4. Purchasing and Materials

TABLE 1.4 FACILITIES PROJECTS

		Projects Completed During 2001	Projects Ongoing as of End of 2001
	New construction, major renovations, and explansion projects	210	314
	Building purchases	86	54
	New lease construction	230	243
	Other lease actions (alternative quarters, new leases, and lease renewals)	6,064	1,597
	Expense repair and alteration projects	9,946	3,605
	Capital repair and alteration projects	8,983	1,974

        a. Introduction
In 2001, the Postal Service made more than 38.7 thousand contractual actions (contract awards and modifications) worth more than $13.8 billion. While this dollar total is one of the largest in Postal Service history, it includes the award of a $6.3 billion contract to Federal Express for mail transportation services, the largest contract ever awarded by the Postal Service. Generally, 2001 saw a decrease in Postal Service purchase actions due to the overall fiscal state of the Postal Service. In this business environment, Purchasing and Materials took effective steps to maximize purchasing leverage and to simplify processes throughout the organization. Results from these efforts have proven very positive, in areas such as supply chain management, fuel programs, and materials management-related initiatives, and will continue to pay dividends for years to come.

        b. Supply Chain Management
Purchasing and Materials has identified the supply chain management philosophy and attendant business practices as central to its efforts to further the business and competitive objectives of the Postal Service. During 2001, Purchasing and Materials dramatically expanded its application of these business practices throughout Postal Service purchasing and materials management, and the results have been impressive.

Over the past several years, supply chain management has become one of the most important aspects of successful contemporary businesses; a few years ago, it became a major tenet of the Postal Service’s Breakthrough Productivity Initiative. In general terms, supply chain management is the analysis of the purchase process and the supply stream, from the supplier’s supplier to the customer’s use and disposal, in order to increase customer satisfaction and decrease overall cost. Effective supply chain management involves a number of business practices, including close interaction among end users, buyers, and suppliers, long-term contracts, and ongoing analysis and improvement of operating and administrative processes.

A Supply Chain Management Core Team has been in place for the past several years, using process management data analysis and other business practices to help implement supply chain management throughout Postal Service purchasing and material management. More than 90 supply chain “Centers of Excellence” (COEs) (an increase of 30 over last fiscal year) have been established throughout Purchasing and Materials and are using supply chain management business practices to benefit the Postal Service. The COEs are centered around cross-functional teams, representing both purchasing and internal customers, and each is commodity-focused, investigating how customer satisfaction can be improved and savings realized. As a result, strategic partnerships have been developed with, among others, suppliers providing office products, packaging for expedited mailings, mail transport equipment, and cellular phones and services. These partnerships offer quick delivery, and often cost savings, through electronic commerce. The Postal Service also receives discounts and rebates depending on the amount of business done with a particular supplier. Due to the wide variety of goods and services purchased by the Postal Service, such partnerships will grow, as will the customer service and financial benefits received.

During 2001, several significant new partnerships were formed. A gain-sharing contract was awarded to SBC Global Services, Inc., for voice network services at more than 37,000 Postal Service facilities. As part of the contract, SBC has guaranteed $15 million in savings, and in August the company provided the Postal Service with the first rebate check, in the amount of $5 million. Partnerships were formed with two custodial product suppliers to provide all of the Postal Service’s needs for this commodity. The business advantages include lower prices through consolidation of requirements and volume purchasing, enhanced quality, and end-user satisfaction.

Goodyear Tire and Rubber Co. was awarded a long-term contract and is now the exclusive supplier of new tires for the Postal Service’s 200,000-plus fleet of trucks, vans, and delivery vehicles. During the term of the contract, the Postal Service expects to save at least ten percent per year. An added aspect of this contract is that Postal Service employees will receive significant personal savings in tire purchases and automotive services from participating Goodyear dealers.

These commodity-based contracts are illustrative of how the Postal Service is using supply chain management business techniques to reduce costs and deliver quality. Cross-functional purchase teams define requirements, analyze demand data, use process management tools to devise optimum business approaches, and work with suppliers to reach mutually beneficial agreements. Although in the past several years supply chain management has led to some substantial achievements, FY2001 raised the bar — cost reductions had been predicted to be $100 million — and instead they reached $157 million. Some of this amount contributed directly to the Postal Service’s bottom line, and the remainder was reinvested.

