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Decentralized purchasing: A study of its efficiency and effectiveness

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Decentralized purchasing: A study of its efficiency and effectiveness

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Content DECENTRALIZED PURCHASING: A STUDY OF
ITS EFFICIENCY AND EFFECTIVENESS
by
Elisabeth Wright
A Dissertation Presented to the
FACULTY OF THE SCHOOL OF POLICY, PLANNING,
AND DEVELOPMENT
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PUBLIC ADMINISTRATION
May 2001
Copyright 2001 Elisabeth Wright
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UMI Number: 3 0 2 7 8 0 3
Copyright 2001 by
Wright, Elisabeth
All rights reserved.
®
UMI
UMI Microform 3027803
Copyright 2002 by Bell & Howell Information and Learning Company.
All rights reserved. This microform edition is protected against
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UNIVERSITY OF SOUTHERN CALIFORNIA
SCHOOL OF POLICY, PLANNING, AND DEVELOPMENT
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA 90089
This dissertation, written by
under the direction of hX.t.... Dissertation
Committee, and approved by all its
members, has been presented to and
accepted by the Faculty of the School of
Policy, Planning, and Development, in
partial fulfillment of requirements for the
degree of
DOCTOR OF PUBLIC ADMINISTRATION
EuSfl-ficiTt W/2-161+1"
Dean
DISSERTATION COMMITTEE
Chairperson
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DEDICATION
For my parents, who taught me the value of hard work and perseverance.
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TABLE OF CONTENTS
DEDICATION ...................................... ii
LIST OF TABLES . . ........................ vi
LIST OF FIGURES............................ viii
ABSTRACT ............................................................. ix
ACRONYMS ............................................................... xi
Chapter
I. INTRODUCTION............... 1
Statement of Purpose ........................................................ 1
Research Focus .............................. 5
Drivers for Change...................................................................... 8
Effects of Changes...................................................................... 12
Conclusion ........... 13
II. LITERATURE REVIEW .................................................. 14
Introduction .................................... 14
Definitions ........................................ 14
Purchasing and Procurement .......................... 17
Procurement and the Three Branches of Government ........ 22
Historical Background Regarding Purchasing and
Procurement ........................ 25
The Evolution of Federal Purchasing and Procurement 25
A Brief Look at Early Usage ...................................... 25
Federal Procurement Overview......... ......................... 26
Federal Procurement in Colonial Times ........... 26
The 1800s and Federal Procurement.................................... 29
Events After the Turn of the Century ................... 31
Post-War Lessons Learned .............................................. 36
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Government Commissions and Efficiency in
Procurement ........................................................... 41
The Birth of the Office of Federal Procurement Policy .... 45
A Paradigm Shift—Executive Initiatives and Legislative
Mandates of the 1990s .......................... 46
The National Performance Review and Its Procurement
Focus ............ 47
FASA and FARA—Powerful Legislative Reforms ....... 49
FASA and Simplified Acquisitions . . . . . . . . . . . . . . . . . . . . 50
FARA—Decentralization Aimed at Efficiency and
Effectiveness .................... 52
Purchasing Models: Definition and Objectives.......................... 53
Micro-Purchasing and the Purchase Card .......... 55
Agency and Cardholder Responsibilities .......... 55
Prior Research Examining Decentralized
Micro-Purchasing .................. 56
Purchase Card Research .......... 56
Efficiency and Effectiveness in Government Administrative
Operations .......................... 61
An Historical Look at Decentralization in Bureaucratic
Organizations .......................... 69
A Model in Conflict .............. 69
Theoretical and Operational Views...................................... 71
in. RESEARCH METHODOLOGY AND DESIGN.............................. 76
Introduction ........................................ 76
Research Questions ................................ 77
Data Collection .......... 78
Type of Data and Method of Collection.............................. 79
Testing .......... 83
Expected Results .................. 85
IV. RESEARCH FINDINGS.................. 87
Introduction ................................................................................. 87
Qualitative Data ........................ 87
Policy Organizations: Mission and Relevance to Federal
Purchasing ................ 88
The Army: An Operational Purchasing Organization ...... 108
iv
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Quantitative Data ..................................... 125
Introduction...................... 125
Data Presentation and Analysis . . . . . . . . . . . . . . . . . . . . . . . 127
Observations Regarding the Man Year Assumptions ...... 139
Additional Observations of the Credit Card Method ...... 140
Wilcoxon Signed Rank Test for Statistical Significance
and Testing Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Conclusion ............................................ 145
V. CONCLUSIONS...................... 147
Introduction .................................... 147
. Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Limitations .............. 148
Discussion of Conclusions: Efficiency and Effectiveness ...... 149
Control Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Authority, Control and A udit ................................ 150
The Quality and Cost of Items Purchased . . . . . . . . . . . . . . . . . . 153
Decentralized Purchasing and the World Wide W eb.................. 154
Recommendations ............ 155
1 . Let the Punishment Fit the Crime ........................ 157
Conclusion ........................ 159
SELECTED BIBLIOGRAPHY .............. 161
APPENDICES
1. Chesney Cartoon: Doing Business with the Federal
Government, 1952 ............................................................. 174
2. “Charlie Brown”: Doing business with the Federal
Government................ 176
3. Papers of the Continental Congress, No. 29, Folio 1 15.............. 178
4. Federal Acquisition Regulations Subparts 1.603 (Authority)
and 13.2 (Micro-Purchases) .......................................... 183
5. Executive Order 12931, October 13, 1994 .................. 186
6. Excerpt from Sample Purchase Card Procedures Manual ...... 189
7. Cost Benefit Analysis Small Purchases—Purchase Order 195
8. Cost Benefit Analysis Small Purchases—Credit C ard 199
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LIST OF TABLES
1. Major Changes Under FASA and the Clinger-Cohen Act.'...•.......... 5
2. Fiscal Years 1995 to 1998 Government-Wide Purchase Card
Statistics .................... 7
3. Internal Customer Criticisms of Government Procurement .......... 10
4. Simplified Acquisitions and the Micro-Purchase Sub-Category ....... 19
5. Government Commissions' Interest in Procurement Efficiency ....... 62
6. Key Characteristics of Liberation Management ............ 65
7. An Anthology of Efficiency in Public Administration ................... 67
8. Comparison of Costs/Lead T im es............................... 98
9. Volume of Fiscal Year 1998 Transactions and Expenditures—Purchase
Card Government-Wide .......................... 100
10. Three-Tier Human Control System .......... 105
11. Department of A rm y .................. 109
12. Purchasing Agent Workforce Data (Full-Time Army Staffing
Levels) ............ 114
13. Control Processes ....................................... 120
14. Reported Purchase Card Fraud Compared to Total Purchase Card
Activity for FY 1997 .................. 124
15. Comparison of Average Time Recorded for Purchase Order and Credit
Card Methods at Ft. Belvoir ............ 130
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16. Applicable Groupings for Purchase Order and Credit Card
Processes................ 131
17. Cost Avoidance Associated with Elimination of Contracting and
Property Booking Process Groupings (In Dollars) .................. 132
18. Percentage of Recorded Time for Pre-DOC Task Compared to
Total Recorded Time (In Minutes) Groupings Using the
Purchase Order Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
■ 19. Cost-Per-Transaction Comparison Army-Wide Average ............ 135
20. Comparison of Average Processing Times (In Hours), Department of
the Army and Department of Veterans Affairs ................................ 137
21. Comparison of Total Average Transaction Times and Processing
Costs: Purchase Order vs. Credit Card ............ 139
22. Claimed Cost Per Transaction ......................................................... 140
23. • Contractual Deterrents to Fraud, Waste and Abuse................................ 156
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LIST OF FIGURES
1. The Federal Acquisition Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Survey of Business Regarding Government Procurement Practices .... 9
3. Characteristics of Sealed Bidding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4. Characteristics of Negotiated Procurements .................. 21
5. Historical Army Purchase Card Use Data (Transactions) ............ 57
6. Historical Army Purchase Card Use Data (Dollars) . . . . . . .. . . . . .. . . 58
7. Transaction Flow—Small Purchase Actions (Less Than $2,500)
Centralized Purchase Order Method .......... 92
8. Transaction Flow—Small Purchase Actions (Less Than $2,500)
Decentralized Bankcard M ethod.................................... 93
9. Army Purchase Card Program Growth in Dollars....... .......................... 110
10. Army Purchase Card Program Growth in Purchases................ ........... . I ll
11. Current Credit Card Procedures Flowchart..................................... 128
12. Purchase Order Procedures Flowchart............................................. 129
13. . Processing Time—Army (In Hours) .............................................. 136
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ABSTRACT
The focus of this research was to examine the effectiveness brought about
within the federal government by making purchases using a credit card. Credit card
usage is a new method of purchasing adopted with the intent of streamlining a
cumbersome, protracted paper purchasing system. By legislative authority granted
under the Federal Acquisition Streamlining Act, credit cards became an accepted
means of effecting purchases not to exceed $2,500 per transaction. Additionally,
the legislation permitted a wide dispersion of authority to use credit cards. This
replaced the traditional centralized purchasing system that relied solely upon
contracting officers to issue written purchase orders.
This research examines the processing times experienced within the
Department of the Army using both the written purchase order method and the
credit card method to determine whether the credit card method is more efficient
and effective. The Department of the Army's credit card program is well
recognized within the federal government as a leading program that has embraced
this new paradigm of purchasing. Using a time-motion study conducted by the U.S.
Army Audit Agency, the researcher conducted an analysis of the processing times
experienced using the old system, i.e., the centralized purchase order system and
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those recorded using the new credit card system. Additionally, specialized
interviewing was conducted with key policy makers and operational managers to
get insight into the genesis and experiences to date using the credit card method of
purchasing.
The research demonstrates that use of the credit card as a means of making
purchases offers a significant reduction in processing times. Thus, credit card
purchasing is more efficient in that it reduces administrative processing time and
concomitant costs. This, in turn, benefits the internal customer and the taxpayer.
However, the almost exclusive emphasis that is placed on achieving administrative
savings is at the expense of other measures of effectiveness. While issues such as
internal controls are purported by agency officials to be important, a lack of
effective control systems paves the way for fraud, waste and abuse. Agencies need
to take the necessary steps to design and implement rigorous control systems that
ensure the deterrence as well as the detection of fraud, waste and abuse. Without
systemic control, a credit card system that is faster and cheaper may not be better.
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ACRONYMS
AFMC Air Force Materiel'Command
AFPI Air force Procurement Instructions
AMC Army Materiel Command ‘
APC Agency Program Coordinator
APD Army Procurement Directives
ASPR Armed Services Procurement Regulations
CG Comptroller General
DoA Department of the Army
DoD Department of Defense
FAR Federal Acquisition Regulations
FARA Federal Acquisition Reform Act
FASA Federal Acquisition Streamlining Act
FPASA Federal Property and Administrative Services Act
FPR Federal Procurement Regulations
FY Fiscal Year
GAO General Accounting Office
GSA General Services Administration
ITMRA Information Technology Management Reform Act
NAVMAT Navy Materiel Command
NPD Navy Procurement Directives
NPR National Performance Review
OFPP Office of Federal Procurement Policy
OMB Office of Management and Budget
SA Simplified Acquisition
SBA Small Business Administration
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CHAPTER I
INTRODUCTION
Statement of Purpose
The subject of this research is to examine the effects that recent federal sector
acquisition reform has had on internal purchasing functions. Specifically, this
research focuses on the extent to which the decentralization of purchasing authority
has made purchasing more efficient and effective. Purchasing is a component of the
acquisition process. (See Figure 1.) It is the means by which federal agencies obtain
goods and services in support of day-to-day operations.
Historically, purchasing authority has vested exclusively with contracting
officers within centralized procurement offices. The right to purchase on behalf of
federal agencies is legislatively authorized and codified by Federal Acquisition
Regulations (FAR). The First Hoover Commission recommended a strong
centralized procurement system. Such a system has remained in place throughout
most of this nation’s history. Centralized authority has been considered necessary in
order to ensure strict accountability for the expenditure of public funds (Nagle,
1992). Furthermore, it is characteristic of bureaucratic organizations.
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Federal Acquisition Process
A C Q U ISITIO N PLANNING SELECTION AND AWARD
SO LICITATION
CONTRACT ADMINISTRATION
Negotiation Awaid
Assignment
FIGURE 1
THE FEDERAL ACQUISITION PROCESS
Source: Meiners, Arthur C. (1995). Fundamentals o f the acquisition process. Acton, MA: Copley Publishing Group.
* Denotes purchasing activities
to
Reform movements throughout the century have continually sought to
improve government operations in a variety of functional areas. Procurement is no
exception. As will be examined in the historical review of procurement,
recommendations for reform within the overall acquisition field are generally
directed at specific targeted functions, such as procurement (Frank, 1998). However,
while acquisition reform movements, bom of legislative as well as executive
initiatives, have historically tightened procurement authority and its operations,
recent reform initiatives aimed at efficiency in government operations have
contradicted that pattern.
A procurement system, viewed as bureaucratic and cumbersome, was
considered an impediment to meeting the needs of a new environment characterized
by the National Performance Review (NPR) as "customer focused" (NPR, 1993).
The NPR and the legislative changes bom from the Contract with America provided
the framework that allowed federal agencies to decentralize purchasing functions.
The government was expected to operate "faster, better and cheaper." The traditional
procurement process was identified as one of the government operations that needed
vast improvement. Its value in terms of the means to an end had become suspect for
several reasons. Procurement is not viewed as a direct contributor to the operations
of good government. This is not an unusual perception, since operations such as
purchasing are "back-room" processes that are often considered by customers to be
unnecessary (Davenport, 1993).
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Additionally, mandates for a balanced budget have forced government
agencies to streamline and reduce operating costs. Purchasing has been targeted as
an area in which administrative cost savings and increased efficiency could be
realized (Gore, 1993).
The sense of urgency surrounding recent reform is evidenced by the speed
. with which legislative and policy reform has taken place. Acquisition reform
initiatives of the past were slower paced when compared to the three significant
acquisition reform statues of the mid 1990s. The Federal Acquisition Streamlining
Act (FASA) was passed in 1993, the Federal Acquisition Reform Act (FARA) in
1996, and the Information Technology Management Reform Act (ITMRA) in 1996.
FARA and ITMRA are collectively referred to as the Clinger-Cohen Act. (See Table
1.) These three statutes radically changed federal purchasing policy and operations.
The General Service Administration describes FASA as the most significant piece of
acquisition reform legislation in fifty years (Educational Services Institute, 1995).
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TABLE 1
MAJOR CHANGES UNDER FASA AND THE
CLINGER-COHEN ACT
Federal Acquisition Streamlining Act of 1994 (FASA)
• Exempted commercial items from many unique government requirements
• Promoted use of simplified buying procedures for low dollar-value purchases
• Encouraged use of electronic commerce
• Established statutory framework for task- and delivery-order contracts
____________________ Clinger-Cohen Act of 1996_______
• Devolved information technology procurement authority from GSA to agencies
• Emphasized accountability, performance, and results-based IT management
• Allowed contracting officers to select competitive contractors more efficiently
• Promoted improved performance of the civilian agency acquisition workforce
Research Focus
While many changes have resulted from the aforementioned reform
initiatives, this research focuses on the effects caused by the decentralized use of the
government purchase card. Has the decentralization of the purchasing function
resulted in more efficient and effective purchasing operations?
By examining the history of procurement within the federal government and
the recently adapted decentralized purchasing operations of two large federal
agencies, conclusions about the efficiencies and effectiveness of decentralized
purchasing can be drawn. Decentralization in power and authority to purchase has
occurred in an environment that had traditionally remained highly centralized and
functionally bounded. Decentralization was encouraged by the Congress and the
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Executive Branch and viewed as a means with which government agencies could
operate in a more efficient and effective manner.
The first use of the purchase card can be traced to 1989. In that year,
$460,000 worth of purchases were made using the purchase card. This initial interest
resulted from a policy initiative directed towards identifying means of reducing the
administrative costs of buying goods and services. A few agencies, such as the
Department of Veteran's Affairs and the Department of Defense, participated in this
pilot program. The pilot program lacked direction and received little attention until
the NPR campaign, when the potential for streamlining the procurement process was
linked with purchase card use (Interview, Purchase Card Program Manager, Ms.
Nancy Goode, General Services Administration Acquisition Center, October 21,
1999).
Purchase card use became popular in 1994, when the Federal Acquisition
Streamlining Act (FASA) was promulgated in the Federal Acquisition Regulations
(FAR). FASA lifted many longstanding purchasing restrictions and is considered the
watershed legislation by which current acquisition reform has taken place. However,
decentralized use of the purchase card was encouraged by Executive Order 12931 of
October 13,1994. That order gave the General Services Administration oversight
authority for the purchase card program and urged agencies to decentralize micro
purchase authority (defined as purchasing actions under $2,500). On the heels of the
legislation and Executive Order were regulatory changes that made the purchase card
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the preferred method of making and paying for micro-purchases. In Fiscal Year (FY)
1996, 90% of the total federal purchases were under $2,500. Card use has increased
1,500% from 1990 to 1996 (NPR Reinvention Express, 1996). In Fiscal Year 1998,
$8 billion was spent using the purchase card. This figure indicates astronomical
growth from 1989, the year in which the purchase card was introduced and
expenditures approximated $460,000. (See Table 2.)
TABLE 2
FISCAL YEARS 1995 TO 1998 GOVERNMENT-WIDE
PURCHASE CARD STATISTICS
FY SALES ($$) # TRANSACTIONS # CARDHOLDERS
89 460,612.00 2,326 10,489
90 56,312,535.00 270,983 18,926
91 140,735,006.00 639,389 30,336
92 275,573,665.00 1,058,890 44,532
93 472,103,391.00 1,512,275 74,591
94 808,473,245.00 2,471,308 82,804
95 1,591,773,703.00 4,248,496 130,353
96 2,914,368,604.00 7,327,878 209,295
97 5,045,264,294.00 11,593,616 264,505
98 7,960,818,860.00 16,447,721 340,078
Source: General Services Administration, Services Acquisition Center
(1999). Washington, DC: GSA Purchase Card Center.
Decentralized authority to spend public funds has affected federal purchasing.
In 1998, decentralized authority to purchase was held by approximately 340,000
cardholders. These 340,000 cardholders represent a plethora of professions. By
7
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comparison, in 1998,28,000 contract specialists constituted the total procurement
workforce within the federal government (Interview, Ms. Linda O'Neill, Director,
Federal Acquisition Institute, September 22,1999). Decentralized purchasing places
customers closer to suppliers. Customers choose the supplier and make the
transaction. GSA attributes the growth in purchase card usage to administrative
savings, short lead times to delivery experienced with card usage, and a downsizing
procurement workforce.
Drivers for Change
For years, the government acquisition system has been burdened with many
criticisms. There is a common perception by Americans that "the government" does
things the hard way (Frank, 1998). A survey conducted by researchers at the
University of South Florida illustrates typical problems encountered as a result of
government procurement practices. (See Figure 2.) The decentralization of
purchasing enables companies to be in direct contact with government customers.
Inability to do so was a chief criticism of surveyed companies. Dissatisfaction and
frustration with the purchasing systems reduces competition and discourages
companies from doing business with the federal government. Decentralized
purchasing can alleviate many concerns, since it reduces paperwork and processing
time. Caricatures depicting, with humor, the frustration associated with government
procurement are not uncommon. (See Appendixes 1 and 2.) The view from within
is not unlike the outside perceptions. Government customers, traditionally tasked
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Problems Businesses Frequently Encounter in Doing Business With Government (percent)
Slow payment cycles
44 5
'-•id specifications written too narrowly to
permit real competition
Difficulty making contact with actual user
of service,'product
Too much paperwork required for appli
cation
Competition from other firms pushes
prices too low for firm to compete
Confusion over official responsible lor
specific purchasing decision
Reluctance to consider new products-'ser-
vtces
Bid specifications written too generally
and imprecisely
Too much paperwork required for con
tract received
Inordinate delays between bid closing and
actual contract decision
Difficulty in competing against large firms
Absence of rigorous pcrfonrjr.ee audits to
weed out bad contractors
Bid bond requirement
I ’crforinance bond requirement
Mandated minority set-aside require
m ent'
i. r talistic delivery requirements t usually
too short!
Payment bond rcqueer.ier.t
Too many noncompetitive sole source
contracts
Other
Inadequate cxcedurcs for protests and
appeals
Mandated labor cost': higher than iocai
standards
Lick of a written procedures manual avail
able to suppliers
Government purchasing cycles out ot sync
" ith industry cyc.es
Pifhcultv in competing against small firms
35.5
FIGURE 2
SURVEY OF BUSINESS REGARDING GOVERNMENT
PROCUREMENT PRACTICES
Source- MacManus. Susan A. (1991, July/August). Doing Business with Government: The Private
Sector’s Assessment of Government Purchasing and Contracting Practices. Public Administration Review 51 (4).
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with defining requirements and forwarding them to a procurement office for.
processing, have a dim view of the traditional procurement process (Kelman, 1990).
(See Table 3.) ^
TABLE 3
INTERNAL CUSTOMER CRITICISMS OF
GOVERNMENT PROCUREMENT
Process takes too long 29
Too much oversight/too many layers of review/easy for vendors to protest 15
Give managers more responsibility/don't assume we're crooks 15
Competitive procedures allow unqualified vendors to bid/win 11
Miscellaneous other criticisms (not mentioned more than once) 18
System basically all right as is 21
Note: Responses were coded into categories from open-ended answers.
Percentages add up to more than 100 because of multiple answers. The number of
managers responding was 36.
Source: Kelman, Steven (1990). Procurement and public management: The
fear o f discretion and the quality ofgovernment performance. Washington, DC: AEI
Press, Table 1-2.
Problems associated with procurement are not new. In 1915, H. B. Twyford
offered the following insight:
A purchasing staff which is entirely unsympathetic with the
particular needs of the users of the material will fail to grasp what
is one of the most essential things for their department. They will
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be dealing with papers and accounts instead of men and things.
(Twyford, 1915)
The use of a purchase card to effect transactions and obtain goods and services can
be viewed as a process innovation. The results of process innovation are the
redistribution of authority (Davenport, 1993). According to the Controller of the
Office of Management and Budget, the driving force behind government use of card
services is in response to several demands:
1. Outdated Federal processes for delivering services;
2. Public pressure to downsize the Federal government;
3. Renewed interest in accountability and performance reporting;
4. Availability of efficient transaction processing capacity; and
5. An established, yet flexible, regulatory environment for card services
(DeSeve, 1996).
Significant changes in how the government purchases goods and services
have serious consequences for the actors. Contracting officers, who have historically
had exclusive power to buy, lose some of that power when purchasing transactions
can be effected outside of their domain.
The most recent acquisition reform initiatives are modeled after the
commercial sector practices (Frank, 1998). The best commercial practices in
purchasing were identified as the means by which to make the federal government
more efficient and effective, and purchase card use in the commercial purchasing
environment has been a popular practice. The NPR campaign relied heavily on
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adopting best commercial purchasing practices as a means of realizing administrative
V i S: »! '
savings and obtaining faster delivery of goods and services.
Effects of Changes
In federal government purchasing operations, this new method of streamlined
purchasing decentralizes some of the power to buy by giving purchase cards to
internal customers. Concerns that cardholders would pay too much for items, favor
certain suppliers over others, and perhaps order items that were not for government
use were offered as potential problems. However, the commercial marketplace of
many buyers and sellers and internal agency policies regarding accountability are the
counter mechanisms in place to mitigate such concerns (Interview, Ms. Ida Ustad,
Associate Administrator, General Services Administration, April 22,1999).
Regardless of the dollar value of an item, such matters continue to be of interest in
federal purchasing. On March 23,1998, the Washington Post reported that the
Defense Department paid $75.60 for a screw that should have cost 57 cents (Barr,
1998). Articles such as this are testimony to the continued interest that the media has
in expenditure of public funds.
Purchase card use has become an alternative purchasing method that has
fundamentally altered the way goods and services are purchased in the federal arena.
The power to buy has been decentralized, and the purchase card has created a new
paradigm—a shift in how federal purchasing is conducted. The goal of
decentralization has been more efficient and effective purchasing operations.
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Decentralized purchasing authority is relatively new. This dissertation will
identify the extent to which this decentralization has resulted in more efficient and
effective purchasing operations. Furthermore, it will set the stage for further research
in the area of acquisition reform.
Conclusion
This study will contribute to the field of Public Administration, as it
examines whether decentralized purchasing has led to increased efficiency and
effectiveness. Federal procurement is big business. Last year, the federal
government spent approximately $200 billion purchasing goods and services. In
1995, micro-purchases represented 85% of all procurement actions (GAO/T-OGC-
95-26, October 19,1994). Dennis Fischer, Chief Financial Officer at the General
Services Administration, has stated that, to achieve maximum efficiency, the
purchase card should be used for purchases up to $100,000.00 (Interview,
Government Executive, May 1997). At the present time, any card usage for
purchases in excess of $2,500 per transaction is made by centralized procurement
(Interview, Ms. Julie Basile, Program Director, Office of Federal Procurement
Policy, April 14,1999). The significance of purchase card usage with respect to
public purchasing will increase if the threshold is increased to $100,000.00. In that
case, the relevance of future studies increases in importance, since more transactions
and dollars will be effected. The effect will be a rise in dispersed authority to buy,
accompanied by more claims of efficiency and effectiveness.
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CHAPTER n
LITERATURE REVIEW
Introduction
This chapter provides an extensive review of the literature surrounding the
procurement process and its historical roots, as well as an examination of the
centralized and decentralized authority and efficiency as a goal of government. First,
however, definitions and other useful information regarding procurement terms and
the influences of various federal actors are provided.
Definitions
It is helpful for the reader to be familiar with the parlance of government
procurement. While the federal government is known for its exhaustive use of
acronyms, their use will be limited in this paper to the maximum extent possible.
Note: The following definitions have been extracted from the well-recognized text in
the field—Definitions and Terms in Federal Contracting (Nash, 1998).
Acquisition: The process of acquiring by contract, supplies or
services by and for the use of the federal government through
purchase or lease. The supplies or services may already exist or
may require development. The term is used to describe the entire
process associated with the contract effort, from identification of
need to the logistical support necessary to support fielded
systems.
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Approving Official: A person within a requiring organization of
an agency who has been specifically designated to provide de
facto approval for purchases made by a cardholder.
Agency Program Coordinator (APC): The person within an
agency, appointed by written letter, who is responsible for the
oversight of the purchase card program. The Agency Program
Coordinator appoints cardholders based upon the needs of the
requiring organizations. The APC also ensures that cardholders
and approving officials obtain annual purchase card training and
that suspected abuses of cardholder privileges that may be brought
to the attention of the agency program coordinator are
investigated and appropriate measures taken to ensure correction
of program operating deficiencies. Generally, the APC is a senior
procurement or financial administrator within the agency.
Cardholder: Persons, designated in writing by letter from the
agency program coordinator, who are authorized to make micro
purchases in direct support of the requiring organization in which
they work. The limitations of cardholder authority may be
threshold driven or commodity based. For example, a cardholder
in the Information Systems organization may have authority to
purchase only supplies and services necessary to support day to
day operations of his organization, that have a single transaction
value that does not exceed $2500 and a monthly total limitation of
$ 100,000.
