were purchased outside the
contract, the Postal Service is concerned that its employees continue to
spend a significant percentage of office supply dollars outside the
contract. Anticipated savings were based on the assumption that almost all
supplies would be purchased from the national contract. The fact that this
has not occurred, together with the absence of a benchmark against which
to measure savings, has contributed to the Postal Service*s failure to
realize estimated savings from its supply chain initiative. National-
Level Office

Supply Contract Has Not Been Fully Implemented

Page 7 GAO- 03- 230 Contract Management

Although the Postal Service conducted market research that supported the
implementation of a national- level contract for office supplies, it did
not take sufficient actions to ensure that the contract would be used as
anticipated. Figure 2 shows that Postal Service employees buy office
supplies through three mechanisms: contracts (including Boise and non-
Boise contracts), purchase cards, and other methods such as cash and money
orders.

Figure 2: Office Supply Spending (Fiscal Years 1999 to 2001)

Postal Service officials stated that the increase in contract dollars from
fiscal year 1999 to 2001 indicates that the national contract is being
used more extensively. However, they have not determined why employees
continue to buy their supplies outside the contract. Postal Service
officials did not expect immediate compliance with the contract; they
anticipated that some purchasing would occur outside the national contract
during the implementation period because the cultural environment of the
Postal Service Did Not

Take Sufficient Actions to Ensure Contract Would Be Used

Page 8 GAO- 03- 230 Contract Management

Postal Service has allowed local buyers to make purchases independently.
However, they were unaware of the extent to which the contract is not
being used because they did not sufficiently plan its implementation, nor
have they adequately tracked and monitored office supply purchases.

There are several indications that the Postal Service did not take
sufficient action to ensure that the contract was properly implemented.
First, the Postal Service continues to maintain a number of non- Boise
office supply contracts. Although the number of vendors on these other
contracts declined from 49 to 33 from fiscal years 1999 through 2001, the
dollar value of supplies bought from these contracts has grown, as shown
in figure 3.

Figure 3: Postal Service Office Supply Spending with Contract Vendors
(Fiscal Years 1999 to 2001)

Note: Boise spending in fiscal year 1999 represents business from its
existing contract with the Postal Service, prior to the national contract
award.

Page 9 GAO- 03- 230 Contract Management

The Postal Service did not undertake a systematic review of all office
supply contracts when it implemented the national contract. Such an
assessment would have provided an indication of which non- Boise contracts
should have been continued and which phased out. In fact, some of the
items purchased under non- Boise contracts in fiscal year 2001* such as
binders, paper, and measuring tape* should have been purchased from Boise,
according to the terms of the national contract. According to Postal
Service officials, other items* such as printed envelopes and some types
of rubber bands* are purchased under separate contracts because the items
are not part of the Boise catalog or they are unique and purchased in
volume. Postal Service officials told us that the improved oversight they
expect as a result of centralized office supply procurement will allow
them to phase out some of the existing office supply contracts.

Second, Postal Service employees continue to use purchase cards to buy
office supplies outside the contract. Because the purchase card cannot be
used to order from the Boise contract, none of the $16.8 million spent on
office supplies through purchase cards in fiscal year 2001 was spent under
the contract. Postal Service officials have not tracked or monitored
purchase card procurements to determine why these employees are not using
the contract. Postal Service managers indicated that they are able to use
quarterly purchase card spending reports to identify errant purchases*
office supplies that should have been purchased from the national
contract. However, they acknowledge that these reports are not used
consistently to monitor employee purchases of office supplies.

Finally, Postal Service employees continue to use cash and money orders to
buy supplies from local vendors. As with the purchase cards, cash and
money orders cannot be used to buy supplies from the Boise contract.
Because the Postal Service has limited information about cash and money
order purchases, it was unaware that 33 percent of office supply spending
in fiscal year 2001 occurred through these methods. Postal Service
officials remarked that they are encouraged by the decrease (from about
$66 million in fiscal year 1999 to $41 million in fiscal year 2001) in
office supply purchasing using cash and money orders. However, until the
Postal Service is able to better track and monitor local office spending,
it will lack the information it needs to ensure that the national contract
is being used as intended.

