General Services Administration: Information on Pricing Retail Packaging
Products (Letter Report, 07/07/1999, GAO/GGD-99-116).
The General Services Administration (GSA) sells 27 retail packaging
products, which include boxes, envelopes, and shipping sacks, to federal
agencies. The Postal Service is its largest customer. GSA is not
required to, nor does it set prices to, recover all estimated costs
associated with selling retail packaging products on an item-by-item
basis. GAO's analysis of the 27 retail packaging products shows that
GSA's prices for most of these products fell short of recovering all
estimated costs associated with each item. GAO agrees with GSA that the
method it has chosen to achieve full cost recovery is within its
discretion as long as the money obtained from all the products and
services sold under the General Supply Fund covers the fund's operating
expenses. On the other hand, a question that remains unanswered is
whether GSA should be selling the majority of its products at prices
that do not recover all selling costs. GSA's ongoing study of its stock
program may shed some light on this issue.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-99-116
TITLE: General Services Administration: Information on Pricing
Retail Packaging Products
DATE: 07/07/1999
SUBJECT: Prices and pricing
Federal supply systems
Cost analysis
Cost control
IDENTIFIER: GSA Retail Packaging Program
General Supply Fund
Federal Supply System
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United States General Accounting Office GAO Report
to the Subcommittee on Treasury and General Government Committee
on Appropriations U. S. Senate July 1999 GENERAL SERVICES
ADMINISTRATION Information on Pricing Retail Packaging Products
GAO/GGD-99-116 United States General Accounting Office GAO
Washington, D.C. 20548 General Government Division B-281901 July
7, 1999 The Honorable Ben Nighthorse Campbell Chairman The
Honorable Byron L. Dorgan Ranking Minority Member Subcommittee on
Treasury and General Government Committee on Appropriations United
States Senate This report responds to Senate Report 105-251 on the
fiscal year 1999 Treasury and General Government Appropriations
Act, which directs us to examine the General Services
Administration's (GSA) retail packaging products program. Retail
packaging products include items such as boxes, envelopes, and
shipping sacks. GSA sells 27 of these products to federal
agencies, with the Postal Service being its largest customer. As
agreed with the Committee, our objectives were to determine
whether (1) GSA is required by law to set its prices for retail
packaging products at levels sufficient to ensure that all selling
costs are recovered on each item and (2) GSA's selling prices for
these items do recover all costs. GSA is not required to, nor does
it set prices to, recover all estimated costs Results in Brief
associated with selling retail packaging products on an item-by-
item basis. The statutory provision related to product pricing and
cost recovery, 40 U.S.C. 756, specifically identifies the purchase
price, transportation, and the direct and indirect costs
associated with contracting, handling, and distributing products
as the costs that GSA should recover, so far as practicable,
through its selling prices. However, the law does not require GSA
to use a specific method in recovering its costs or require GSA to
establish a price for an individual product that will recover all
of the costs associated with selling that product. Accordingly,
GSA officials believe that they are complying with the full cost
recovery requirement mandated in 40 U.S.C. 756, if the revenues
for all products and services sold through its General Supply Fund
are at least equal to the total cost of operating the Fund.1 In
fiscal years 1997 and 1998, GSA's audited financial statements
showed that the Fund's revenues exceeded its operating expenses.
Because the statute does not specify how GSA should implement full
cost recovery, does not require that GSA must recover cost on an
item-by-item 1 The General Supply Fund, under the control and
direction of the GSA Administrator, is used to finance, on a
reimbursable basis, a national supply system for federal agencies.
This system includes four business lines, under one of which
retail packaging products are sold. Page 1
GAO/GGD-99-116 Retail Packaging Products B-281901 basis, and
states that cost should be recovered so far as practicable, we
believe the method GSA is using to achieve full cost recovery is
within its discretion. Our analysis of the 27 retail packaging
products indicates that GSA's selling prices for the majority of
these products were not sufficient to ensure that all estimated
costs associated with selling each individual item were recovered
from the sale of these products. Specifically, we found that the
actual pricing markups applied to these products were usually
lower than the individual product markups calculated by GSA's cost
allocation model, which, according to GSA officials, is the most
accurate estimate of how much it costs GSA to sell each item
individually. For example, in fiscal year 1999, the markups used
to determine selling prices for 23 of the 27 retail packaging
products were less than the markups calculated by the cost
allocation model. GSA officials told us that this is not unusual
because their objective is to recover cost on a business line
level and not on an item-by-item basis. They said that they do
not use individual product markups when establishing selling
prices, and it is not their objective to ensure that all costs
associated with selling each individual product are recovered from
the sales of those products. Instead, GSA groups similar products
into what it calls a federal supply class and applies a single
markup to each class to determine its product selling prices. The
federal supply class markups are determined through the use of the
cost allocation model and the professional judgement of supply
officials. Also, GSA officials said that even after the federal
supply class pricing markup has been determined and the
recommended selling price has been calculated, officials in the
commodity center responsible for purchasing and managing a
particular item can adjust the selling price in order to remain
competitive. Given this situation, the thousands of products in
its inventory, and the needed flexibility to manage its diverse
products, GSA pricing officials said that it would be burdensome
and impractical to implement a system that tracks each product and
ensures full cost recovery on an item-by-item basis. A primary
mission of GSA's Federal Supply Service (FSS) is to ensure that
Background the service and supply needs of federal agencies are
efficiently and effectively met at the least cost to the taxpayer.