Contracting Officer: An employee of the federal government
who has the authority to legally bind the government by signing a
contractual instrument. The Federal Acquisition Regulations
(FAR) Subpart 2.101 defines a contracting officer as a person
with the authority to enter into, administer and/or terminate
contracts. Contracting officers are appointed in writing and are
responsible for ensuring performance of all actions required by
the contract. By regulation, in selecting Contracting officers, the
appointing official must consider the complexity and dollar value
of the acquisitions to be assigned as well as the candidate's
training, education, business acumen, judgement, character and
reputation. Contracting officer authority is evidenced by issuance
of a written Certificate of Appointment, known in the trade as a
warrant.
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Contracting: The specific portion of the acquisition process that
deals with obtaining supplies or services from non-federal
sources.. Contracting is a subset of acquisition and procurement.
Government-Wide Purchase Card: A purchase card that is
similar in nature to the commercial purchase card (e.g., Visa,
MasterCard), that is issued to authorized agency officials, that is
cardholders, for their use in acquiring supplies and services. The
limitations on purchase card use are prescribed in the FAR
13.301(a). This card is also known as the International Merchant
Purchase Authorization Card or IMP AC.
Micro-purchase: The acquiring of supplies or services, the single
purchase amount of which does not exceed $2,500. Micro
purchases are exempt from competition, set aside requirements
for small business participation, and may be made from any
source the cardholder chooses. Federal Acquisition Regulations
(FAR) 13.201(a) states that agency heads are encouraged to
delegate micro-purchase authority to individuals who will be
using the supplies or services being purchased. Although micro
purchase does not require the use of a government wide purchase
card, it is strongly encouraged.
Procurement: The stages of an acquisition that deal with
identification of a need and end with contract closeout or
termination. Procurement actions encompass both transaction
based repetitive buys as well as those actions necessary to support
the strategic needs and overall mission of an agency.
Purchasing: A subset of procurement, purchasing describes
procurement actions that are transaction based, repetitive buys.
The purchasing process is complete when performance or delivery
is made. The purchasing process includes single actions ranging
from $1 to $100,000. Within purchasing, the term micro
purchase refers to all transactions that have a unit value that does
not exceed $2500.
Purchasing Agent: A contracting officer who has the authority to
issue written purchase orders not to exceed $100,000.
Purchase Orders: Written orders, using simplified acquisition
procedures, signed and released by purchasing agents which
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constitute an offer on the part of the government to purchase
supplies or services for small, over-the-counter purchases.
Requiring Organization: Sub units within an agency or
department that have common and unique requirements that must
be satisfied by sources outside the federal government. The heads
of requiring organizations nominate persons within their
organization to act as cardholders. Once approved by the APC,
these persons have the authority to place oral orders with non-
federal sources as necessary to support their organization.
Simplified Acquisition Procedures: Methods used for making
purchases of supplies and services within the simplified
acquisition threshold, currently set by statute (Federal Acquisition
Streamlining Act of 1994) at $100,000. The procedures are
described in FAR Part 13. Simplified acquisition procedures
include written purchase orders issued by purchasing agents, and
oral orders placed by cardholders using the IMPAC.
Purchasing and Procurement
The methods by which the government solicits, offers and selects a supplier is
at the heart of the procurement process. Procurement has become more complex
throughout history (Kelman, 1990). The Federal Acquisition Regulations (FAR)
contains three general methods of procuring goods and services: (1) simplified
acquisitions—micro-purchases and actions between $2,501 and $100,000; (2) sealed
bidding; and (3) competitive negotiations. The first, simplified acquisition (SA), is
reserved for those actions not exceeding $100,000. In the case of commercial items,
a SA threshold of $5,000,000 has been established as a pilot program that sunsets at
the end of Fiscal Year 2002.
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Within the federal sector, purchasing is defined as those actions that do not
exceed $100,000 per transaction. The remaining actions—those in excess of
$100,000—are defined as large contracts. Prior to the passage of FAS A in 1994,
federal purchasing was referred to as “small purchase.” The use of that term
included all actions with a value of $25,000 or less. With the passage of FAS A, the
dollar threshold increased to $100,000 per action, and the term to describe all actions
within that new threshold became "simplified acquisitions.” It describes a group of
procurement actions that are relatively simple to process. What makes such
transactions non-complex is the relative simplicity with which solicitation of quotes
and placement of contracts are accomplished. Actions within this categoiy that are
valued above $2,500 simply require three competitive quotes that meet the agency’s
needs. Award is then made to the low bidder. According to Professor Ralph Nash at
The George Washington University, these simplified procedures are intended to
reduce administrative costs and promote efficiency and economy in procurement
(Nash, 1998). An important aspect of the process is the requirement to solicit three
quotes and award to the low bidder. (See Table 4.) With the passage of FASA, the
micro-purchase category was created within simplified acquisitions. Micro
purchases are exempt from the competitive quote requirement and are exempt from
other burdensome requirements that may complicate processing some procurement
actions. Sealed bidding and competitive negotiated procurements are the two
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methods of procurement that apply to actions in excess of the SA threshold. Figures
3 and 4 briefly summarize the characteristics and conditions for use of each.
TABLE 4
SIMPLIFIED ACQUISITIONS AND THE
MICRO-PURCHASE SUB-CATEGORY
SIMPLIFIED ACQUISITIONS
(Actions NTE $100,000)
MICRO-PURCHASES
(A Subset of Simplified Acquisitions)
Estimated Price Not To Exceed $100,000
Supply/Service Must be Obtained Using
Some Fixed Method of Pricing
Preliminary Market Research Mandatory
Public Posting of Requirement for Actions
Less than $10,000
Synopsis of Requirement in Commerce
Business Daily for Actions Over $10,000
Soliciting of Three Quotes
Solicitation is Set Aside 100% for Small
Business Participation
Price Must Be Determined to be Fair and
Reasonable by Contracting Officer
Award is Made to the Low Priced Quote
Micro-purchase Threshold $2,500
Fixed Method of Pricing Required
Market Research Not Required
No Public Posting of Requirement
No Synopsis Requirement
No Solicitation of Three Quotes Required
No Set Aside for Small Business Required
Requestor Determines If Price is Fair and
Reasonable
Award Made to Vendor of Preference
(considering price, availability and other
benefits considered)
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No limitations on estimated price
Supply/Service must be obtained using some fixed method of pricing
Preliminary Market research mandatory
Synopsis of Requirement in Commerce Business Daily 15 days prior to release of
solicitation
Invitation for Bids (IFB) Released to Interested Vendors
Bids Received
Public Opening of Bids and Recording of Prices on a Public Bid Abstract
Award to the Low Bidder
FIGURE 3
CHARACTERISTICS OF SEALED BIDDING
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No limitation on estimated price
No limitation on pricing method (may be cost based or priced based)
Preliminary market research mandatory
Synopsis of Requirement in Commerce Business Daily 15 days prior to release of
solicitation
Request for Procurement (RFP) is released
Offers Received
Negotiations conducted with offerors to obtain a better price or supply/service
Award can be made to other than the low priced offer
FIGURE 4
CHARACTERISTICS OF NEGOTIATED PROCUREMENTS
It is helpful to distinguish between the terms “purchasing” and
“procurement.” While commercial firms tend to use the term “purchasing” to
describe all types of purchase actions, the federal government makes a distinction
between the two terms. This distinction first appears in the federal regulations in the
Twentieth Century (Meiners, 1995). It should be noted, however, that the all-
encompassing use of the term “purchasing” within federal government operations
dates to the late 1700's. (See Appendix 3.) Advancements in technology and the
changing needs of defense initiatives have contributed toward the sub-specializations
that exist in procurement today. Procurement has many facets from simple
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transaction-based purchasing actions, such as buying commercial off-the-shelf
software programs, to the procurement of major weapons systems in support of
national defense. Purchasing can be defined as those procurement actions that are
transaction-based and are not strategic in nature (Gordon, 1993). Typically, such
purchases are repetitive in nature and are of a low dollar value (Sherman, 1999).
Procurement and the Three Branches of Government
All three branches of government influence procurement policy and
operations. The contributions of each are unique and significant. In consonance
with one other, the Legislative and Executive Branches set in motion the reforms that
decentralized micro-purchasing by placing the purchase card in the hands of some
430,000 internal customers. The changes that each branch champions are determined
by competing internal and external interests. Throughout history, each branch has
played an important role in shaping procurement law, policy and operations.
Legislative Branch: Congress establishes fundamental procurement policies
through the passage of legislation and through less formal actions ranging from
Committee reports and investigations to individual attention to complaints.
Congressional action, such as audits or special provisions included in a bill, may
affect individual or groups of agencies, or programs within an agency. However,
legislation governing the conduct of procurement has applied equally to all agencies.
Throughout the history of procurement, congressional interest in federal procurement
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has grown. This can be attributed, in part, to budget issues, matters of national
security and public interest.
The General Accounting Office is responsible for the audit function of
Congress. Dubbed the "watchdog of Congress," it influences procurement policy
through decisions on procurement matters, legislative advice to Congress, and review
of proposed agency policies and those policies in action. One only has to visit the
GAO Web site (www.gao.gov) to appreciate the depth and breadth of interest as
evidenced by the testimonies and reports resulting from GAO studies. Its actions
affect government-wide patterns of practice and/or policy, or may focus exclusively
on a particular agency, program or practice. One common theme is GAO’s
examination of the implementation of various statutes by selected agencies. In doing
so, GAO obtains “a pulse” with which Congress can determine the extent and
success of agency compliance with statutes.
Executive Branch: A significant amount of procurement policy developed in
the Executive Branch consists of translating basic statutes into a body of rules and
regulations. Public Law 93-400 established the Office of Procurement Policy
(OFPP) in 1974. The OFPP operates as the procurement arm of the Office of
Management and Budget (OMB). Prior to the creation of the OFPP, the Department
of Defense and the General Services Administration formulated Executive Branch
policy. The former set procurement policy for all defense activities, while the latter
set policy for all civilian activities. The result was often confusing and contradictory
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policy that made it difficult to do business with the federal government. .
Furthermore, policy lacked centralization that often resulted in vastly different
interests, views and implementation of procurement issues.
The OFPP also initiates policy on matters of importance for which the
Congress and the courts have not spoken. In its 1982 proposal on procurement
reform, the OFPP noted that the need to continually reconcile matters of economy
and efficiency must be a primary concern of the procurement process (Whelan,
1985). The OFPP played a prominent role in effecting the decentralization of micro
purchasing.
Last, the Executive Branch contributes to procurement policy through the
authority of agency administrative law judges who hear and decide matters in dispute
by contracting parties.
Judicial Branch: Interpretations of statutes, regulations and contract
provisions by the Federal court in suits involving procurement have a direct effect on
the evolution of policy. Court decisions may require actions, such as legislative
changes to existing statutory language, or less severe actions, such as changes to how
statute and/or policy are being interpreted in the daily operations of a federal agency.
The two primaiy courts that influence procurement matters are the U.S. Claims Court
and the U.S. Court of Appeals for the Federal Circuit.
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Historical Background Regarding Purchasing and Procurement
The remainder of the literature review is divided into four sections. The first
section is devoted to understanding the history of federal procurement. It examines
the evolving construct and contribution that procurement has made throughout the
nation’s history and identifies a common denominator for change throughout
history—procurement policy and operations react and adjust to meet the changing
demands of the nation. The second section is devoted to the prior research on the
micro-purchasing. The third section examines the centralized and decentralized
authority within the federal government and, in particular, within federal
procurement operations. The last section discusses efficiency as a goal of federal
government operations.
The Evolution of Purchasing and Procurement
A Brief Look at Early Usage
Purchasing can be traced back to the Thirteenth Century BC. According to
Professor Emeritus Harry Page at The George Washington University:
Inscribed clay tablets from the 13th Century BC days of the
Phoenician traders refer to persons serving as purchasing agents.
The Holy Bible, in the Book of Deuteronomy, provides
instructions for buyers in the honest use of weights and measures.
Ancient purchase orders, written on parchment scrolls in the days
of Julius Caesar, call for delivery of amphorae of wine, honey and
oil.
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Federal Procurement Overview
A review of the historical literature that traces the two-hundred-year history
of procurement makes it clear that statutes, rules, regulations, policies and operations
affecting procurement throughout history change in reaction to the needs of the
nation (Nagle, 1992). The needs of the nation may change depending on external
events, and the federal government procurement process must accommodate changes.
World and domestic events as well as developing technologies have had the most
profound influences on changing patterns in procurement policy and operations.
Early procurement initiatives supported pressing matters such as the Revolutionary
War, Civil War and Manifest Destiny. The government has continually reexamined
and revised procurement policies and operations in a search for an efficient and
effective procurement apparatus (Kelman, 1990). Today is no exception. The use of
the purchase card is testimony to the continued pursuit of procurement operations
that will meet the needs of today's nation—real-time information technology
requirements, recognition and respect for a budget-constrained operating
environment, and achievement of more efficient, customer-focused government
operations.
Federal Procurement in Colonial Times
Federal purchasing operations date back to the 1700s. Rations to support
troops during the revolutionary war were obtained through procurement of supplies
from commercial sources. Lack of a centralized procurement system was a major
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contributor to the failures that the American republic experienced in adequately
supporting its military during the Revolutionary War (Culver, 1985). Soon
thereafter, the centralized authority to conduct procurements was vested in a
Quartermaster General. Quartermaster Generals and their assistants were specifically
nominated for appointment and approved by the Congress through legislation.
Ethical issues surfaced as these appointed officials often struck purchasing deals with
relatives and, on occasion, with themselves, operating as private citizens to supply
provisions for the troops. Furthermore, kickbacks were not uncommon. Thomas
Mifflin, the first Quartermaster General, frequently purchased goods and services
from relatives, obtaining kickbacks in the form of a "commission" (Nagle, 1992).
Matters of ethics such as these continue to be of concern in procurement operations
to the present day (Sherman, 1996). However, the rank order of ethics in federal
operations is a function of “tides.” That is, competing interests refocus priorities and
often cause conflict as reform tides ebb and flow (Light, 1997).
Regulations and reorganizations also characterize early procurement. The
first procurement regulation was adopted in 1777. This regulation consisted of
seventeen pages and established separate departments of purchases and issues. The
Commissary Department was headed by a Commissary General (Culver, 1985).
These regulations included a requirement for detailed accounts of expenditures in
ledgers. These details included date of purchase; seller's name; place purchased;
species and quantity of provisions; number; color, and natural or artificial marks of
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livestock; price paid, total amount of purchase and weight (Nagle, 1992). Such
record keeping, aimed at achieving a system of accountability, is comparable to the
records government purchase card users must keep today. However, these early
attempts at accountability proved frustrating. Failure to keep detailed accounts
resulted in dismissal-from service. A demoralized Commissary Department
contributed greatly to the failure to support troops at Valley Forge. Using regulations
to combat fraud in procurement had defeated efficiency, and Congress turned to a
less regulated system that placed trust in individual character rather than paper
(Nagle, 1992).
Accountability, however, continued to be a lingering concern throughout the
following decades. Scandals were regularly reported to Congress regarding the
activities of the Quartermaster General and Commissary General departments.
Departments argued that the paperwork demands of Congress were impractical and
that the departments needed to have free reign in making decisions necessary to
support national interests (Culver, 1985).
The Constitution supported a strong central federal government and shaped
federal procurement in a like manner. Debates over the independence of the
executive took place during the First Congress in 1789. The Congress determined
that officials within the Executive Branch served at the pleasure of the President
(Nagle, 1992). The establishment of the Department of Foreign Affairs (the
predecessor of the Department of State), Treasury and the United States Post Office
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by the Congress was quickly followed by Congressional appropriations with which
those departments could purchase lighthouses and other facilities. In May 1792, the
Second Congress passed the first law governing federal procurement. This law
provided that the Treasury Department (specifically the Office of the Purveyor of
Public Supplies) would act as the government's purchasing agent (Culver, 1985).
Eventually, all contracts were ordered transferred to the Treasury Department.
Centralized federal procurement is credited to Alexander Hamilton, the first Treasury
Secretary. In 1799, a centralized procurement office was created within the
Department of the Navy, and some procurement functions were delegated. However,
Congress still considered the Treasury Purveyor accountable for all procurement
actions. Historians view this Treasury accountability function as the predecessor of
the General Accounting Office oversight functions in place today (Culver, 1985;
Nagle, 1992).
The 1800s and Federal Procurement
In 1809, Congress passed an act that required that all soliciting of bids would
be conducted using formal advertising (Meiners, 1995). Use of a formal advertising
methodology was the first attempt to put some discipline into the actual procurement
process. Formal advertising meant that procurement needs would be satisfied by
open purchases; that is, needs would be publicly advertised in order to obtain
proposals from commercial sources. The War of 1812 required that the purchasing
authority of the Quartermaster General's office of the Army Department be expanded.
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Furthermore, other federal agencies were given authority to make purchases and
adopt their own procurement procedures, taking care to fund their requirements from
their own budgets and appropriations. During this period, the ultimate accountability
for procurement actions remained vested with the Treasury Department. Authority to
purchase was delegated to authorized purchasing agents within federal agencies. ■
Federal procurement did not interest Congress again until the Civil War (Culver,
1985). A number of statutes were passed, some of which are in existence today.
Most dealt with matters pertaining to fairness in the competition and selection of
sources. Two of the most important laws passed during this period related to the
creation of a bid abstract and use of formal advertising without use of competition.
The former required the public posting of bids received so those bidders would have
an opportunity to view bids submitted by competitors. Formal advertising required
that purchase orders be given to the low priced bidder. By public posting, the public
had an opportunity to ensure that formal advertising rules were being followed. The
latter law passed in 1860 provided that, in cases of public exigency, formal
advertising for purchases was not necessary. This law, referred to as the "advertising
law of 1860" remained in place until 1965 (Nagle, 1992).
During the Civil War, allegations of profiteering affected procurement
operations. Revised Statute 3709 was passed with the intent of stopping profiteering
during the war. This statute established a board that would review all the purchase
proposals received by an agency. Specifications became a concern of the Congress,
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since war fighting capability demanded accuracy in design specifications. During
this period, we have the establishment of the first commission on federal
procurement, the Dockery Commission (Meiners, 1995). Among other things, the
Commission reported unstable prices and duplication of procurement functions. We
see an interest in these matters throughout the course of federal procurement. Lastly,
during the latter part of this century, the nation began a shift from the agrarian state
to an industrial nation. This would have a profound effect on the operations of
federal procurement.
Events After the Turn of the Century
The turn of the century marks the beginning of the government's attempts to
regulate prices and keep the cost of supplies and services fair and reasonable. The
notion of fair and reasonable pricing was first introduced by the Dockery
Commission as a result of their findings regarding unstable pricing during the Civil
War. Fair and reasonable prices were considered the prices that two prudent business
persons would expect to pay during the normal course of business (Sherman, 1999).
It strives to ensure that buyers do not pay exorbitant prices and that sellers realize a
profit from the efforts. In 1900, Congress attempted to reduce what was viewed as
high pricing for Navy armor plate by passing a statute setting the price at $300 per
ton. Suppliers reacted by simply refusing to do business with the Navy (Culver,
1985). During this early period, the Army entered into a contract with the Wright
Brothers for a heavier than air flying machine. The contract was unique in that it
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included a monetary incentive tied to exceeding specification requirements (Meiners,
1995). Additionally, during the early 1900s, the government began to take an active
interest in socioeconomic issues in procurement actions. For example, eight-hour
laws were adopted in 1892 and amended in 1912.
• World War I had a great impact on federal procurement operations. Anti
trust legislation was in effect and enforced in federal procurement. With respect to
procurement, the most significant impact of the war was the recession of the formal
advertising and competition requirements in place since the late 1800s. The rules
were relaxed as the nation prepared for war. The War Industries Board was
established in 1917 and was responsible for war materials, setting priorities for
manufacturing requirements and determining prices. During this time, many cost-
type contracts were put in place. These contracts allowed for contractors to supply
the required goods and services and be reimbursed their actual costs plus a
reasonable profit. Air capability was considered weak, and the War Board approved
the construction of 22,500 airplanes (Nagle, 1992). Despite the continued existence
and use of public exigency as an exception to formal advertising and competition,
General Pershing blamed delays in mobilization on the inability of contractors to
provide the necessary weaponry. As with the Civil War, stories of profiteering
abounded. In hopes of preventing excessive profit-taking, Congress passed the
Excess Profits Tax in 1917. According to historians, it proved ineffective (Nash,
1998). Using his executive powers, President Wilson reestablished the War
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Industries Board as a separate agency. Its mission was to oversee and prioritize
manufacturing and services procurement efforts. The procurement system managed
to effectively support the war effort by providing troops with adequate rations and
related support, as well as the weaponry necessary to wage an effective campaign.
A significant post-War event occurred when the Congress passed the Budget
and Accounting Act of 1921. This statute dramatically affected the procurement
process. It established the General Accounting Office, headed by the Comptroller
General. This office became the arm of Congress through which government
operations within the Executive Branch could be examined and changed. For the
first time in history, a federal government organization was given real power to audit
the disbursement and utilization of public funds. Today, the General Accounting
Office (GAO) remains a powerful force in shaping procurement policy and
operations. By establishing the GAO, Congress guaranteed itself the ability to
examine and shape the many facets of government operations. A cursory review of
GAO reports and testimony demonstrates that, throughout the years, procurement has
been an area of great interest for GAO audits.
The economic conditions that followed the war brought about changes that
affected federal procurement. Congress passed a plethora of legislation during
President Roosevelt's terms in office, much of which affected federal procurement.
Federal contracts were the means by which the economy could be stimulated;
however, Congress wanted to avoid cutthroat competition and the fraud and low
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wage issues that could result (Nagle, 1992). The Davis Bacon Act was passed. It
guaranteed a prevailing wage in designated localities for construction workers. Other
labor statutes followed. Among other things, they all established minimum
prevailing wages to be paid employees in various classes of industry, such as
construction and manufacturing. At the time of their passage in the post-War era, the
$2,500 contract minimum threshold ensured that the wages of the vast majority of
employees supporting government contract efforts were protected. Despite several
recent attempts to raise the threshold to $25,000, the post-War amount remains in
place today. These labor statutes remain in effect today and are a primary reason for
the $2,500 micro-purchase card limit. The Economy Act was also passed. It allowed
agencies to transfer funds to other agencies for the purposes of obtaining supplies or
services either directly from the receiving agency or through one of its contracts. By
allowing for the inter-agency transfer of funds, work could be accomplished more
economically and efficiently, since the requesting agency could legitimately avoid
formal advertising and competition requirements. The Economy Act guaranteed a
more economic means of procuring goods and services by requiring a cost/benefit
analysis for the intended scope of work (McKenna, 1983). The Buy American Act
mandated the procurement of certain supplies and services from domestic sources.
Many programs were established during this period in order to bring the nation out of
the depression as quickly as possible.
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World War II brought with it the same challenges the procurement system
faced in earlier conflicts. Because wars are expensive to fund, monies must be
frequently reallocated to meet emergent requirements. In these times, the
procurement system is expected to ensure that funds are used appropriately and that
supplies and services are obtained expeditiously. Again, industry and the
government were required to work together to ensure that the supplies and services
necessary to support the war fighting operations were made available.
Congress overcame strict procurement regulations in eleven days and passed
the War Powers Act on December 18, 1941, which temporarily altered the
complexion of federal procurement. This act authorized the President to permit any
agency or department engaged in war matters to issue "letters of intent" to
contractors. These letters provided official authorization for contractors to proceed
with pre-contract actions necessary to ramp up for production. Also, the Act
permitted contracting officers to enter into contracts or modify existing contracts
without advertising or competing the procurement actions (Nash, 1998). Thus, we
see the swift redesign of the standing procurement processes in order to support the
nation's war fighting efforts. In 1939, the War Department was given the authority to
conduct procurement actions for matters of national security in a non-competitive,
non-publicized manner (Nagle, 1992). A "cash and carry" procurement program was
instituted as the nation prepared for war (Culver, 1986). It allowed designated
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procurement officials to purchase armaments and establish a production line for the
allied forces.
During this period, procurement operations played a vital role in the war
fighting effort. Procurement actions would swiftly ensure that contracts were in
place to keep commercial production lines up and running. In 1940, Congress passed
the Multiple Awards Act. It permitted contracts to be awarded to several bidders (in
addition to the low bidder) so that alternate sources of supply were continually
available and parallel production lines were operational (Culver, 1985). At the war's
end, the Contract Settlement Act allowed contracting officers to terminate existing
contracts and settle amounts of monies due and disposition of surplus property.
Soon thereafter, Congress recognized the need to return to a more orderly
system of federal procurement. Some emergency provisions were retained for use in
specific circumstances—generally matters of a classified nature to be approved in
advance by agency heads (Culver, 1985). But, for the most part, procurement
returned to the competitive, advertised processes that had been in place prior to the
war.
Post-War Lessons Learned
The post-War period gave the American government some valuable lessons
learned with respect to federal procurement. During the war period, thousands of
contractors supported the allied effort. Both contracting officers and contractors had
developed a good understanding of best practices and lessons learned. Congress
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recognized a need to balance structure and order in federal procurement with
processes that would support emergent requirements. The result was the passage of
the first act that standardized procurement procedure for all defense agencies: The
Armed Services Procurement Act. Passed in 1947, this Act was codified into
regulations known as the Armed Services Procurement Regulations (ASPR) in 1949
(Cibinic & Nash, 1998). The ASPR remained the governing procurement regulation
for the Army, Navy and Air Force until 1984. Services supplemented the ASPR with
service-peculiar regulations aimed at defining ASPR requirements in further detail to
meet the unique needs of each service. These supplements were titled the Air Force
Procurement Instructions (AFPI), the Army Procurement Directives (APD) and the
Navy Procurement Directives (NPD). The service regulations were subordinate to
the ASPR (Culver, 1985).