Postal Service officials explained that their ability to track office
supply spending* enabling them to better target those employees who are
not using the contract* should improve as Boise contract use increases

Page 10 GAO- 03- 230 Contract Management

because the contract requires Postal Service employees to use a Web- based
purchasing system referred to as e- buy. 9 The Postal Service*s
expectation is that information about e- buy purchases will be
systematically and consistently collected. However, use of the contract is
not being enforced, and employees continue to use other methods* such as
contracts outside the national contract, purchase cards, cash, and money
orders* to buy office supplies.

The Postal Service*s decision to award a national- level contract to a
single supplier was based, in part, on an expectation of saving up to $28
million annually. These savings would result from (1) purchasing a large
quantity of items from a single supplier, thereby reducing item costs, and
(2) implementing the e- buy purchasing process, which would reduce overall
transaction costs. To realize the maximum benefits and cost savings under
the Postal Service*s acquisition strategy, almost all office supplies must
be purchased from Boise. However, the fact that employees continue to buy
supplies outside the contract, combined with the lack of an established
benchmark to measure savings, prevents the Postal Service from determining
whether it is achieving its savings goals.

The Postal Service*s reported savings are calculated using a formula
established in 1999. The formula is based on market research, Postal
Service Annual Report data from 1998, and spending on an office supply
contract in existence at that time. This methodology predicted transaction
cost savings of up to 70 percent and item price savings of up to 10
percent on a $50 million contract. The Postal Service claimed savings of
up to $28 million for fiscal year 2001 using these estimates. However,
when we asked for evidence of actual savings to date, the Postal Service
could provide documentation for only about $1 million. This amount
reflects rebates that Boise agreed to give the Postal Service on all new
business and reduced prices negotiated as part of the contract.

9 E- buy requires use of the intranet for placing orders. In the event of
a telephone or fax order, a Boise customer service representative inputs
the order. Postal Service is Unable

to Document Estimated Savings

Page 11 GAO- 03- 230 Contract Management

Boise and the Postal Service have not paid sufficient attention to the
subcontracting goals under the national office supply contract. The
subcontracting plan was carelessly constructed, and it contains obvious
ambiguities. In fact, Postal Service and Boise officials do not agree on
the basic subcontracting goals. Notwithstanding this disagreement, for the
purposes of this report we have used the Postal Service*s position that
the goal is to award 30 percent of annual revenues to SMW businesses.

Boise has fallen far short of achieving the 30 percent goal. In fiscal
year 2001, Boise reported achievements of only 2. 6 percent. Boise has
also fallen short of its specific goals for minority and woman- owned
businesses. Boise and the Postal Service provided several reasons why
Boise is not achieving the subcontracting goals and they have identified
actions that they believe will improve performance. However, these actions
will not be sufficient to enable Boise to reach its subcontracting plan
goals.

When Boise initially submitted its proposal, its subcontracting goal was
to provide 12 percent of its Postal Service business to SMW
subcontractors. This proposed subcontracting plan included 4 percent goals
for minority- and woman- owned businesses. However, after Boise was
selected as the intended awardee* but before the contract was awarded* the
goal for SMW businesses was increased to 30 percent based on negotiations
with the Postal Service. At the same time, Boise increased its goals for
minority- and woman- owned business from 4 to 6 percent.

The subcontracting plan contains obvious ambiguities that should have been
addressed prior to contract award. For example, because the plan is not
clearly written, Postal Service and Boise officials disagree on the
overall SMW subcontracting goal. Postal Service officials maintain that
the goal is 30 percent of overall revenue for the contract, a figure
confirmed in a preaward email from Boise. A Boise official, however,
asserts that there is both an overall 30 percent goal and a fixed dollar
value goal of $3,300,000. Despite this disagreement, neither Boise nor
Postal Service officials have taken steps to revise the plan.

