The Postal Service Network of the Future
The Postal Service has proposed to reduce its network of post offices by more than 3,200 and consolidate over 250 mail processing locations. The goal is to optimize Post Office locations and streamline the processing network to better align with mail volumes that have declined more than 20 percent over the past five years. The Postal Service’s infrastructure was built to handle a mail volume of over 213 billion pieces. It is driven by a Congressional mandate for 6-day delivery to every delivery point, First-Class Mail® overnight delivery service standards in local areas, and a Post Office network viewed as a community infrastructure.
The Postal Service estimates that streamlining/optimization would generate over $3 billion in annual savings to help reduce the losses that topped $5.0 billion in 2011. Much of the projected optimization savings is associated with reducing the size of the workforce as approximately 80 percent of the Postal Service’s costs are employee related. The Postal Service is subject to collective bargaining and must follow its union agreements in any downsizing effort. More than 480,000 members of the workforce are covered by union contracts with binding arbitration frequently used to settle contract negotiations. In certain cases, these contracts have no layoff provisions and the ability to cross craft employees from one function to another is limited.
Many community leaders especially from small towns and rural areas have voiced significant concerns about elimination of needed postal services in their neighborhoods. Others have raised concerns regarding downsizing of needed jobs in the midst of an economic downturn. However, it is difficult for the Postal Service to justify a network built for mail volumes that are significantly higher than the current volumes being processed. It is also difficult to envision a future scenario in which mail volumes approach the numbers needed to support the infrastructure that is in place. Finally, in the digital age, the services needed by communities are evolving and the infrastructure for the 21st century may need to change to meet those needs.
We would like to hear from you on what an optimized Postal Service infrastructure looks like in the 21st century and beyond?
For this week’s topic, we’ve also asked the following guest commentators to discuss this topic over the next three days:
- Cliff Guffey, President, American Postal Workers Union, on Tuesday, March 13.
- Alan Robinson, President, Direct Communications Group, on Wednesday, March 14.
- John Callan, Director, Ursa Major Associates, LLC, on Thursday, March 15.
We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, March 16, OIG will summarize and conclude the discussion on this important topic.
Our Guest Bloggers
|Cliff Guffey||Alan Robinson||John Callan|
Cliff Guffey is President of the American Postal Workers Union, which represents 220,000 employees in the clerk, maintenance and motor vehicle crafts.
Alan Robinson is the President of the Direct Communications Group. He has thirty years of experience helping firms and government officials deal with the regulatory, policy, marketing, and management issues associated with changes in competition within transportation, parcel delivery and postal markets. His thoughts on the challenges facing the Postal Service can be found at the Courier Express and Postal Observer.
John Callan is Managing Director of strategy consultancy Ursa Major Associates, LLC, focusing on the growth opportunities and transformational challenges in the postal-parcel-logistics space. He is also the founder of The PostalVision 2020 Initiative designed to envision the American postal ecosystem of the future.
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Guest Blogger Cliff Guffey, President, APWU – March 13, 2012
The Postal Service’s infrastructure should serve its mission: to bind the nation together through the personal, educational, literary, and business correspondence of the people; to provide prompt, reliable, and efficient service to patrons in all areas, and to render postal services to all communities.
The Postal Service’s infrastructure supports a $1 trillion mailing industry, employing almost nine million people, and accounts for six percent of our nation’s economic activity. It continues to be an engine of commerce, with over $65 billion in annual revenue.
It also serves the American people. Approximately 55 percent still receive hard-copy bills and statements; nearly 40 percent don’t have broadband access, and 28 percent have no Internet access at all.
The Postal Service’s financial crisis has been caused primarily by an act of Congress that imposed annual payments of $5.5 billion from the Postal Service to the federal Treasury. If the Postal Service is to survive, Congress must correct this underlying cause of the USPS financial crisis. If Congress fails to do so, the Postal Service plans to slash its network and delay mail delivery. However, these actions would lead to the demise of Postal Service rather than solve its financial problems.
In addition to getting legislative relief from its burdensome payment obligations, the Postal Service also must develop new sources of revenue and a new business model that takes into account changes in communication.