To accomplish this mission, FSS operates four business lines--
supply and procurement, vehicle acquisition and leasing, property
management, and travel and transportation. These business lines
operate under the General Supply Fund, and each is composed of
smaller components. For example, the Page 2
GAO/GGD-99-116 Retail Packaging Products B-281901 supply and
procurement line consists of three methods of supply or programs--
schedules, special order, and stock. This report pertains
primarily to the stock program in which FSS purchases about 19,000
common-use products, places them into its inventory, and then
resells the products to federal agencies and other customers.2
Products sold through the stock program include tools, paints,
photocopy paper, pens, pencils, cleaning products, boxes,
envelopes, and shipping sacks. Among the boxes, envelopes, and
shipping sacks offered through FSS' stock program are 27 types of
these products, which collectively are referred to as retail
packaging products. These products are included in 7 of the 271
classes of products sold under the stock program. FSS' sales of
retail packaging products began to rise several years ago after
the Postal Service approached GSA with a proposal to buy these and
other products from GSA when GSA offered the best value. In
fiscal year 1995, FSS sold $3.4 million in retail packaging
products to the Postal Service; and by 1998 this amount had
increased to $6.8 million, or about 73 percent of total sales for
these products. FSS is industrially funded, which means that
generally the costs of the products and services sold to federal
agencies and other customers and the costs of operating FSS'
programs are to be recouped from the prices charged. GSA's
consolidated financial statements, which have received unqualified
opinions from independent auditors, demonstrate whether revenues
exceed expenses. As part of the product pricing process, FSS
considers actual costs and revenues from the accounting system,
projected budgetary costs, and other costs, such as depreciation,
that are associated with operating the overall Supply and
Procurement business line and then assigns these costs to each of
the three methods of supply--schedule, special order, and stock.
Prices for products and services sold through each supply method
are determined differently. In the stock program, a major part of
the pricing process involves the use of a computer-based model
that calculates pricing markups for groups of products according
to their procurement, storage, handling, and transportation costs.
FSS centrally calculates recommended selling prices on a
semiannual basis for products sold through the stock program.
The prices become effective on the first day of October and April.
However, item managers can adjust the recommended selling price
for any product at any time. 2 For purposes of the General Supply
Fund, the term "federal agency" is defined in 40 U.S.C. 472 as any
executive agency or any establishment in the legislative or
judicial branch of the government except the Senate, House of
Representatives, and the Architect of the Capitol. Other
entities, such as the Postal Service, are also authorized to
purchase products and services from GSA. Page 3
GAO/GGD-99-116 Retail Packaging Products B-281901 GSA operates
four major distribution centers located in Burlington, NJ;
Palmetto, GA; Fort Worth, TX; and Stockton, CA; and three smaller
centers located in Franconia, VA; Chicago, IL; and Auburn, WA, to
receive, store, and ship products purchased by federal agencies
through the stock program. In addition, there are 19 GSA Express
Stores located throughout the world, where customers can purchase
and pick up products. In fiscal year 1998 total sales for the
stock program were $817 million. During this same year, retail
packaging product sales totalled $9.3 million, and about 73
percent of these sales were made to the U.S. Postal Service. To
accomplish our objectives, we reviewed the applicable statutory
Scope and provision, 40 U.S.C. 756, and
GSA's pricing policy and practices relating to Methodology
products sold by GSA through the FSS Supply and Procurement
Program. We obtained information on how the computer model was
used to establish product prices, including how it assigned direct
and indirect costs associated with selling each product. We also
discussed the pricing and management of retail packaging products
with GSA officials from FSS' headquarters in Arlington, VA, and
several field locations involved in pricing or distributing retail
packaging products to customer agencies. We did our work between
November 1998 and May 1999, in accordance with generally accepted
government auditing standards. Appendix I provides more details
about our objectives, scope, and methodology. We requested
comments on a draft of this report from GSA's Administrator and
the Postmaster General. GSA officials orally provided technical
comments, which we incorporated in the final report. The Postal
Service had no comments. The statutory provision related to
product pricing and cost recovery, 40 GSA Is Not Required to
U.S.C. 756, does not require GSA to recover its costs associated
with Recover Costs on an selling products on an item-
by-item basis and does not specify how GSA should implement full
cost recovery. The statute gives GSA wide latitude Item-by-Item
Basis in how to recover its costs. It is GSA's view
that as long as the revenues obtained from all products and
services sold under the General Supply Fund cover the expenses of
operating the Fund, GSA is complying with the law. The full cost
recovery requirement became effective in 1988, after Congress
amended 40 U.S.C. 756 (a) by adding language that provides for
industrial funding of FSS and authorizes full cost recovery of the
products and services purchased by federal agencies and other
customers.3 3 Public Law 100-202, 101 Stat.1329-427 (1987) amended
40 U.S.C. 756(a) by adding subsection (a)(3), which states that
the general supply fund shall be available for paying other direct
costs and indirect Page 4
GAO/GGD-99-116 Retail Packaging Products B-281901 Subsection (b)
of this provision identifies the purchase price, transportation,
and direct and indirect costs associated with contracting,
handling, and distributing products as the costs that GSA should
recoup through its selling prices.4 However, the law does not
require that GSA use a specific method in recovering its costs or
require GSA to establish a price for individual products that will
recover all of the costs associated with selling each product on
an item-by-item basis. The statute provides that GSA is to fix
its product prices at levels to recover, so far as practicable,
the applicable purchase price, transportation, and other direct
and indirect costs associated with selling the products. Since the
inception of industrial funding GSA has interpreted the statute as
providing it with considerable discretion in determining how to
achieve full cost recovery. GSA's 1988 Industrial Funding
Implementation Plan5 recognized that the legislation provided a
great deal of flexibility. GSA officials said that the language
of the statute, which provides that prices should be fixed at
levels to recover so far as practicable all applicable purchase
price and transportation and other direct and indirect costs
associated with the products it sells, suggests that Congress
recognized GSA should have latitude in establishing product prices
and could not, in all cases, recover the costs associated with
selling each product. Officials from GSA's Office of General
Counsel also told us that a private company challenged GSA's
interpretation of the full cost recovery statute in federal
district court and they said GSA won this lawsuit.6 It should be
noted, however, that the court did not address the claim that
GSA's pricing methodology failed to comply with 40 U.S.C. 756(b).