One commodity receiving particular attention was transportation fuel, which annually costs the Postal Service more than $700 million. A Fuel Management Program has been established, based on a pilot test that began in 1998. The program provides lower cost fuel to suppliers who transport and deliver mail on behalf of the Postal Service (historically, these suppliers purchased the fuel on the open market). Two contracts have been awarded to suppliers for approximately 95 million gallons of fuel nationwide, and savings have been estimated at about $0.12 per gallon. Additionally, savings are being realized nationwide through the use of a fuel card that can also be used for vehicle maintenance services.

Innovative business practices have been and continue to be used to further supply chain management. Reverse auctioning, an Internet-based business practice, was first used during FY2000 for selected commodities. Reverse auctioning allows potential suppliers to adjust their proposed price on-line as they react to the proposed prices of their competitors. The results for the Postal Service are lower prices, better negotiating position, shorter purchasing cycles, and improved productivity. During 2001, reverse auctions were held for several commodities. In one case, a reverse auction for corrugated boxes generated savings of $2.5 million.

The adoption of supply chain management by Purchasing and Materials has obviously led to some real successes. However, more can be achieved. Purchasing and Materials’ senior management began a complete review of organizational structure, effectiveness, and human resources and skill sets. During FY 2003, a new structure will be in place, and it will maximize the use of commodity teams, supply chain management business practices, and technology to ensure that Postal Service purchasing and materials management continue at the forefront of both the public and the private sectors.

        c. Process Simplification
For some time, small purchases have been made locally by Postal Service employees via credit card. This allows users to purchase day-to-day operational needs quickly and efficiently. The new emphasis on supply chain management and large consolidated contracts for many of these common items has somewhat reduced the need for these buys (while also increasing Postal Service purchasing power), but providing local offices with the means to get what they need when they need it remains important. During 2001, the number of credit cards in use remained approximately the same as it was in FY 2000, and the total dollar amount of such purchases shrank by approximately one-sixth, mostly due to the Postal Service’s financial position and budget tightening.

New policies and tools have also been introduced to simplify the purchasing process. In FY 2000, several years worth of effort led to a complete redesign of the contractual documentation used for Postal Service solicitations and contracts. With the issuance of the new policies in January 2002, Postal Service solicitations will consist of three basic solicitation provisions, and contracts will consist of two basic clauses. Contracting officers and purchase teams will add to or modify these basic terms and conditions based on the item being purchased or the contract type being used, and the result will be contracts that have far more in common with commercial terms and conditions than those generally used in government contracts.

Among the new tools bringing greater efficiency to Postal Service purchasing is a web-based application, eBuy, which links Postal Service employees, purchasing and materials management professionals, web-based catalogs, and suppliers. EBuy provides a “paperless” requisitioning, purchasing, and payment system, while ensuring adequate oversight. The benefits are significant. Transaction and other administrative costs have been reduced, prices for most available commodities have fallen, and large inventories are no longer required. At the same time, lead times are reduced, and purchasing professionals are freed from concentrating on transactions and now can concentrate on strategic sourcing. Another new tool we are introducing is the electronic Governmentwide Point of Entry (GPE), which has replaced the Commerce Business Daily as the means of publicizing purchase opportunities. The GPE is accessed via the Internet.

        d. Materials
The materials organization of Purchasing and Materials is responsible for managing thousands of line items required for daily Postal Service operations, providing purchasing and materials support to the areas through ten Purchasing and Materials Service Centers (PMSCs), and operating of one Material Distribution Center. The Materials cataloging function maintains more than 25,000 stocked items and more than 6,000 direct supplier items.

Gross sales for the Materials wholesale operations were $356 million in parts, supplies, printed materials and equipment. Issues from wholesale inventories amounted to $156 million, while electronic commerce-based direct sales from 90 suppliers rose to $200 million, a 25 percent increase over last year. At the same time, the Label Printing Center produced more than 2 billion mail processing labels, and the Mail Equipment Shops produced more than 1.6 million sacks and pouches, 4.4 million keys, and 330,000 locks.

