By Robert Cohen
Should the Postal Service pursue a last mile strategy? A strategy that emphasizes delivery and deemphasizes the retail, processing, and transportation functions which are outsourced explicitly or through pricing incentives.
In some ways, the Postal Service is already pursuing a last mile strategy. Historically, the Postal Service has generally set worksharing discounts based on cost avoided. In other words, the discount is set at the amount of money the Postal Service saves if it doesn’t do the activity itself. If a presorter can sort the mail more efficiently than the Postal Service, it will choose to do so. This is good for society as a whole because it provides the lowest overall cost for end-to-end mail service. It also means that the Postal Service receives the same profit per piece whether it is workshared or not. The profit from the 80 percent of the mail that is workshared comes from delivery.
A last mile strategy would mean that the Postal Service should extend worksharing to provide discounts for dropshipping bulk First-Class Mail. This would benefit many bulk First-Class mailers because the printing of their mail could be distributed around the country eliminating mail processing and transportation costs and delays. It would provide a greater incentive for First-Class mailers to use the delivery system, and research has shown that new worksharing discounts are highly stimulative to new volume. (See “The Effects of Worksharing and Other Events on U.S. Postal Volumes and Revenues” by Edward S. Pearsall available at www.prc.gov.) The introduction of dropship discounts in Standard Mail was associated with a large expansion of Standard Mail volume.
The strategy would also imply that the Postal Service should move towards 100 percent passthrough for all its worksharing discounts and thereby reduce upstream costs to the mailers. Again, this would maximize the incentive to use the delivery network. In some cases discounts are not set at 100 percent of avoided cost because these discounts are not defined well and and they lead to anomalous results (e.g. Standard mail dropship discounts). The Postal Accountability and Enhancement Act of 2006 may have given the Postal Service the opportunity to adjust worksharing discounts so that they are less than avoided cost. Setting discounts that are smaller than avoided cost adds a small additional amounts of institutional cost contribution relative to the large amount included in the implicit price for delivery. It is, however, inconsistent with a last mile strategy because it increases upstream prices.
Looking at the Postal Service more broadly, the strategy would encourage contracting out upstream activities that can be done at a lower cost than in-house. It may be that savings and service improvements could be generated by contracting out significant portions of the ground transportation network in a way similar to the FedEx air transportation contract. There are presorters in almost every large city that would be prepared to sort single piece and bulk letter mail. This would be most attractive in cities where the Postal Service’s processing productivity is comparatively low. Retail also deserves attention because much of this function could be contracted out. Selling some retail facilities and then contracting for retail services from the new owners could allow the full utilization of their commercial potential.
Worksharing began as presorting in the 1970s and was a significant move in the direction of a last mile strategy because it allowed the bypass of some upstream activities. Over the years worksharing has been further developed so that it now encompasses almost all upstream activities. The result has made mail service in the United States a collaboration between the Postal Service, mailers, and third party providers. A rate structure was created around worksharing that put virtually all the institutional cost contribution of workshared mail in the implicit charge for the delivery function and the one thing the Postal Service reserves to itself is the delivery of mail to the mailbox. An explicit last mile strategy would simply be a continuation of the successful outsourcing strategy that began over thirty years ago.
An unabridged treatment of this topic is available here.
Mr. Cohen was the manager of the Mail Classification Research Division at the U.S. Postal Service from 1974 to 1978 when he joined the Postal Rate Commission, now known as the Postal Regulatory Commission. In 1979 he was named the director of the Commission’s Office of Rates, Analysis and Planning. He retired from that position in 2005 and has been an independent consultant since then.
DISCLAIMER: The views expressed in this post are solely those of Mr. Cohen and do not necessarily represent the views of the United States Postal Service or the Office of Inspector General. The U.S. Postal Service Office of Inspector General cannot guarantee the source, originality, accuracy, completeness, or reliability of any statement, data, finding, or opinion presented by this guest blogger.