The Court dismissed the complaint on the grounds that the
plaintiff had failed to establish that it had suffered an injury
or that it was an intended beneficiary of the statute. The United
States Court of Appeals affirmed the lower court's finding. costs
that are reasonably related to contracting, procurement,
inspection, storage, management, distribution, and accountability
of property and nonpersonal services provided by the General
Services Administration. 4 Because 40 U.S.C. 756 identifies the
specific costs that GSA should recover when selling products and
services under the General Supply Fund, the statute takes
precedence over OMB Circular No. A-25, which establishes federal
policy regarding fees assessed for government services and for
sale or use of government goods and resources. 5 The 1987
amendment to 40 U.S.C. 756 required that GSA prepare by Feb. 15,
1988, an Industrial Funding Implementation Plan that (1) fully
described and explained the accounting system (including the
pricing and cost allocation methodology for products and services)
to be used for such implementation and (2) contained a schedule
for completing implementation of full cost recovery. 6 T & S
Products, Inc. v. United States Postal Service, General Services
Administration, No. 94-896, 1994 U.S. Dist. Lexis 20751 at *1
(D.D.C. May 26, 1994;) aff.d 68 F. 3d 510 (D. C. Cir. 1995). Page
5
GAO/GGD-99-116 Retail Packaging Products B-281901 GSA asserts that
it is complying with the full cost recovery requirement mandated
in the law as long as the revenues for all products and services
sold through the General Supply Fund are at least equal to the
costs of operating the Fund. In the two most recently completed
fiscal years--1997 and 1998--GSA's audited financial statements,
which FSS officials said were prepared in accordance with Federal
Accounting Standards Advisory Board accounting principles, show
that the General Supply Fund revenues exceeded operating expenses
by $119 million and $133 million, respectively.7 These revenues
resulted from total sales of $2.8 billion in fiscal year 1997 and
$2.7 billion in fiscal year 1998. Because 40 U.S.C. 756 does not
specify how GSA should implement full cost recovery, does not
require GSA to recover costs on an item-by-item basis, and states
that costs should be recovered so far as practicable, we believe
the method GSA is using to achieve full cost recovery is within
its discretion. Notwithstanding GSA's discretion under the
statute, it is GSA's objective to GSA Does Not Set recover
costs on each of the four business lines--supply and procurement,
Prices to Recover the vehicle acquisition and leasing, property
management, and travel and transportation--under the General
Supply Fund from the activities within Costs of Selling Each
each line. For example, FSS strives to recover the overall costs
of Product Individually operating the supply and procurement
business line, which includes retail packaging products, from the
sales of products and services provided under this line.
However, it is not FSS' goal to recover costs on each of the
programs that are operated under this business line--schedules,
special order, and stock--or to recover costs on an item-by-item
basis. According to FSS officials, if the revenues produced by
the schedules, special order, and stock programs are at least
equal to the total cost of operating the supply and procurement
business line, FSS has achieved its objective. In fiscal year
1998, net income from the supply and procurement business line was
$22 million. Because FSS focuses on recovering costs at the
business line level and not at the program or product level, FSS
officials said that it is not surprising that the price charged
for a given product will not always cover all costs associated
with providing that product. On the contrary, the officials said
that the price charged for many products sold through the stock
program might not be sufficient to ensure that all costs
associated with providing a 7 According to FSS officials, 40
U.S.C. 491 authorizes FSS to retain revenues from the General
Supply Fund generated from agencies participating in the
interagency fleet management system for the purpose of replacing
such motor vehicles and related equipment and supplies.
Accordingly, FSS estimated that it needed to retain $135 million
and $124 million of the revenues generated in 1997 and 1998,
respectively, for these purposes. Consequently, there was a
revenue deficit of $16 million ($119 million minus $135 million)
in 1997 and a revenue surplus of $9 million ($133 million minus
$124 million) in 1998. Page 6
GAO/GGD-99-116 Retail Packaging Products B-281901 given product
are recovered from the sales of those products. Our analysis
found that this was true for most of the retail packaging products
sold at the prices that were in effect at the beginning of fiscal
years 1997 through 1999. We compared the actual markups that FSS
used to establish selling prices for retail packaging products
with the individual product markups calculated by FSS' cost
allocation model. The results of our analysis show that the
selling prices established at the beginning of fiscal year 1997
for all of the 22 retail packaging products for which we could
calculate full cost recovery prices were insufficient to fully
recover FSS' estimated costs of selling these products. At the
beginning of fiscal year 1998, 18 of the 27 retail packaging
products, 67 percent, were priced at amounts insufficient to
recover all associated selling costs. At the beginning of fiscal
year 1999, 23 of 27 (85 percent) product prices were initially
established at levels that would not fully recover all estimated
costs. Our analysis also showed that both the dollar and
percentage differences between the selling prices and the
estimated full cost recovery prices for retail packaging products
were generally greater in 1997 than in the next 2 years. A
dramatic example was the video cassette mailer. In dollars, the
full cost recovery price was higher than the selling price at the
beginning of each fiscal year for this product by $356.26 in 1997,
$0.94 in 1998, and $2.72 in 1999. FSS officials told us that the
difference between a product's selling price and its full cost
recovery price is influenced by several factors, including the
cost price8 of the product, historical sales, and projected sales.
These officials explained that if a product has low projected
sales, the cost allocation model calculates a higher recommended
markup than it would if that product had higher projected sales.
This occurs because a product with low projected sales has fewer
units sold to help absorb the assigned costs. The FSS officials
also said that in 1997, some retail packaging products may have
had low projected sales and this, in turn, could have caused the
products' estimated full cost recovery prices to be significantly
higher than the products' selling prices. Appendix II provides the
selling prices for each of the retail packaging products offered
at the beginning of the 3 fiscal years and the prices that would
have resulted if FSS had used the individual product markups in
determining product prices. 8 An item's cost price is the weighted
average cost of that item. The weighted average cost is
calculated on the basis of the cost and quantity of a product in
inventory or on order and the additional quantities expected to be
ordered during the pricing period. Page 7
GAO/GGD-99-116 Retail Packaging Products B-281901 According to FSS
officials, the price that FSS pays for each product, referred to
as the cost price, is the beginning point of the pricing process.
