Our objective was to assess if the management of Postal Service vehicle parts agreements is consistent with pricing requirements.
In fiscal year (FY) 2020, the Postal Service used about 255,000 delivery vehicles to distribute mail to 160 million delivery points across the nation. While about $292 million was spent on vehicle parts through 16 suppliers, the Postal Service spent about $190 million (65 percent) with two primary consignment vehicle part suppliers.
These suppliers are contracted through national ordering agreements for the sale of vehicle parts through consignment with a period of performance from 2007 to 2050. The agreements also include a most favored customer pricing clause which allows the Postal Service to obtain an equal to or lower unit price for vehicle parts provided to the suppliers’ other customers.
The Postal Service contracted with the suppliers through the consignment vehicle parts program for the ease of obtaining regularly replenished repair parts, to maintain supplier institutional knowledge, and to receive discounted parts. Through the consignment process, selected vehicle repair parts are ordered through the Solution for Enterprise Asset Management system, received, and stocked at Vehicle Maintenance Facilities (VMFs). The parts remain the supplier’s property until they are used to repair a vehicle, at which time the Postal Service is charged.
As part of the Postal Service’s Ten-Year Plan to Achieve Financial Sustainability and Service Excellence, one of the key strategies is to invest in new delivery vehicles. In February 2021, the Postal Service announced it awarded a ten-year contract to manufacture a new generation of U.S. built postal delivery vehicles. Under the contract’s initial $482 million investment, the supplier will finalize the production design of the Next Generation Delivery Vehicle and will assemble 50,000 to 165,000 vehicles over ten years.
Meanwhile, the existing fleet of delivery vehicles, averaging over 28 years old, still requires continuous repair and maintenance to support the current operations of the Postal Service. This means that the Postal Service will continue to require the services of the two suppliers to provide the required vehicle repair parts needed to maintain the fleet.
While consignment provides many benefits, the Postal Service has opportunities to enhance the program’s pricing evaluation process and improve management.
We found that the Postal Service has not determined whether it is receiving most favored customer pricing from its consignment vehicle part suppliers. Since the execution of these agreements in 2007, no supplier data, reporting, or analysis has been requested, received, or conducted by the contracting officers. Per Clause 2-48, when requested by the contracting officer, the supplier must show that prices offered to the Postal Service for goods and services are equal to or lower than those offered to the suppliers’ other customers, and such pricing data must be available for review by the Postal Service.
Additionally, we found that consignment vehicle part prices may fluctuate throughout the duration of the agreement due to consumer price index and other one-time price changes, for example. We reviewed the top 100 purchased consignment vehicle parts from the two suppliers in FY 2020 and analyzed all price changes for those parts from FY 2012 through FY 2020. Of the 186 instances where a price increased by 5 percent or greater, 143 price changes (77 percent) had a documented assessment of price increases from the contracting officer, while 43 price changes (23 percent) had no evidence of a contracting officer evaluation to ensure the price was reasonable. We were unable to determine if better pricing was available for these parts since Supply Management did not obtain or analyze pricing data for the suppliers’ other most favored customers.
In FY 2021, management developed and implemented a fair and reasonable determination process that reviews periodic price changes and new part additions to ensure pricing is fair and reasonable. However, the process does not consistently address one-time price changes or compare pricing of goods offered to other customers of the suppliers.
These issues occurred because the contracting officers were not monitoring or enforcing compliance with the most favored customer pricing clause for consignment vehicle parts suppliers. In October 2018, Supplying Principles & Practices Clause 2-48 was revised to include additional requirements for both the supplier and the Postal Service, including an annual comparative report of Postal Service and other customer purchases and pricing data. However, the national ordering agreements were not modified nor required to be modified to include these revisions. Supply Management personnel stated this clause is no longer relevant for these agreements because there are no other customers of similar size purchasing vehicle parts in the same quantities as the Postal Service. However, the clause was never removed from the ordering agreements. Additionally, there was no formal process to ensure these prices remained reasonable and advantageous to the Postal Service prior to FY 2021.
When contracting officers do not enforce the most favored customer pricing clause or perform evaluations for pricing changes, they cannot ensure they are receiving most favorable pricing and the Postal Service could be overpaying for goods and services.
Finally, Supply Management can improve the oversight of its consignment vehicle parts agreements with the suppliers. We compared purchases of the top 100 consignment vehicle parts offered by both suppliers in FY 2020 and found that the Postal Service was not always purchasing the lower cost part. Of $64 million in purchases, $4.9 million could have been saved if the Postal Service purchased from the supplier offering the lower price.
This occurred in part because VMF personnel have recently been experiencing issues with the availability and quality of parts; and are occasionally forced to choose more expensive parts or seek parts from local suppliers. While there is no formal requirement for purchasing consignment vehicle parts, the Postal Service entered into a long-term ordering agreement with the expectation that replacement parts would be reliable, available, priced reasonably, and provided timely.
The Postal Service must consistently evaluate its consignment vehicle part agreements to ensure they are obtaining the best value from these agreements and to avoid contracting for inferior repair parts and/or paying excess for higher priced parts.
We recommended management:
- Evaluate whether the existing most favored customer pricing Clause 2-48 (2006) remains applicable to the contract terms for these consignment suppliers. If not applicable, modify the contract to remove the clause and establish a monitoring process to ensure vehicle part prices are reviewed annually.
- Incorporate one-time price changes over a specific defined threshold into the fair and reasonable determination process.
- Perform an annual review of the consignment vehicle parts for these agreements to evaluate the quality and availability of parts provided by the suppliers to assist Vehicle Maintenance Facilities in obtaining the most cost-efficient parts.