Continuing our process management efforts with internal Postal Service partners, Materials worked with Retail to save an additional $11 million on the distribution of merchandise to all postal stores and outlets and $412,000 in packaged stamps. Another partnership was established with the Consumer Advocate, under which a test for the on-line sales of unclaimed property from the Mail Recovery Centers (MRCs) was begun. Using a single MRC as a pilot test, more than 36,000 items were sold, and this generated approximately $1.4 million in net revenue. In its preliminary findings, the Consumer Advocate’s organization stated that this figure was three times that of past returns, and this test will be extended into FY 2002.

Partnerships with other Postal Service organizations yielded similar successes. Working with the Maintenance Management organization, Materials improved order and delivery cycle times from 14 days to 10 days. This will decrease field inventory investments by more than $2 million annually. In partnership with Delivery Confirmation, we developed and obtained funding, and initiated equipment acquisition for consolidating national delivery confirmation label production into the Label Print Center. This is projected to save $1.8 million by the fourth quarter of FY 2002. And, working with Retail’s POS ONE (Point-of-Service One) program, Materials was able to institute a program that identified $3 million in underused equipment and redeployed it in lieu of new purchases.

Materials Distribution organization also began using the Freight Traffic Management System (FTMS) — a web-based software system that calculates expected freight charges and allows a user to select the best value carrier. The system is used by materials distribution and materials management specialists at the areas and districts; it calculates expected freight charges and allows a user to select the best value carrier. Materials also worked with Fleet Management, the Inspection Service, Finance, the General Services Administration, and four vehicle manufacturers to purchase 1,083 non-mail vehicles. The purchase ensures timely deliveries and prompt payments, and it resulted in overall cost avoidance of $2 million. Last in this area, Materials evaluated more than 42 major acquisitions for transportation opportunities and obtained an average 10 percent savings.

To reduce operating costs and improve customer service, Materials reviewed distribution requirements and support structure. This led to the closing of the South River, NJ Materials Distribution Center. The closing resulted from a volume decline in supply and equipment operations and an accelerated use of direct vendor deliveries. Operational savings of $2 million will be realized from the closing, as will an additional $2 million once the facility is leased to commercial operations. Additional savings were obtained by reducing wholesale inventories from $148.5 million to $138.6 million through increased use of direct vendor deliveries and implementation of phased deliveries under the automated warehouse replenishment initiative.

The Recovery of Assets and Materials (RAM) initiative, begun in 1998, continues to reap successes. RAM manages field surplus and excess equipment. In 2001, equipment reallocations and cost avoidance in lieu of new purchases were more than $78 million, an 80 percent improvement over FY 2000.

        e. Professional Development
In order to further integrate commercial best practices into Postal Service purchasing, we are changing our training to focus more on the private sector. However, while in the process of phasing out most of our in-house curriculum, we continue to conduct select purchasing and materials courses. During 2001, more than 500 purchasing and materials employees attended 23 courses. All of the courses receive college credit recommendations from the American Council on Education.

As noted, Purchasing and Materials is transitioning to full implementation and management of an integrated supply chain, and we are transitioning to the use of commercially available supply management courses. In 2001, 448 Purchasing and Materials professionals systemwide attended 18 offerings of the two-day Institute for Supply Management seminar, "Purchasing and Materials: Creating a Seamless Process." Purchasing and Materials professionals will attend more such courses in FY 2002 and beyond. In terms of education and professional attainments, as of January 2001, more than 60 percent of Purchasing and Materials’ professional and administrative staff attained at least a bachelor’s degree or higher, and more than 38 percent had attained a professional certification in either the purchasing or materials management discipline.

Under the Office of Government Ethics (OGE) guidelines, the Postal Service must provide designated employees with annual ethics update training. In 2001, web-based ethics training was developed and provided to more than 350 Purchasing and Materials employees, thereby meeting the OGE annual training requirement.

        f. Major Purchases
The contract awarded to Federal Express for handling and transportation of expedited mail, worth $6.3 billion, is the largest contract ever awarded by the Postal Service. Performance began in August 2000, and is scheduled to continue for seven years. More than 61 million pounds of mail per year will move under the contract. The Postal Service also entered into a retail agreement with Federal Express for the placement of its collection boxes at designated Postal Service facilities. An indefinite delivery contract with United Airlines for the transportation of First-Class Mail amounted to $427.9 million, and a similar contract awarded to Delta Airlines amounted to $390.4 million.