Once the cost price for each product is known, FSS pricing
officials use the cost allocation model to assign program costs to
each product and calculate an individual product markup. FSS
officials explained that although the individual product markups
represent the most accurate estimate of how much it costs to sell
each product individually, these markups are not used to determine
final product prices. Instead, similar products are grouped into
a federal supply class, and the cost allocation model calculates
an average markup for all items included in each class. These
markups are then adjusted on the basis of the professional
judgment of FSS pricing and supply officials, and the resulting
markups become the recommended pricing markups. The recommended
markups are applied to FSS' cost prices to determine the
recommended selling prices. The list of recommended product
selling prices, which are set semiannually, is then sent to the
appropriate commodity centers responsible for purchasing and
managing the products. Item managers within each commodity center
can adjust the recommended selling price for any product in order
to be able to offer competitive prices. Furthermore, item managers
can change the selling price for any product at any time between
the semiannual pricing cycles in order to remain competitive with
the private sector. According to a commodity center official,
item managers typically reduce the selling price to stay
competitive and raise the selling price to cover an increase in
costs resulting, for example, from a higher cost charged by an FSS
supplier. According to FSS officials, although several pricing
alternatives were considered when the Industrial Funding
Implementation Plan was completed in 1988, FSS determined that
applying a pricing markup to each federal supply class would
provide the preferred pricing solution. FSS officials said
because they offer thousands of products, prices on these products
can change throughout the year, and FSS needs flexibility to
manage its diverse product lines; it would be impractical and
burdensome to monitor each product to ensure that all associated
selling costs were recovered on an item-by-item basis. In 1996,
GSA's Office of Inspector General completed a review of the
process FSS used to price products sold through the stock program.
The study concluded that FSS was generally pricing products in an
efficient and effective manner, and no alternative pricing methods
were identified.9 9 Advisory Review on Pricing of FSS Stock
Program Items, GSA OIG, Audit Report A51844/F/6/V96012 (Mar. 19,
1996). Page 8
GAO/GGD-99-116 Retail Packaging Products B-281901 The fact that
many retail packaging products were priced at amounts that do not
recover all of FSS' selling costs is not unique or unusual under
the stock program. FSS pricing officials with whom we spoke
estimated that two-thirds of the approximately 19,000 products
sold through the stock program are priced below full cost
recovery. To test this estimate, we requested that FSS query its
pricing data pertaining to the stock program in February 1999.
The results showed that on 78 percent of the 18,946 products, the
individual product markups--which FSS officials said is the most
accurate estimate of how much it costs FSS to sell each product--
were higher than the markups that were actually used to determine
selling prices. In 1992, we reported a similar situation in which
many orders for low-value products that GSA was selling through
its stock program depots were being subsidized by revenues from
other products.10 FSS management recognizes that the stock program
is facing difficult challenges, including declining sales and
changes in customers' shopping habits. Therefore, beginning in
January 1999, GSA initiated a study to explore strategic options
for the stock program. The study group, which includes senior
managers, is focusing on several issues regarding the future of
its distribution centers' operations. One option is to explore
the possibility of having a new FSS business model for the 21st
century. As of May 1999, no decisions had been made on what
changes should be made to the stock program, and time frames for
making these decisions had not been established. In our prior
work, we reported that the Department of Defense (DOD) also has
examined its distribution system and achieved some success in
reducing the costs of providing medical and food products to its
customers and in reducing the quantities of these products in its
supply and distribution depots. DOD achieved this success by
implementing inventory management best practices developed by the
private sector. Among these best practices was the use of direct
delivery, whereby the private vendor delivers products directly to
the customer instead of to a DOD warehouse.11 Although the costs
FSS incurs in transporting products to its customers FSS Applies
an Additional are included in the pricing process described
above, FSS applies an Transportation Markup to additional 7-
percent charge to retail packaging products to cover the Retail
Packaging Products increased transportation costs incurred on
these products. According to FSS officials, FSS sometimes incurs
increased transportation costs 10 General Services Administration:
Increased Direct Delivery of Supplies Could Save Millions
(GAO/GGD-93-32, Dec. 28, 1992). 11 Inventory Management: Greater
Use of Best Practices Could Reduce DOD's Logistics Costs (GAO/T-
NSIAD-97-214, July 24, 1997). Page 9
GAO/GGD-99-116 Retail Packaging Products B-281901 because many of
the retail packaging products ordered by the Postal Service are
shipped via the mail, and this mode of transportation is not
generally the most economical available to FSS. FSS uses the mail
because a written agreement between GSA and the Postal Service
stipulates that, when possible, orders shipped to Postal
installations will be mailed. Because the Postal Service was
buying most of FSS' retail packaging products, officials became
concerned that the prices charged for these products were not
sufficient to cover the increased cost of shipping them via the
mail. Consequently, a one-time limited study of the
transportation cost on retail packaging products was completed in
March 1995. On the basis of this study, FSS began to apply an
additional 7-percent markup to retail packaging products sold in
fiscal year 1997 and thereafter. We attempted to verify the basis
for this surcharge by reviewing the FSS transportation cost study.
However, we found that there was insufficient documentation to
allow us to determine the specific time period of the study, the
sample size, or the methodology that was used. Given that we
could not independently verify the merits of the 7-percent
surcharge, we did a limited analysis of the costs of shipping
retail packaging products using FSS-supplied data on orders that
were shipped from three distribution centers. On these orders, we
compared the actual shipping costs of retail packaging products
with the costs that FSS would have incurred if a more economical
mode of transportation had been used. Our analysis showed that at
two of the three locations the 7-percent surcharge used by FSS
exceeded the added transportation costs associated with retail
packaging products. Specifically, at the Fort Worth and Franconia
distribution centers, we found that a 4-percent and 6-percent
surcharge, respectively, would have covered the additional
transportation costs for the retail packaging products included in
our analysis. However, at the Burlington Distribution Center, we
found that a surcharge of approximately 10 percent would have been
necessary to fully cover the additional transportation costs on
the products we reviewed. As noted above, our analysis of
transportation costs was limited and was conducted only to get a
rough idea about the accuracy of FSS' 7-percent surcharge.
