GAO finds Postal Service reforms not reaching potential

Three major financial reform initiatives that the U.S. Postal Service implemented in 2001 have scored mixed results, according to a new General Accounting Office report.

Since the beginning of fiscal 2002, the Postal Service has initiated bulk fuel programs, reverse auctions for highway contracts and national contracts to consolidate spending. The report, "Postal Service: Progress in Implementing Supply Chain Management Initiatives," (GAO-04-540) found, however, that the agency had varied results in implementing the reforms.

The bulk fuel program involved purchasing diesel fuel directly and providing it to existing postal fuel facilities for use by highway contractors and postal-owned vehicles. It fell far short of its projected annual savings of $18 million by reporting only $1.1 million in savings for fiscal 2003. According to GAO, resistance from highway contractors proved to be a major problem. Postal Service officials suspect this resistance may stem from the fact that, under the old system, contractors were often able to retain extra profits when they bought fuel that was lower than the price of reimbursement. Given the time and resources it takes to track fluctuations in fuel prices, postal officials relied heavily on contractors to submit their own adjustments.

"In practice, according to Postal Service officials, contractors are typically quick to submit an adjustment when they are paying more than the contract price, but slow to do so when they are able to obtain the fuel more cheaply," the report stated.

The contractors, however, did not cite that as a reason for opposing the program, GAO auditors found. Contractors claimed they were unwilling to give up the strong business relationships they have with their current suppliers, who they said were far more responsive than the suppliers that would be designated by the bulk fuel program. They also said they could often get lower prices from their local suppliers. The Postal Service noted that because contractor's fuel charges were reimbursed, the price should be irrelevant to them.

The contract prices themselves were also tremendous burden under the new bulk fuel program, GAO noted. The program failed to include an automated system for compiling the gallons purchased and the price per gallon paid by the highway contractors. Instead, agency officials had to sift through individually filed reports and manually calculate the contract prices, which according to the report, took up to 30 minutes per contract.

The watchdog agency also found that the Postal Service's lack of success in opening new fuel locations accounted in part for its failure to reach its savings goal. The agency currently has only 44 locations where contractors can buy fuel, but expects to open 22 locations in the near future.

The Postal Service saw more success with its reverse auctions, which allow the agency to choose the lowest highway contractor prices, but GAO auditors found portions of that program needing improvement as well.

The report noted that while the Postal Service was implementing more reverse auctions, it did not necessarily conduct them in a way that guaranteed the lowest price. In more than 27 percent of the auctions, the Postal Service received only one bid. The report pointed out the unlikelihood of this being the lowest possible price given the absence of competitors. The Postal Service does not negotiate with single bidders, further increasing the possibility that the price was not the lowest possible, GAO found.

The Postal Service also failed to allow significant time for competitors to place low bids, the report concluded. The agency did not offer an "overtime" option in which there's a period after the final bid for competitors to make a lower bid or counteroffer. According to GAO, the Postal Service uses this practice in reverse auctions for some supplies and materials, but not with highway contractors. Instead, GAO found that the contractor who waits until the final moments of the auction will get the final bid regardless of the willingness of other competitors to offer lower prices.

While the Postal Service claims $5.9 million in savings from reverse auctions, GAO auditors considered $2.1 million of it to be questionable due to incorrect baseline data or unsubstantiated statistical analysis.

Savings reports were also a highly noted flaw with national contracts, the most successful, but possibly most controversial of the three initiatives. The national contract program was designed to consolidate spending on material such as boxes, custodial products, labels, retail packaging and tires. The Postal Service claimed $71.1 million in savings and revenue in fiscal 2003 for those five products, but GAO was unable to validate the reported savings because of errors in the baseline data.

In addition to discrepancies in savings reports, national contracts seemed to result in significant losses for small businesses, the report stated. The number of small business suppliers for the five products dropped for every category except tires, which did not have any small business suppliers. GAO auditors attributed this to a lack of planning and consideration for small businesses, and recommended that Postal officials follow the lead of commercial companies in taking steps toward including small businesses.

In a written response to the report, the Postal Service agreed with most of GAO's conclusions, and said it had already implemented many of the recommended changes.

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