The modern postal network must:
• Be capable of satisfying customers who want quick delivery – including overnight delivery;
• Be capable of notifying customers what is headed to their mail boxes;
• Permit customers to re-direct mail to a work location, a vacation spot, or a parcel locker;
• Allow senders and receivers to track and see their items in transit – in real time;
• Be capable of converting electronic messages to hard copy and vice versa;
• Be nimble, flexible and quick to recover when natural disaster strikes.
This requires a network of facilities capable of providing overnight service, quick re-delivery and convenient customer pickup in every part of the country. Retail outlets should remain close to consumers and located conveniently to win more business.
The Postal Service’s transition to the digital age will require substantial capital investment. But it will result in a more efficient, low-cost and agile service that can serve those living in the digital world and those left out.
The USPS must offer:
A One-Stop Shop for Many Government Services – The Postal Service should leverage its network of retail outlets to provide other government services. The USPS already provides passport services. It also could provide driver’s licenses, Social Security cards, business licenses, veterans’ services, etc.
Email Addresses for Everyone – The Universal Service Obligation – the Postal Service’s mandate to provide affordable service to every citizen — should be extended to email. The Postal Service maintains the most complete database of delivery points in the country. If every delivery point were assigned an email address, the Postal Service could provide delivery by hard copy or email to any address in the country – securely delivered – backed by the fact that tampering with the mail is a federal offense. It could provide a uniform system for forwarding email if a user changes email addresses.
Electronic Bill Payment – The Postal Service is already in the money order business. Why not electronic bill payment? The convenience and security of paying bills through a local post office, for those without computers, is a natural fit.
Your Neighborhood Office, Everywhere –The Postal Service could leverage its retail network to provide computer terminals and high-speed Internet access for rent by the hour or by the minute.
Paper to Digital Conversion Services – The USPS should offer digital conversion services. Mailers could send correspondence (either paper or digital) through the USPS to be delivered digitally, or to be printed and delivered in hard copy.
Expansion of Parcel Delivery Services – As the Internet has grown, there has been tremendous growth in the need to deliver products that have been purchased online. The USPS is already a major parcel carrier and is well-positioned to leverage its network to compete for a growing share of this market.
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Guest Blogger Alan Robinson, President, Direct Communications Group – March 14, 2012
Link to the full version of Alan Robinson’s blog.
In trying to define an optimized Postal Service infrastructure, I was stuck at trying to define what “an optimized Postal Service infrastructure” meant. The problem that I had was not with the mathematics of optimization which is focused on either cost minimization or profit maximization but with four sets of constraints that affect the formulation of an optimization model. These constraints are:
• Customer service needs which determine product characteristics;
• Labor management constraints that impact operating costs;
• Capital spending constraints that limit options for infrastructure optimization; and
• Regulatory constraints which modifies a market-driven optimal network to reflect political considerations.
While in the future, the Postal Service’s customers are going to need a postal infrastructure that offers both physical and digital delivery, this post will focus on the physical delivery infrastructure. The information infrastructure that would be needed to either provide coordination between digital and physical delivery of different documents or transform a digital document into a physical one or visa-versa that an optimal Postal Service should offer will not be discussed.
Customer Service Needs–The service needs of the Postal Service’s customers have six dimensions:
1. Access to services in a convenient manner;
2. Delivery to a location that satisfies the needs of recipients documents and parcel;
3. The speed that a document or parcel must be delivered from point A to B;
4. The reliability of a promised delivery commitment;
5. Information on delivery status and reliability provided on a real time or near real time basis; and
6. A price that makes the service financially viable.
In determining the optimal infrastructure, customer service needs set the product characteristics offered at particular prices and the volume of mail and parcels that the infrastructure must handle. However, as customer needs constantly change, communications access, processing, transportation, and delivery infrastructure will need to be re-optimized on a regular basis.
Labor-Management Constraints– As labor costs will always represent the majority of operating costs, any deviation from competitive levels of employment costs raise the cost inputs of optimization models and force an optimization modeler to generate a sub-optimal infrastructure to serve customer needs at prices the Postal Service can charge.