Therefore, the results of our analysis cannot be projected to the
universe of retail packaging products shipped by each center or
sold by FSS. Appendix I provides more details on our methodology
for analyzing transportation costs and the orders that we
reviewed. Page 10 GAO/GGD-99-116
Retail Packaging Products B-281901 The applicable federal statute
gives GSA considerable discretion in Conclusions
determining how it is to achieve full cost recovery on products
and services sold through the General Supply Fund. Consequently,
GSA is not required to, nor does it, price all of its products at
levels that will ensure that all costs associated with selling
each item individually are recovered from the sale of the product.
The prices that GSA set centrally for most of the retail packaging
products it sold in fiscal years 1997, 1998, and 1999 were not
sufficient to recover all estimated costs associated with selling
each individual product. Nevertheless, we agree with GSA that the
method it has chosen to achieve full cost recovery is within its
discretion under the statute as long as the revenues obtained from
all the products and services sold under the General Supply Fund
cover the expenses of operating the fund. On the other hand, a
question that remains unanswered is whether GSA should sell the
majority of its products at prices that do not recover all
associated selling costs. GSA's ongoing study of its stock
program may shed some light on this issue, if the study
specifically addresses the costs and benefits of the stock program
to GSA and its customers. On June 9, 1999, FSS Assistant
Commissioners for Business Management Agency Comments and
Marketing and the Office of Distribution Management, their related
staff, and the Special Assistant to the FSS Controller provided
oral comments on a draft of this report. They agreed with the
results of our analysis and the message of the report. They also
provided technical comments, which we incorporated into this
report to improve the clarity of our description of the General
Supply Fund and the cost allocation model. On June 15, 1999, the
U.S. Postal Service's liaison to GAO said that the Service had no
comments on a draft of this report. We are sending copies of this
report to Senator George V. Voinovich, Chairman, and Senator
Richard Durbin, Ranking Minority Member, Subcommittee on Oversight
of Government Management, Restructuring, and the District of
Columbia, Senate Committee on Governmental Affairs; Representative
Jim Kolbe, Chairman, and Representative Steny H. Hoyer, Ranking
Minority Member, Subcommittee on Treasury, Postal Service and
General Government, House Committee on Appropriations;
Representative Steve Horn, Chairman, and Representative Jim
Turner, Ranking Minority Member, Subcommittee on Government
Management, Information and Technology, House Committee on
Government Reform; Senator Kay Bailey Hutchinson; the Honorable
David J. Barram, Administrator, General Services Administration;
and Mr. William J. Henderson, Postmaster General. We will also
send copies to other interested congressional Page 11
GAO/GGD-99-116 Retail Packaging Products B-281901 committees and
subcommittees and make copies available to others on request.
Major contributors to this report are acknowledged in appendix
III. If you or your staffs have any questions, please contact me
on (202) 512-8387 or at [email protected]. Bernard L. Ungar
Director, Government Business Operations Issues Page 12
GAO/GGD-99-116 Retail Packaging Products Page 13 GAO/GGD-99-116
Retail Packaging Products Contents 1 Letter 16 Appendix I
Objectives, Scope, and Methodology 19 Appendix II Comparison of
Retail Packaging Products' Selling Prices With Prices Calculated
Using Full Cost Recovery Markups 22 Appendix III GAO Contacts and
Staff Acknowledgments Table II.1: GSA's Fiscal Year 1997 Selling
Prices vs. Full 19 Tables
Cost Recovery Prices Table II.2: GSA's Fiscal Year 1998 Selling
Prices vs. Full 20 Cost Recovery Prices Table
II.3: GSA's Fiscal Year 1999 Selling Prices vs. Full
21 Cost Recovery Prices Abbreviations FSS Federal
Supply Service GSA General Services Administration USPS
U.S. Postal Service DOD Department of Defense Page 14
GAO/GGD-99-116 Retail Packaging Products Page 15 GAO/GGD-99-116
Retail Packaging Products Appendix I Objectives, Scope, and
Methodology Our objectives were to determine (1) whether the
General Services Administration (GSA) is required by law to set
its prices for retail packaging products at levels sufficient to
ensure that all selling costs are recovered on each item and (2)
whether GSA's selling prices for these products do recover all
costs. In doing our work, we primarily performed audit work at
GSA's Federal Supply Service (FSS) headquarters located in
Arlington, VA. We also performed audit work at the FSS Office
Supplies and Paper Products Center in New York, NY; the
Southwestern Distribution Center in Fort Worth, TX; the Northeast
Distribution Center in Burlington, NJ; and a Forward Supply Point
in Franconia, VA. In addition, we interviewed an official from T&S
Products, a private company that competes with GSA to supply
retail packaging products to the United States Postal Service
(USPS). To meet the first objective, we reviewed the applicable
statutory provision, 40 U.S.C. 756, relating to the pricing of
products and services that FSS sells to federal agencies and other
customers under the General Supply Fund. We also reviewed a court
case in which a private company sued GSA alleging that GSA's
pricing of retail packaging products was in violation of 40 U.S.C.
756. Additionally, we met with officials from GSA's Office of
General Counsel to discuss the statutory requirements pertaining
to product pricing. Finally, we reviewed and summarized a prior
GSA Office of Inspector General report dealing with the subject of
product pricing. To meet our second objective, we assessed FSS'
pricing policy and procedures pertinent to retail packaging
products and other items sold through the stock and procurement
business line. We determined whether the pricing policy and
procedures were within GSA's discretion under 40 U.S.C. 756(b),
which provides that product prices be fixed at levels so as to
recover, so far as practicable, the applicable purchase price, and
transportation and other direct and indirect costs associated with
selling the products. We examined how FSS determined prices for
retail packaging products in fiscal years 1997, 1998, and 1999. In
completing our examination, we reviewed how the cost allocation
model was used in the product pricing process and the assumptions
and data that were used in determining the final product prices.