The Armed Services Procurement Regulations (ASPR) was the most detailed
regulation ever put into place (Cibinic & Nash, 1998). It was based on the
compilation of experiences that occurred during the war. While it was designed to
retain some rigor and discipline in procurement processes, it also gave contracting
officers a great degree of freedom and latitude in deciding when competitive and
non-competitive procedures were appropriate. The regulations detailed
documentation requirements to be met by contracting officers in performance of their
duties. Failure to comply with regulatory mandates could result in removal of a
contracting officer's authority to enter into contracts (Sherman, 1999).
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Another major event in the post-War period was the creation of the First
Hoover Commission. The commission was charged with examining the organization
of the government, proposing reorganizations, and making other recommendations as
appropriate. One important recommendation of the Commission was to have a
strong central organization to provide federal services, such as supply and
procurement (Culver, 1985).
It mandated a single set of procurement regulations to govern civilian
agencies. In 1949, the Federal Property and Administrative Services Act (FPASA)
was passed. This was a separate act to govern non-defense agency procurements,
because the mission of defense and non-defense agencies was considered to be vastly
different. The FPASA established the General Service Administration (GSA). The
GSA was charged with developing a single set of regulations to govern civilian
agencies. Those regulations were finally enacted in 1959 as the Federal Procurement
Regulations (FPR). The FPR remained in effect until 1984. The creation ofthis
regulation was a recommendation of the First Hoover Commission some ten years
earlier. While the GSA has had many primary responsibilities throughout the years,
Subpart 13.2 of the Federal Acquisition Regulations has given oversight responsibility
for the purchase card program exclusively to the GSA.
In July 1953, former President Hoover was tasked to head up the Second
Hoover Commission. This Commission was interested in devolution of federal
functions to state and local governments. While a centralized procurement process
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was still advocated by the Commission, we see the beginnings of state and local
procurement:offices as nuclei for procurement actions directly supporting
government at those levels (Culver, 1985). During this period, continued cold war
events forced defense initiatives which increased the demands on the procurement
system within the Department of Defense. In 1953, the Small Business
Administration (SBA) was established through the Small Business Act (Cibinic &
Nash, 1998). Its primary purpose was to assist small businesses in their attempts to
grow, develop and capture a market share of the nation's economy. The federal
government was the largest customer for commercial markets. Initiatives to mandate
and encourage small business use in meeting procurement needs became a part of
SBA's mission. To this date, SB A sets annual overall percentage goals that agencies
must consider in awarding contracts to small businesses. Additionally, SBA retains
oversight authority and reports to Congress on the number and dollar value of
contract awards to small businesses.
The 1960s marked the emergence of a permanent defense industry (Culver,
1985). With the Cold War at its height, procurement organizations bore the
responsibility of buying technology and weaponry that was state of the art.
Additionally, we had an active space program and an unpopular war in Southeast
Asia. All these events required procurement support. As the flavor of national and
international events changed, and the defense posture of the nation became larger, we
saw a plethora of new procurement regulations and directives. Under the leadership
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of Secretary Robert McNamara, each service established a procurement command;
and procurement field activities were established under the cognizance of
headquarters' procurement organizations. In 1961, the Air Materiel Command
(AMC) was established. One year later, the Army established the Army Materiel
Command. Finally, in May 1966, the Navy Materiel Command (NAVMAT) was
created. Each of these organizations was the policy center for all service-related
procurement operations. Soon thereafter, each command began to establish
procurement field activities. The establishment of field activities was intended to
lessen the burden and volume of procurement actions at the headquarters' locations.
Under this design, which exists today, requirements' personnel can work with local
federal procurement offices in meeting their procurement needs. Significant
procurements, e.g., systems requirements, continue to flow to headquarters'
procurement organizations. The specialized talent and experience necessary to
procure sophisticated, complex and costly systems remains, for the most part, within
headquarters' procurement organizations (Sherman, 1999).
Emerging technology continued to play an important part in procurement
operations. Regional conflicts began to break out in various parts of the world, and
there was a need to maintain a defensive posture, develop and maintain state-of-the-
art defense systems and stockpile weapons. As the world events changed, the
demands placed on procurement organizations intensified. Congress began to play
an increasing role in the procurement process by enacting legislation on matters
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previously left to executive orders and the regulatory process (Culver, 1985).
Catalysts for this Congressional interest were the need to achieve success in the war
effort as well as the nation's ability to remain a world power. Intense Congressional
interest in federal procurement operations continues to this day.
Government Commissions and Efficiency in Procurement
The technology explosion and the cold war continued into the 1970s.
Congress became ever more involved in matters relating to government procurement.
In 1969, the Commission on Government Procurement was created by Public Law
91-129. Its purpose was to study and recommend to Congress methods to promote
the economy, efficiency and effectiveness of Executive Branch procurement
operations. It reported its findings in 1973, many of which were ultimately adopted.
The procurement interests of the Commission spanned some 400 topics of study.
Some of those major interests centered around efficiency and effectiveness of small
purchase procurement transactions (Sherman, 1999).
In Fiscal Year 1972, $57.5 billion was spent on federal procurement. This
accounted for approximately one-fourth of the national budget. Procurement was the
primary means of accomplishing the mission of the federal government (Sherman,
1999). In its 300-page, four-volume report, the Commission recognized the
importance of federal procurement and the need to make substantive changes. Of
particular interest to this research were the following recommendations:
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Small Purchases: During the 1970s, the Armed Services Procurement Act
and the Federal Property and Administrative Services Act governed the procurement
operations of defense and civilian agencies respectively. Under both statutes,
procurements in excess of $2,500 were processed using formal advertising or
negotiation procedures. Simplified procedures were authorized only for.
procurements of less than $2,500. These simplified procedures required that
competition be obtained from two or more suppliers. At the time of the
Commission's report, the Federal Procurement Data System, the central
clearinghouse for procurement statistics, reported 795,917 procurement actions under
$10,000 each representing 98% of all transactions. Many of the transactions were for
commercial items for which prices were set competitively or by regulatory processes
(Sherman, 1999). The threshold of $2,500 placed a significant number of "simple"
transaction-based purchases over the limit, requiring a great deal of extra paperwork
and time. The Commission concluded that many potential suppliers lost interest in
doing business with the federal government because of the paper-intensive,
cumbersome and time-consuming process. Additionally, longer lead times to
delivery and additional administrative costs associated with processing paperwork
frustrated internal customers and contracting personnel. The Commission estimated
that $30 million in administrative costs could be saved annually by procurement
organizations, if the threshold for using simplified procedures was raised to $10,000.
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A Consolidated Statute: The Commission found that the 4,000 procurement
statutes distributed throughout the United States Code represented an uncoordinated
mixture with non-procurement-related laws. In some cases, the Commission
determined that codification and consolidation of procurement statutes would
minimize, simplify and harmonize the laws, promote common understanding and
uniform interpretation, and improve visibility and control by Congress over the
procurement process.
A Uniform Regulatory System: Procurement regulations implement and
further define statutory requirements consistent with the spirit and intent of the
statute. No single regulatory system had ever been in place that governed the
policies and procedures of the federal procurement. This had been a chief complaint
of the commercial contracting community for many years. Lack of a single
regulation that applied to all federal agencies forced contractors to be thoroughly
knowledgeable about the variations in regulatory language that applied to the same
aspect of procurement, but in differing ways. For example, the Department of State
regulations governing negotiations could differ substantially from the regulations
governing negotiations as set forth by the Department of the Army. Compliance with
each agency's regulations was critical to ensuring compliance with the agency's
contract. The Commission recommended that the two primary regulations—the
Armed Services Procurement Regulations and the Federal Procurement
Regulations—be integrated into one uniform regulatory system. The Commission
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did not intend that the regulatory system be a single one, simply a uniform system
that would provide a common numbering system and be non-duplicative and
consistent in addressing rules. Some eight years after the Commission's
recommendations, the Federal Acquisition Regulations were put into place and
continue to serve today as the uniform regulatory system governing the procurement
activities of all federal agencies.
The Commission attributed a great part of the problems of the complex and
unmanageable regulatory systems to the lack of a central manager within the
Executive Branch responsible for coordinating procurement regulations. The
Commission recommended legislation establishing an Office of Federal Procurement
Policy (OFPP). The OFPP would have the following attributes:
1. Operate independently of any agency having procurement responsibility;
2. Operate at a level above all procuring agencies;
3. Operate in a directive capacity rather than an advisory manner;
4. Be responsive to the Congress; and
5. Consist of a small, highly competent staff of procurement professionals
(Culver, 1985).
The 1980s saw the continued interest in the part of the Congress and the
Executive Office of the President, demonstrated by the establishment of three
commissions whose interest focused on procurement operations. The Grace
Commission published its report in 1984. Following with common themes of how to
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revamp procurement operations to achieve efficiency and effectiveness was the
President's Blue Ribbon Commission on Defense Management, known as the
Packard Commission. Lastly, the Defense Department initiated its own set of
reviews aimed at identifying ways of streamlining procurement. These Defense
Management Reviews, conducted from 1987 through 1990, had some effect on the
shape and size of defense procurement operations (Sherman, 1999). The common
theme among these efforts was to identify the means with which to streamline
government procurement operations (Meiners, 1995).
The Birth of the Office of Federal Procurement Policy
One of the first recommendations of the Commission on Government
Procurement to be implemented was that of a central procurement authority. In
1974, the OFPP was established as an executive office within the Office of
Management and Budget. Its characteristics were consistent with the suggested
attributes outlined by the Commission. It is a small, highly competent organization
responsible for the development, dissemination and monitoring of procurement
policy. To effectively carry out its mission, the OFPP must work closely with the
Congress and federal agencies to ensure that legislative efforts and agency
requirements contribute to the overall betterment of procurement policy and
operations. The OFPP has proved to be a valuable and effective means with which
to coordinate procurement matters and provide centralized management attention and
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leadership to procurement agencies while liaising with Congress to shape and
influence procurement legislation. ■ .
The OFPP was responsible for the creation and implementation of the
uniform regulatory system still in existence today—the Federal Acquisition
Regulations. In recent history, and of particular importance to this research, is the
role that the OFPP played in effecting a decentralized purchasing model aimed at
creating a more responsive and less costly purchasing operation, characteristics
considered by the NPR as indicative of an efficient and effective government.
A Paradigm Shift—Executive Initiatives and Legislative Mandates of the 1990s
While the two decades prior to the 1990s saw a significant number of
procurement changes, the changes of the 1990s were profound. Both the Congress
and the Executive Office of the President were interested in effecting substantive
changes on how the government operates. Political agendas, a public distrust of
government and media attention toward purchasing atrocities all contributed to this
interest. The existing procurement system was considered the stumbling block that
prevented procurement officials from using common sense and good judgement in
making purchasing decisions (Kelman, 1990). Congressional hearings and
legislation were aimed at improving federal procurement policy and operations.
However, legislative inability to formulate policy is often caused by political
pressures, and agencies are left with the task of putting into place the administrative
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and institutional processes for creating and implementing public policy (Brodkin,
1987-1988).
As we have seen from an examination of procurement history, changes in
procurement policy are reactions to changes in the environment. In the 1990s, the
challenges of a global economy, end of the cold war, shifting national security
interests, the information technology explosion and the budget deficit demanded a
government that could "work better and cost less" (Gore, 1993). Public scrutiny was
facilitated by media reports of inefficient government. Primary targets within all
federal agencies were administrative functions, and procurement was at the top of the
hit list. "Faster, better, cheaper" characterized the political platform that would shape
the democratic agenda for the next several years. Known as the National
Performance Review (NPR), this democratic initiative dove-tailed nicely with Newt
Gingrich's Contract with America and was the catalyst for the wave of procurement
reform that has occurred in the 1990s.
The National Performance Review and Its Procurement Focus
In March of 1993, President Clinton authorized Vice President Gore to
spearhead the NPR. This partnership for Reinventing Government began with a
comprehensive study of federal procurement policy and operations (Sherman, 1999).
Cutting red tape and creating a government that "works better, costs less, and gets
results Americans care about" was the goal of the NPR (Gore, 1993).
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The NPR was organized around four core principles: (1) measuring results,
(2) putting customers first, (3) making government more market-oriented, and
(4) decentralizing, deregulating and empowering. All of these principles have an
effect on traditional procurement structure and operations. Decentralization was
aimed at creating a more efficient and effective purchasing process.
After a detailed examination of the federal procurement process, the NPR
concluded that the federal procurement system relied upon "rigid rules, procedures
and extensive paperwork" (Gore, 1993). NPR determined to change the detailed
regulations into guiding principles and to do so within a three-year window. The
report also noted that the system was, by design, highly centralized and concluded
that a reorganization of the federal procurement system was in order.
The report stated that centralization was in place to prevent profiteering and
fraud and was created to respond to the industrial patterns of the past. Bulk
purchasing brought buying power in an era in which industry mark-ups and the use of
"middle-men" were common. Furthermore, the report proffered the notion that
vertical integration, commonplace in industry today, eliminated mark-ups and
effectively negated the need for bulk purchasing. Unlike the procurement
environment of yesteryear, purchasing needs could be more simply met by placing
phone orders with suppliers such as Office Depot, Walmart, and Price Club (Gore,
1993). Adding further support to procurement reform was the historical conflict
between internal customers and procurement offices. Because procurement
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personnel did not have requisite technical expertise, it was often difficult, if not
impossible, for them to meet the actual needs of requiring personnel (Kelman, 1990).
NPR characterized this "second-hand approach" to procurement as problematic.
Would it not be better to directly use the experience and technical understanding of
the requiring personnel to effect better procurement actions? The report called for
decentralization of purchasing authority to requiring managers, along with a dramatic
simplification of the procurement processes and regulations. The decentralization
and streamlined methods for purchasing were made possible by legislative and
executive mandates.
FAS A and FARA—Powerful Legislative Reforms
“Laws are made to keep things in good order. Good government makes
changes within its superstructures, whilst the foundation remains unchangeable”
(Sidney Algernon, Discourse Concerning Government, HI, 1698,13:30).
The procurement reform legislation of the 1990s provided the tools for
procurement process improvement. The OFPP played an instrumental role in
representing the interests of the White House in working with Congress to
legislatively reform the federal procurement system. The objectives were
consistent—reduce the size of government and make government operations more
efficient and cost-effective. The combined efforts of these two branches of
government resulted in two significant pieces of legislation that set the stage for
dramatic changes in federal procurement operations—The Federal Acquisition
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Streamlining Act (FASA) and the Federal Acquisition Reform Act (FARA). The
Federal Acquisition Streamlining Act (FASA) was enacted in 1994. The General
Accounting Office (GAO) identified key FASA purposes as follows:
1. Reduce unique purchasing requirements;
2. Increased use of Simplified Acquisition Procedures; and
3. Obtain goods and services fester, and reduce in-house purchasing costs.
FASA contained more than 200 sections changing the laws governing how
the federal government purchased $200 billion worth of goods and services
(Sherman, 1999). Through negotiated rulemaking procedures, citizens were engaged
in the change process. The FAR was amended to comply with the statute and "put
some operational teeth" into the spirit and intent of the legislation. While FASA
resulted in many changes to procurement regulations, one of the most significant
resulted in decentralized purchasing. The intent was to reduce transaction costs and
reduce the lead time to ordering and obtaining goods and services.
FASA and Simplified Acquisitions
Prior to the passage of FASA, simplified acquisitions were defined as those
procurement actions with monetary values ranging from $0.01 to $25,000. FASA
redefined and expanded the threshold limitations of simplified acquisitions. The
simplified acquisition threshold was increased to $100,000. A ceiling of $2,500
created a category within simplified acquisition called micro-purchases. One of the
unique features of micro-purchases was significant exemptions from statutory
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requirements. For example, micro-purchase actions were exempted from the
requirements of the Small Business Act that set aside all procurement actions under
$100,000 for small businesses (Cibinic & Nash, 1998). Micro-purchases were also
exempt from the Buy American Act, a statute mandating that preference be given to
U.S. suppliers of certain classes of goods and services, as well as a plethora of other
statutes. Furthermore, a public announcement of a "business opportunity" was not
required, and the requirement for competition was also abolished (Federal
Acquisition Regulations, Subpart 13.2).
A review of the statutory language within Public Law 103-355 demonstrates
that FASA did four important things: first, it affirmed that use of the government
purchase card was one of the simplest forms of a simplified acquisition procedure.
Prior to FASA, the use of the purchase card was extremely limited and sanctioned by
the OFPP as a pilot program within specifically designated agencies. Second, it
made the use of the purchase card by customers the preferred method for micro
purchases. Third, it exempted all procurement actions under $2,500 from a plethora
of procurement related statutes. And fourth, FASA stated a preference for the
purchase of commercial items as opposed to the government's unique specifications
and standards that had been used in the past. FASA also stipulated that the micro
purchase features of the statute become effective not later than 60 days after
enactment. This caused the rapid publication of an interim rule in the Federal
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Register regarding micro-purchases and the use of the purchase card (FAC 90-24,
Federal Register, No. 64784, December 15,1994).
FASA's exemptions to procurement statutes eased the constraints that had
traditionally been in place for small dollar value purchases, making it easier for small
buys to be transacted. Coupled with a statutorily stated preference for commercial
items, achievement of the purposes of FASA was greatly facilitated. A natural
fallout was that detailed knowledge of developing unique specifications and.
standards and requisite knowledge of when and how to apply statutes no longer
remained an issue. ■
The regulatory language regarding micro-purchases was the first piece of the
legislation to be codified in the FAR. (See Appendix 4.) Recognizing that the relief
granted by Congress made the process of purchasing small items much less complex,
the OFPP, interested in continuing the mandate of the NPR regarding reduced
administrative costs and purchasing lead time, issued Executive Order 12931 on
October 13,1994. (See Appendix 5.) This Executive Order contained the first
policy statement regarding decentralized purchasing authority. This Executive Order
was codified by FARA, the second piece of legislative reform aimed at creating a
more streamlined federal government procurement function.
FARA—Decentralization Aimed at Efficiency and Effectiveness
FARA was passed in 1996 and made some significant contributions to
procurement reform in several areas. Of importance to this research was its removal
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of the title "contracting officer" from prior statutory language contained in the Office
of Federal Procurement Policy Act (41 USC 428). FARA replaced this term with the
word “micro-purchaser,” thus eliminating any statutory requirement to have
contracting officers effect micro-purchase transactions. In effect, FARA put
legislative teeth into the Executive Order. This change paved the way for
decentralization of some purchasing authority (FARA, Section 4301). In summary,
three important changes occurred. First, FASA created the micro-purchase category
and made it a simple purchasing process by eliminating many statutory roadblocks.
Second, OFPP sanctioned decentralized purchasing. Third, FARA provided clear
legislative authorization to decentralize micro-purchasing authority.
Purchasing Models: Definitions and Objectives
There are four basic objectives of purchasing:
1. To support agency operations;
2. To buy competitively;
3. To buy wisely, i.e., searching for a better value yields the best
combination of quality, service and price, relative to the buyer's
needs; and
4. To handle the purchasing function proactively in a
professional, cost-effective manner. (Dobler & Burt, 1996;
Sherman, 1999)
Purchasing can operate as either a centralized or a decentralized function. By
definition, centralization or decentralization of a function is not characterized by the
location per se, but by the purpose of the organization performing the function
(Dobler & Burt, 1996).
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The following definitions are provided:
Centralization: The placement of purchasing authority is the responsibility
of a single person within a functional procurement organization (Dobler & Burt,
1996). Traditionally, within the federal government, procurement authority is
delegated to the head of the contracting activity (HCA) by the secretariat of the
agency. In turn, the HCA delegates procurement authority to contracting personnel
located within the functional procurement office. (See Appendix 6.)
Decentralization: Decentralization of purchasing occurs when personnel
from other functional areas, e.g., production, engineering, marketing, finance, etc.,
decide unilaterally on sources of supply or negotiate directly with suppliers (Dobler
& Burt, 1996).
Research suggests that public procurement reform initiatives have adopted
the commercial notion that centralization of the procurement function remains vital
for conducting strategic complex purchasing activities but that non-strategic,
transaction-based purchasing can be accomplished more efficiently and effectively
through decentralization (Dobler & Burt, 1996; Sherman, 1999). Low value-adding
purchasing activities should be decentralized (Interview, Matthew Blum, Purchase
Card Program Coordinator, Regulatory and Legislative Counsel, Office of Federal
Procurement Policy (OFPP), April 14,1999; Dobler & Burt, 1996; Sherman, 1999).
Recognizing that micro-purchases are low value-adding transactions, the function has
been decentralized.
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Micro-Purchasing and the Purchase Card
The use of a purchase card was not a brand new concept to federal purchasing
operations. Contracting officers in some agencies had been using the purchase card
in a limited capacity since 1989 under an OFPP sanctioned pilot program. Critical to
its expanded use were the legislative and Executive Branch initiatives that
encouraged and expanded its use. Within OFPP's charter is the authority to test
innovative procurement ideas. The OFPP considered its test of purchase card use in
mainstream procurement operations a major early successful use of this authority
(Bedell, 1988). This test project formed the foundation of the purchase card system
in use across federal agencies today. The pilot program did not offer any empirical
data upon which to justify permanent adoption of the purchase card. Rather, it relied
upon the perceptions and observations of operational personnel.
Agency and Cardholder Responsibilities
FASA requires agencies to institute procedures that will encourage
decentralized use of the purchase card. Cardholders bear a significant burden of
responsibility for compliance with procedures. Within federal agencies, procedure
manuals are the standard method used to document or prescribe all of the steps in a
process (MacManus, 1991). An excerpt from a standard Purchase Card Procedures
Manual illustrates the broad coverage provided by agencies. (See Appendix 6.)
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Prior Research Examining Decentralized Micro-Purchasing
A literature review has revealed prior research on this topic. Three
independent studies that specifically address purchase card usage and efficiency have
been undertaken. Additionally, many journal articles discuss the notion of efficiency
and federal government operations. These will be examined in the next section.
Purchase Card Research
A study conducted in 1995 focused on purchase card processes of field
activities. Field activities are small operational units that are geographically
dispersed and fall under the cognizance of a headquarters command. The focus of
the research was to identify areas for improvement in purchase card use and reveals
some relevant empirical data about the demographics of micro-purchasers.
Additionally, a survey of the attitudes of participants regarding the changes brought
about by the implementation of the purchase card program was conducted as part of
this prior research. Information regarding the distribution of purchase cards was
gathered for 1995. This data revealed that the Department of the Army was, by far,
the agency having the largest number of purchase card actions. (See Figure 5.)
Interviews conducted with the General Service Administration indicated that card
usage was expected to grow in future years (Zayas, 1995). Sales under the purchase
card program showed significant growth from the period of inception in 1989
through the 1994 research period. (See Figure 6.) Army sales increased 132%
during that same period. In the 1994-1995 one-year period examined, Army sales
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3,500,000
3,000,000
2,500,000 -
2 ,000,000
£ 1,500,000
1,000,000
500,000
I Purchases
FIGURE 5
Source: Army Purchase Card Program Management Office
HISTORICAL ARMY PURCHASE CARD USE DATA (TRANSACTIONS)
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£
J 5
o
Q
1.400.000.000
1.200.000.000 -j
1. 000. 000.000
800,000,000
600. 000.000 X
400.000.000
200. 000.000
1,388,483,065
1,092,540,150
739,545,435
456,840,549
§
T -
o> 8
C O
03 5
ID
03
$ 03
SB
03
OS 03 03 O )
T - 2
03 03 03 0 3
I Dollars
i i t i .
>
L L
Source: Army Purchase Card Program Management Office
FIGURE 6
HISTORICAL ARMY PURCHASE CARD USE DATA (DOLLARS)
LA
O O
represented 25% of total program sales for the Department of Defense. The statistics
demonstrate the aggressive approach the Army took in implementing and
decentralizing purchase card authority. The Army Materiel Command, the
organization responsible for all Army procurement policy, adopted a policy that
customers were to conduct all micro-purchase card transactions (McMahon, 1995).
Such initiatives began to shape a decentralized purchasing paradigm that was
intended to make purchasing more efficient. Within the Department of the Navy,
surveys indicate a similar policy, with many Navy activities issuing policies that
mandated decentralization of micro-purchasing (McMahon, 1995).
Also of interest in these earlier research efforts was the demographics of
cardholders. One researcher focused on a specific organization within the
Department of the Navy—the Naval Weapons Center, China Lake, California. In
1995, there were a total of 274 cardholders at that facility. Of that number, 77%
were decentralized users consisting of industrial and electronic engineers, budget
analysts, public affairs officer, computer specialists, computer programmers, and
physical scientist technicians (Zayas, 1995). Over half of the cardholders surveyed
indicated that the purchase card program could be improved by increasing the
threshold for individual transactions from $2,500 to $5,000. A similar survey was
conducted in late 1994 to examine the demographics of cardholders at several US
Marine Corps installations throughout the country. In contrast to earlier survey
findings, only 27% of 200 cardholders were non-procurement personnel. A
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significant portion of the empirical data that was gathered during this particular
research effort is pre-Executive Order 12931 and pre-FARA. This researcher
suspected that the low percentages of decentralized authority were because
delegating authorities were unclear regarding the policy on decentralized purchasing.
Furthermore, as an explanation for this statistic, the researcher noted that the
centralization existed primarily at command level organizations. Decentralization
was significantly higher at remote locations (e.g., recruiting offices). Through
interviews, the researcher identified a lack of trust as another inhibitor to
decentralization. The decision to delegate was left to the heads ofprocurement
organizations who had a vested interest in maintaining the status quo of centralized
purchasing. This concern is voiced in all prior research efforts (McMahon, 1995;
Slater, 1994; Zayas, 1995). Concerns over possible misuse, failure to follow
regulations and inability on the part of the functional procurement office to have
visibility into purchase card transactions were major contributors to continued
centralization at some locations. Decentralization facilitated purchasing at remote
locations where no centralized purchasing offices existed, and delegating officials
viewed this as a primary consideration in decentralizing purchasing authority (Slater,