Restrictions in management flexibility to schedule employees and use full and part-time employees affect the choice of access, processing, and delivery operating plans that can minimize operating costs and meet customer needs. The greater the flexibility available the broader the set of customer needs can be met at the same cost level. Therefore these restrictions influence which customer needs the Postal Service designs its infrastructure to meet and makes it difficult to justify a bigger infrastructure that can provide a higher level of service to some or all customers.
Capital Constraints– The issue of capital constraints on the Postal Service infrastructure can be illustrated by the network optimization that the Postal Service plans to implement in May, delays in implementing its information architecture, and delays in replacing its delivery fleet. In all cases, capital constraints have resulted in a sub-optimal solution. For example, the Postal Service’s network optimization used only existing facilities and existing equipment. A green field optimization would have continued to use many existing plants but in many parts of the United States a new or expanded plant would have provided the proposed service commitments at a lower cost or even better service commitments at the same or lower operating costs than what were possible using only existing facilities.
Regulatory Constraints– The Postal Service’s regulatory constraints come from both laws set by Congress and regulations set by the Postal Regulatory Commission. Regulatory and legal constraints have adversely affected both cost and revenue related factors that enter into analyses of the Postal Service’s optimal infrastructure needed to serve real customer needs. Regulatory and legal constraints also slow needed infrastructure adjustments as market demand changes.
Conclusion — The optimal Postal Service infrastructure is not an ideal infrastructure. It reflects the level of service that the Postal Service can offer at set prices and costs and still generate a return sufficient to allow it to be self-sufficient. As such, the Postal Service cannot maintain an infrastructure that offer all customers exactly the level of service that they want but must try to provide an infrastructure that meets the needs of customers that it believes are most likely to require its services for the next decade or more.
The optimal Postal Service infrastructure is not static as customer needs continually change. Demand for the various services that the Postal Service offers change over time. Demand for many existing services is expected to decline over the next decade. The service and other product characteristics demanded by customers for current products will evolve as alternative communications and parcel delivery options develop.
Labor-management, capital availability, and regulatory constraints all have the effect of making the Postal Service infrastructure sub-optimal for both meeting customer needs and ensuring that the Postal Service’s financial goals are met. To the extent that that these constraints can be relaxed, the Postal Service’s infrastructure will move closer to an optimal level.
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Guest Blogger John Callan, Director, Ursa Major Associates, LLC – March 15, 2012
It’s now no surprise to anyone that the U.S. Postal Service is losing money due to e-substitution of First Class Mail. The Postal Service has informed Congress about this crisis and its projected rate of decline in volume through 2016. PMG Pat Donahoe has proposed a Plan to Profitability to radically down-size its infrastructure in order to right-size its capacity to serve a diminishing if not vanishing core product demand. As painful as it is for employees, customers, and for literally all of us, including Congress, he must be permitted to move on this plan immediately to prevent an otherwise inevitable “bail-out”.
The Postal Service will survive this crisis one way or the other. As a federal government entity, it must. It must continue to ensure that society’s needs for services that ‘bind the nation together’ continue to be met. During its 237 year existence those needs have been re-interpreted and the means by which it has met those needs have been re-invented, time and time again. Its underlying infrastructure has been re-designed many times to adapt to technological change and it’s now time for yet one more transformation.
Beginning with Constitutional authorization to Congress to “establish post offices and post roads,” our federal government has constructed a platform upon which mail and parcels are collected, transported and delivered through a vast network connecting virtually every business and household in America. As mail volume has constantly increased over the past two centuries, the Postal Service has accommodated this growth by constructing thousands of retail outlets and processing facilities, installing a vast array of automation equipment, acquiring and operating thousands of vehicles and employing hundreds of thousands of skilled workers.