We then determined whether the prices set for retail packaging
products at the beginning of fiscal years 1997, 1998, and 1999
were sufficient to recover, so far as practicable, the estimated
costs associated with selling each item. We did this by using FSS
accounting and cost data, including the weighted average cost
price for each product, individual product markups Page 16
GAO/GGD-99-116 Retail Packaging Products Appendix I Objectives,
Scope, and Methodology calculated by FSS' cost allocation model,
and the actual product selling prices, as of the beginning of each
fiscal year. Specifically, we compared the selling prices for each
of the retail packaging products with the prices that would have
been charged if FSS officials had applied the individual product
markups. Our analysis assumed that the individual product markups
represent the most accurate estimates of what it actually costs
FSS to sell each product. We used the individual product markups
and selling prices for products ordered through FSS' Customer
Supply Centers because a large majority of retail packaging
products were ordered through these centers. While performing our
price analyses, we conducted limited testing on a sample of the
FSS cost and pricing data to determine the age, accuracy, and
reasonableness of these data. We also verified FSS' cost prices
for retail packaging products by reviewing samples of contracts
and inventory information. In examining the transportation costs
associated with retail packaging products, we attempted to
evaluate the FSS study that was completed in 1994 and its
corresponding conclusion that an additional 7-percent markup
should be applied to these products. Our evaluation of this study
was, however, severely limited because we could not independently
determine the specific time period, sample size, or methodology
that was used in the study. Consequently, we tested the accuracy
of the additional markup by analyzing orders provided to us by FSS
officials that included retail packaging products. These orders
were shipped from distribution centers located in Burlington, NJ;
Fort Worth, TX; and Franconia, VA. We verified the accuracy of
these orders before conducting our analyses. We examined 57 orders
from Fort Worth that were shipped from January 28 through January
31, 1999, and 50 orders shipped from Franconia, VA, from January 4
through January 29, 1999. We also examined 436 orders placed with
the Burlington center from February 1 through February 5, 1999. We
used the placement date in analyzing the Burlington data because
some files provided by FSS for this location did not specify
shipping dates for the orders. Using the data from each
distribution site, we determined the total dollar value of sales,
transportation costs, and the costs of using an alternative
transportation method for retail packaging products. We used this
methodology because GSA has an agreement with USPS that it will,
when possible, ship all mailable items to Postal facilities by the
U.S. mail. According to GSA officials, this method of
transportation was frequently used for retail packaging products,
and it is often more expensive than other methods of
transportation. In analyzing the Fort Worth and Page 17
GAO/GGD-99-116 Retail Packaging Products Appendix I Objectives,
Scope, and Methodology Burlington shipments we allocated the total
actual and alternative transportation costs to each item on a per
pound basis. For the orders shipped from Franconia, we did not
have to complete this allocation because the actual transportation
costs could be reconstructed from existing data. To enable us to
calculate the alternative transportation cost, FSS officials
provided the lowest transportation cost that FSS would have
incurred if the USPS shipping requirements did not apply. We then
determined the difference between the actual and alternative
transportation costs and calculated the markup needed to recover
the additional transportation costs for each distribution center.
Because of the way the locations were selected and orders were
obtained, we could not combine the results of our analysis or
project them to the population of retail packaging products sold
by each center or by FSS overall. We did our work between November
1998 and May 1999, in accordance with generally accepted
government auditing standards. We did not, however, validate the
accuracy of all data that are included in the FSS cost allocation
model, and the results of our price analysis are not projectable
to all products sold by GSA. We requested comments on a draft of
this report from GSA's Administrator and the Postmaster General.
GSA officials orally provided technical comments, which we
incorporated in the final report. The Postal Service had no
comments. Page 18 GAO/GGD-99-116
Retail Packaging Products Appendix II Comparison of Retail
Packaging Products' Selling Prices With Prices Calculated Using
Full Cost Recovery Markups Table II.1: GSA's Fiscal Year 1997
Selling Prices vs. Full Cost Recovery Prices
Full cost Percent National stock number
Item description--quantity FSS sell pricea
recovery priceb Differencec differenced 7510-01-383-
7967 Tape, with dispenser 2"X22'-6/package
$7.37 $8.40 $(1.03) (14)
7520-01-368-3499 Stamp dispenser, plastic-25/box
3.51 3.92 (0.41) (12)
7530-01-372-3098 White envelope 6"X9"-50/box
4.51 10.25 (5.74) (127)
7530-01-372-3099 White envelope 9"X12"-50/box
5.47 9.78 (4.31) (79)
7530-01-372-3100 Green border envelope 10"X13"-50/box
5.66 14.37 (8.71) (154)
7530-01-372-3104 White envelope 6"X9"-250/box
14.97 22.46 (7.49) (50)
7530-01-372-3113 White envelope 9"X12"-250/box
18.14 21.64 (3.50) (19)
7530-01-372-3114 Green border envelope 10"X13"-250/box
22.54 24.72 (2.18) (10)
8105-00-281-1169 Shipping sack 14-1/4"X20"-50/package
17.93 21.79 (3.86)
(22) 8105-00-281-1436 Shipping sack 10-1/2"X16"-100 sacks
23.12 28.03 (4.91)
(21) 8105-01-385-7246 Shipping sack 6"X10"-50/package
8.60 258.18 (249.58) (2,902)
8105-01-385-7396 Shipping sack 8-1/2"X12"-100/package
19.79 112.03 (92.24) (466)
8105-01-385-7584 Shipping sack 10-1/2"X16"-50/package
16.58 67.22 (50.64) (305)
8105-01-386-2181 Video cassette mailer-25/package
15.16 371.42 (356.26) (2,350)
8105-01-386-2189 Audio cassette mailer-25/package
5.66 102.57 (96.91) (1,712)
8105-01-386-2202 Diskette mailer-25/package