1994). Respondents to this researcher’s survey noted displeasure with the limited
decentralization that was effected. They commented that the transaction of low
dollar value repetitive items was not streamlined through the use of the purchase
card, simply because enough delegation had not occurred to effect streamlining
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(Slater, 1994). The need for Headquarters, Marine Corps, to encourage more
decentralization of purchasing consistent with statutory and policy initiatives would
result in streamlined purchasing of low dollar value transactions (Slater, 1994). As
expected, reactions from customers to the opportunity to receive purchasing authority
were received with mixed emotions. In an environment that was rule-based and risk-
adverse for so long, customers were sometimes reluctant to accept purchasing
authority (McMahon, 1995). Rather than obtain some relief from cumbersome
procurement processes, the risk associated with responsibility was considered by
some to be too great. However, as the purchase card program matures within various
organizations, decentralized use is expected to expand (McMahon, 1995).
Efficiency and Effectiveness in Government Administrative Operations
Interest in efficiency and effectiveness of procurement operations is not new.
In the mid 20th Century, the Commission on Government Procurement, the Grace
Commission and the Packard Commission were created to examine procurement
operations and identify means by which such operations could be improved. (See
Table 5.) Each effort resulted in some process and legislative changes, however as
the environment changes, the need to re-examine processes and identify areas for
improvement continues. The National Performance Review is the newest reform
movement aimed at reinventing, inter alia, procurement operations. While the
efforts of the three noted Commissions resulted in more regulation, the NPR is
interested in deregulation. According to reinventionists, deregulation will enable low
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level bureaucrats to accomplish their jobs without being constrained by a plethora of
rules and regulations. The NPR also focuses on how the government conducts
business rather than what the government does (Kellough, 1992). The NPR has
raised the level of public awareness about areas for improvement in federal
government operations. Changes that make government “better” will presumably
raise the confidence level that citizens have in their government. And, efficiency and
effectiveness are the two important concepts upon which NPR is grounded.
TABLE 5
GOVERNMENT COMMISSIONS’ INTEREST IN
PROCUREMENT EFFICIENCY
EXAMINING BODY REASONS CITED
FOR INEFFICIENCY
PROPOSED
SOLUTIONS
Commission on Dollar threshold constraints Simplify procurement
Government compliance
Procurement
(1972)
requirements
Grace Commission Administrative costs to procure
(1984) excessive compared to cost savings Mandate detailed
experienced under contract analysis of contract
costs during
Packard Commission Items being purchased were “gold- negotiations
(1986) plated”
Require purchase of
National Performance Red tape commercial items
Review Bureaucratic structure
(1993) Decentralization
empowerment
A total of 120 recommendations in sixteen different areas were included in
the NPR Report. Of all the targeted areas for reform, the NPR has most closely
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associated procurement policy and operations with the opportunity for efficiency in
government (Wilson, 1994). The NPR estimated 5% savings on an annual
procurement budget of $200 billion as a result of implementing the twenty
procurement initiatives. The NPR had twenty specific recommendations regarding
the procurement process. Included in that list, and relevant to this research, are the
following:
PROCOl. Reframe Acquisition Policy: Convert 1,600 pages of the Federal
Acquisition Regulations from a set of rigid rules to a set of guidelines.
PROC02. Encourage More Procurement Innovation: Provide new legislative
authority to test innovative procurement methods. Establish a mechanism to
disseminate information government wide on innovative procurement ideas.
PROC09. Lower Costs and Reduce Bureaucracy In Small Purchases Through
the Use of Purchase Cards: Provide managers with the ability to authorize employees
to purchase small dollar value items directly using a government purchase card.
PROC13. Foster Reliance on the Commercial Marketplace: Change laws to
make it easier to buy commercial items.
These recommendations were identified as areas within which the
procurement process could be streamlined and made more efficient and more
effective (Gore, 1993). Decentralization encourages new ideas and new processes.
(Light, 1997). These recommended changes relied on decentralization of authority,
the reduction of red tape and implementation of customer service standards. The
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result would be better government (effective) and cost savings (efficiency) associated
with administrative processes.
. The NPR has adopted many private sector concepts to be used as models for
building efficient and effective government operations (Kellough, 1998). The
decentralized use of the purchase card is modeled after commercial best practices
(Interview, Ida Usted, Associate Administrator, General Services Administration,
April 22,1999). Through legislative action and policy initiatives, changes were
made to implement the recommendations of the NPR. For example, FASA and
FARA were the statutes that paved the way for organizational change in procurement
practices. Using tides as a metaphor for examining the reform movements aimed a
better government, Paul Light identifies scientific management and liberation
management as reform themes aimed at efficiency. The NPR is based upon the
liberation management philosophy that trusts government employees to do their jobs
well, given the climate which encourages such behavior (Light 1997). The
characteristics of liberation management as defined by Light are displayed in Table 6.
Front-line employees are empowered to do their jobs in an environment that fosters
empowerment as a means to achieving high performing agencies. Light believes that
decentralization will eventually lead to stories about scandals. Scandals in
procurement are not new and have traditionally resulted in rules and regulations
being put in place to avoid repeated offenses. Recognizing that scandals occur in any
environment—be it liberation management or war on waste—punishment of
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offenders rather than return to a strict rule based environment has been suggested as a
means of discouraging such behavior (Kelman, 1990). Centralized policy and
decentralized operations were suggested by the First Hoover Commission as a means
of restructuring government administrative offices (Light, 1997). Today, under the
decentralized purchasing model, policy continues to be made by centralized
procurement officials while the micro-purchase transactions are decentralized among
customer organizations. The legacy of the NPR will be determined by the success of
the outcomes resultant from administrative changes (Kellough, 1998). So, the
efficiency and effectiveness of procurement outcomes in a new decentralized
environment will be a measure of success.
TABLE 6
KEY CHARACTERISTICS OF LIBERATION MANAGEMENT
Goal Higher Performance
Key Inputs Standards, Evaluation
Key Products Outcomes, Results
Key Participants Front-Line Employees
Defining Moments Gore's National Performance Review
Source: Light, Paul (1997). Tides o f Reform. Binghamton, NY: Vail Balloon
Press.
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What is efficiency? According to James Q. Wilson, efficiency has always
been given two meanings: reducing federal expenditures and minimizing the
resources for delivering a government need or service (Wilson, 1994). Creating ■ . .
value for the costs expended is also an important consideration (DeGeorge, 1992).
Efficiency is also a matter of judgement and can be a cause of conflict between the
reviewer and the reviewee (DeGeorge, 1992). Efficiency has been viewed by many
theorists* including Max Weber, Frederick Taylor, Frank Goodnow and Woodrow
Wilson as central to effective public administration. Efficiency has been sought after
in such programs as Planning, Programming and Budgeting system (PPBS) in the
1960s, Management by Objectives, and Zero Based Budgeting, of interest during the
Carter Administration. Efficiency has been viewed as a tool and as a theory. Table 7
provides an encapsulated overview of public administration theorists and their views
regarding efficiency. What becomes apparent is that interest in efficiency has
transcended various periods in history and has gravitated from a tool to a means of
structuring organizations to a reform movement.
However, efficiency is worth little if program operations are not effective.
NPR has challenged agencies to look beyond achieving efficiencies and also strive
for effectiveness, defined as quality and value in services. What is the point in
making a system more efficient if it is not effective? Effective programs are those
that have targeted measurable, achievable goals and objectives that meet pre-defined
needs (Osborne & Plastrik, 1997).
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TABLE?
AN ANTHOLOGY OF EFFICIENCY IN PUBLIC ADMINISTRATION
THEORIST EVOLVEMENT OF EFFICIENCY THEORY
Max Weber — Bureaucracies are the most rational and efficient
organizational structure.
— Roots in Protestant work ethic.
— Efficiency achieved through expert groups, discipline,
consistency and hierarchy.
F. Taylor — Primary goal of management should be promoting
efficiency.
— Grounded in scientific management movement.
— Efficiency can be reduced to scientific principles.
— One best way of accomplishing any given task will be
the most efficient method.
L. Gulick — Use of the scientific method for accomplishing
administrative activities will result in the greatest
efficiency.
— Adopt the administrative practices of private
corporations.
F. Mosher — Efficiency is ideologically important. Separation of
politics and administration necessary to ensure efficiency
and avoid political meddling.
— Adopt the administrative practices of private
corporations.
Mary P. Follett — Organizations are complex and efficiency is achieved by
creating incentives that motivate employees.
— Efficiency is a means to an end.
H. Simon
A. Wildavsky
— Efficiency is a means not a goal.
— Efficiency is a tool of measurement.
— Efficiency is based on individual values but is measured
to the goals of the group.
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Within the federal government, the Offices of Inspector Generals (OIG) were
created within each cabinet level agency as charged with the responsibility for
promoting efficiency in operations (DeGeorge, 1992). The dual reporting
relationships of OIGs somewhat insulates them from the pressures of the Congress
and the presidency. OIGs are characteristic of “war on waste” reform initiatives
(Light, 1997). In addition to their interest in efficiencies in government operations,
OIGs also examine programs to determine effectiveness. The examination of
efficiency and effectiveness takes place through the audit function, whereby
inspectors’ general conduct internal audits of various agency operations to identify
best practices and target areas for improvement. Program success is best measured in
terms of the results realized, given the stated objectives of the innovation
(Davenport, 1993). As part of the OIG function, audits of purchase card programs
have been conducted to measure and assess program success, given the goals
established by the agency as consistent with the NPR. The research findings
examine the goals and objectives of the Department of the Army's decentralized
purchase card programs as well as the findings and conclusions of Army Audit
Agency's time-motion study conducted in 1997.
Supplying products in today's rapidly changing technological environment
must happen in a timely manner. Federal procurement is an administrative function
that continues to evolve to meet the changing needs of its environment. Today's
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environment encourages and rewards an administrative system that focuses on the
goals of the agency and not on rigid internal processes.
To summarize, this procurement literature review has acquainted the reader
with definitions, distinctions, and the changing landscape of procurement throughout
the nation’s history. Prior research on micro-purchasing as well as a discussion of
purchasing models and efficiency as a goal of federal agencies conclude the
discussion. The extent of changes within federal procurement policy and operations
is evidenced by the initiatives put in place to create a procurement system that
supports the changing needs of the time as well as the direction and focus of the
legislative and executive branches. Statutes, policy and operations all contribute
toward effecting and implementing such changes. The effectiveness of recent
changes will be examined in order to assess the achievement of the goals and
objectives set by the agencies.
An Historical Look at Decentralization in Bureaucratic Organizations
Bureaucracy is one of the most pervasive institutions of the modem world
(Beetham, 1996).
A Model in Conflict
One of the predominant themes throughout the literature is the examination
and criticism of federal bureaucracies. Webster's dictionary defines bureaucracy as a
"government marked by diffusion of authority among numerous offices and
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adherence to inflexible rules of operation" (Webster’s New World Dictionary,
Second College Edition, 1984). Given this definition, negativity about government
organizations and how they operate is not a surprise. The public perceives the
federal government as a slow-churning piece of machinery that consistently fails to
meet the demands of the American public (Nye et al., 1997). Under the watchful eye
of the media, citizens and the rest of the world, the reinventing government campaign
has been viewed by many as the possible panacea to solving government’s problems.
Its various initiatives were designed to cut red tape, foster entrepreneurial behavior,
and focus on and reward output rather than input (Osbome & Plastrik, 1997). The
success of the campaign has been the subject of much debate, as is the fundamental
belief that it represents the right solution to solving the government's problems (Moe,
1993; Jaques, 1990; Frederickson, 1992). What is evident, however, is that the most
basic rules of the reinvention game require decentralizaiton and deregulation in
organizations that have traditionally be highly centralized and stove-piped.
Decentralization may eventually render moot arguments suggesting that the
public sector has created a fatal separation of giving, taking and deciding
(Recktenwald, 1983). Market purchases, decision, service and payment are closely
associated. This is counter to the traditional, well-established model of public
purchasing in which the user, purchasing decision-maker and payer are purposefully
separated. In 1983, Recktenwald posited that efficiency is not a concern in the public
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model and that public organizations pay a high price for such a separation of
functions.
Theoretical and Operational Views
American bureaucracy is rooted in the Progressive Era, a time in which the
personal preferences of politicians dictated who would assume positions within the
government service. To correct this corrupt and biased way of appointing people to
public service, the civil service system was instituted during the administrations of
Roosevelt and Wilson. In their book, Reinventing Government, Osbome and Gaebler
(1992) note that the very construction of grand and glorious buildings implied the
making of a system that would operate forever. This symbolism alone is what
remains of some of those very bureaus whose buildings are now vacant and
abandoned. The search continues for organizations whose core missions fall short of
what is considered an effective means of performing government functions. While
bureaucracies served their useful purpose throughout the first three quarters of this
century, a new progressive movement (NPR) aimed at reinventing government
challenges government's bureaucratic structure as it has existed throughout this
century. However, reform of federal government is not new. Over sixty years ago, A
Case for Bureaucracy (Beard & Beard, 1933) challenged the notion of that time
regarding bureaucratic responsibility for national societal failures.
In his early essay “Bureaucracy,” Max Weber described bureaucracies as
most structured and orderly forms of hierarchy. Bureaucracies allow for task
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assignments based upon complexity, with organizational levels having distinct
spheres of competency contained within a clear hierarchical order. Administrative
functions are governed by rules and regulations, and written procedures dictate
processes for task completion. According to Weber and others, this structure is
prevalent in organizations where complex and large-scale administrative tasks are
performed (Beetham, 1996; Albrow, 1970; Blau, 1971; Dunsire, 1978). How
bureaucracies function and how they might do so in a more efficient manner has been
of interest to those in the public administration field (Beetham, 1996). In the past,
the monopoly on knowledge has been a primary source of power in the bureaucracy
(Weber, 1922; Beetham, 1996). Deregulation and information technology explosions
have affected the monopoly on knowledge. The shifting power base brought about
by decentralized purchasing characterizes an effort to create a bureaucracy that
operates more efficiently (Kettl, 1994).
The centralized hierarchy of command is a most notable feature of Weber's
bureaucratic model. Additionally, in the Weberian model, any overlap of functions
should be avoided (Rosenbloom, 1983). The Weberian model has been a well-
accepted model for describing and analyzing bureaucracies. It is important to
remember the state of world affairs at the time of Weber's treatise. A mass industrial
society had come into existence. The scientific management theoiy was highly
regarded as representative of the means to an end. The scientific management theory
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posited that routine well-defined rules for completing repetitive tasks best postured
large organizations to employ efficient operations (Taylor, 1912).
Recent challenges to bureaucratic structures blame the rule-driven
hierarchical structure as the cause of red tape and inflexibility that discourages
individual ownership and initiative in conducting the daily administrative functions
(Beetham, 1996; Peters, 1996; Osborne & Gaebler, 1992). The application of routine
actions based on training and skill may hinder an individual's ability to adapt to
changing conditions (Merton, 1957). Various recent theorists have described
bureaucracies as dysfunctional organizations regarded as too rigid and functioning
under cumbersome standard operating procedures (Hill, 1991). While Weber's essay
lauds the hierarchical structure, Beetham argues that the Achilles heel of hierarchical
organizations is the collection of information at the "wrong place" and the
complicated means by which that information is synthesized and transmitted. Such
processes cause non-value-added participation in transactions and can result in
confused and incorrect decisions. He further argues that decentralized organizations
are the solution to this information problem. By decentralizing, the responsibilities
for making decisions will rest within the individuals who have the knowledge
(Beetham, 1996). In this way, those with the expert knowledge will also own the
expert and legitimate power.
Beetham is not alone in his view of an organization of associates versus a
hierarchical organization. The treatise, “The Management of Innovation,” posits that
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understanding the operating environment best creates the structure of an
organization. Organizations that operate in an environment that rapidly changes
require a different structure than those organizations which operate in a predictable
and stable environment. A mechanistic structure might suit the former; however,
rigidity will not serve the organization that operates in a dynamic environment which
requires adapting and evolving processes. In an unstable environment, an "organic,
or post-bureaucratic" organization, in which authority lies with the knowledge expert,
is necessary (Bums & Stalker, 1961). Some of the fundamental characteristics of the
bureaucracy should remain intact with the challenge being an adaptation to the
bureaucratic structure (Frederickson, 1992). The challenge may be to determine how
best to adapt the hierarchical structure characteristic of the bureaucracy to capture,
maintain and adapt the creative energies of its workforce, given the constraints
imposed by rules and regulations (Jaques, 1990).
Early critics of bureaucracies have emphasized that the structure and rigidity
of processes can lead to inefficiency and waste (Merton, 1957; Wilson, 1887). That
theme of inefficiency and waste parallels the theme of today’s reinventionists, and
decentralized purchasing has been viewed as a means of effecting better
administrative practices.
Hierarchy and functional specialization adequately served the slower paced
industrial society of 100 years ago (Osborne & Gaebler, 1992). In examining the
changing landscape of government bureaucracies, theorists have posited that
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bureaucracy can be viewed as a continuum that spans the hierarchical bureaucracies
that satisfy the Weberian characteristics to those that have adopted more
entrepreneurial attitudes that have created variations to the Weberian model (Osborne
& Gaebler, 1992).
Various models have been offered as alternatives to the bureaucratic model
(Peters, 1996). Decentralized purchasing has the characteristics of the deregulated
and participative models. These models are based upon the following assumptions
and characteristics.
Deregulated Model:
1. Internal regulations and rules cause operational problems (DiLulio, 1994).
2. No defined structure should be lauded as preferred.
3. Decision-making is improved through the existence of more freedom.
Participative Model:
1. Hierarchy causes operational problems.
2. Flatter organizations are preferable.
3. Employee involvement improves operations (Deming, 1986; Kettl, 1994).
The deregulated and participative models have been adapted with the
intention of creating more efficient and effective purchasing practices. This research
will examine the extent to which efficiency and effectiveness has been achieved.
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’ ■ - CHAPTER III
RESEARCH METHODOLOGY AND DESIGN
Introduction
The two previous chapters have established the importance and purpose of
this research. A literature review addressing the history of procurement, theory and
practices of efficiency and the evolution of the decentralized bureaucracy have been
provided. This chapter provides the hypothesis and information regarding the data
collection methodology and design, testing methods, expected results, and
interpretation of the data.
The research methodology has been designed to gather important and relevant
information from the sources most suited to providing that information. The
researcher has conducted an extensive review of prior research efforts. No doctoral
level research has been done in this specific area. Some prior research was done at
the masters’s level, using the survey methodology to gather data on a small-scale
level from the cardholders themselves. This research effort examines the efficiency
and effectiveness brought about by decentralized purchasing by gathering and
analyzing secondary quantitative data available from the Department of the Army,
coupled with specialized interviews with the influential and well informed. Such a
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methodology is useful in identifying and understanding whether decentralized
purchasing is, in fact, more efficient and effective than the traditional centralized
model. In an administrative environment historically characterized by rigid
bureaucratic design, purchasing has been identified as an area in which transaction
costs could be reduced and administrative savings realized. Studying relevant
quantitative and qualitative data enables the researcher to draw conclusions regarding
the efficiency and effectiveness resultant from decentralized purchasing. Such
conclusions can form the foundation for a model of decentralized purchasing, which
can be adopted by purchasing organizations.
Research Questions
The following research questions are addressed.
1. Does the Army model of credit card purchasing result in an efficient and
effective system?
2. If so, should that model be adopted by other agencies?
To answer these questions, the researcher uses the findings of a time-motion
study conducted by the U.S. Army Audit Agency, re-examines that data and conducts
a test of statistical significance to draw some conclusions about the Army data. This
is augmented by the qualitative data obtained through elite and specialized
interviewing, and that allows the researcher to draw some conclusions regarding the
efficiency and effectiveness of the Army model.
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Data Collection
■ Data was collected from three government sources. They are:
1. General Services Administration (GSA): As the agency responsible for
monitoring purchase card usage and maintaining oversight of purchase card
programs, GSA is a repository of relevant statistical data.
2. Office of Federal Procurement Policy: The OFPP is the procurement
policy arm of the Office of Management and Budget (OMB). The OFPP makes ■
policy that affects federal procurement operations and works closely with the
Congress to create and implement changes to procurement statutes. The OFPP
played an important role in statutory and rule-making changes that permitted
decentralization of purchasing operations.
3. Department of the Army: The Army is a recipient of Vice-President
Gore’s Hammer award for its acquisition streamlining initiatives. In FY '98, the
Army accounted for 22% of federal dollars expended using the purchase card. They
also participated in the federal government’s pilot program in which some
purchasing functions were decentralized.
Agency records and personnel are valuable sources of data. Agency records
provide secondary data used in conducting this research. The GSA is a repository of
information regarding micro-purchasing at all agencies. Agency level data
segregates centralized and decentralized purchasing transactions. Agency records
also provide insight into the processes associated with both methods of purchasing.
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This information is necessary to conduct the research because process identification
will enable the researcher to flowchart purchasing processes.
Type of Data and Method of Collection
Quantitative and qualitative data were collected and analyzed. The
quantitative data was gathered from the GSA and Department of the Army. Data'
from the GSA is collected and reported using a structured reporting method used
within federal procurement to capture transaction and expenditure data within
predetermined ranges. This ensured that expenditures that fell below, for example,
$25,000 per procurement action, were segregated from the next group, $25,001 to
$100,000. The GSA micro-purchasing data was obtained by GSA through the
automated banking system, the Rocky Mountain Bancard (RMBC). It was presumed
valid for baseline evaluation purposes.
The quantitative data consists of the following:
1. Number and dollar value of all decentralized purchase card transactions in
FY '98.
2. Costs and man-hours associated with processing a purchase order in each
selected agency (Centralized model).
3. Costs and man-hours associated with making a purchase card transaction
in each selected agency (Decentralized model).
4. The workflow process for purchase card transactions in each selected
agency.
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5. The workflow process for issuing purchase orders in each selected agency.
Qualitative Data was gathered by conducting specialized interviews with
selected agency officials responsible for setting policy, and interviewing the
cognizant program managers in each selected agency.. The use of interviews as a
technique for gathering data can offer a means of obtaining more data at less cost
than other methods (Dexter, 1970). The research issues require the type of
information that can best be gathered from the specialized interview. These
specialized interviews provided data regarding the changes in efficiency and
effectiveness that have resulted from decentralization. Interviews are useful as a
means of securing experiences from the past and expectations regarding experiences
in the future (Lincoln & Guba, 1985). Open-ended interview questions provide
greater spontaneity and richness of responses (Oppenheim, 1992). Leading questions
offer a means by which the respondents can provide a rich discussion of specifics
without the direct prompt of a pointed question. The use of vague key words allow
the respondent to comment using his or her own interpretation and experiences
(Dexter, 1970).
Of particular interest was the information regarding program operations and
how they have become more efficient and effective. Rather than ask the respondents
questions that might suggest measures of efficiency and effectiveness, questions were
phrased to encourage the respondents to discuss the measures of efficiency and
effectiveness. By phrasing questions in such a manner, interviewing tactics are not
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likely to affect that the respondents said. Interviewing two independent agency
officials at each agency allows the researcher to validate information provided by
each respondent. Comparing the responses within each agency allows the researcher
to detect distortion and evaluate the reliability of data collected during the interview
(Dexter, 1970).
The GAO Prescriptive Guide, Using Structured Interviewing Techniques
(GAO/PEMD-10-1-5, 1991) assisted in the development of questions. However, the
specialized interviewing method offered the researcher an opportunity to obtain rich
and valuable information from persons in positions of authority. To that end, Elite
and Specialized Interviewing by Lewis Dexter provided the researcher with a
framework within which to best obtain the necessary data. By constantly asking for
examples to substantiate comments, the point to be made becomes evident (Dexter,
1970).
Given the schedules and availability of the selected participants, the use of
pre-determined questions allowed for optimization of time usage. Interviews were
conducted in the respondent’s offices. This allowed for accessibility to objective
data that otherwise might not be available. The use of probes as a means of
following up a response allowed the researcher to obtain any additional information
necessary to fully understand the participant’s responses (Gall, 1989).
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Additionally, policy statements, as well as memoranda, mission statements
and other relevant material were examined. The qualitative data consists of the
following:
1. Identification of the goals and objectives of each agency’s purchase card
program.
2. Identification of each agency’s definition of efficiency and effectiveness.
3. Identification of policy initiatives and internal operating procedures aimed
toward enhancing efficiency and effectiveness.
4. Identification of the perceptions and relevant information regarding
efficiency and effectiveness.
Interviews were conducted with the following persons:
Agency Agency Official Title
OFPP Mr. Matthew Blum Attorney, Legislative and Regulatory Matters
OFPP Ms. Julie Bastile Purchase Card Program Director
GSA Ms. Ida Ustad Associate Administrator for Acquisition Policy
Amy Mr. Bruce Sullivan Program Manager, Purchase Card
Amy Mrs. Dorothy Hindeman Deputy Program Manager, Purchase Card
These officials were selected because of the role each plays in effecting
policy and in implementing purchasing process initiatives in the selected agencies.
Interviewees were initially selected upon the basis of a their position as evidenced by
an initial review of policy and operational directives put in place by the individuals.
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The interviewees from the Army are the top line managers responsible for the all
purchase card program operations in each agency.
Interviewees from the OFPP and GSA are officials directly responsible for
government wide policy initiatives that reshape and refocus individual agency efforts
in streamlining purchasing processes. Also, these policy makers provided valuable
insight into the motivations and expectations regarding these procurement reform
initiatives. Data collected through interviews were recorded and analyzed and the
researcher manually recorded all responses. Analysis of the interview data was
conducted through content analysis (Berg, 1995). Listening to the interviewees was a
critical component of the data gathering process.
In using specialized interviewing techniques, the researcher is able to let the
respondent discuss the situation and attendant problems. This approach is most
effective when the interviewer has technical knowledge of the subject and is
interviewing prominent and well-informed members of a population (Dexter, 1970).
Centralized purchasing activity data will be compared to the data gathered for
the decentralized purchase card process to identify and analyze changes in efficiency
and effectiveness.
Testing
The independent variable is decentralized purchasing. The dependent
variables are efficiency and effectiveness. The observation taken before exposure to
