The City of Palo Alto is re-examining its purchasing policies and switching office-supply providers after a critical audit found that the city could have saved close to $350,000 if it had better contract management.
The audit, which was performed by the Office of the City Auditor and released last week, focuses on the city's contract with OfficeMax. It determined that the city was overcharged for some items, failed to take advantage of discounts on others and has major weaknesses in its procurement process, including loosely defined positions among the purchasing staff.
The audit, which the City Council's Policy and Services Committee discussed Tuesday night, also found that OfficeMax had overcharged the city at least $47,563 by applying "unauthorized changes to pricing" and that the city could have received discounts totaling between $148,921 and $341,864 on non-contract items if it had received the type of discounts that the office-supply chain touted as part of its America Saves program for large customers. This particularly pertained to "non-contract items" on which the city received an average discount of 40 percent, far short of the 85 percent discount touted in the program's contract.
"We found there was an overall decline in the discount rate on office supplies for the city and that the city was purchasing increasingly non-contract items that were discounted much less," said Houman Boussina, senior performance auditor.
In discussing the audit, staff from the Administrative Services Department (ASD) outlined the reforms the department is pursuing in response to the report's recommendations. Lalo Perez, who as the city's chief financial officer serves as the department's director, wrote in a response to the audit that ASD "has worked to implement improvements to the overall procurement process to provide better-coordinated service to departments." This includes creating clear definitions for the roles and responsibilities in the city's purchasing operation, developing a process for highlighting contracts that are due to expire and working with the City Attorney's Office on a reimbursement from OfficeMax.
The City is also switching to Staples after a bid process that began in 2011, before the audit was conducted, said David Ramberg, assistant director of ASD.
"We did identify that the office supply agreement we have in place was due for scrutiny and due for a competitive process," Ramberg said. "We were delayed in getting that kicked off but we did get it kicked off in 2011."
Perez noted in his response to the audit that the city would pay more attention on discounts in the new contract.
"Using tools offered by the new contract, ASD will monitor and ensure that discounts and incentives offered are realized," Perez wrote.
One major reason for the flaws in the procurement operation is the turnover and staff reductions in the purchasing operation. Since 2005, the purchasing division went from 10 to nine full-time employees and the accounting division lost three full-time positions. Perez said that the department has seen a 13 percent overall reduction in staff, while the work didn't go away.
The council committee asked staff to consider whether adding a position would lead to savings.
"The lessons I get from this are worrisome," Councilman Larry Klein said. "The Finance Committee should be spending some time in January and February to focus on whether we have a sufficient number of people."
Perez said he believed the position would pay for itself. He recommended hiring part-time or seasonal help to assist with procurement.
"There are plenty of examples where our organization has significantly (saved) -- I'm talking about millions in savings," Perez said. "We're a large organization and we'll have areas for improvement and this is one that merits review and discussion.
"Frankly, we don't want to add permanent staff (that's) fully benefited. That's our challenge."