And yet, the USPS has not met all of the nation’s needs on its own. In fact, today’s Postal Service like the U.S. Post Office before it, greatly depends upon the private sector to help it achieve its objectives. In the 1800’s mail carriage and delivery in rural areas was contracted out to Star Route agents who proudly delivered with “Celerity, Certainty and Security.” The romanticized Pony Express was a private contract venture that rarely failed to deliver on its motto that the “Mail Must Go Through, even though it failed to deliver profits to its investors before it went out of business in only 18 months. Contracting transportation and delivery to private sector firms has become a time-honored tradition for the Postal Service that continues today. FedEx, for example, provides air transportation for mostly Priority Mail and earned $1.4 billion in doing so in 2011.
Not long after the subsidized U.S. Post Office became the profit-oriented U. S. Postal Service in 1971, it introduced an innovative “worksharing” concept that enabled the private sector to bear some of its cost, share some of its work, and thereby earn some of its potential profit as well. This unique postal partnering practice began with address automation and letter presorting in the seventies while affording private sector partners with significant discounts. It was eventually expanded into other postal processes such as consolidation and drop shipping and has enabled the emergence of dedicated private sector worksharing industries such as presort bureaus and parcel consolidators.
Worksharing works. By enabling the private sector to take on more of the work that the Postal Service must otherwise do itself, it reduces its own dependence on the high infrastructure costs of processing and transportation. It encourages the profit-motivated private sector to invest in innovation and technology in order to improve service offerings and performance. It transfers more of the risk of capital expenditure and potential loss to the private sector, along with their opportunity for profit.
In an optimized network environment, the Postal Service should do only what it does best and does better than anyone else. It should continue to provide residential delivery service for a diminishing stream of mail and a growing stream of parcels coming from its worksharing partners, like FedEx SmartPost, UPS SurePost and other smaller consolidators. While as a platform, it should enable these and a large and growing number of private sector neighborhood retailers, print and mail service providers, bulk transporters, software providers and digital innovators to come to the party, take on more of the burden and business risk and hopefully earn more of the profit
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Recapping the week – March 16, 2012
In the second week of our blog series, we asked three more experts to give us their opinions on important challenges facing the Postal Service: What would an optimized Postal Service infrastructure look like in the 21st Century and beyond?
Our bloggers provided insightful views of an optimized infrastructure. Alan Robinson identifies four constraints that would prevent an optimal network:
• Customer service needs which determine product characteristics.
• Labor management constraints that impact operating costs.
• Capital spending constraints that limit options for infrastructure optimization.
• Regulatory constraints which modifies a market-driven optimal network to reflect political considerations.
Cliff Guffey agrees with the need for capital investment and believes “it will result in a more efficient, low-cost, and agile service.” However, John Callan sees the Postal Service transferring capital expenditures to the private sector through the idea of worksharing. Specifically, “by enabling the private sector to take on more of the work that the Postal Service must otherwise do itself, it reduces its own dependence on the high infrastructure costs of processing and transportation.” In regards to regulatory constraints, Cliff Guffey calls for relief from the mandatory obligation to prefund retiree health benefits in order to maintain the current infrastructure. John Callan wants Congress to permit the Postmaster General to go forward with his “Plan to Profitability,” which includes substantial downsizing of the current infrastructure.
Cliff Guffey and Alan Robinson agree that in order for a future Postal Service infrastructure to remain optimal, it would require a high degree of flexibility to change quickly according to customer needs. Cliff Guffey offers a number of revenue generation ideas based on current customer needs that would leverage the Postal Service’s existing retail network. Alan Robinson notes “customer needs constantly change. Communications access, processing, transportation, and delivery infrastructure will need to be re-optimized constantly.” John Callan differs on flexibility stating, “The Postal Service should do only what it does best and does better than anyone else. It should continue to provide residential delivery service for a diminishing stream of mail and a growing stream of parcels.”
We thank each of these bloggers for their comments and will continue to keep the blogs open for additional input from the public. In addition, we invite you to keep up with the Office of Audit’s latest work through the Audit Project Pages. This site provides a forum for you to share your ideas, comments, and concerns on our open audit projects.
Join us for next week’s blog series when we will examine the question: What opportunities exist for the Postal Service to integrate its traditional role in the digital world?
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