the independent variable is called the pretest (O’Sullivan et al., 1995). The pretest
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environment is characterized by the use of centralized procurement offices to transact
micro-purchases. The observation taken after exposure is called the post-test
(O’Sullivan et al., 1995). A decentralized purchasing model characterizes the post
test environment. The ability to decentralize purchasing authority has resulted in a
process that no longer requires direct intervention by functional purchasing
organizations. Thus, the testing offers a meaningful comparison of transactions costs
and labor hours utilized in the centralized and the decentralized models.
To assess internal validity, the researcher posits the following question:
Could some other event other than the independent variable have caused the
relationship between decentralization and efficiency and effectiveness? While some
modicum of efficiency can always be achieved through some other process
improvement that might be adopted, decentralization has offered an opportunity to
dramatically change the purchasing process by removing several layers of
bureaucratic reviews and approvals from the purchasing cycle.
External validity was determined by the ability to universally apply the
research, findings and conclusions among all agencies. With the exception of the
Tennessee Valley Authority, the Federal Aviation Administration and the US Postal
Service, all agencies operate within the parameters established by the Federal
Acquisition Regulations and the policies of the OFPP.
The extent to which individual agencies have decentralized purchasing will
range between 80% and 100% of all micro-purchase transactions (Interview, Ida
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Ustad, General Services Administration). However, the research findings and
conclusions suggest a model for decentralization which, if adopted by agencies,
could result in increased efficiencies and be a more effective program, given a
redefinition of what constitutes an effective program. The external validity of the
research findings and conclusions were based upon the following factors:
1. With the three exceptions noted above, the micro-purchasing policy
applies to all agencies.
2. The same drivers for change exist in all agencies.
3. History documents that the changing environment is a great catalyst for
change across all agencies.
Expected Results
The model of purchasing in the post-test environment demonstrates the
marked difference in the purchasing process that has resulted from the removal of
layers of bureaucratic reviews and approvals.
The data indicates a decrease in the processing time and the per transaction
costs experienced under the decentralized purchasing model when compared to the
processing time and transaction costs incurred using the centralized purchase order
model. Thus, each agency’s expectations of efficiency, specifically processing time
and administrative processing costs, may be achieved. Increased effectiveness is
based upon a comparison of stated goals to actual achievement of those goals.
Increased effectiveness is likely, given the cost savings and streamlined customer-
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focused approach that is characteristic of decentralized purchasing. However, the
extent to which the selected agencies have adopted a program that controls frauds ■
waste and abuse and considers the results thereof an indicator of effectiveness
remains questionable. Once conclusions are drawn, a model can be developed that
increases efficiency and effectiveness.
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CHAPTER IV
RESEARCH FINDINGS
Introduction
In this chapter, research findings are presented. Qualitative data obtained
through the interviewing methodology are presented first. Quantitative data is then
presented. A synthesis of all the data concludes the chapter.
Qualitative Data
Findings are grouped into two categories. The first category contains the data
available from the policy organizations. These policy organizations are the Office of
Federal Procurement Policy and the General Services Administration. The second
category contains the Department of the Army data. The mission of the
organizations is also provided. This information is useful in that it provides a
framework for understanding how each organization affects and is affected by
purchasing. Research findings that result from the qualitative data gathered are then
provided.
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Policy Organizations: Mission and Relevance to Federal Purchasing
Office of Federal Procurement Policy
The Office of Federal Procurement Policy (OFPP) is the executive branch
organization responsible for procurement policy. The OFPP is the nucleus for
federal procurement policy and qualitative data that captures the goals and
perspectives of the administrators is relevant to this research. Additionally, the
OFPP works closely with the legislative branch in defining the purpose and shaping
the language of procurement statutes. Thus, the researcher valued an interview with
these policy makers.
Interviews were conducted at the OFPP headquarters with the two senior
administrators who are responsible for the development, implementation and broad
oversight of the program.
The General Services Administration
The General Services Administration (GS A) is the agency responsible for the
contract policy and management of the Visa Bankcard contract. This contract has
enabled decentralization to take place by placing bankcards in the hands of some
430,000 civilian and military workforce members. The GSA has limited quantitative
data relevant to this research subject. Inherent in their capacity as contract managers
is the management and general oversight of the program. Therefore, the data
obtained through interviewing the associate administrator responsible for the
purchase card program is of importance to this research.
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Data Inquiry and Findings—OFPP and GSA
Questions posed during the interviews with these policy makers and the data
provided by the respondents follow.
Question 1
Describe the events surrounding the decision to create a decentralized
purchasing environment.
Response:
OFPP: Both respondents agreed that the development of the purchase card
program was driven primarily by the National Performance Review (NPR) mandate
that administrative functions such as purchasing be done “faster, better and cheaper.”
The purchase card program presented an opportunity by which agencies could absorb
looming budget cuts by decentralizing the purchasing operation. In doing so, it was
expected that administrative costs to process a purchase request would be reduced.
Furthermore, decentralizing purchasing was also viewed as the means by which
routine, non-complex commercial purchases could be made quickly by the customers
themselves. The result would be more customer satisfaction- another goal of the
NPR.
The respondents stated that the traditional process of making purchases was
cumbersome. It involved the use of centralized purchasing agents who were viewed
as adding no value to the purchasing process. The respondents characterized the
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centralized process of small purchasing as “a paper-pushing exercise.” The goal of
the OFPP was to provide a regulatory and policy framework that would provide
agencies the opportunities to “improve the process and cut administrative costs.”
GSA: The respondent stated that “the Government Performance and Results
Act (GPRA) was challenging agencies to align their resources with their core
missions.” Administrative resources, such as purchasing agents, were considered an
expendable resource since routine, non-complex items did not contribute to the core
mission of the agencies. Furthermore, she stated that the removal of regulatory
constraints would create an environment in which routine, non-complex items could
be easily purchased directly by customers. Thus, resources could be realigned to
better achieve the goals and objectives of the agencies. She also noted that the era in
which the purchase card program was adopted was one of emphasis on budget
cutting and customer satisfaction. She recalled Vice-President Gore’s appearance on
the David Letterman Show in 1992 at which he displayed a 200-page specification
for cookies for the Department of the Army that had a lead time of twelve months to
delivery. The decentralization of purchasing that could be achieved through the
implementation of a purchase card program would “do-away with unnecessary
purchasing processes” that had been in use for many years. “Chips-Ahoy” would be
a phone call away.
The respondent further stated that decentralization would create a government
purchasing operation that was more responsive to customer’s needs in two ways.
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First, customers themselves would have the authority to make routine, non-complex
purchases as requirements surfaced. This would avoid a cumbersome purchase
request process. This, in turn, created a more responsive centralized procurement
staff able to focus their efforts on the complex, high-dollar value requirements of
their customers that were mission related.
During the interview, the respondent created a written sketch of Figure 7 to
demonstrate the traditional purchasing process. She then offered the decentralized
model shown in Figure 8. A comparison of the two reveals that several processing
steps have been removed in the decentralized purchase card model. The respondent
believes that reducing the steps in the process results in less processing time and
reduced transaction costs.
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PR Approved
PA Issues Order
to Vendor
Invoice
Forwarded to
Finance
PA Locates Vendor
& Obtains Quote
Customer
Identifies
Requirement
Invoice Paid
within 30 Days
of Receipt
PR Forwarded to
Purchasing Agent (PA)
Customer Generates
Purchase Request (PR)
Customer Receives
Items; Certifies Invoice
for Payment
FIGURE 7
TRANSACTION FLOW—SMALL PURCHASE ACTIONS
(LESS THAN $2,500) CENTRALIZED PURCHASE ORDER METHOD
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Customer
Contacts
Vendor
Customer
Identifies
Requirement
Customer Places
Order Receives Item
Vendor Receives
Payment Thru
Bankcard System
Statement of
Monthly Charges
Forwarded to
Cardholder
Cardholder/Approving
Official Review &
Approve Monthly
Financial Statement
FIGURE 8
TRANSACTION FLOW—SMALL PURCHASE ACTIONS
(LESS THAN $2,500) DECENTRALIZED BANKCARD METHOD
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Question 2
Explain the role that this organization plaved in shaping and implementing
the purchase card program.
Response
OFPP: Both respondents stated that the OFPP was “very instrumental” in
shaping and implementing the decentralized purchase card program. The OFPP
worked closely with the legislature to draft new procurement statutes. Trends and
practices found in commercial organizations were examined. According to the
respondents, the OFPP found that decentralized purchasing through purchase card
methods was a “standard operating procedure” in the commercial sector.
The respondents briefly discussed the bi-partisan efforts that went into
crafting the legislation that would open the door for decentralized purchasing. The
OFPP then worked with agencies to draft the new regulatory language that would
redefine purchasing and would offer the guidelines for implementing a decentralized
purchasing program. As an example, one respondent offered the shift toward
purchasing of commercial items. The program was designed in part around the new
regulatory language brought about by the FASA and FARA that encouraged the
purchasing of commercial goods and services. Buying commercial goods and
services was much easier than buying to government specifications and standards.
While the respondents were unable to offer any statistical data to support their
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estimate, both concurred that the bulk of decentralized purchase card transactions are
commercial in nature.
The respondents then discussed the efforts that OFPP took to remove
regulatory language that barred anyone other than a warranted “Contracting Officer”
from making purchases. With little difficulty, the OFPP spearheaded the initiative to
have the term “Contracting Officer” replaced with “micro-purchaser.” This paved
the way for decentralized purchasing within the agencies. Armed with purchase
cards, the OFPP expected agencies to “delegate purchasing authority” to internal
customers who would be able to buy more quickly and at less administrative cost to
the agency. Both respondents indicated that the ultimate goal was a system that was
more efficient and effective.
The respondents noted that while OFPP played a significant role in creating a
policy and regulatory environment that made decentralized purchase card use easy to
implement, the task of deciding how to implement such a program was left to the
agencies themselves. The GSA was named the central agency that would enter into
and manage the credit card contract. The OFPP played an important role in the
“front end” and the GSA would play an important role in the “back end” of the
program. To that end, the respondents noted that any quantitative data regarding
efficiency and effectiveness was to be generated at the agency level and at the
agency’s discretion. “Any data the OFPP may require is obtained through a data call
to the GSA or the agency directly.”
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GSA: The respondent noted that the GSA had successfully acted as a central
agency for managing government wide efforts in the past. She recalled the long
standing responsibility that GSA had until 1996 as the single procurement authority
for all information technology contracts throughout federal agencies. So, the
respondent believed that selecting GSA as the “matriarch” for managing the purchase
card program was a logical choice.
As a follow-up, the respondent was asked about an audit requested by the
GSA and conducted by the General Accounting Office (GAO) in 1996 that addressed
efficiencies brought about by decentralized purchase card use. The GAO reported
that a 1994 study by the Purchase Card Council demonstrated significant cost savings
associated with processing decentralized card purchases. In brief the report states:
The council reviewed the labor cost of requisitioning, purchasing,
receiving and processing bills for payment. For all 17
organizations in the study, it found that decentralized card
purchases was a less expensive process than purchase orders. For
15 organizations, card purchases cut costs by at least one-third.
For 8 of these 15 organizations, costs were cut by over half. Per
transaction savings for the 17 organizations ranged from $1.42 to
over $142, with an average saving of about $54. (GAO/NSIAD-
96-138: Acquisition Reform)
The respondent was asked about the basis of the savings reported by the 17
organizations. The range is significant and the average $54 per transaction reported
savings reported is not supported by any raw data. The respondent stated that the
organizations utilized a “best estimate” method of estimating purchase order
transaction costs and estimating decentralized purchase card transactions costs for
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micro-purchases (actions less than $2,500). The respondent noted that no distinction
was made for type of product ordered in that no unique processing requirements exist
for any “class” of product. In other words, the process for purchasing software or
copy paper did not differ.
For the centralized method, randomly selected purchasing agents were asked
to provide a best estimate of the total time spent processing purchase orders. For the
purchase card method, cardholders were asked to estimate total processing time.
Both estimates of time were then multiplied by the hourly rates of the employees.
The methodology and estimating technique lack rigor. Purchasing agents are
not trained in applying the methodologies that serve to quantify processing times.
In 1998, the Purchase Card Council conducted another cost-benefit analysis
on small purchases of less than $2,500 to determine the average cost of processing a
using a purchase order and using a bankcard. The Council consisted of ten agencies
and was led by the Department of the Treasury. The data is illustrated in Table 8. A
review of the data indicates a significant decrease in the transaction costs and lead
times associated with decentralized purchase card use versus the centralized
purchasing method. The council reported that the administrative processing costs
and lead times were reduced as a direct result of program offices using bankcards in
lieu of forwarding requirements to the centralized purchasing office (“The
Government Purchase Card,” September 1998).
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TABLE 8
COMPARISON OF COSTS/LEAD TIMES
Method of Processing Processing Cost Processing Lead Time*
Purchase Order $92.40 4 days
Purchase Card $40.43 3 hours
*Lead time measures all time expended from identification of need through
placement of the order.
When asked about the derivation of these estimates, the respondent indicated
that the PCC had used the same methodology employed in the 1996 study. She
further stated that the GSA was continuing to examine the best methods for
quantifying transaction cost savings.
As a follow-up, the respondent was asked if the GSA had examined the
methodology used by the Army. She stated that, in her opinion, the Army time-
motion study methodology was considered the most reliable study to date.
Question 3
What effect has the decentralized purchase card program had on procurement
operations?
Response
OFPP: Both respondents stated that the program has provided unprecedented
opportunities for agencies to streamline processes and make the purchasing system
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more efficient. Deregulation removed statutory prohibitions that made streamlining
difficult in the past. One respondent offered the following example: Prior to the
passage of FAS A, all purchases under $100,000 were reserved exclusively for small
businesses. Additionally, competitive quotes from two or more small business were
mandated. FASA removed the small business set-aside requirement and competition
requirements for micro-purchases (i.e., purchases under $2,500). As a result, small
dollar value items could be purchased more quickly. And, procurement personnel
could “focus on meeting the strategic purchasing needs of their customers rather than
spend time processing routine requests.”
The respondents provided data demonstrating the volume of transactions and
dollars expended in calendar year 1998 using the purchase card. The data is
displayed in Table 9. Army ranks first in both number of transactions and dollar
volume. The fluctuation among the agencies is due to the following factors:
• Extent to which purchase card use has been implemented;
• Number of requirements that can be satisfied through the purchase card
method; and
• Individual purchasing needs of each agency.
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TABLE 9
VOLUME OF FISCAL YEAR 1998 TRANSACTIONS AND
EXPENDITURES—PURCHASE CARD GOVERNMENT-WIDE
Agency
Purchase Card
# of Card
Transactions
Total Dollars on
Purchase Card
AID 4,731 $1,844,565
Agriculture 749,071 $245,833,632
Air Force 2,132,919 $815,193,902
Army • ■ 3,289,117 $1,469,935,473
Commence 267,249 $100,577,009
Other Defense 368,880 $249,910,240
EPA 74,398 $31,173,793
Education 15,167 $8,350,545
Energy 314,759 $165,704,195
FEMA 25,137 $21,395,422
GSA 203,454 $120,932,148
HHS 419,867 $190,201,839
HUD 16,278 $11,240,529
Interior 865,200 $291,741,290
Justice 600,093 $274,400,016
Labor ' 43,462 $13,661,320
NASA 122,462 $68,161,886
Navy 2,090,131 $1,121,535,486
NRC 4,607 $2,299,269
OPM 13,444 $9,091,112
SSA 98,771 $49,083,317
SBA 19,034 $8,184,331
State 36,172 $20,467,403
Transportation 618,684 $265,845,549
Treasury 463,120 $141,346,055
VA (Purchase Card) 1,911,419 $1,073,886,922
VA (Prime Vendor) 251,271 $981,455,103
Other Agencies 1,234,462 $453,148,876
TOTALS 16,253,359 $8,206,601,227
Source: Federal Supply Service based on information furnished by the
International Merchant Purchase Authorization Card (IMPAC) and GSA.
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GSA: The respondent stated that procurement has changed dramatically.
Centralized procurement organizations have downsized. She attributes this reduction
in personnel partly to the reduced workload that has resulted from decentralized
ability to purchase. She stated that some workforce reductions would have occurred
regardless of decentralized purchasing. Decentralization of purchasing made it easier
for agencies to absorb mandated personnel and budget reductions. Processes have
become “user-friendly” enabling customers to directly fulfill purchasing needs. The
result is that less purchase requests are forwarded to the centralized purchasing staff.
Question 4
Has the program been successful? Please explain.
Response
OFPP: The respondents believe that the program has been a huge success.
Feedback from the Procurement Executives indicates that agencies are able to
conduct transaction based purchases faster and at less administrative cost. One
respondent noted, however that the small business community is concerned about the
impact the program has had on small businesses. “Prior to FAS A, all purchases
under $100,000 were reserved exclusively for small businesses. Small businesses are
complaining to the OFPP that government cardholders find it much easier to shop at
places such as Office Depot and Wal-Mart.” The respondents stated that the OFPP
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in conjunction with the Small Business Administration is in the process of gathering
empirical data to examine this allegation.
GSA: The respondent considers the program successful based upon the
reduced purchasing lead times, administrative cost savings, and the rebate program.
The respondent referred to the data she provided in response to earlier questions.
Furthermore, she noted that the feedback received from cardholders in annual
training sessions is generally positive. When asked for an example of negative
feedback, she stated that the majority of the cardholders would like purchasing dollar
limitations increased. She stated that the GSA considers the program “too new” to
increase purchasing thresholds at this time. She does envision that the placement of
web based contracts will facilitate increased spending limitations.
As a follow-up question, the researcher asked the respondent to discuss the
rebate program that was noted as a measure of success. The respondent stated that
under the rebate program, card use results in refunds provided directly to the
agencies. Just as an individual conducting private transactions might obtain a rebate,
frequent flyer miles, or other benefits based on card transactions, the GSA has
negotiated refunds in this card services contract. Refunds vary based on the specific
terms of each agency’s arrangement with the card-issuing bank and are dependent on
an agency’s payment history. The respondent offered the following example:
The Department o f Veterans Affairs (VA) has elected to pay its
charges daily, and receives a refund o f approximately one percent o f
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its transaction totals. In F Y 1997, VA’ s card refunds totaled more
than $7 million. These refunds are allocated to the VA hospitals and
other activities based on card transaction volume. The refunds can
then be allocated by each activity to service delivery. For example,
the VA’ s Knoxville Medical Center in Iowa was able to use its refunds
to purchase equipment for its eye clinic. (Emphasis added.) (Office of
Federal Procurement Policy, March 1998)
Question 5
Describe the controls in place.
Response
OFPP: At the onset, the respondents made it clear that the OFPP is not
interested in monitoring the program. One respondent stated: “We expect agencies
to police themselves.” The respondents stated that by regulation, annual training is
mandatory for all cardholders and approving officials. The respondents stated that
under the guidelines established within the contract, mechanisms such as individual
and monthly spending limitations, cardholder certification on monthly charge
statements and the signature of the designated approving official on the cardholder’s
monthly charge statements are in place within all agencies. The respondents also
stated that the audit arm of each agency is expected to conduct an audit of the
program at intervals deemed necessary. The respondents concluded by remarking
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that ultimately, “each agency head is held accountable for the program.” If there are
problems with control mechanisms in place, agencies are responsible for making the
necessary changes. The respondents noted that the regulations are silent on the
subject of purchase card control; therefore agencies have “some deal of latitude and
discretion in deciding what control mechanisms to put in place.”
GSA: The respondent described the three-tiered “human” control system in
place depicted in Table 10. It becomes evident that levels of control can become less
effective given the volume of oversight at each subsequent level. For example, while
the cardholder is solely responsible for their individual purchases, the Approving
Official is responsible for the purchases of all cardholders under their supervision.
The Agency Program Coordinator at the top tier is responsible for all cardholder and
Approving Official actions.
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TABLE 10
THREE-TIER HUMAN CONTROL SYSTEM
Tier Function Control
First Cardholder Responsible for all
individual transactions
Certifies monthly “log”
as accurate
Second Approving Official Reviews cardholder
accuracy
Third Agency Program
Coordinator
Receives monthly
printout with all
transactions within the
organization
Reviews law agency
procedures
No certification required
The respondent stated that the detailed control and oversight of card usage
remains an agency function. However, she noted that some controls exist within the
bankcard contract. As an example, she stated that the contract requires that
cardholders be appointed in writing. The issuance of a card is predicated upon a
written appointment. This is intended to avoid any card use by unauthorized
individuals. She further stated that the contract requires the designation of an
Agency Program Coordinator (APC), who functions as the primary liaison to the
bank and the GSA. Within each agency, the APC has overall responsibility for the
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program. The APC is responsible for ensuring that agency cardholders comply with
the terms and conditions of the contract. The respondent stated that contract terms
and conditions are reviewed as part of the annual mandatory training. Consistent
with the OFPP respondents, she stated that “each agency is responsible for putting in
place controls that ensure that misuse of the card is avoided.”
The respondent referred to some control language contained in the contract
between Visa and the GSA. In part, that language states:
Agencies must have the following procedures in place prior to
issuing purchase cards under the contract:
• Identify, by name, those persons who are authorized to use
cards;
• Set spending limits for cardholders and offices, including
single purchase limits and monthly limits
• Approve purchases and ensure funds are available before
goods or services are bought; and
• Reconcile and approve cardholder statements. (Government-
wide Commercial Credit Card Services Contract No. GS23F-
94031)
The respondent further stated that the contract provides the APC with access
to detailed records maintained by the bank for all transactions. The respondent
recognizes that because the current system is not fully automated, the sheer volume
of cardholders and transactions makes it difficult for the APC to seek out and review
detailed records. The GSA is working with the bank to develop an “automated query
and ad hoc reporting program” that can be easily accessed and used by agency APCs.
This program will provide easier oversight capability for the agencies.
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Question 6
Provide any additional comments that you believe important to the analysis of
efficiency and effectiveness of decentralized purchase card use.
Response
OFPP: The respondents believe that the decentralized method if definitely a
more efficient way of doing business. Both noted that the opportunities for building
a more efficient and effective purchasing process will be created through a
“cooperative effort of the financial, information, procurement and security
communities” of the federal government. One respondent stated that this could best
be accomplished through the use of information technology as a means of “migrating
from single purpose charge cards to multi-functional smart cards program.” As
better electronic capabilities are introduced, additional features such as “secure
electronic messaging and the ability to examine buying trends” will enable agencies
to further improve the purchasing function.
GSA: The respondent stated that the nature of the purchase shapes the buying
technique. Decentralization has created a purchasing system that can respond more
quickly to meeting routine, repetitive requirements while reducing administrative
costs. As more meaningful data on administrative cost savings is gathered,
opportunities to modify the system to make it more efficient and effective will be
explored.
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The respondent mentioned the recent award of a “SmartPay” contract that
enables agencies to select a single financial institution to handle their purchase, travel
and fleet (e.g., gasoline) requirements. She stated that government wide use of the
purchase card totaled $8 billion in FY 1998. FY 1999 and 2000 totals are expected
to be $12 billion and $18 billion respectively. She attributes the expected growth to
an increase in the number of cardholders and vendors that accept the government
card. The respondent closed by stating that “trends such as “SmartPay” will continue
to make purchasing more efficient.
The Army: An Operational Purchasing Organization
Department of the Army
The Department of the Army (DOA) is dedicated to protecting and preserving
peace and security for the nation and around the world primarily through the
deployment of armed land forces. Readiness, rapid deployment requirements and
recognition of the depth and breadth of possible regional conflicts in which the Army
may be engaged requires reliance on a highly organized and complex logistical
infrastructure. The great majority of this agency’s needs are satisfied through
outsourcing, i.e., little capital facilities exist internally that support Army operations
fwww.army.mil/mission/htmlb So, purchasing plays an important role in securing
the supplies and services necessary to create responsive and effective service
operations. This means putting needed supplies in the hands of the user as quickly
and efficiently as possible. Army total procurement dollars and purchase card dollars
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for fiscal years 1995 through 1998 are depicted in Table 11. Beginning in fiscal year
1996, a small downward trend in procurement dollars expended (in billions) is
indicated along with a significant upward trend in the purchase card dollars expended
for the same periods. While purchase card dollars expended remains a modest
amount of total procurement dollars, it is nonetheless significant in terms of real
dollars. Furthermore, an upward trend in purchase card expenditures is apparent.
Army purchase card expenditures and number of transactions for the last 8
years is provided in Figures 9 and 10. The data indicates a rapid growth in purchase
card use over a relatively short period of time. In the last two reporting years, total
dollars spent and number of transactions doubled.
TABLE 11
DEPARTMENT OF ARMY
Fiscal Year Total Procurement
Dollars
(in billions)
Total Purchase Card
Dollars
95 32.1 426.8M
96 33.8 740.0M
97 33.1 1.1B
98 32.6 1.4B
Source: Federal Procurement Data System.
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1,400,000,000
1,388,483,065
,200,000,000
1,092,540,150
,000,000,000
800,000,000
JS
Q 600,000,000
739,545,435
400,000,000
456,840,549
200, 000,000
w
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>
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LL
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LL
Dollars
Source: Army Purchase Card Program Management Office
FIGURE 9
ARMY PURCHASE CARD PROGRAM GROWTH IN DOLLARS
o
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3,500,000
CO
3,000,000
2,500,000
$ 2,000,000
1
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C M
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I Purchases
Source: Army Purchase Card Program Management Office
FIGURE 10
ARMY PURCHASE CARD PROGRAM GROWTH IN PURCHASES
Data Inquiry and Findings: Department of the Army
Interviews were conducted with Mr. Bruce Sullivan, Program Manager,
Purchase Card Program and Mrs. Dorothy Hindeman, Deputy Program Manager,
Purchase Card Program, Department of the Army at the Army facility located in
Skyline Plaza, Arlington, Virginia. Interviews were conducted on the morning of
October 21, 1999, from 8:00a.m. until 11:30a.m., with a follow-up interview on
April 27,2000. Questions posed to respondents interviewed at Departments of the
Army:
Question 1
What were the drivers behind your agency’s implementation of the
decentralized purchase card program?
Response
The respondents stated that a pilot program implemented in FY 1990 at Ft.
Stewart, Georgia, to study decentralized purchase card use had positive results: a
quicker ordering and delivery process. Our challenge was to design a purchasing
system that provided a quicker response time. When FASA was passed, the Army