9.65 Not available Not available Not available 8105-01-
386-2209 Shipping sack 6"X10"-250/package
37.20 115.37 (78.17) (210)
8105-01-386-2217 Shipping sack 8-1/2"X12"-50/package
10.48 270.45 (259.97) (2,481)
8105-01-434-3492 Photo mailer 9-3/4"X12"-25/package
Not available Not available Not available Not available
8110-01-386-2192 Square mailing tube 24"X3"X3"-15/bundle
19.24 Not available Not available Not available 8110-01-
386-2214 Square mailing tube 36"X3"X3"-15/bundle
20.75 Not available Not available Not available 8115-01-
357-9995 Shipping box 18"X12-1/2"X3"-15/bundle
14.84 16.93 (2.09) (14)
8115-01-357-9996 Shipping box 8"X8"X8"-15/bundle
8.00 11.64 (3.64) (46)
8115-01-357-9997 Shipping box 15"X12"X10"-15/bundle
17.18 19.26 (2.08) (12)
8115-01-364-9492 Shipping box 20"X14"X10"-15/bundle
22.39 25.29 (2.90) (13)
8115-01-386-2238 Shipping box 20"X20"X20"-15/bundle
35.91 Not available Not available Not available 8135-01-
381-6525 Bubblewrap 16"X108'X3/16"-12/package
18.67 23.56 (4.89) (26)
Note 1: The gain or loss for each individual product cannot be
extrapolated to the total sales of that product during the fiscal
year because each of the products may have been sold at different
prices throughout the year, and the quantities of products sold at
these different prices were not readily available. Note 2:
Parentheses denote the number is negative. aSell price effective
beginning on October 1, 1996, for products sold through the
Customer Supply Centers. All product selling prices are subject
to change in April of each year and may be changed throughout the
year by item managers. bThe full cost recovery price represents
the cost price plus the individual product pricing markup as
calculated by FSS' cost allocation model. According to FSS, the
individual product markup represents the most accurate estimate of
how much it costs FSS to sell each item individually. cAccording
to FSS, the higher difference between a product's sell price and
its full cost recovery price may be due to low projected sales
volume. The costs allocated to each unit are higher on a product
with low projected sales than on a product with high projected
sales because the product with low projected sales has fewer units
sold to absorb the costs. As a result, a low sales projection for
a product could cause that product's full cost recovery price to
be significantly higher than its selling price. dThe difference as
a rounded percentage of the FSS sell price. Source: GAO analysis
of FSS' cost and sell prices and markups for retail packaging
products. Page 19
GAO/GGD-99-116 Retail Packaging Products Appendix II Comparison of
Retail Packaging Products' Selling Prices With Prices Calculated
Using Full Cost Recovery Markups Table II.2: GSA's Fiscal Year
1998 Selling Prices vs. Full Cost Recovery Prices Full cost
Percent National stock number Item description--quantity
FSS sell pricea recovery priceb Differencec
differenced 7510-01-383-7967 Tape, with dispenser 2"X22'-
6/package $7.61 $6.23
$1.38 18 7520-01-368-3499 Stamp
dispenser, plastic-25/box 3.99
6.63 (2.64) (66) 7530-01-372-3098
White envelope 6"X9"-50/box
8.98 10.20 (1.22) (14)
7530-01-372-3099 White envelope 9"X12"-50/box
10.18 12.20 (2.02) (20)
7530-01-372-3100 Green border envelope 10"X13"-50/box
9.84 13.44 (3.60) (37)
7530-01-372-3104 White envelope 6"X9"-250/box
27.30 24.58 2.72 10
7530-01-372-3113 White envelope 9"X12"-250/box
33.35 28.39 4.96 15
7530-01-372-3114 Green border envelope 10"X13"-250/box
37.69 32.60 5.09 14
8105-00-281-1169 Shipping sack 14-1/4"X20"-50/package
19.93 20.78 (0.85)
(4) 8105-00-281-1436 Shipping sack 10-1/2"X16"-100 sacks
28.13 28.81 (0.68)
(2) 8105-01-385-7246 Shipping sack 6"X10"-50/package
8.89 12.63 (3.74) (42)
8105-01-385-7396 Shipping sack 8-1/2"X12"-100/package
16.46 16.67 (0.21)
(1) 8105-01-385-7584 Shipping sack 10-1/2"X16"-50/package
16.08 23.72 (7.64)
(48) 8105-01-386-2181 Video cassette mailer-25/package
11.18 12.12 (0.94)
(8) 8105-01-386-2189 Audio cassette mailer-25/package
5.03 6.32 (1.29) (26)
8105-01-386-2202 Diskette mailer-25/package
7.55 8.83 (1.28) (17)
8105-01-386-2209 Shipping sack 6"X10"-250/package
29.32 28.14 1.18 4
8105-01-386-2217 Shipping sack 8-1/2"X12"-50/package
10.58 16.91 (6.33)
(60) 8105-01-434-3492 Photo mailer 9-3/4"X12"-25/package
12.27 11.49 0.78 6
8110-01-386-2192 Square mailing tube 24"X3"X3"-15/bundle
17.49 21.35 (3.86) (22)
8110-01-386-2214 Square mailing tube 36"X3"X3"-15/bundle
18.85 23.21 (4.36) (23)
8115-01-357-9995 Shipping box 18"X12-1/2"X3"-15/bundle
10.82 10.78 0.04 0
8115-01-357-9996 Shipping box 8"X8"X8"-15/bundle
5.32 7.58 (2.26) (42)
8115-01-357-9997 Shipping box 15"X12"X10"-15/bundle
9.90 11.56 (1.66) (17)
8115-01-364-9492 Shipping box 20"X14"X10"-15/bundle
14.05 15.27 (1.22)
(9) 8115-01-386-2238 Shipping box 20"X20"X20"-15/bundle
27.36 26.07 1.29 5
8135-01-381-6525 Bubblewrap 16"X108'X3/16"-12/package
17.45 16.14 1.31 8
Note 1: The gain or loss for each individual product cannot be
extrapolated to the total sales of that product during the fiscal
year because each of the products may have been sold at different
prices throughout the year, and the quantities of products sold at
these different prices were not readily available. Note 2:
Parentheses denote the number is negative. aSell price effective
beginning on October 1, 1997, for products sold through the
Customer Supply Centers. All product selling prices are subject
to change in April of each year and may be changed throughout the
year by item managers. bThe full cost recovery price represents
the cost price plus the individual product pricing markup as
calculated by the FSS' cost allocation model. According to FSS,
the individual product markup represents the most accurate
estimate of how much it costs FSS to sell each item individually.
cAccording to FSS, the higher difference between a product's sell
price and its full cost recovery price may be due to low projected
sales volume. The costs allocated to each unit are higher on a
product with low projected sales than on a product with high
projected sales because the product with low projected sales has
fewer units sold to absorb the costs. As a result, a low sales
projection for a product could cause that product's full cost
recovery price to be significantly higher than its selling price.
dThe difference as a rounded percentage of the FSS sell price.