Further, the subcontracting plan misstates two of the three reporting
categories for which there is a contractual goal. The language in the plan
includes goals for *small, disadvantaged businesses* and *small, woman-
owned businesses.* In practice, however, the Postal Service and Boise
report achievements for *minority* and *woman- owned* firms, which may be
small or large. There is no clear linkage between the Boise Is Not

Achieving Subcontracting Plan Goals

Subcontracting Plan Contains Inconsistencies

Page 12 GAO- 03- 230 Contract Management

categories of SMW businesses as stated in the plan and the way Boise is
reporting its achievements. A Boise official explained that the
subcontracting plan reflects the categories the firm typically uses when
contracting with federal agencies, and it did not revise the reporting
categories to reflect the Postal Service*s supplier diversity categories.
In responding to our questions, the Postal Service officials acknowledged
that the plan is inconsistent with the way Boise*s achievements are
measured and that it needs to be revised.

Despite its disagreement with the Postal Service about the subcontracting
goals, Boise reports the dollars and percentages that went to SMW
businesses based on the annual total revenues under the contract. Table 1
reflects reported achievements for fiscal year 2001.

Table 1: Boise*s Reported Fiscal Year 2001 Subcontracting Achievements
Percent of dollars to SMW

businesses Total dollars to

SMW businesses

Percent of dollars to

minority businesses

Total dollars to minority businesses

Percent of dollars to woman- owned

businesses Total dollars to

woman- owned businesses

Reported achievements 2.6% $1,245,161 0. 7% $345,556 1.9% $899,625

Source: Boise. Note: Boise*s total sales to the Postal Service on the
national contract for fiscal year 2001 were $47 million.

Postal Service and Boise officials stated that 30 percent was a stretch
goal to demonstrate the Postal Service*s commitment to supplier diversity.
A Boise representative stated that Boise agreed to the 30 percent goal
because Boise understood the goal to be negotiable. Even though the Postal
Service has no plans to renegotiate the goal before the end of the initial
contract performance period of 3 years, Boise and the Postal Service have
started discussions to renegotiate the subcontracting goal in the event
that the Postal Service decides to exercise an option to extend the
contract. Postal Service officials noted that they realize, in hindsight,
that the 30 percent goal may have been unreasonable. Boise*s Reported

Achievements

Page 13 GAO- 03- 230 Contract Management

Boise and Postal Service officials provided several reasons why the
subcontracting goals have not been achieved. First, a Boise official said
that Boise agreed to the 30 percent goal based on its earlier achievements
under the General Services Administration*s Federal Supply Schedules
program. 10 In fiscal years 1999 and 2000, Boise awarded small businesses
24.6 percent of its Schedules program sales. In retrospect, Boise and
Postal Service officials explained that the Schedules program was not a
reliable source for an estimate because Boise*s contract under the
Schedules program included 1,800 items, compared to about 13,000 items in
the Postal Service contract. Moreover, the total dollar sales in Boise*s
Schedules contract*$ 14.3 million in fiscal year 2000* were considerably
lower than the total sales on the Postal Service contract*$ 47 million in
fiscal year 2001.

Second, while Boise has a corporate supplier diversity strategy, a Boise
official stated that the company*s ability to achieve the subcontracting
plan goals has been hampered by the fact that the Postal Service does not
require its employees to target SMW businesses when ordering from the
catalog. In fact, officials at one district we visited had the impression
that by simply purchasing from the contract they were complying with the
Postal Service*s SMW business initiatives. At another district we visited,
employees were not aware that the Postal Service had SMW subcontracting
goals in the contract. All of the district officials we spoke with stated
that they base their purchasing decisions on the lowest available price
and do not search the catalog for SMW businesses.