saw the opportunity to expand the program. Seven years later in 1997, there was a
530% growth in transactions made by customers using the purchase card. And, one
year later, in 1998, transactions doubled again. Respondents stated that under the old
system it was not uncommon for customers to experience a three-month waiting
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cycle from identification of their need to delivery of the item. One respondent
offered the Gulf War as an example. The Gulf War tested the efficiency and
effectiveness of allowing line personnel to place orders themselves instead of relying
on the traditional centralized purchasing system.
The respondents briefly discussed the workforce reductions driven by budget
cuts beginning in 1995. “Between 1995 and 1998, the Army reduced its acquisition
workforce by 45%.” The focus was on the “non-value added” administrative
functions.” These were the secretarial workforces and purchasing agents. The rapid
explosion of information technology services reduced the need for secretarial support
just as the purchase card reduced the need for purchasing agents. Table 12 shows the
decline in the number of purchasing agents in terms of full time equivalent positions.
The steady decline between FY 1994 and 1998 has reduced the purchasing agent
workforce by over one-third in four years. The respondents noted that the decline in
workforce was driven by budget cuts and the decentralization of micro-purchasing
enabled the Army to absorb those budget cuts.
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TABLE 12
PURCHASING AGENT WORKFORCE DATA
(Full-Time Army Staffing Levels)
Fiscal Year Staffing Level
1994 676
1995 597
1996 530
1997 458 . .
1998 444
Source: Department of the Army Program Management Office.
Question 2
What were the agency’s goals and objectives in implementing the program?
Response
Both respondents stated that the objectives of all programs adopted by the
Army are aimed at supporting the war fighter. Obtaining supplies and services
quicker would satisfy customers and at the same time reduce processing costs. A
smaller purchasing workforce could be better aligned with reduced work levels.
Some of those administrative cost savings could potentially “free-up” funding to
support more mission related programs.
The respondents emphasized the need to sustain a “modem” workforce and
processes that enable to Army to quickly respond to emergent threats and conflicts.
By decentralized purchase card use, routine, non-complex items could be quickly
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purchased. One respondent noted that “simple items such as batteries can make the
difference between a successful or a failed campaign.”
Question 3
Are those goals and objectives being achieved? Please explain.
Response
The respondents agreed that the program had been a success. One respondent
referred to a memorandum he authored on the subject. It states:
The Army re-engineered its procurement process by delegating
procurement authority for low cost services and supplies down to
user organizations. Using the purchase card gets goods and
services into the hands of Army soldiers and civilians faster,
cheaper, and easier than using the old purchase order method.
(Mr. Bruce Sullivan, “Information Paper,” January 21,1997)
Workforce reductions in centralized purchasing were absorbed without a negative
impact on operations. Although customers were initially hesitant to use their
purchase cards as authorized, the benefits have become a catalyst for increased use.
When asked to define the benefits, respondents offered the quick delivery times that
customers now experience. “In the past, it could take up to three months to have an
item delivered. Now, the customer can go to the nearby K-Mart, select, buy and
receive the item all at once.”
Additionally, the respondents referred to substantial per transaction cost
savings of $92.90 brought about by decentralized purchase card use. In response to a
follow-up probe by the researcher, the respondents stated that this per transaction
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cost saving was identified in an audit conducted by the Army Audit Agency in 1997.
Subsequent to the interviews, the researcher was able to obtain the report through the
Freedom of Information Act. The data is discussed in the succeeding section.
Question 4
Describe the means with which success is measured.
Response
Both respondents agreed that customer satisfaction was a primaiy measure of
success. The cardholder community provides informal feedback to their Approving
Officials and also at annual cardholder training sessions that are mandatory for all
cardholders to attend. As important, however, was the need to continue to streamline
purchasing processes to get the most “bang for the buck.” One respondent discussed
the success of the rebate program. The Army considers the rebate program a
measure of success and places value on its ability to received millions of dollars in
rebates from the Visa bankcard service provider. One respondent described the
rebate as “volume and payment driven.” “The greater the volume of transactions and
the faster the Army pays its Visa bill, the more opportunity for rebate monies.” As a
follow-up question, the researcher asked for an example.
In FY 1998, the Army received approximately $20M in rebates. According to
the respondent, the existing arrangement between the Army and bankcard services
requires payment for charges within 10 days in return for V a% rebate monies.
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As a follow-up to this question, the researcher inquired about quantitative
measures of success that the Army has in place. In response, the respondents referred
once again to the Army audit report. The respondents stated that another measure of
success is the timely reconciliation of monthly statements. According to Army
policy, cardholders must reconcile their monthly statements within 10 days of
receipt. The respondents cite the importance of the reconciliation because after that
10-day period, the Army has no dispute rights regarding billing. Each purchase card
activity must provide an affirmative statement that reconciliation has been completed
for all cardholder accounts. The respondents believe that reconciliation is a vital part
of the process since it avoids improper payments. And, activities have learned the
importance that reconciliation holds for the program managers. One respondent
offered the following example:
Recently, one stateside Army activity failed to notify the program office that
reconciliation had been completed. The respondent terminated the activity’s total
purchase card authority. When the activity’s cardholders attempted to use their
purchase cards, purchases were denied. The respondent stated that techniques such
as this have proved effective in getting activities to “follow the rules.”
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Question 5
What-challenges do you face in making the program successful?
Response
The respondents stated that changing the culture and detecting and punishing
offenders who misuse the card have been the biggest challenges to date. On the
i . ■ : :
matter of culture, one respondent described the Army’s efforts in conducting “road
shows.” “In 1996, we chartered a team to examine impediments to this new process.
Culture was identified as a primary inhibitor.” Program representatives visited Army
sites and discussed the benefits associated with card use. As people became more
comfortable with this new process, card use increased.
The respondents stated that the existing system lacks automated capability
that would facilitate the detection of possible inappropriate card usage. The three
tiered approval process places the responsibility on the “people in the process.” In
particular, approving officials are expected to conduct regular, routine inspections of
card holder “logs” to ensure that misuse does not go undetected. The respondent
notes that while some cases of misuse have been reported, overall card usage has
been proper.
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Question 6
Describe the controls in place.
Response
In response to this question, the respondents first described the three-tiered
control system contained in the Army Purchase Card Procedures Manual. It is
consistent with the control system described by the GSA respondent. Additionally,
reference was made to a report of the Purchase Card Integrated Product Team. The
respondent provided the report and referred to the following language contained in
the report:
The controls currently in force include:
• The cardholder’s dollar transaction and billing cycle spending limits;
• The merchant type codes authorized or blocked for purchase card use;
• The office billing cycle spending limit; and
• The cardholder’s reconciliation of the account statement (Department of
Defense, 1996).
Table 13 provides a brief description of each of these four controls and how
they work to effect controls in purchasing. The table demonstrates that internal
controls are built in at the individual and office level.
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TABLE 13
CONTROL PROCESSES
Control Mechanism Purpose
Cardholder's dollar transaction billing
cycle spending limits
Any purchase above the preset
individual limit will be rejected.
Any purchase that would bring total
expenditures over the preset billing
cycle limit will be rejected.
Controls amount of purchases i.a.w.
with the projected purchasing demands
Merchant-type codes authorized or
blocked for purchase card use
Prevents use of card for items not
authorized
Office billing cycle spending limit Prevents total spending beyond funds
allotted for the period
Cardholder's reconciliation of the
account statement
Prevents unauthorized billings lfom
being processed for payment
These controls are “pre-purchase” controls. The controls establish some
predetermined boundaries within which purchasing can take place. However,
blocking merchant codes is not a panacea. One respondent offered two examples
(emphasis added):
The Army blocked all purchases o f alcohol. An immediate phone
call was received from several Army chaplains. They were
unable to purchase wine for church services.
Jewelry stores are blocked so that no cardholder may use the
card at a jewelry store. However, jewelry can be purchased at a
K-Mart o f a Wal-Mart.
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A brief dialogue between one respondent and the researcher discussed the
GAO requirement that auditable billing files be kept by agencies for 6 years and 3
months (GAO Policies and Procedures Manual for Guidance of Federal Agencies,
Title 8, General Records, Schedule 6, September 1992). The respondent believes
that this retention period is adequate.
Lastly, the respondent pointed out that, while he believes that a good control
system is in place, “people will always find ways to circumvent the system.”
Question 7
To what extent has instances of fraud, waste and abuse have been observed.
Response
Several cases of fraud, waste and abuse have been reported. When queried as
to the sources of the detection, the respondents stated that most cases are not
identified through the routine of control processes. However, the respondents
believe that the system in place can be used for not only the prevention of fraud,
waste and abuse, but the detection of it as well. They recognize that prevention and
detection surveillance techniques could be improved, but the existing system relies
heavily on the diligent oversight and monitoring of approving officials and
cardholder training. The respondents stated that a purchase card fraud hotline has
been established so that anonymous callers can report suspected cases of card misuse.
Three examples of fraud and abuse were offered (emphasis added):
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Case 1: A Special Forces supervisor was designated as an approving
official. The Special Forces mission required this supervisor to travel
overseas regularly for extended periods for mission training. A
cardholder reporting to the official used his purchase card for
personal items, such as home patio furniture, go-carts, and personal
automobile accessories valued at over $40,000.
The approving official was overburdened with paperwork upon return
to work and didn Y review purchases on the statements o f account
before approving payment. These personal purchases went
undetected for 18 months until an independent audit identified the
fraudulent activity.
Case 2: An approving official didn Y review cardholder purchase
records. A cardholder used the card to purchase about $3,500 o f
home office equipment, such as a personal computer, facsimile
machine and supplies. The cardholder was assigned a new approving
official, due to job transfer o f the prior approving official. When the
cardholder was forced to produce his purchase records, the
fraudulent purchases were discovered.
Case #3: A federal employee at an Army installation started his own
business on the side selling cleaning equipment and supplies. He
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marketed his company to cardholders at the installation who
. frequently purchased such items from the federal employee.
The researcher identified data indicating that in FY 1997 104 cases of
purchase card fraud were reported. The cases total ■ an estimated $1.6 million in
potential loss (U.S. Army Audit Agency Report: AA98-261, 31 July 1998). When
asked about the validity of this number, the respondents noted that some card misuse
could be unreported. The following circumstances suggest reasons for such
behavior:
• Incidents may be resolved at the local level;
• Fraud is viewed as a “bad mark” on the Commanding Officer’s record;
• Fraud is undetected; and
• Approving officials didn’t consider some instances “important.”
The Army believes that card efficiencies exceed losses pointing out that $1.6
million is less than 1 percent of card usage. Table 14 shows the Army’s total
purchase card expenditures and number of transactions for the FY 1997 period.
While the estimated value of potential loss from card misuse is a significantly small
percentage of total purchase card expenditures and transactions, concerns exist
regarding undetected and unreported cases.
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TABLE 14
REPORTED PURCHASE CARD FRAUD COMPARED TO
TOTAL PURCHASE CARD ACTIVITY FOR FY 1997
Purchase Card Transactions Purchase Card Expenditures
Reported Total Reported
Fraudulent
Reported Total Reported
Fraudulent
2,442,303 104 $1,092,540,150 $1,600,000
Source: Army Audit Report, 1998.
Question 8
Provide any comments that vou believe important to the analysis of the
efficiency and effecti veness of decentralized purchase card use.
Response
The respondents believe that an analysis of efficiency and effectiveness must
consider:
• Per transaction cost savings achieved;
• Better processing times;
• Customer satisfaction; and
• Pre-purchase and post purchase control mechanisms.
They believe that per transaction cost savings may increase as contracts are
placed on the web and cardholders have electronic access to vendors. An “E-mall”
initiative spearheaded by the Army will place a host of contracts on the web for
cardholders to place orders by a “point and click.” Furthermore, better accessibility
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to cardholder data to be achieved through automated query programs will provide
approving officials a streamlined way to review cardholder accounts.
Quantitative Data
Introduction
In July 1998, the U.S. Army Audit Agency, Office of the Deputy Auditor
General reported the results of a time-motion study that had been conducted in the
spring of 1998. The purpose of the study was to determine whether or not
decentralized purchase card use was more efficient and effective that the traditional
centralized purchase order method. The findings presented in this section are based
upon a review of analyses conducted by the U.S. Army Audit Agency to determine if
the transaction cost is lower when “micro-purchases” (those under $2,500) are
executed by credit card rather than by purchase order. The U.S. Army Management
Engineering College Office of the President, located in Carlisle, Pennsylvania,
validated the time-motion methodology used by the Army in its study.
Using a timing analysis methodology, i.e., a time-motion study, minutes
expended were recorded and loaded with salary dollars (for grade of person
observed) converted to per minute wages and then multiplied by minutes expended.
Loads were obtained from the Cost and Economic Analysis Center, Office of
Personnel Management, Washington, DC, 20503. Loads represent the monetary
value of federal service fringe benefits. The time-motion study was conducted at the
following Army sites: Ft. Belvoir, Ft. Meade, Aberdeen Proving Ground, Ft. Lewis
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and Ft. McNair. These five Army sites were selected since they were the top five
Army sites that generated the most credit card transactions and the most purchase
order transactions during the fiscal year. Additionally, these sites were selected
because they had the most mature credit card processes, i.e., credit card processes
were in effect for not less than six years.
Three purchase orders and three credit card transactions were observed at
each site. Each of the following was selected:
• An item of supply;
• A service item; and
• An “information technology” related purchase (e.g., software, hardware).
For purchase card observations, a fourth observation was made for
construction transactions. The credit card process is not currently recognized as an
acceptable purchasing alternative for construction related goods and/or services.
Thus, no fourth observation is recorded for the credit card process. The time-motion
study concluded at the point when the transaction is forwarded to central finance
office for payment. (Each activity is serviced by a central activity, Defense Finance
Administration Services in Cleveland, Ohio.) The following summarizes the
analysis conducted:
1. All steps in the credit card and purchase order processes were flowcharted.
2. All flowcharted steps were timed using the stopwatch method.
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3. The utilized steps in both processes were “costed out” and segregated by
activity.
4. The data gathered for the five sites in the sample was used to compute an
average per transaction processing time and an average cost per transaction.
5. The average time and cost to process a credit card versus a purchase order
transaction were then compared.
Data Presentation and Analysis
Flowcharts of each of the purchasing methods are depicted in Figures 11 and
12. Figures 11 and 12 were flowcharted by the Army Audit Agency as part of the
time-motion study. There are fewer processing steps in the credit card method
shown in Figure 11. The reduction in the number of steps as well as reduced number
of individual tasks that occur within each step accounts for the differences in total
time and total costs associated with the purchase order and the credit card processes.
For purposes of illustration, time-motion observations recorded for the Ft.
Belvoir site are presented in Table 15. This data is the result of the time-motion
study conducted by the Army Audit Agency. Table 15 presents summary data for
recorded observations of the purchase order process compared to the recorded
observations of the credit card process. The details of this table are included in
Appendices 7 and 8. The data is representative of the process used to collect data at
all five selected sites. The groupings and the steps identified within each grouping
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NO
NO
yes I
YES
Y E S |
NO
END
IDF NT IFY
NEE D
P ROCESS
COMPLETE
i D t IN T i F Y
P R O P E R
P URCHAS E
P ROC EDURE
JTACT VENDOR
TO RESOLVE
PROBLEMS
ARE
DISCREPANCIES
ON SOAP
IS REQ UEST
V A I ID FOR
CREDIT BUY'
WAS THE
PROBLEM
RESOLVED?
P R E P A R E R EQU EST
FOR M AND AQ U IRE
NEEDE D SIGNATURES
C A R D I-101: D E R L O G S
CREDIT CARD
P U RCHASE
ARE THE RE
P R OBL EM S WITH
THE O RD E R?
V E N D O R
RECE IVE S AND
VERIFIES O RDE R
FOR C OM PLE TCN ES
ARRPOVING
OFF 1C IA I. LOR
CARDHOLDER VERIFIES
RECONCILIATION
RECEIVE AND
R E C ONCIL E M O N T H L Y
STATIC) ENT OF
ACCOUM I (SOA)
C.A RDH OLDER
C O NT A C T S
VENDORS AND MAKE
PU RCH A SE
SOA W IT H C A R 0 H O L D E R
APPROVING OFFICIAL
SIGNATURES SENT TO
FINANCE
FIGURE 1 1
CURRENT CREDIT CARD PROCEDURES FLOWCHART
to
©e
NOTIFY
ROCKY MOUNTAIN
BANK
SEND BANK
QUEST i C) N A B L L :
ITEM REPORT
IDENTIFY
PREPARE
REQUISITION
REQUEST
ASSIGN
ARE
FUND
AVAILABL
COMMIT
CUSTOMER
FUNDS
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THROUGH
SUPPLY
L SYSTEM ,
THROUGH
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PREPARE
PURCHASE
ORDER
IDENTIFY
VENDOR
ENTER
REQUEST
INTO
SAACONS
SEND
PURCHASE
ORDER
TO
VENDOR
ENTER INTO
INSTALLATION
SUPPLY
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ORDER USING
PURCHASE
ORDER
VENDOR
RECEIVING
DOCUMENTS ARE
SIGNED BY
RECEIVING
RECEIPT
DOCUMENT
SIGNED BY
CUSTOMER
VENDOR
DELIVERS
ORDER
WITH INVOICE
ORDER
IS RECEIVED
AND EACH
UNE IS
VERIFIED
' c u s t o m e r
NOTIFIED
FOR
PICKUP OR
DELIVERY
CUSTOMER
VERIFIES
ORDER AND
NOTIFIES
APPRO. OFFICE
OF UNRESOLVED
ISSUES
Source: Army Audit Report, 1S98
FIGURE 12
PURCHASE ORDER PROCEDURES FLOWCHART
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include all possible steps that could occur when processing either a credit card or
purchase order.
TABLE 15
COMPARISON OF AVERAGE TIME RECORDED FOR
PURCHASE ORDER AND CREDIT CARD METHODS
AT FT. BELVOIR
Grouping
(By Function)
Total Minutes
Expended
(Purchase Order)
Total Minutes
Expended
(Credit Card)
Customer 71.45 13.6
Property Book 30 0
Budget 49.5 1.7
Logistics 19.5 44.3
(including Resource
Manager) -
Contracting 124.5 0
Receiving 48.5 0
Cardholder 0 34
Approving Official 0 9.8
Average (in hours) 5.77 1.75
The time-motion study defines broad process areas that are referred to as
groupings. These groupings are illustrated in Table 16. An “x” in a column
indicates that a particular grouping participates in one or both processes. For
example, an “x” in the customer columns indicates that the customer participates in
the purchasing process regardless of whether the purchase order or credit card
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method is used. On the other hand, the contracting grouping participates in the
purchase order process but not in the credit card process.
TABLE 16
APPLICABLE GROUPINGS FOR PURCHASE ORDER AND
CREDIT CARD PROCESSES
Grouping Purchase Order
Method
Credit Card Medhod
Customer X X
Cardholder X
Resource Manager X
Logistics X X
Budget X X
Receiving X X
Property Book X
Contracting X
The applicability of an individual grouping is predicated upon which method
of purchasing is used since there are process design differences between the methods.
In Table 15, the total minutes recorded for all tasks are totaled at the grouping
level (referred to in the table as Total [Grouping Name] Time in Minutes. A
comparison of Table 15 data indicates that the property booking and contracting
groupings found in the purchase order process have been eliminated. An
examination of the recorded time data reveals that these two process groupings
account for 36-59% of the total minutes expended in the purchase order process.
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Table 17 provides the data illustrating that in each observance, the cost avoidance
realized by eliminating these two process groupings is significant.
TABLE 17
COST AVOIDANCE ASSOCIATED WITH ELIMINATION OF
CONTRACTING AND PROPERTY BOOKING PROCESS GROUPINGS
(In Dollars)
Process
Groupings
Observations (Ft. Belvoir)
1 2 3
Contracting (58.64) (58.64) (72.90)
Property Booking (15.71) (15.71) (15.71)
Using the credit card method redefines tasks allowing the customer to spend
less time on the intensive paperwork that is required using the purchase order
process. The customer coordination tasks with outside departments that exists within
the purchase card process is also time consuming. These tasks are also reduced or
eliminated using the credit card process.
In the purchase order method, the Director of Contracts (DOC) is the
centralized department responsible for issuing purchase orders. The observed tasks
that must be accomplished prior to the DOC process activity are time consuming. In
particular, recorded time associated with various research efforts identified as tasks
throughout the six groupings is significant. Table 18 provides recorded time data
that reflects the significant amount of time recorded in the task areas that precede the
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DOC grouping in the purchase order method. The percentage of time expended in
preparing the necessary paperwork and securing appropriate levels of coordination
and approval represents from slightly below to slightly above half of total time
recorded using the purchase order process.
TABLE 18
PERCENTAGE OF RECORDED TIME FOR PRE-DOC TASK
COMPARED TO TOTAL RECORDED TIME (IN MINUTES)
GROUPINGS USING THE PURCHASE ORDER METHOD
Observation Pre-DOC Tasks*
Recorded Time
Total Recorded
Time
%
1 196 404 48.5
2 186 394 47.2
3 158 296 53.3
4 158 291 54.3
*Tasks preceding Group E, DOC are Group A (Customer) Group B (Property Book),
Group C (Budget), Group D (Logistics)
An examination of the recorded times for both methods suggests that a more
dynamic process exists in the credit card model. In the purchase card model, the
actual purchase occurs within the Group E (DOC) task group, i.e., specific sequential
steps must occur prior to Group E DOC task completion. In the credit card method,
issuance of the “order” can occur at various points in the process. The purchase
order method in Table 15 indicates that after contracting tasks are completed one
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remaining group, the Receiving Group, complete tasks. If the item ordered is directly
delivered to or picked up by the requestor, this final grouping of tasks is not required.
In the credit card method, contracting is no longer responsible for the
ordering tasks of the purchase order model. Some of these tasks shift to other groups
(e.g., placement of the order) and others are eliminated (e.g., issuance of a signed
purchase order).
There are differences in the credit card processing steps used depending on
what is being purchased. For example, if an item to be ordered is defined as non
expendable, the cardholder forwards a request for approval to the Directorate of
Information Management (DOIM) (for information technology related purchases)) or
the Equipment Management Division (EMD) (if not IT related but non-expendable).
The request is then forwarded to Resource Management to obtain a funding citation.
If an item is expendable, the cardholder does not need to complete the process steps
that involve these two divisions, but rather goes directly to Resource Management
for funding.
Figure 13 provides the per-site and Army-wide average total transaction times
(in minutes). The credit card processing times among the sites range from 1.55 hours
to 2.39 hours with an average of 1.96. Processing times using purchase orders range
from 5.43 to 8.34. The processing times for Ft. Lewis are higher than those recorded
for the other four sites. For example, cardholders at Ft. Lewis must compete all
transactions in excess of $1,000. While competitive quotes are generally obtained
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telephonically using the credit card method, the DOC solicits written competitive
quotes prior to issuing a purchase order. This increases the processing time and
associated transaction costs at the Ft. Lewis site.
A comparison of the average per transaction costs by grouping for all
observations for the purchase card and credit card methods is presented in Table 19.
TABLE 19
COST-PER-TRANSACTION COMPARISON
ARMY-WIDE AVERAGE
Grouping Purchase Order Credit Card Per-T ransaction
Savings
Customer $35.98 $11.98 67%
Cardholder 0.00 13.49 n/a**
Resource
Management 24.42 6.41 73%
Logistics 28.42 7.15 75%
Contracting 42.98 0.00 n/a**
Subtotal $131.63 $39.03 70%
Accounting 23.46 23.46 0%
Service* Charges
Total $155.09 $62.49 60%
*A standard rate of $23.46 is applied to all transactions to recover costs incurred by
the accounting department.
** Indicates the two groupings in which costs shifted resulting in a 68% cost savings
when using credit card method.
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■ Purchase Orders
■Credit Cards
□Savings
Aberdeen
5.43
1.78
3.65
o\
Belvoir Fi Lewis Ft Meade Ft. Meyer
Average
5.78 8.34 5.7 5.73 6.2
1.72 2.39 2.35 1.55 1.95
4.06 5.95 3.35 4.18 4.25
1 Purchase Orders ■Credit Cards DSavings]
FIGURE 13
PROCESSING TIME—ARMY
(In Hours)
Similar studies were conducted elsewhere. A comparison between the results
of an audit of purchase order and credit card processing times conducted by the
Veteran's Administration Inspector General for Auditing and the Army Audit Agency
is shown in Table 20. The VA examined processing times at four medical centers.
A comparison of the processing times recorded for purchase order and credit card
transactions shows a slight variance from those recorded in the time-motion study
conducted by the Army.
TABLE 20
COMPARISON OF AVERAGE PROCESSING TIMES (IN HOURS),
DEPARTMENT OF THE ARMY AND DEPARTMENT OF
VETERANS AFFAIRS
Department Average P.O.
Processing Time
Average Credit
Card Processing
Time
Savings
Army 6.2 1.95 4.25
VA 5.89 1.86 4.03
Source: VA Audit Project No. 7R3-042.
The differences in recorded average transaction processing times for purchase
orders indicate that average VA processing time is .31 of an hour less than recorded
Army time. However, the difference is even less for credit card processing times,
with the average VA credit card processing time being less than .10 of that recorded
in the Army study. This further suggests that credit card use can bring about
significant efficiencies in processing times. Consistent with the Army study, the VA
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study attributes reduced processing times to streamlining the steps in the process.
For example, in both agencies, the streamlined credit card process eliminates the
processes performed by the contracting function.
The averages presented in both Figure 13 and Table 19 are derived by
averaging the recorded actual processing hours and computed associated costs for
each grouping for the five sites. The difference in each processing activity for the
purchase card and the credit card processes is significant, resulting in cost savings
with credit card usage as great as 74% in one grouping. Also, the costs associated
with the contracting are eliminated as a separate grouping of costs.
The purchase order process requires a substantial amount of processing time
and associated costs for the contracting grouping. The purchase process does not
include cardholder functions; thus, costs associated with the cardholder process do
not apply to the purchase order process. The findings of the time-motion study
suggest that, for the sites observed, the credit card process results in decreased time
and costs. Transaction costs are reduced by 59.6%; processing time is reduced by
approximately two-thirds (Table 21).
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TABLE 21
COMPARISON OF TOTAL AVERAGE TRANSACTION TIMES AND
PROCESSING COSTS: PURCHASE ORDER VS. CREDIT CARD
Process Average Per-
Transaction Time
Associated Per-
Transaction Costs
Purchase Order 6.20 hours $155.09
Credit Card 1.95 hours $ 62.49
Difference 4.25 hours $ 92.60
Observations Regarding the Man Year Assumptions
The Army methodology assumes that a person is available for 2,087 hours per
year. The number of hours that a federal worker is generally available for work can
be computed using the following methodology: 365% x 8 hours/day x (availability of
5/7) = 2,087 hours (to the nearest integer). The amount of time available for each
federal worker must be reduced from 2,087 hours to account for time out due to
illness, holidays and vacation. Time unavailable for work can be computed as
follows:
Holidays: 10 days x 8 hrs./day = 80 hours
Illness: 6l A days x 8 hrs./day = 51 hours
Vacation: 20 days x 8 hrs./day = 160 hours
Total: 291 hours
This reduces the number of hours available for work to 1,796 hours (2,087 -
291).
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Given this more realistic number, costs for purchase order and credit card
transaction methods are increased by a factor of 2,087/1,796 and the difference in
costs and savings increases by the same amount. The differences are shown in
Table 22.
TABLE 22
CLAIMED COST PER TRANSACTION
Purchase Order Credit Card Savings
Army-wide
Average
$155.09 $62.49 $92.60
Correction 2,087/1,796
Corrected Average $180.22 $72.62 $107.60
Additional Observations of the Credit Card Method
Logistics Tasks
Some sites require all requisitions to go through the DOL Supply division for
local purchase determination. Some others do not. The DOL intervention is aimed
at ensuring that an item to be ordered is not currently available in stock in a local
warehouse. To streamline the process, the automated system of warehousing
inventory could be made available to all cardholders. This would eliminate the need
for each cardholder to obtain approval to purchase from the logistics grouping. DOL
also records all purchases of non-expendable (not consumed in use) supplies.
Current government property and control standards set the threshold at $2,500.
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Removing the DOL review and recording of planned micropurchase card
transactions and using an automated cardholder log as a means of obtaining de facto
data on purchases of non-expendable supplies would streamline the system. The
logistics review also ensures that cardholders are not purchasing unique mission
related items such as replacement parts for tanks. An automated inventory and
control system could be made available to cardholders as a means of identifying
items that should not be purchased by cardholders.
Resource Management Tasks
Resource management department provides the funding authorization for
each proposed credit card purchase. Funding authorization must be obtained before