In the Supplies and Services area, significant contractual actions included the exercise of an option contained in an existing contract with Ford Motor Company calling for the delivery of more than 11,000 carrier vehicles and priced at more than $235.1 million. Another contract modification, this one with Lockheed Martin and for Recognition Improvement Program II, was executed in September and valued at $152 million. Also of interest is a two-year contract for the aggregated natural gas requirements of 125 Postal Service facilities in the Eastern, New York Metro, and Capital Metro Operations areas. The contract, which was awarded to a Native-American-owned, Tulsa, OK, company, stabilizes and reduces natural gas prices for these facilities.

In the Design and Construction commodity area, a $35.5 million contract was awarded for major renovations to the Seattle Processing and Distribution Center (PDC). The renovations include a complete roof replacement, security improvements and structural and seismic upgrades. A $9.1 million contract was awarded in November for an expansion at the Champaign, IL, PDC. The work, which was completed 90 days ahead of schedule, included the construction of an 88,000-foot addition to the existing workplace.

        g. Supplier Diversity
The Postal Service’s Supplier Diversity program is a fundamental element in its corporate strategy to remain competitive and profitable in the marketplace. The Postal Service’s record is a good one, and because its business and financial challenges are more similar to those of the private sector than to those of government agencies, the Postal Service has adopted more of a private-sector approach to supplier diversity. That approach is based on strengthening the supplier base by reaching out to identify strong suppliers and providing them with opportunities to compete for Postal Service contracts.

The Postal Service periodically benchmarks itself against both the public and private sectors, and historically, the results have proven substantial. These efforts continued during 2001. For example, the Postal Service participated in a supplier diversity survey of Conference Board firms. The survey found that the Postal Service was a leader in the use of small and woman-owned firms, and "above average" with minority-owned firms. While direct comparisons are extremely difficult, given the wide differences among the data available for comparison, this leadership position was reconfirmed from a second source. In the second annual DIV2000.com survey of 100,000 small, minority, and woman-owned suppliers, the Postal Service ranked sixth among public sector entities in promoting "multicultural business opportunities." While this ranking reflects both effort and success, it is a drop from the Postal Service’s number two ranking last year. However, overall program results naturally were affected by the general decrease in contract opportunities during 2001, and the statistical spike resulting from the contract awarded to Federal Express.

Earlier in the year, the Postal Service was the only public sector entity chosen to participate, with a number of Fortune 100 firms, in the development of a Public Broadcasting Service series on the importance of supplier diversity. The program is now being aired in several markets, and the Postal Service uses it as part of its ongoing supplier diversity training. The Postal Service also has developed a Computer-Based Training course addressing postal-specific supplier diversity issues. The course will be broadly distributed and used during 2002, and appears so promising that at least one local chapter of the National Minority Supplier Diversity Council has requested use of the course.

The Postal Service continues to maintain close relationships with a number of national associations and their affiliates that support supplier development and diversity throughout the country. During 2001, the Service sponsored or actively participated in an estimated 100 fairs and events focused on supplier diversity across the nation. The Postal Service website, USPS.com, contains a variety of material designed to provide information on how to do business with the Postal Service, connects to buyers and key contact points, and delivers information on contract opportunities as they arise.

Policy changes regarding subcontracts with small, minority, and woman-owned businesses introduced in 1999 continue to gain attention. Some 440 firms submitted subcontracting reports in 2001, up markedly from the 310 that reported last year. However, despite the increase in firms reporting, subcontract dollars with small, minority and woman-owned businesses for 2001 were significantly lower than last year.

Outside of the subcontracting area, more than $3.8 billion (representing more than 69 percent of contractual actions) went to small businesses. Nearly $314 million (representing 8.8 percent of contractual actions) went to minority businesses, and more than $569 million (representing 12.3 percent of contractual actions) went to woman-owned businesses. Last, the Postal Service committed more than $58.3 million to suppliers that employ blind and severely handicapped people under the Javits, Wagner, O'Day statutes.