Third, one of the primary reasons Boise and Postal Service officials
offered for the low subcontracting achievements was that compliance with
the JWOD Act is taking away dollars from small businesses. However, Boise
records show that of the 47 Boise vendors whose items were replaced with
JWOD items in fiscal year 2001, only 7 were small businesses. These 7
vendors supply 26 out of the 404 Postal Service office supply items that
are subject to the automatic JWOD replacement. Moreover, financial data
from Boise show that in calendar year 2000, while total sales on JWOD
items were just over $3 million, the impact of JWOD compliance on these 7
vendors was relatively small. These vendors potentially lost $167,629 in
business due to the automatic substitution of

10 The Schedules program provides federal agencies with a simplified
process for obtaining commonly used commercial supplies and services,
ranging from office supplies to information technology services, at prices
associated with volume buying. Several Reasons

Offered for Failure to Meet the Goals

Page 14 GAO- 03- 230 Contract Management

JWOD items for their items. In calendar year 2001 (representing one full
year of contract sales), these 7 vendors potentially lost $297,036 of
sales, while the total sales on JWOD items for the year doubled to almost
$6 million. This trend continued in the first 6 months of 2002.

Finally, Postal Service officials also explained that Boise could not
reach its goal because it had planned to subcontract with a woman- owned
enterprise that provided cash register tapes, a technology that the Postal
Service decided to phase out. They stated that although Boise had relied
on this business to reach its subcontracting goal, a change in technology
resulted in significantly less business with this vendor than was
expected. However, neither Postal Service nor Boise officials could
provide us with specific estimates of expected sales. In fact, sales to
this woman- owned firm increased in 2001 and 2002. Boise records show a
growth in sales of the cash register tapes from this business of
approximately $283, 000 in 2000 to $455,000 in 2001. Sales for the first
half of 2002 indicate a dollar amount in sales similar to the total sales
in 2001. Moreover, Boise was notified of the changes to the new technology
as far back as 1998; therefore, this was not new information received
during the negotiations regarding the subcontracting goals.

The Postal Service and Boise recognize that the performance on the
subcontracting plan is not satisfactory and have started to take some
actions to improve Boise*s achievements under the current contract. While
Boise is responsible for its contract performance, the coordinated actions
of the Postal Service and Boise can assist Boise*s ability to achieve the
subcontracting plan goals. Although the following steps are being taken to
improve performance, it is highly unlikely that these actions will enable
Boise to reach its 30 percent subcontracting goal.

 Boise is working with the Postal Service to include additional SMW
businesses as subcontractors. For example, Boise continues to work with
the Postal Service to identify small business suppliers of recycled toner
cartridges, who in many cases provide their products at half the price of
new toner cartridges. District officials received a listing of small
businesses supplying recycled toner cartridges in October 2001. However,
neither the Postal Service nor Boise has determined the extent to which
this information will increase Boise*s subcontracting achievements. 
Boise is working with the Postal Service to reflect indirect services

provided to Boise by small businesses in its reporting of subcontracting
plan achievements, as it is allowed to do under the Postal Service
contract. Indirect services include data entry and information management
services, Actions to Improve

Subcontracting Performance

Page 15 GAO- 03- 230 Contract Management

such as invoicing and tracking sales information. However, Boise estimates
that including indirect services provided by SMW businesses will have
minimal impact on subcontracting plan achievements. Currently, there is no
time frame for implementing this change in Boise*s reporting of its
subcontracting achievements.  In October 2001, the Postal Service and
Boise teamed up to design a

quarterly report that tracks SMW business purchases at the Postal Service
districts. The Postal Service expects to finalize and distribute these
reports in January 2003.  The Postal Service and Boise are expanding the
education of Postal

Service employees on the benefits of seeking out SMW suppliers when they
order office supplies from the national contract. Since initial office
supply contract training was provided in the fall of 2000, Postal Service
efforts to educate employees about SMW suppliers have been through
informal channels, such as e- mail. Boise*s educational efforts focus on
providing more information to the Boise sales representatives that work
with the Postal Service. While Boise expects some improvements in its
subcontracting achievements as a result of the educational efforts, their
impact is unknown.

Postal Service data show that office supply purchases made directly from
SMW businesses* using contracts and purchase cards* decreased from about
50 to 18 percent from fiscal year 1999 through 2001. However, the extent
to which the Postal Service is buying office supplies from SMW businesses
is unclear because its purchase card information is unreliable and because
the Postal Service has not tracked purchases by employees using mechanisms
such as money orders and cash. Our review, as well as a report by the
Postal Service Inspector General, 11 found that incomplete and unreliable
diversity statistics on suppliers resulted in the Postal Service
overstating or incorrectly classifying dollars awarded to SMW businesses.
The Inspector General*s report made nine recommendations to correct the
reporting of diversity statistics. 12

11 Office of Inspector General, U. S. Postal Service, Supplier Diversity
Program for Supplies, Services, and Equipment Purchases, CA- AR- 01- 005
(Arlington, VA: Sept. 6, 2001).