the logistics department screens the proposed credit card purchase. In addition, the
resource management department assigns a resource accounting codes. The control
number assigned by the cardholder could replace this number. Alternatively, “block”
funding and more generic resource codes could be created and utilized to enable the
resource managers to determine transaction expenditures within broad categories.
For example, the establishment of four resource codes would enable resource
managers to isolate transaction data for information technology, supplies
(expendables), services, and equipment (non-expendables).
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Wilcoxon Signed Rank Test for Statistical Significance and Testing Hypothesis
A formal non-parametric procedure known as the Wilcoxon signed-rank test
was employed to draw some reasonable conclusions about the applicability of the
sample data findings to the population. The data used to conduct this test is the data
provided in Figure 13. The data consists of the time-motion study's average times
recorded at each of the Army installations using both the credit card and purchase
order methodologies. The Army conducted no tests of statistical significance relative
to the findings of the time-motion study.
The Wilcoxon signed-rank test uses the sign and the magnitude of the rank of
the differences between pairs of measurement. It tests the formal null hypothesis that
the population distribution of differences is symmetrical about Do (difference).
Additionally, the test is sensitive to the distribution of differences being shifted to the
right of left of Do. This one sided test ranks, in absolute value from lowest to
highest, the non zero differences.
The Wilcoxon non-parametric statistical testing methodology is a useful
means of making statistical inferences when assumptions about the normal
distribution of the population cannot be reasonably made. It is appropriate for use
when testing small samples. The Wilcoxon signed-rank test is a useful alternative
testing method to the t-test. The one sample t-test is used for random samples from
normal populations. The two sample t-test is used for independent random samples
from two normal populations having the same unknown variance (Freund, 1992).
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Because reasonable assumptions regarding the normal distribution and variances for
this data cannot be made, the t-test is not considered an appropriate measure of
statistical inference.
The Wilcoxon signed-rank test was applied in two ways. First, the data for
hours saved using the credit card was statistically examined. Second, a statistical
analysis was conducted based on the percentage of time experienced when using the
purchase card and the credit card methods.
For the first application of the Wilcoxon signed-rank test, the researcher used
mean processing time data collected by the Army Audit Agency to statistically
determine what the upper and lower limits of the mean processing times would be at
a confidence level of 95%. The null hypothesis states that, at the lower limit, the
mean processing time will be 3.86; the alternate hypothesis states that the mean
processing time will be greater than 3.86. At the upper limit, the researcher tested
the null hypothesis for a mean processing time of 5.06 hours; the alternative
hypothesis is a mean processing time less than 5.06 hours.
To conduct the test, differences between mean savings at the five Army sites
and the total mean savings were converted to absolute values and ranked. The result
is that, at a confidence level of 95%, the mean transaction time savings realized from
credit card use is greater than 3.86 hours. And the mean transaction time savings is
less than 5.06 hours at the 95% confidence level.
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For the second application of the Wilcoxon signed-rank test, the researcher
again used the mean processing time data collected by the Army Audit Agency. The
test was used to determine the credit card mean processing time as a percentage of
purchase order mean processing time. The upper and lower limits of the percentage
were tested at a confidence level of 95%. At the lower limit, the null hypothesis
states that the percentage of time spent using the credit card method will be 28% of
purchase order mean processing time; the alternate hypothesis states that the
percentage will be greater than 28%. At the upper limit, the null hypothesis states
28%; the alternate hypothesis states that the percentage will be less than 37%.
To conduct the test, percentage differences between the purchase order and
credit card processing time data were calculated for each of the five Army sites to
determine the percentage difference using each method at each site. The total mean
percentages were then converted to absolute values and ranked. The result is that, at
a confidence level of 95%, the mean percent of time it takes to use the credit card is
greater than 28% of the processing time using the purchase order method. And the
mean percent of time is less than 37% of purchase order transaction processing time.
This represents a significant reduction in the processing time. Issuing
purchase orders is a labor-intensive process as demonstrated by the recorded data
from the time-motion study. Therefore, the concomitant cost associated with
purchasing small value items is also favorably impacted due in part to reduced
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processing times associated with a redistribution of tasks and removal of the
contracting grouping in the credit card model.
Conclusion
The data demonstrates that using the credit card as a means of making micro
purchases is a more efficient process since the transaction processing time is
significantly reduced. However, it appears that more opportunities for further
processing time reductions exist. Furthermore, the emphasis of policy makers and
operational executives appears focused on achieving reduced transaction times. The
monitoring and oversight functions lack a disciplined approach that is critical to a
successful administrative system. This calls into question the overall effectiveness of
the new credit card model. While those interviewed purport that some element of
fraud, waste and abuse will be experienced and can be tolerated, one wonders what
confidence level can be placed in the reported fraud, waste and abuse findings of a
control system that lacks rigor and discipline.
Early research efforts indicate that changes to the administrative systems
within the federal government were driven in great part a public distrust of
government (Nye, 1996). Given that level of distrust, it becomes questionable as to
whether the new “system” of purchasing can tolerate any recorded instances of fraud,
waste and abuse. In fact, the findings of the Inspector’s General note that cases of
fraud, waste and abuse go unreported to avoid the public scandal that would result.
The next chapter will discuss systemic changes that could contribute toward the
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development of a system that includes control mechanisms aimed at effectively
preventing and detecting fraud, waste and abuse.
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CHAPTER V
CONCLUSIONS
Introduction
The primary purpose of this research has to been to examine whether or not
the new paradigm of decentralized purchasing is efficient and effective. The
secondary purpose was to determine, whether a specific model for decentralized
purchasing, used by the Army, should be adopted by other federal organizations. The
Army model was selected for this research project, since it is a mature model that has
been empirically examined through the use of a time-motion study.
Previous chapters have addressed the relevance of this research problem, the
focus of this research project, supporting literature, the research design and
methodology, and research findings. This chapter presents the contributions and
conclusions that can be drawn from the research, the limitations of the study and the
implications for future research.
Contributions
This research examines the first empirical study (conducted by the
Department of the Army) of the efficiency and effectiveness of the decentralized
federal purchasing paradigm. Although some federal government agencies -claim
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with general statements and vaguely supported numbers that better government has
been achieved through reinventing the federal purchasing system, little in the way of
empirical data exists to support such claims. The Army time-motion study is the
only rigorous study to date that examines claims of a purchasing system that is more
efficient. The time-motion study substantiates that the administrative processing
times are: greatly reduced. However, the study pays little attention to other important
characteristics of an effective system that are expected to be inherent in federal
administrative processes.
Limitations
This study will be of interest to federal purchasing organizations that operate
under the guidelines of the Federal Acquisition Regulations. Such organizations
share the constraints of centralized purchasing as well as the opportunity to
streamline purchasing operations by decentralization.
This research focuses on an examination of the data made available through
specialized interviewing and a re-analysis of the time-motion study. The purchasing
process utilized by various federal agencies may vary to some degree; however, the
steps identified in the Army time-motion study are generally representative of the
steps that would occur within any federal purchasing organization, since the majority
of federal agencies must follow the Federal Acquisition Regulations (FAR). The
Army model is a useful model for other federal agencies to adopt, if they are
experiencing administrative purchasing processing times in excess of those
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experienced by the Army. However, the Army’s decentralized credit card system
lacks the systemic controls necessary to deter and detect fraud, waste and abuse. For
example, the system relies to a great extent on an ad hoc review and approval
mechanism. Additionally, no structured approach toward sampling cardholder
transactions is in place. Approving officials are at liberty to review and approve
cardholder transactions as they see fit.
Discussion of Conclusions: Efficiency and Effectiveness
The question that must be asked is whether or not a new purchasing system
that cuts processing time in half can be characterized as an effective system. The
answer is no, certainly not by public standards. It is the contention of the researcher
that the new purchasing system focuses on speed of processing and places too little
emphasis on other measures of effectiveness.
Control Systems
The centralized purchasing system model contains a review and approval
protocol that limits the extent to which improper purchases may be made. The
ultimate control mechanism within the centralized model is the sole authority of the
contracting officer to make a purchase. The Contracting Officer is essentially an
outside party in the sense that he has no personal interest in the purchase.
In the decentralized model, 420,000 credit card holders directly place orders
with a vendor, can directly pick-up items ordered and bear responsibility for the
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reconciliation of their own monthly credit card accounts. The control mechanism
within the decentralized system relies primarily on the review and approval of
designated approving officials, who are responsible for sanctioning transactions
made by assigned groups of credit cardholders. As evidenced by the examples
provided in the research findings, the opportunities to identify misuse of the credit
card are limited by the lack of an effective system’s design.
Cardholders are working in their own best interests as they make purchases
quicker to meet their needs and the needs of their department. Approving officials
are charged with reviewing and approving purchases as an “ad hoc” responsibility.
What is evident from this research study is an emphasis on the “faster” part of the
reinvention theme “faster, better, cheaper.” Better is poorly defined, and cheaper
focuses on the costs associated with administrative processing times, not the cost of
goods and services purchased.
In adopting a decentralized purchasing system, the centralized system’s
design that had been in place was abandoned in favor of a loosely structured system
of control and audit. The system’s design must recognize that, while trustworthy
people do exist, there are others who will abuse the system. Therefore, a disciplined
system’s design must be adopted to deter and detect misuse of the credit card.
Authority, Control and Audit
The three critical components of systems design are authority, control, and
audit. (Burke, Stewart & MacDonald., 2000). Burke defines each as follows:
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Authority: Within a system, authority is a statement of what an individual
may do, within what limits and carries with it the accountability for
exercising proper j udgement in doing it.
Control: The verification that the system is being used, including a sampling
of the decisions of the authorized person and an evaluation of the quality of
the judgement used by the authorized person.
Audit: A check that the system is being used, that the controls are in place
and being used, and that the system is doing what it is intended to do and
functioning effectively.
In the Army model, this systems design places well-defined authority with the
credit card holder. The approving official is the control mechanism, since the
approving official is responsible for reviewing the cardholder’s purchasing log to
determine the extent to which the cardholder has exercised appropriate authority.
The Agency Program Coordinator, who determines that the controls are in place and
being used and that the result is an efficient and effective system, then performs the
audit check.
The existing decentralized purchasing system contains some characteristics of
authority as defined by Burke. What appears lacking is the accountability aspect.
The punishment for misuse of the card varies and as discovered in the interviewing
process, government officials are sometimes hesitant to take appropriate disciplinary
measures for various reasons, including unfavorable publicity and subsequent
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personnel grievance filings. By its own admission, the Army is unable to accurately
assess the level of card misuse. What is most evidently lacking is the control
mechanism that should have been designed into the decentralized purchasing system.
For example, the Veteran’s Administration’s Agency Program Coordinator has stated
that, to her memory, no audits of credit card transactions have ever been conducted
(VA Audit Report 7R3-042, December 3, 1998).
A review of the Army and Veteran’s Policy and Procedures Manual for
Purchase Card Use reveals no mandated or even recommended level of statistical
sampling. The sampling of purchasing transactions is at the sole discretion of an
approving official, whose duties in this regard fall under the “other duties as
assigned” category. Unless control mechanisms are assigned a higher level of
importance, those within the system will act accordingly and place little effort in
developing rigorous control methods. Rather than placing the responsibility for
establishing an individual control mechanism with approving officials, organizations
must develop a control system, train approving officials in its effective use, and hold
them accountable for failure to exercise the control arm of the system. The audit
feature of the system is the means by which the extent of use of the designed control
methods can be validated. Given the lack of a control and audit system there are no
basic mechanisms in place to effectively detect and deter erroneous and unauthorized
transactions.
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It appears that the Army audit agency has taken the lead in performing the
audit function. While it was able to assess efficiency of the decentralized purchasing
system it failed to draw sound conclusions about the effectiveness of the
decentralized purchasing system. This is a result of the inadequacy of the authority
and control features of the system. Thus, while the system may be efficient, it is an
ineffective system by other standards.
The Quality and Cost of Items Purchased
Does the actual cost of the item vary depending upon the method of
purchasing used? And, is there a quality difference? It is the government’s belief
that purchasing commercial items in a market of competitive buyers and sellers
ensures that the quality and cost of items purchased is acceptable. The federal
government has changed from an organization that relied on unique federal
specifications and standards to describe its requirements to one that now emphasizes
the purchase of commercially-available products and services. Given this shift
toward the purchase of commercial items, the presumption is that competitive market
forces will drive the quality and price of commercially available items. While no
empirical data exists that addresses the percentage of credit card sales and number of
transactions that result in commercial purchases, the policy makers interviewed
agreed that virtually all credit card purchases are for commercially available goods
and services,
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The market arrangements between buyers and Sellers will vary depending
upon the items purchased. Buyers often have a preference for a particular item and
may pay more for that item. However, in a competitive marketplace, if sellers set a
price that the market will not bear, the forces of supply and demand are no longer in
their favor. And most sellers are able to adjust their prices; buyers can obtain better
prices. According to Dobler and Burt (1998) prices in the free, competitive segment
of the economy (roughly 70%) are determined primarily by supply and demand.
Cardholders are expected to pay a fair and reasonable price for items
purchased. Market-driven pricing and reliance on the cardholder’s independent
assessment of what constitutes a fair and reasonable price are the two mechanisms in
place.
If we were to assume that the cost of a commercial item remained constant
with either purchasing method, the centralized method could result in a higher
purchase cost, if the administrative burdens associated with processing the purchase
order or placing the credit card order were taken into account.
Decentralized Purchasing and the World Wide Web
The Army intends to capitalize on the advances in electronic commerce and
harness the energy in this area toward creating web based contracts that will be used
by all credit cardholders. The availability of a Web-based “consortium” or
“corporate” contracts can have a positive effect on the quality and pricing aspects of
credit card purchasing. These “mega” contracts will be negotiated with many
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suppliers using a “step-down” pricing mechanism that will result in quantity
discounts to the federal government as a single customer. For example, when sales
for a particular item reach the 500-unit mark (or some other predetermined point),
unit pricing reductions would take effect. Using this pricing methodology allows the
government to leverage its buying power despite its decentralized approach to
buying. Items of poor quality will be deleted from the item list and may be reported
as a negative past performance rating for the supplier in question. Negative past
performance ratings have a serious impact on a supplier’s ability to obtain future
government contracts. However, this approach relies on the cardholders to report
incidences of poor quality and/or late delivery. Expecting such feedback demands
that the means with which feedback is solicited be easy. For example, brief
electronic questionnaires could be provided to cardholders on a weekly basis.
Recommendations
At the present time, there are no efforts underway to strengthen the weakened
control system that exists for decentralized purchasing. However, these consortium
contracts offer a great opportunity to build in control mechanisms that would
strengthen accountability. Table 23 offers some contract provisions that could
involve the supplier in the government’s efforts to deter and detect fraud, waste and
abuse.
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TABLE 23
CONTRACTUAL DETERRENTS TO FRAUD, WASTE AND ABUSE
Type of Problem Contract Remedy
Customer has a suspicious pattern of
ordering.
Notification to AO*
Customer indicates a non-work delivery
address.
Notification to AO
Customer orders items that are
inconsistent with his buying pattern.
Notification to AO
Customer orders “repairable” items as if
they were consumable.
Notification by AO
Customer makes a single purchase of
the same item more than x (some
predetermined parameter) times a
month.
Notification to AO
*AO - Approving Official
These electronic contracts could block pre-defined proposed purchases (such
as jewelry) and send an immediate notification to the cardholder and approving
official on the matter. Thoughtful identification of exceptions to purchases that
might appear candidates for the “no purchase” zone must occur. So, for example, the
Army chaplain would have no difficult purchasing wine and having it delivered to
the base chapel, whereas an electrical engineer would have difficulty making such a
purchase.
As fraud is detected and confirmed, suppliers could share in savings
associated with reported incidents. Additionally, as part of contract management,
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suppliers could provide electronic “snapshots” of purchasing volume, patterns of
purchases by commodity, and volume of purchases by activity or organization.
Under the present system, cardholders maintain logs of purchases. Under a
consortium contract, an electronic reporting system could be built into the system
that would consolidate a buyer’s activities over a stated period of time and permit
each agency to download purchasing activity. This negates the need to rely on the
buyer’s personal log of purchases.
Let the Punishment Fit the Crime
As evidenced in the analysis conducted of the Army fraud, waste and abuse
incidences, there is no pre-determined level of punishment established for credit card
misuse. This has made it difficult for organizations to enforce punishment. This is
further exacerbated by the desire to avoid publicity of such matters. However, the
consequences for misuse should be strong, and they should be publicized within the
organization. Cardholders who misuse their authority should reimburse the
government for improper charges.
The system in place must provide a maximum deterrent to card misuse. The
lack of rigor that exists in the Army model suggests that any data regarding
incidences of misuse would not be useful in terms of capturing the depth and breadth
to which misuse may exist. What remains clear is that the system encourages
efficiency, while giving “lip service” to other important factors. The following
control and audit functions would strengthen the Army model:
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1. Appoint Approving Officials who have the time and will take the time to
review and approve cardholder transactions.
2. Rescind cardholder authority for blatant misuse of the card.
3. Require reimbursement for inappropriate charges.
4. Hold AOs accountable for the actions of their assigned cardholders.
5. Provide appropriate recognition of cardholder and AO duties and
commensurate compensation for a job well done.
6. Establish a corps of reviewers that are charged with the routine
responsibility of statistically sampling cardholder transactions. Reviews
could be structured in various ways. For example:
— Target certain customer organizations during selected periods.
— Conduct a detailed review of random cardholder statements.
— An in-depth review of certain transactions, e.g., software purchases.
— An in-depth review by dollar value, e.g., items over $1,000.
— Place strict limits on what each cardholder can buy and the cumulative
thresholds. Set the thresholds based upon budgeted funds available
and the historical and projected card usage of the individual
cardholders. (Note: While AOs can adjust spending limits and
categories as they see necessary, doing so is currently viewed as a
waste of time.)
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— A combination of the above methods that alternate at random or in
accordance with a pre-determined schedule.
Such a review group would need autonomy with no allegiance to customer
organizations. A reward system that recognized these reviewers for identification of
systemic problems and proposed corrective actions would strengthen the
commitment of the corps and go a long way toward creating a better purchasing
system.
Commercial credit card companies review patterns and costs of purchases as
a routine matter. If government wants to adopt the behaviors of the commercial
credit card customers, practices such as these should be adopted and enforced.
Conclusion
Management control and audit ensures the integrity of any system. The Army
model needs to be designed with a rigorous and disciplined approach. Agencies
adopting the Army model will realize savings in transaction processing times and
concomitant processing costs; however, a modified system must be in place that
includes an appropriate level of control and audit. Cardholders and approving
officials must operate within a well-designed system and be held accountable for
their actions. The level of trust that is ultimately placed in the administrative
processes performed by the federal government will be based upon the actions of
those within the system and the design of the system itself. It is the well-designed
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system that will be characterized not just as an efficient system, but as importantly, ■
as an effective system.
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172
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APPENDICES
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APPENDIX 1
CHESNEY CARTOON: DOING BUSINESS WITH
THE FEDERAL GOVERNMENT, 1952
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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
APPENDIX 2
“CHARLIE BROWN”: DOING BUSINESS WITH
THE FEDERAL GOVERNMENT
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177
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APPENDIX 3
PAPERS OF THE CONTINENTAL CONGRESS,
NO. 29, FOLIO 115
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Journals of the Continental Congress, 1774-1789 Page 1 o f 4
AMERICA*
M E M O R Y
REVIOUS
f
1
Item 1 of 100_________________________________________
Journals Cont. Cong.— TUESDAY, APRIL 14,1778
TUESDAY, APRIL 14,1778
A letter, o f 9, from the Board o f War, enclosing sundry affidavits relative to the flag stopped at
Lancaster, was read:
Ordered, That the same be referred to a committee o f three:
The members chosen, Mr. [William] Duer, Mr. [William Henry] Drayton, and Mr. Jfonathan] B
[ayard] Smith.
The committee to whom were referred sundry letters from General Howe to General Washington,
brought in a report:
Ordered, That it be re-committed to the foregoing committee.
A memorial from the general assembly o f Pensylvania, relative to forts built in the county o f
Westmoreland and provisions laid up there, was read:
[Note t : 1 This memorial, dated April 2, is in the Papers of the Continental Congress. No. 41, VIII, folio
50.]
Ordered, That it be referred to the Board o f War.
Congress resumed the consideration o f the report o f the committee appointed to confer with Mr.
Wadsworth; Whereupon,
Whereas, it is expedient for the service o f the United States, that the Department o f Commissary
General should be so regulated as to______________________________________________________
induce Men o f Integrity and worth to enter into it as to hold out the best prospect o f procuring the
ends of that establishment; it is therefore
Resolved, That the commissary general o f purchases have full power to appoint and remove every
officer in his department:
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Journals o f the Continental Congress, 1774-1789 Page 2 o f 4
[Note 1: 1 This paragraph was rejected, but later restored and agreed to.]
That the commissary general shall, from time to time, as the service may require, visit the armies and
posts o f the United States, and be subject to the orders o f the Commander in Chief:
That the commissary general shall not be obliged to reside at the place where Congress sit, but he
shall there keep an office, to which all general returns in his department shall be made, and which
shall be under the inspection and direction o f the Board o f War; every officer necessary to that office
being daily allowed one ration o f provisions; office rent, fire wood, candles, paper, wax, wafers and
quills, being furnished at the expence o f the United States:
That the commissary gen eral, or his clerk at the office o f general returns, shall receive from the
treasury, by warrant in the usual manner, all sums o f money necessary for the service o f his
department, and shall be entitled to receive one half per cent, on all sums by him paid to the deputy
commissaries general for the public service, who, in their respective districts, shall furnish the
necessary sums o f money to the purchasing commissaries in such districts: each deputy commissary
general shall be entitled to receive one half per cent, upon all sums o f money by him paid to the
purchasing commissaries in his district; and also three rations o f provision when in camp: each
purchasing commissary shall be entitled to receive a commission, not exceeding two per cent, upon
Page 3 4 6 1
all sums o f money by him laid out in the discharge o f his office: and the commissary general and his
deputies shall be allowed forage for their horses, when at any post where there is forage for the service
ofthe United States, and shall have their horses shod at any shop belonging to the United States:
That money for the use o f the commissary general's department, shall be transmitted from the
commissary general's office to the respective deputy commissaries gen eral, and expresses sent on
the necessary business o f that department at the expence o f the United States.
That no person acting in the commissary General's Postponed, department ought, while in that
department, to be liable to militia duty.
That it be recommended to the governments o f the several states to exempt from militia duties all
persons, who are, bona fide, engaged in the commissary general's department:
That the commissary general shall appoint an assistant to reside at head quarters, under the orders of
the Commander in Chief: the assistant shall be entitled to receive a daily pay of five dollars, an
allowance o f rations, two for himself and one for his servant, forage for two horses, which shall be
shod at the expence o f the United States:
That the commissary g en era l, the deputy commissaries gen eral, and the purchasing commissaries
respectively, shall provide teams and drivers for transporting provisions at the expence ofthe United
States, when teams and drivers for such services cannot, in due time, be obtained from the quarter
master general's department:
That the commissary general shall assign to the several purchasing commissaries , their respective
districts for the sphere o f their purchases, out o f which they shall not make any purchase for the
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Journals of the Continental Congress, 1774-1789 Page 3 of 4
United States, nor into which they shall give any encouragement for the bringing any
Page 3 4 7 1
commodities from any other purchasing commissary's district, unless thereto expressly authorized by
the commissary general or deputy commissary general o f the district:
That each purchasing commissary , upon his entrance into office, shall take an oath before some
magistrate, "that he will not directly nor indirectly take any measure, nor cause or countenance any to
be taken, to raise the price o f any articles within the view o f the commissary general's department;
that he will use his best skill and judgment in purchasing, on the most reasonable terms, on account of
the United States, and that he will give to the commissary gen eral, from time to time, the earliest
information o f such frauds and abuses in his department as shall come to his knowledge:" [and the
affidavit so taken shall be returned to the commissary gen eral, and by him lodged in the war office:]
[Note 1: 1 These words were inserted by Henry Laurens.]
That all persons in the commissary general's department shall take bills o f parcels for all the articles
by them respectively purchased, receipts for all the monies by them respectively paid, and receipts for
all articles delivered, to be produced as necessary vouchers at their several settlements:
That the purchasing commissaries shall make monthly returns to the deputy commissaries general o f
their respective districts, o f their purchases and the prices paid, and shall settle their accounts once in
six months:
That the deputy commissaries general shall, once in every two months, make their returns to the
commissary general's office o f general returns, and shall settle their accounts at that office whenever
required to do so by the commissary gen eral:
That every three months the commissary general shall render to Congress an account ofh is receipts
and expenditures, and every nine months a state o f the general
Page 348 ]
returns ofhis department, and such account and state shall be returned at such other times as Congress
shall require:
That any Deputy Comm issary General or Purchasing Commissary transgressing any part o f these
regulations, having by his superior been enabled to comply with them in consequence o f proper