Source: GAO analysis of FSS' cost and sell prices and markups for
retail packaging products. Page 20
GAO/GGD-99-116 Retail Packaging Products Appendix II Comparison of
Retail Packaging Products' Selling Prices With Prices Calculated
Using Full Cost Recovery Markups Table II.3: GSA's Fiscal Year
1999 Selling Prices vs. Full Cost Recovery Prices
Full cost Percent National stock number
Item description--quantity FSS sell pricea
recovery priceb Differencec differenced 7510-01-383-
7967 Tape, with dispenser 2"X22'-6/package
$7.97 $6.44 $1.53 19
7520-01-368-3499 Stamp dispenser, plastic-25/box
4.35 7.63 (3.28) (75)
7530-01-372-3098 White envelope 6"X9"-50/box
2.44 3.42 (0.98) (40)
7530-01-372-3099 White envelope 9"X12"-50/box
4.17 6.45 (2.28) (55)
7530-01-372-3100 Green border envelope 10"X13"-50/box
5.17 7.22 (2.05) (40)
7530-01-372-3104 White envelope 6"X9"-250/box
10.66 11.14 (0.48)
(5) 7530-01-372-3113 White envelope 9"X12"-250/box
16.73 17.01 (0.28)
(2) 7530-01-372-3114 Green border envelope 10"X13"-
250/box 18.96 18.89
0.07 0 8105-00-281-1169 Shipping sack
14-1/4"X20"-50/package 20.00
21.97 (1.97) (10) 8105-00-281-1436
Shipping sack 10-1/2"X16"-100 sacks
23.66 25.64 (1.98)
(8) 8105-01-385-7246 Shipping sack 6"X10"-50/package
8.57 13.28 (4.71) (55)
8105-01-385-7396 Shipping sack 8-1/2"X12"-100/package
17.25 18.70 (1.45)
(8) 8105-01-385-7584 Shipping sack 10-1/2"X16"-50/package
17.09 25.27 (8.18)
(48) 8105-01-386-2181 Video cassette mailer-25/package
12.34 15.06 (2.72)
(22) 8105-01-386-2189 Audio cassette mailer-25/package
5.01 7.84 (2.83) (56)
8105-01-386-2202 Diskette mailer-25/package
7.58 9.16 (1.58) (21)
8105-01-386-2209 Shipping sack 6"X10"-250/package
36.24 35.82 0.42 1
8105-01-386-2217 Shipping sack 8-1/2"X12"-50/package
10.63 18.18 (7.55)
(71) 8105-01-434-3492 Photo mailer 9-3/4"X12"-25/package
8.68 9.81 (1.13) (13)
8110-01-386-2192 Square mailing tube 24"X3"X3"-15/bundle
10.21 12.41 (2.20) (22)
8110-01-386-2214 Square mailing tube 36"X3"X3"-15/bundle
11.51 13.70 (2.19) (19)
8115-01-357-9995 Shipping box 18"X12-1/2"X3"-15/bundle
11.12 12.80 (1.68) (15)
8115-01-357-9996 Shipping box 8"X8"X8"-15/bundle
6.30 10.77 (4.47) (71)
8115-01-357-9997 Shipping box 15"X12"X10"-15/bundle
12.19 14.75 (2.56) (21)
8115-01-364-9492 Shipping box 20"X14"X10"-15/bundle
16.32 18.42 (2.10) (13)
8115-01-386-2238 Shipping box 20"X20"X20"-15/bundle
32.76 36.74 (3.98) (12)
8135-01-381-6525 Bubblewrap 16"X108'X3/16"-12/package
18.98 18.02 0.96 5
Note 1: The gain or loss for each individual product cannot be
extrapolated to the total sales of that product during the fiscal
year because each of the products may have been sold at different
prices throughout the year, and the quantities of products sold at
these different prices were not readily available. Note 2:
Parentheses denote the number is negative. aSell price effective
beginning on October 1, 1998, for products sold through the
Customer Supply Centers. All product selling prices are subject
to change in April of each year and may be changed throughout the
year by item managers. bThe full cost recovery price represents
the cost price plus the individual product pricing markup as
calculated by FSS' cost allocation model. According to FSS, the
individual product markup represents the most accurate estimate of
how much it costs FSS to sell each item individually. cAccording
to FSS, the higher difference between a product's sell price and
its full cost recovery price may be due to low projected sales
volume. The costs allocated to each unit are higher on a product
with low projected sales than on a product with high projected
sales because the product with low projected sales has fewer units
sold to absorb the costs. As a result, a low sales projection for
a product could cause that product's full cost recovery price to
be significantly higher than its selling price. dThe difference as
a rounded percentage of the FSS sell price. Source: GAO analysis
of FSS' cost and sell prices and markups for retail packaging
products. Page 21
GAO/GGD-99-116 Retail Packaging Products Appendix III GAO Contacts
and Staff Acknowledgments Bernard Ungar (202) 512-8387 GAO
Contacts In addition to the individual named above, Gerald
Stankosky, James Acknowledgments Cooksey, William Dowdal, Jeff
Kaser, Alan Belkin, and Susan Michal-Smith also made key
contributions to this report. Page 22
GAO/GGD-99-116 Retail Packaging Products Page 23 GAO/GGD-99-116
Retail Packaging Products Page 24 GAO/GGD-99-116 Retail
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