12 The Postal Service has addressed only one of these recommendations,
noting in its April 2002 Purchasing Assessment Report that fiscal year
1999 and 2000 data contained errors in SMW data. Reports Indicate

a Drop in Small Business Dollars, but Data Are Unreliable

Page 16 GAO- 03- 230 Contract Management

Table 2 shows the decline in the percentage of SMW purchases from fiscal
years 1999 through 2001, based on Postal Service data.

Table 2: Reported Office Supplies Purchased from SMW Businesses Office
supplies 1999 2000 2001

Total purchases $ 107,181,787 $ 107,392,563 $ 125,047,235 SMW purchases $
20,207,461 $ 16,939,654 $ 15,002,143 SMW purchases as percent of total
purchases 19% 16% 12% Total purchases using contracts and purchase cards
only $41,211,956 $49,714,964 $83,748,545 SMW as percent of total purchases
using contracts and purchase cards 49% 34% 18%

Source: GAO analysis of U. S. Postal Service data. Note: *Total purchases*
reflects contracts, purchase cards and other purchasing mechanisms such as
money orders and cash.

During the same 3- year period, SMW business participation has decreased
as a percentage of contract spending (excluding spending through purchase
cards, cash, and money orders), while the overall dollar value of office
supplies purchased through contracts increased from $14.5 million to
almost $67 million. In addition, the number of SMW vendors selling office
supplies to the Postal Service decreased during this period. Postal
Service district officials told us that they are no longer attempting
outreach to local SMW businesses* such as participating in small business
conferences or trade shows to attract new vendors* because of the emphasis
on buying office supplies only through the Boise contract. Table 3 shows
the decline in contract activity with small businesses from fiscal years
1999 through 2001.

Table 3: Reported Office Supplies Purchased through Contracts 1999 2000
2001

Purchase of office supplies using contracts $ 14,500,475 $ 25,148,837 $
66,930,690 Contract purchases from SMW businesses $ 5,440,943 $ 9,150,457
$ 9,938,844 SMW businesses as percent of total contract spending 38% 36%
15% SMW vendors 27 29 17

Source: GAO analysis of U. S. Postal Service data.

Page 17 GAO- 03- 230 Contract Management

Similarly, the Postal Service reports that office supply procurements from
SMW businesses through purchase cards decreased from fiscal years 1999
through 2001. Table 4 shows the decline in the percentage of purchases
from SMW businesses using purchase cards from fiscal year 1999 through
2001.

Table 4: Reported Office Supplies Purchased Using Purchase Card 1999 2000
2001

Total purchase card spending $26,711,481 $24,566,126 $16,817,855 Purchase
card purchases from SMW businesses $14,766,518 $7,789,198 $5,063,299 SMW
businesses as percent of total purchase card spending 55% 32% 30%

Source: GAO analysis of U. S. Postal Service data.

Despite the Postal Service*s reported statistics, we could not determine
the extent to which the Postal Service is buying from SMW businesses.
First, because the Postal Service does not track or report socioeconomic
data when payments are made to vendors using cash or money orders, it is
not possible to assess SMW business achievements when those payment
methods are used.

Second, the Postal Service, like other federal agencies, relies on reports
from banks for annual purchase card transaction and vendor information.
This information is ambiguous and contains numerous errors because
socioeconomic categories are often inaccurate. For example, the Postal
Service*s purchase card data for fiscal years 1999 through 2001 included
over $40 million dollars in office supply purchases from businesses that
were identified as both small and large.

The Postal Service is aware of the problems with the purchase card
transaction information and has been working with Visa Corporation to
improve the data. Because banks and payment card associations, such as
Visa, control the transaction databases, the Postal Service must rely on
the information provided by these institutions. We recently reported on
the issue of unreliable and incomplete socioeconomic data on purchase card
merchants. 13

13 U. S. General Accounting Office, Contract Management: Government Faces
Challenges in Gathering Socioeconomic Data on Purchase Card Merchants,
GAO- 03- 56 (Washington, D. C.: Dec. 13, 2002).

Page 18 GAO- 03- 230 Contract Management

The Postal Service has not achieved its goal of using a single supplier
for office supplies and, as a result, has not achieved its anticipated
savings. Because the Postal Service has not analyzed how its employees buy
office supplies, it does not know why the national contract is not being
used as extensively as planned. In fact, the Postal Service has no
assurance that the national strategy is effective because it has not
adequately tracked its employees* office supply purchases.

Implementing a national- level office supply contract through a single
supplier makes the realistic development and measurement of Boise*s
subcontracting goals and achievements critical to the Postal Service*s
efforts to achieve its supplier diversity objectives. The failure to
establish an effective subcontracting plan and the lack of oversight and
enforcement has created an environment where participation by SMW
businesses is minimal. The fact that the Postal Service and Boise cannot
agree on the levels of SMW participation established in the contract is
evidence of the lack of attention Boise and the Postal Service have paid
to this issue. While Boise and the Postal Service have taken some actions
to address SMW achievement, it is highly unlikely that Boise will be able
to reach its subcontracting goal.

We recommend that the Postmaster General of the United States  determine
why the national contract is not being used as a mandatory

source of office supplies;  reassess the cost effectiveness of a national
office supply contract and

measure actual savings from using the contract rather than applying the
outdated estimating formulas initially established;  develop mechanisms
to track employees* compliance with the mandatory

use of the contract, if analysis indicates that the national- level
contract is beneficial; and  direct that the contract be modified to
include a revised subcontracting

plan that accurately and clearly reflects realistic goals for small,
minority, and woman- owned businesses, consistent with the Postal
Service*s supplier diversity program. Conclusions

Recommendations

Page 19 GAO- 03- 230 Contract Management

In written comments on a draft of this report, the Postal Service agreed
with our recommendations and indicated that our report will help it
develop and enforce policies aimed at improving performance under the
national office supply contract. Recognizing that the success of a
contract such as this requires continuous management, the Postal Service
has established a new supply management organization that will use our
findings and recommendations to determine why the contract is not being
used as fully as anticipated. The Postal Service indicated that it will
continue to seek cost- effective ways to expand its oversight efforts and
expects that increased use of the Web- based purchasing system will assist
in these efforts. Regarding the savings from the contract, the Postal
Service stated that its internal analysis has validated $5.3 million in
cost reductions during fiscal year 2002. This analysis was not shared with
us during our review. Finally, the Postal Service stated that it has
corrected the ambiguities in the subcontracting plan and is working with
Boise to establish more realistic subcontracting goals. The Postal
Service*s letter appears in appendix I.

We also received a written statement from Boise expressing its opinion on
federal subcontracting involving SMW businesses and offering several
comments on our findings. Boise stated that actual sales under the
contract (approximately $50 million) far exceeded its expected contract
amount of $11 million. Boise uses this information as a rationale for its
failure to achieve its subcontracting goals, which it asserts were based
on the $11 million expected contract amount. However, the contract did not
guarantee a minimum or maximum level of sales to Boise and, as noted in
our report, a 30 percent goal was confirmed by Boise in a pre- award e-
mail. Further, the Postal Service based its projected savings on an
estimated contract amount of $50 million. Boise also noted that sales to
SMW businesses with the Postal Service increased from fiscal year 1999 to
fiscal year 2001. However, Boise*s analysis relies on a comparison of
sales data from a previously existing Postal Service office supply
contract, for 200 high- use items, to the sales data from the current
contract, which covers almost 13,000 items. Because Boise is comparing
sales data from two different contracts, we do not believe that this is a
legitimate comparison. Boise indicated that it is working with the Postal
Service to correct the inconsistencies we noted in the subcontracting
plan.

In addition, Boise believes that JWOD items block sales to SMW businesses;
however, Boise did not provide sufficient evidence to support this claim.
As noted in our report, the potential lost sales to SMW businesses due to
JWOD item replacements were relatively small. Agency Comments

Page 20 GAO- 03- 230 Contract Management

Boise also commented that because sales of a cash register tape made by a
woman- owned business did not increase at the expected rate, its SMW
achievements were affected. However, as discussed in our report, neither
Boise nor the Postal Service could provide us with documentation on the
expected sales of the IRT tapes.

Finally, Boise was concerned about our selection of field sites because it
was not based on a random sample. We targeted locations that, according to
Boise*s data, were low users of the contract. The objective of our field
visits was not to identify overall awareness of the contract. Rather, our
intent was to gain an understanding of why certain locations were not
using the contract as a mandatory source of office supplies. Boise*s
letter appears in appendix II.

To meet our objectives, we reviewed the Postal Service*s office supply
spending and the related SMW achievements during fiscal years 1999 through
2001.

To examine the status of the Postal Service*s implementation of its
national office supply contract with Boise, we reviewed the acquisition
planning, contract formation, and contract administration documentation,
including market research results, the solicitation, and the contract.
Total office supply spending was identified using information from the
Postal Service purchasing and materials data warehouse. We determined
office supply spending for fiscal years 1999 through 2001 by using the
same account codes that the Postal Service used to conduct its market
research to justify the national office supply contract. We reviewed the
Postal Service*s total office supply spending details for all contract,
purchase card, money order, and cash transactions. We did not
independently verify the accuracy of the reported spending. We interviewed
and obtained information from the Postal Service*s contracting officer and
contract administrator. In addition, we interviewed and obtained
information from three area offices and three district offices based on
data that indicated these locations were not using the national office
supply contract. We interviewed purchasing specialists, administrative
services managers, financial system coordinators, and administrative
personnel with office supply purchasing responsibility. We also held
discussions with and acquired information from Boise*s federal business
manager.

To determine Boise*s achievement of its SMW subcontracting plan, we
reviewed the contract*s subcontracting plan and Boise*s quarterly Scope
and

Methodology

Page 21 GAO- 03- 230 Contract Management

reports on its SMW achievements. We interviewed and obtained information
from the Postal Service*s contracting officer, area finance officials, and
district finance and purchasing officials. We also held discussions with
and acquired information from Boise*s federal business manager, its
minority- and woman- owned business development and supplier diversity
manager, and two minority- owned subcontractors.

To assess the extent to which the Postal Service is buying office supplies
directly from SMW businesses, we reviewed Postal Service supplier
diversity policy and guidance. We examined the Postal Service*s reported
socioeconomic statistics, including the dollar amount and type of vendor
for fiscal years 1999 through 2001. We interviewed and obtained
information from Postal Service officials in the offices of supplier
development and diversity, purchasing and materials, and the Postal
Service Inspector General. We determined that the reported purchase card
data were unreliable; however, we did not attempt to correct the errors in
the data provided.

Additionally, we met with representatives from the National Office
Products Association and a small, woman- owned business to gain a better
understanding of their views with regard to the national contract.

We conducted our review from March 2002 to November 2002 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to other interested congressional
committees; the Postmaster General of the United States; and the Senior
Vice President and Federal Business Manager, Boise Office Solutions. We
will also make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at http:// www.
gao. gov.

Page 22 GAO- 03- 230 Contract Management

Please contact me at (202) 512- 4841 or Michele Mackin at (202) 512- 4309
if you have any questions regarding this report. Other major contributors
to this report were Penny Berrier, Art L. James Jr., Judy T. Lasley,
Sylvia Schatz, and Tatiana Winger.

David E. Cooper Director, Acquisition and

Sourcing Management

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

Page 23 GAO- 03- 230 Contract Management

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

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

Page 24 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Page 25 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Appendix II: Comments from Boise Office Solutions

Page 26 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Page 27 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Page 28 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Page 29 GAO- 03- 230 Contract Management

Appendix II: Comments from Boise Office Solutions

Page 30 GAO- 03- 230 Contract Management (120129)

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