advances o f money, shall for the first offence be removed from office.
That all former regulations o f Congress, relative to the department of the commissary general o f
purchases, which interfere with the foregoing resolutions, be repealed.
[Note 1: 1 This report, in the writing of William Henry Drayton, save the last paragraph, which is in that of
William Duel is in the Papers of the Continental Congress, No. 29, folio 111. it is endorsed: "Read 3d
April. Debated on commission, and postponed till Committee from camp arrives in Congress."]
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Journals o f the Continental Congress, 1774-1789 Page 4 of 4
The committee to whom the letter from Governor Henry, o f Virginia, together with a contract made
by him with Mr. Hawkins for the purchase o f cattle, was referred, brought in a report; Whereupon,
Resolved, That Mr. Hawkins proceed to purchase beef, cattle and bacon, agreeably to his contract
with Governor Henry; and that Mr. Aylett, present deputy commissary general o f purchases, be
desired to continue to execute the remaining duties ofh is office, until Colonel Wadsworth,
commissary gen eral, shall give further orders with respect to that department. That Mr. Wadsworth
be directed to transmit money to Governor Henry, o f Virginia, to enable Mr. Hawkins to go on with
his purchases.
[Note 2: 2 To this point the report in the writing o f Francis Lightfoot Lee, is in the Papers of the
Continental Congress, No. 29, folio 115.]
The committee to whom was referred the letter o f the 10th, from General Washington, brought in a
report, which was taken into consideration; after debate,
Ordered, That the farther consideration thereof be postponed till to morrow.
[Note 3: 3 It was postponed on the request o f Pennsylvania.]
Adjourned to 9 o'Clock to Morrow.
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APPENDIX 4
FEDERAL ACQUISITION REGULATIONS SUBPARTS
1.603 (AUTHORITY) AND 13.2 (MICRO PURCHASES)
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Excerpts Regarding Micro Purchase Authority from the
Federal Acquisition Regulations in Effect September 30, 1996
Part 1
1.603-3 Appointment
(a) Contracting officers shall be appointed in writing on an SF 1402, Certificate of
Appointment, which shall state any limitations on the scope of authority to be
exercised, other than limitations contained in applicable law or regulation.
Appointing officials shall maintain files containing copies of all appointments that
have not been terminated.
(b) Agency heads are encouraged to delegate micro-purchase authority to individuals
who are employees of an executive agency or members of the Armed Forces of the
United States who will be using the supplies or services being purchased. Individuals
delegated this authority are not required to be appointed on an SF 1402, but shall be
appointed in writing in accordance with agency procedures.
Part 13
Subpart 13.2—Actions At or Below the Micro-Purchase Threshold
13.201 General
(a) Agency heads are encouraged to delegate micro-purchase authority (see 1.603-3).
(b) The Government-wide commercial purchase card shall be the preferred method
to purchase and to pay for micro-purchases (see 2.101).
(c) Purchases at or below the micro-purchase threshold may be conducted using any
of the methods described in Subpart 13.3, provided the purchaser is authorized and
trained, pursuant to agency procedures, to use those methods.
(d) Micro-purchases do not require provisions or clauses, except as provided at
32.1110. This paragraph takes precedence over any other FAR requirement to the
contrary, but does not prohibit the use of any clause.
(e) The requirements in Part 8 apply to purchases at or below the micro-purchase
threshold.
184
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13.202 Purchase Guidelines
(a) Solicitation, evaluation of quotations, and award.
(1) To the extent practicable, micro-purchases shall be distributed equitably
among qualified suppliers.
(2) Micro-purchases may be awarded without soliciting competitive
quotations if the contracting officer or individual appointed in accordance
with 1.603-3(b) considers the price to be reasonable.
(3) The administrative cost of verifying the reasonableness of the price for
purchases may more than offset potential savings from detecting instances of
overpricing. Therefore, action to verify price reasonableness need only be
taken if:
(I) The contracting officer or individual appointed in accordance with
1,603-3(b) suspects or has information to indicate that the price may not
be reasonable (e.g., comparison to the previous price paid or personal
knowledge of the supply or service); or
(ii) Purchasing a supply or service for which no comparable pricing
information is readily available (e.g., a supply or service that is not the
same as, or is not similar to, other supplies or services that have recently
been purchased on a competitive basis).
(b) Documentation. If competitive quotations were solicited and award was made to
other than the low quoter, documentation to support the purchase may be limited to
identification of the solicited concerns and an explanation for the award decision.
Source: Federal Acquisition Regulations (1996). Chicago, E L : Commerce
Clearing House.
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APPENDIX 5
EXECUTIVE ORDER 12931, OCTOBER 13,1994
Reproduced with permission ofthe copyright owner. Further reproduction prohibited without permission.
Executive Order 12931
October 13, 1994
Presidential Documents
Federal Register
Vol. 59, No 199
Monday. October 17, 1994
Title 3 -
Executive Order 12931 of October 13,1994
The President
Federal Procurement Reform
By the authority vested in me as President by the Constitution and the laws of the United States of
Am erica, and in order to ensure effective and efficient spending o f public funds through fundam ental
reform s in Government procurement, it is hereby ordered as follows:
Section 1. To make procurement more effective in support of mission accomplishment and consistent
with recommendations of the National Performance Review, heads of executive agencies engaged in
the procurement of supplies and services shall:
(a) Review agency procurement rules, reporting requirements, contractual requirements, certification
procedures, and other administrative procedures over and above those required by statute, and, where
practicable, replace them with guiding principles that encourage and reward innovation;
(b) Review existing and planned agency programs to assure that such programs meet agency mission
needs,
(c) Ensure that procurement organizations focus on measurable results and on increased attention to
understanding and meeting customer needs.
(d) Increase the use of commercially available items where practicable, place more emphasis on past
contractor performance, and promote best value rather than simply low cost in selecting sources for
supplies and services;
(e) Ensure that simplified acquisition procedures are used, to the maximum extent practicable, for
procurements under the simplified acquisition threshold in order to reduce administrative burdens and
more effectively support the accomplishment of agency missions;
(f) Expand the use of the Government purchase card by the agency and take maximum advantage of
the micro-purchase authority provided in the Federal Acquisition Streamlining Act of 1994 by
delegating the authority, to the m axim um extent practicable, to the offices that will be using the
supplies or services to be purchased,
(g) Establish clear lines o f contracting authority and accountability;
(hi Establish career education programs for procurement professionals, including requirements for
187
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Executive Order i 2931
successful completion o f educational requirements or mandatory training for entry level positions and
for promotion to high level positions, in order to ensure a highly qualified procurement work force;
(i) Designate a Procurement Executive with agency-wide responsibility to oversee development of
procurement goals, guidelines, and innovation, measure and evaluate procurement office performance
against stated goals, enhance career development of the procurement work force, and advise the
agency heads whether goals are being achieved; and
G) Review existing and planned information technology acquisitions and contracts to ensure that the
agency receives the best value with regard to price and technology, and consider alternatives in cases
where best value is not being obtained
Sec. 2. The Director to the Office o f Personnel Management, in consultation with the heads of
executive agencies, shall ensure that personnel policies and classification standards meet the needs of
executive agencies for a professional procurement work force.
Sec 3. The Administrator of the Office o f Federal Procurement Policy after consultation with the
Director of the Office o f Management and Budget, shall work jointly with the heads of executive
agencies to provide broad policy guidance and overall leadership necessary to achieve procurement
reform , including, but not limited to:
(a) Coordinating Government-wide efforts;
(b) Assisting executive agencies in streamlining guidance for procurem ent processes;
(c) Identifying desirable Government-wide procurement system criteria; and
(d) Identifying major inconsistencies in law and policies relating to procurement that impose
unnecessary burdens on the private sector and Federal procurement officials, and following
coordination with executive agencies, submitting necessary legislative initiatives to the Office o f
Management and Budget for resolution of such inconsistencies.
THE WHITE HOUSE,
October 13, 1994
(FR Doc 94-25837
Filed 10-13-94; 4:48 pm)
Billing code 3195-01-P
188
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APPENDIX 6
EXCERPT FROM SAMPLE PURCHASE CARD PROCEDURES MANUAL
189
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Excerpt from Sample Purchase Card Procedures Manual
VJi \ ■
The purchase card is to be used to pay for over the counter or telephone purchases
when the supplies or services are immediately available and a single delivery and
payment will be made. It is intended to supplement established simplified
acquisition procedures and is designed to minimize the cost and administrative
burdens and reduce procurement lead-time.
Purchase card use is the preferred method of purchasing items under $2,500. The
Director of Finance will issue a delegation of authority to nominated cardholders.
The delegation will specify the authority being delegated and any limitations of the
authority. The Approving Official (AO) will review the cardholder's monthly
statement and serve as liaison with the bankcard representative. (Note: Visa has been
the service organization since 1997.) The AO should be a supervisor in the
cardholder's operational organization.
Cardholders should be employees of the agency assigned to activities supported by
the Contracting Directorate. Purchases made by cardholders are subject to the
following:
1. Limited to supplies and services being purchased for less than $2,500 that
are within the limits of the delegation of authority.
2. No other person is authorized to use the card, other than the cardholder.
3. Prospective cardholders and cognizant approving officials must receive
four hours of annual training regarding agency policy and procedures for card use.
New cardholders must received training within 60 days of issuance of a card. Annual
training must be completed by cardholders for their authority to remain in effect.
4. Cardholders must attend procurement ethics training at least once yearly as
provided for by the Office of General Counsel.
5. Cardholders may obtain increased authority or other changes to purchase
authority by written request to the Agency Program Coordinator. In no instances
may delegations of authority extend beyond a single purchase threshold of $2,500.
6. The use of the purchase card does not authorize purchases that are not
otherwise authorized by law or regulation.
190
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7. The Office of the Chief Financial Officer will conduct semi-annual
inspections of the purchase card program.
Administrative Procedures
1. Delegations: The senior official in an office nominates prospective
cardholders and cardholder approving officials and submits the nominations to the
cognizant Finance Office.
2. Training: The training requirement for cardholders with a limit up to the
single purchase threshold ($2,500) must be deemed to sufficiently address basic
purchasing concepts. This training may be a standard course or one customized to
address unique needs or characteristics of the purchasing needs of the operational
organization.
3. Standards of Conduct: Cardholders and approving officials must comply
with the agency's published standards of conduct. Employees who knowingly misuse
the purchase card for personal or other unofficial use are subject to administrative
actions, remedies, and penalties including dismissal, civil and criminal prosecution.
4. Responsibilities of the Cardholders:
a. Use the purchase card only for official authorized purchases.
b. Report lost or stolen cards promptly to their approving official.
c. Complete training requirements.
d. Stay within their assigned purchase limit.
e. Maintain a purchase card ordering log for all transactions made.
f. Provide all required data when filling out the purchase card application
form.
g. Call the Visa Bancard Center for assistance if the purchase card is
rejected while making a purchase.
h. Always request a sales tax exemption.
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I. Never use the purchase card to establish personal credit,
j. Keep the purchase card in a safe place.
Ordering and Receiving Procedures
Ordering Procedures
Cardholders are authorized to charge purchases in person, by telephone, mail,
Internet, or facsimile. When placing an order, the cardholder shall do the following:
1. Record all transactions in a purchase card-ordering log. The log will help
the cardholder keep track of purchases, deliveries, and expenditures. The log will
also assist in reconciling the statement of account required by Deputy Chief Financial
Officer (DCFO) to reconcile monthly charges.
2. Ensure that the merchant provides total charges, including shipping and
handling costs, if applicable.
3. Notify the merchant that the purchase is tax exempt from state and local
sales tax.
4. Request that the merchant include a packing slip if the order is shipped.
5. Request that the shipping label include the cardholder's name, office,
billing address and office telephone number. The purchase card account number
must not be included on the shipping label.
Receiving Procedures
Upon receipt of items ordered, cardholders shall do the following:
1. For partial deliveries where the full amount appears on the "Statement of
Account," the cardholder should only authorize payment for part of the shipment
actually received and should note that a partial delivery has been received.
2. The cardholder must contact the merchant to determine status on the
remaining part of the order and must follow-up as necessary until full shipment has
been received. If a dispute between the cardholder and merchant ensues regarding
partial shipments, the cardholder must contact the VisaBancard Center and submit a
Statement of Questioned Account.
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3. If delivery of the remaining items will take more than thirty days, the
cardholder should ask the merchant to credit the account accordingly. Failure to
issue a credit should be reported to the Visa Bancard Center using the Statement of
Questioned Account.
4. Cardholders should promptly return any damaged or unacceptable
supplies. If the merchant agrees to replace the item and the new item is acceptable,
the cardholder should authorize payment on the Statement of Account. If the charge
was previously billed and the new item is acceptable with no change in price, the
cardholder should immediately notify the Visa Bancard Center to make payment.
5. If a merchant refuses to replace an item, the cardholders should obtain a
credit voucher from the merchant. If the merchant is unwilling to issue a credit
voucher, the cardholder note that the item was returned on the Statement of Account
and submit a Statement of Questioned Account to the Visa Bancard Center within 45
days of the invoice.
Billing and Payment of Purchase Card Transactions
1. A Statement of Account is sent to the individual cardholder. This
statement lists all purchases made in the previous thirty-day billing cycle. A Master
Account Summary Report is sent to the approving official. This summary report lists
the billing cycle purchases of each official's assigned cardholders. The Visa Bancard
Center also provides a copy to the DCFO. The DCFO should reconcile this
statement with each cardholder's statement. The DCFO then initiates payment to the
Visa Bancard Center.
2. The billing cycle date is established as the 27th of each month. If a
Statement of Account has not been received within ten working days after the close
of the billing cycle date, the cardholder must contact the Visa Bancard Center for a
replacement statement.
3. Purchase card transactions are subject to the Prompt Payment Act.
Cardholders must ensure that certified and verifiable statements are promptly
submitted to the finance office in order to avoid any late penalty fees. If a cardholder
will be absent during the reconciliation period, the approving official is responsible
for reconciliation and forwarding of a statement to the DCFO.
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4. In reconciling the account, cardholders must:
a. Review all information for accuracy.
b. Describe each item listed on the description line in sufficient detail to
recognize items.
c. Verify that the accounting code at the top of the statement is correct.
d. Attach copies of sales slips or shipping receipts to the statement.
e. If sales slips or shipping receipts are not available, attach a copy of the
cardholder's Purchase Card Order Log.
f. Sign the statement certifying that the information is accurate.
g. Forward the statement and all attachments to the AO within five days of
receipt.
h. Keep copies of all documents.
I. Maintain purchase card records for 24 months after the end of the fiscal
year in which the transaction occurred.
Source: USD A Graduate School course materials, Purchase Card Training,
1999.
194
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APPENDIX 7
COST BENEFIT ANALYSIS
SMALL PURCHASES—PURCHASE ORDER
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
COST BENEFIT ANALYSIS SMALL PURCHASES—PURCHASE ORDER
A
A-1
A-2
A-3
A-4
A-5
A-6
A-7
A-8
A-9
A-10
A-11
A-12
B
B-1
B-2
B-3
C
C-1
C-2
C-3
C-4
C-5
C-6
C-7
FORT BELVOtR
SITES: #1 #2 m #4
DOL DOC DPW DPW
A.CUSTOMER
Determine purchase need/fServtce) 1 2 2 2
Prepares a requisition request. TOP PART (3953) 5 10 10 20
Determine stock number, vendor, and price/reservation 15 20 10 10
Get DA Form 3953 signed
Delivers request to proerty book office (hand carry) 15 30
Receives order from DOL, signs for order 10 10
Verifies order for completeness/DD form 250 5 4 10
Contacts DOL for any discrepancies in the order 20 15 15
DPW has Post driver make deliveries
Complete Miscellaneous Shipping and Handling
Receives order from DOC 15 15
Contacts DOC for Discrepancies/signs DD Form 250 10
TOTAL CUSTOMER TIME (in minutes) 71 61 77 72
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING CUSTOMER GS-6 GS-12 GM-13 GM-13
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE $36,455.97 $88,147.45 $76,835 02 $76,835.02
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $17.47 $31.69 $36.82 $36.82
HOURLY WAGE DIVIDED BY 60 FOR MINUTE $0.29 $0.53 $0.61 $0.61
COST FOR CUSTOMER TIME IN MINUTES $20.67 $32.22 $47.25 $44.18
B. PROPERTY BOOK OFFICE
Edits, verifies and assigns document number to req 30 30 30 30
Delivers request to the Budget Office, prepared transmittal letter 3 3 3 3
Files copy 3 3 3 3
TOTAL PROPERTY BOOK TIM E (in minutes) . 36 36 36 36
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING PROPERTY GS-11 GS-11 GS-11 GS-11
LOADING SALARY UFE/HEALTH/RETIREMENT/LEAVE $54,635.84 $54,636.84 $54,636.84 $54,636.84
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $26.18 $26.18 $26.18 $26.18
HOURLY WAGE DIVIDED BY 60 FOR MINUTE $0.44 $0.44 $0.44 $0.44
COST FOR PROPERTY BOOK TIME IN MINUTES $15.71 $15.71 $15.71 $15.71
C. BUDGET OFFICE
Check the customer's funds 10 10 5 5
Researches funds availability/obligations
Stamp requisition request approved/research 30 30
Delivers request to DOL/DOC 3 3 10 10
Purchase order sent to Budget for obligation 5 5
Enters purchase order Into system 3 3
Verifies the APC
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C-8 Files copy
3 3
C-9 Researches purchase orders still open
30 30
C-10 Calls and looks up
TOTAL BUDGET TIM (in minutes) 54 54 45 45
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING BUDGET GS-11 GS-11 GS-11 GS-11
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE $54,636.84 $54,636.84 $54,636.84 $54,636.84
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $26.18 $26.18 $26.18 $26.18
HOURLY WAGE DIVIDED BY SO FOR MINUTE $0.44 $0.44 $0.44 $0.44
COST FOR BUDGET TIME IN MINUTES $23.56 $23.56 $19.63 $19.63
D D. DIRECTOR OF LOGISTICS (DOL) INITIAL UP FRONT TIME
D-1 Researcher/editor checks the stock number, supply source, and price 15 15
D-2 Record Requisition request in SAILS
D-3 Receives checkover from Accountable Officer 10 to
CM Requisition request Is entered into system 5 5
D-5 Delivers request to DOC 5 5
D-6 Check document number, ADC, authorization signature
TOTAL DOL TIME (in minutes) 35 35 0 0
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING LOGISTICS GS-6 GS-6
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE $36,455.97 $36,455.97
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $17.47 $17.47
HOURLY WAGE DIVIDED BY 80 FOR MINUTE $0.29 $0.29 $0.00 $0.00
COST FOR DOL TIME IN MINUTES $10.19 $10.19 $0.00 $0.00
E E. DIRECTOR OF CONTRACTING (DOC)
E-1 Verifies supply source and enters request into system 15 15 15 15
E-2 Prepares purchase order 10 10 10 10
E-3 Enters purchase order into system from vendor quote 5 5 5 5
E-4 Customer/Official reviews purchase order/Requisition 5 5 5 5
E-5 Contracting officer reviews and signs purchase order 2 2 2 2
E-6 Contacts vendor and places order 20 20 20 20
E-7 Sends copy of purchase order to DFAS 3 3 3 3
E-8 Sends copy of purchase order to vendor 3 3 3 3
E-9 Sends 2/3 copies of purchase order to receiving 3 3
E-10 Setup file and file copy of purchase order 10 10 10 10
E-11 Review of Required Source
E-12 Document Solicitation of offer
E-13 Files copy of signed receiving report and purchase order when 5 5 5 5
delivery is complete
E-14 Prepare modes for purchase order/issue purchase 30 30 25 25
E-15 Receives and Verifies Order/Closeout 15 15
E-16 Disputes Notify Vendor of Discrepancies 20 20
TOTAL DOC TIME (in minutes) 111 111 138 138
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING CONTRACTING GS-12 GS-12 GS-12 GS-12
LOADING SALARY UFE/HEALTH/RET1REMENT/LEAVE $66,147.45 $66,147.45 $66,147.45 $66,147.45
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $31.69 $31.69 $31.69 $31.69
HOURLY WAGE DIVIDED BY 60 FOR MINUTE $0.63 $0.53 $0.53 $0.53
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COST FOR DOC TIM E IN M INUTES
$58.84 $58.64 $72.80 $72.80
F F. DIRECTOR OF LOGISTICS/END TIME/RECEIVING
F-1 Checks status ol order in SACCONS system
5 5
F-2 Pulls Purchase order from He and matches purchase order
number to invoice
3 3
F-3 Receives and verifies each line Item against purchase order and
delivery receipt or invoice
10 10
F-4 Signs receiving report and purchase order
3 3
F-5 Supply technician pulls copy of purchase from file, assigns
document number, fills out receiving report and files copies
25 25
F-6 Sends copy of signed receiving report and PO to D 3 3
F-7 Sends copy of signed receiving report and PO to D 3 3
F-8 Contacts customer for pickup and delivery 15 15
F-9 Customer signs receipt document checks customer's signature
and is given a copy
5 5
F-10 Logs receipt into SAILS to closeout 3 3
F-11 Flea signed receiving report, purchase order and invoice 2 2
F-12 Notifies vendor of discrepancies from customers 20 20
TOTAL DOL TIME (in minutes) 97 97 0 0
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING RECEIVING
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE
DIVIDED BY 2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE
GS-6
$36,455.97
$17.47
$0.29
GS-5 STEP 5
$32,644.07
$15.64
$026 $0.00 $0.00
COST FOR DOL/RECEIVING TIME IN MINUTES $28.24 $25.29 $0.00 $0.00
TOTAL COST
TOTAL MINUTES
TOTAL PERSONNEL PROCESSING IN HOURS
$157.01
404
6.73
$165.61
394
6.57
$155.49
296
4.93
$152.42
291
4.85
Average Cost
Average Time
Hours Averaged
$157.63
346.25
5.77
SOURCE: Army Audit Report, 1898
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APPENDIX 8
COST BENEFIT ANALYSIS
SMALL PURCHASES—CREDIT CARD
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
COST BENEFIT ANALYSIS SMALL PURCHASES-CREDIT CARD
FORT BELVOIR
OBSERVATIONS tin m inutes)
SITES: #1 #2 #3
DOL DPW DOC
A A. CUSTOMER/USER
A-1 Determine supply item needed 5 1 1
A-2 Determine vendor and price 20 2
A-3 Prepare written request 1 1 1
A-4 Log request into Document Request
A-5 Lookup item in IFSM-Supply
A-6 Prepare Written request DA form 3953
A-7 Get purchase approval signature 1 1 1
A-8 Hand carry to budget for fund cite
A-9 Receives checkover by Management 1
A-10 G et control item authorized 2
A-11 Deliver request to cardhold/handcsrry 2 1
A-12 Hand carry to DOL for document number
A-13 Enter request in Form Flow automated system
A-14 Call vendor to ok deliver
A-15 Make 2/3 copies of shipping document or invoice
A-16 Hand carry 2 copies shipping document or invoice to DRM and 1 to DOL
A-17 Attach copy of shipping document or invoice to DA form 3953 and file
A-18 File 128 in "Pending File"
A-19 Sign PDW Form 128-E when item arrives
A-20 Inventory contents of shipm ent/dose out in system on receipt
A-21 File 128 in "Received File"
A-22 Sends copy of delivery receipt to Property Book/DPW
A-23 Property Book-OK
TOTAL CUSTOMER TIME (in minutes) 12 24 5
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING CUSTOMER GS-5 GS-11 GS-12
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE $32,644.07 $54,636.84 $66,147.45
DIVIDED BY 2087 HOURS IN ONE FTE YEAR $15.64 $26.18 $31.69
HOURLY WAGE DIVIDED BY 80 FOR MINUTE $0.26 $0.44 $0.53
COST FOR CUSTOMER TIM E IN MINUTES $3.13 $10.47 $2.64
B B. CARDHOLDER
B-1 Verifies Requisition to cardholder 5 5 1
B-2 Receives checkover from DOL
B-3 Prepares purchase request
B-4 Logs requisition/request/xfr doc # onto request/coordinate book 15 1
B-6 Obtains quote control number (assign buyer)
B-6 Print a list of requested items
B-7 Obtains approval charge items/Verify DOIM Update Procom 5
B-8 Obtains BPA call record for each line item/Makes copies
B-S Assign a call number to request
B-10 Log call number in IFMS System/enter in AMCISS
2 0 0
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B-11 Print a BPA Call Record/distribute copies of request
B-12 Make a copy of BPA call record for each line Rem/Make copies
B-13 Obtains check by property book officer
B-14 Sends copy of delivery receipt to Properly Book
B-15 Contacts supply source, m akes order and purchases item(s) by credit card
B-16 Send list to vendor for price quote to call in order to vendor/fox to vendor
B-17 Receives and verifies order/complete S T E 1142 copy and forward
B-16 Resolves inaccuracies with supply source/discrepancies
B-19 If can't resolve contact Rocky Mountain Bankcard for help
B-20 Files delivery receipts in monthly folder/make folder/all filing
B-21 Receives and reconciles Statem ent of Account (SOA) average is 7-12 items
so if took 30 minutes
B-22 Prepares Statement of Questioned items report for line item that had errors
8-23 Signs reconciled SOA and Questioned Items report/sends all documents to
approving official
B-24 Prints Material Receipt and Acceptance Report
B-25 Reconcile acceptance reports to packing slips
B-26 Make copies of ail receiving report, packing slip and 12SE/AMC 2110 for
each line item
8-27 Makes copies of all receiving reports and sends to DFAS
B-28 File payment voucher once received from DFAS
B-29 Sign the request/signatures to m approving authorities
B-30 Type DD Form 250 (Receiving Report)
B-31 Verity entry w as correctly posted
B-32 initial and Date 3161 and send to hand receipt manager
B-33 File 3161 in hand receipt folder
B-34 Prepares 2 forms identifying the purchase
B-35 Make copies of SOA and two forms
B-36 Hand carry request to DOL one stop for review
B-37 File copy of invoice signed by customer if expendable
8-38 Prepare transmittal record
15
2
5
1
3
TOTAL PROPERTY BOOK T IM I (in minutes)
PERSONNEL COSTING
37 51 14
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY UFE/HEALTH/RETtREMENT/LEAVE
DIVIDED BY2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE
GS-7 GS-8 GS-12
$39,879.39 $44,428.23 $66,147.45
$19.11
$0.32
$21.29
$0.35
$31.69
$0.53
COST FOR CARDHOLDER TIME IN MINUTES $11.78 $18.09 $7.40
C. APPROVING OFFICIAL (R esource Mngt)
C-1 Finance Verifies
C-2 Verifies reconciliation try the cardholder and signs SOA and Statement of
Questioned Items Report use average for one item
C-3 Sends copies of SOA and Questioned items report to appropriate places
C-4 Review by Supervisor/Finance overvlevwdo ail packages have a signature, etc
5
10
TOTAL APPROVING OFFICIAL TIME
PERSONNEL COSTING
(in minutes) 17 10
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY UFE/HEALTH/RETIREMENT/LEAVE
GS-12 GS-13 GS-14
$06,147.45 $78,844.98 $93,550.40
2 0 1
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DIVIDED BY 2087 HOURS IN ONE FTE YEAR
$31.69 $37.78 $44.83
HOURLY WAGE DIVIDED BY 60 FOR MINUTE
$0.53 $0.63 $0.75
COST FOR APPROVING OFFICIAL TIM E IN MINUTES
$8-98 $6.30 $1.49
D D. DIRECTOR OF LOGISTICS (DOL)
D-1 Verities Requisition to cardholder
5 5
D-2 Receives checkover from DOL
D-3 Prepares purchase request
D-4 Logs requisition
15
D-5 Obtains quote control number (assign buyer)
0-6 Print a list of requested items
0-7 Obtains approval to charge items by xxx
5
D-8 Obtains BPA call record number
D-9 Assign a call number to request
D-10 Log call number in IFMS System
D-11 Print a BPA Call Record
0-12 Make a copy of BPA call record for each line item
D-13 Obtain check by property book officer
0-14 Sends copy of delivery receipt to Property Book
0-15 Contacts supply source, m akes order and purchases item(s) by credit card
D-16 Send list to vendor for price quote to call order Into vendor
D-17 Receives and verifies order
0-18 Resolves inaccuracies with supply source/discrepancies
D-19 If c a n t resolve contact Rocky Mountain Bankcard for help
D-20 Files delivery receipts in monthly folder
D-21 Receives and reconciles SOA
D-22 Prepares Statem ent of Questioned Items report for line item that had errors
D-23 Signs reconciled SOA and Questioned Items report/sends all documents to
approving official
D-24 Prints Material Receipt and Acceptance Report
D-25 Reconcile acceptance reports to packing slips
D-26 Make copies of all receiving report, packing slip and 128E/AMC 2110 for
each line item
D-27 Makes copies of all receiving reports and sends to DFAS
D-28 File payment voucher once reoeived from DFAS
D-29 Sign the request/signatures from approving authorities
0-30 Type DD Form 250 (Receiving Report)
0-31 Verify entry w as correctly posted
D-32 Initial and Date 3161 and send to hand receipt m anager
D-33 File 3161 in hand receipt folder
D-34 Prepares 2 forms identifying the purchase
0-35 Make copies of SOA and two forms
D-36 Hand carry request to DOL one stop for review
D-37 File copy of invoice signed by customer tf expendable
D-38 Prepare transmittal record
15
TOTAL DOL TIME (in minutes)
PERSONNEL COSTING
37 51
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE
DIVIDED BY 2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE
GS-7
$39,879.39
$19.11
$0.32
GS-7
$39,879.39
$19.11
$0.32 $0.00
COST FOR DOL TIME IN MINUTES $11.78 $16.24 $0.00
2 0 2
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
DO DD. DIRECTOR OF LOGISTICS (DOL)
DD-39 Performs checkover of supply source choice and assigns a control number.
DO-2 Review DA Form 3953 for completeness
DD-3 After purchase, enters Items Into SAILS
15 15 15
TOTAL DOL TIME (m minutes) 15 15 15
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE
DIVIDED BY 2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE
GS-7
$39,879.39
$19.11
$0.32
GS-7
$39,879.39
$19.11
$0.32
GS-7
$39.879 39
$1911
$0 32
COST FOR DOL TIME IN MINUTES $4.78 $4.78 $4.70
E E. BUDGET (DRM)
E-1
E-2
Assign Accounting Classification and Document Number, enters into system
Sends original to DFAS
3
1
TOTAL BUDGET TIM E (in minutes) 0 0 4
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE
DIVIDED BY 2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE $0.00 $0.00
GS-12
$66,147.45
$31.69
$0.53
COST FOR BUDGET TIME IN MINUTES $0.00 $0.00 $2.11
F F. RECEIVING
F-1
P-2
Log call number in IFMS Supply system which generating aDPW Form 128-E
Notify customer that their order is in
TOTAL RECEIVING TIME (in minutes) 0 0 0
PERSONNEL COSTING
GRADE OF PERSONNEL PROCESSING PROPERTY
LOADING SALARY LIFE/HEALTH/RETIREMENT/LEAVE
DIVIDED BY 2087 HOURS IN ONE FTE YEAR
HOURLY WAGE DIVIDED BY 60 FOR MINUTE $0 00 $0.00 $0.00
COST FOR RECEIVING TIME IN MINUTES $0.00 $0.00 $0.00
TOTAL COST
TOTAL MINUTES
TOTAL PERSONNEL PROCESSING IN HOURS
$40.45
118.00
1.97
$55.88
151.00
2.52
$18.42
4 0 0 0
0 6 7
SOURCE Army Audit Report, 1996
203
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.

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Asset Metadata

Creator Wright, Elisabeth (author)

Core Title Decentralized purchasing: A study of its efficiency and effectiveness

Degree Doctor of Public Administration

Degree Program Public Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag OAI-PMH Harvest,Political Science, public administration

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-117557

Unique identifier UC11338371

Identifier 3027803.pdf (filename),usctheses-c16-117557 (legacy record id)

Legacy Identifier 3027803.pdf

Dmrecord 117557

Document Type Dissertation

Rights Wright, Elisabeth

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA