We’ve reached the end of our blog series.
We want to thank all of the guest bloggers who participated:
We also want to thank all of the commenters who took the time to add their views.Read More
This is the fifth topic in our “Five Elements of a Postal Solution” blog series. Link to last week’s topic.
Link to the blog by Elmar Toime.
Link to the blog by Jim Sauber.
Link to the blog by Roger Kodat.
Guest Blogger Elmar Toime, independent advisor to the postal sector
There is nothing new in the U.S. Postal Service’s concern about retirement liabilities, but this is part of a larger issue of employee compensation. In developed economies around the world, postal employees enjoyed or still enjoy civil service labor conditions. This is not just about take-home pay. Civil servants typically have better leave and medical arrangements, better working hours, and importantly, more generous pension and medical schemes. This is my first point. Comparisons of postal compensation to compensation in other industries must be made on the value of total remuneration.
In itself, higher compensation need not be a problem. The crucial element is whether superior remuneration can be matched by superior productivity. If it can, then the labor cost is justified. And to be fair, in this context, productivity should include both efficiency (as measured for example by labor cost per postal item) and service (for example timely delivery of mail). Whatever the situation, postal services have to be paid for, either by users (when they buy postage) or by the government through subsidies and market protection for mail services. That’s a public policy choice that governments cannot duck. If you want users to pay, then either postage prices have to increase, or services reduced, or labor productivity improved, or assets worked harder. We see all approaches being implemented in other countries.
In some places, total labor remuneration growth has been slower than the market, rebalancing in that way. We have seen dual pay structures emerge – existing civil servants retain all benefits, new employees simply don’t get them. We have seen service quality change, through post office closures or a five day service. Everywhere there has been investment in new sorting technology and work practices that require less labor for the volume of mail processed. And we have seen governments allow prices to rise more than inflation, protecting the postal company from competition at the same time. New services have emerged, such as banking in post offices, in order to better use assets or fixed costs.
It’s an optimization problem that can’t avoid difficult decisions. Want my 5 cents worth? Transfer existing pensions and medical insurance liabilities to the federal government. That is soon going to happen in the United Kingdom. Separate these ‘old’ benefits from a new employment contract based on existing conditions but which can be allowed to evolve with the business. Implement five-day a week delivery (Monday to Friday), accept private sector provision of retail services, rationalize the sorting center network, and increase prices to provide a 5 percent return on capital invested for the first three years. Announce that market liberalization will occur in the third year. In other words, do what most other countries have done!
Back to top
Guest Blogger Jim Sauber, Chief of Staff, National Association of Letter Carriers
Legacy costs: The Postal Service’s hidden strengths
I often joke that the Postal Service is the most financially sound ‘failing business’ in the country. It has two overfunded pension plans (FERS and CSRS), even with the application of grossly inequitable cost allocations methods in the postal portion of the CSRS fund and it has pre-funded nearly 50% of its future retiree health liability when the median level of funding for such benefits among Fortune 1000 companies is zero (0%), according to an annual survey by Towers Watson.
These strengths suggest that the financial crisis at the Postal Service is not hopeless. Smart policy on pensions and retiree health costs can help save one of America’s greatest economic assets, a last-mile delivery network that links 150 million households and businesses for an industry that employs 7.5 million Americans.
One solution already proposed would be to suspend the retiree health pre-funding during the near term emergency. Restructuring must take priority over pre-funding now. No other agency or private company faces such a mandate. The remaining unfunded liability for retiree health could be covered by implementing the recommendations of the PRC/Segal company audit of CSRS benefits as called for by H.R. 1351, a bill with bipartisan majority support in the House of Representatives.
Although the October 2011 GAO report on this issue backed the OPM’s interpretation of the law, and the methods it used for allocating pre-1971 pension costs between USPS and the Treasury, it also concluded that the methods endorsed by the OIG and PRC audits were “reasonable” and that the choice of methods is essentially a “policy decision.” I agree – Congress should make the policy decision, not OPM.
There is more that can be done to handle future legacy costs.
First, Congress should allow USPS and its employees to invest the assets in the Postal Service Retiree Health Benefits Fund (PSRHBF) in a more appropriate manner. A fund with $45 billion in it, operating on a 75-year time horizon that will pay out $3 billion per year for retiree insurance premiums, should not be invested exclusively in low-yielding Treasury securities. The group of diversified index funds in the Thrift Savings Plan (which also invest for employees’ retirement years) have earned 7.3% annually since their inception. Raising the returns in the PSRHB to this level would cut prefunding cost significantly.
Second, legislation to facilitate the intelligent integration of FEHBP and Medicare benefits as well as bargaining between the Postal Service and its unions on health benefits within a FEHBP context could dramatically reduce future retiree health benefit costs. NALC is aggressively exploring the options right now.
Of course, these policy changes alone won’t be enough to save the USPS. NALC knows that costs must be properly aligned with the economic realities of the 21st Century through pain-staking collective bargaining – a process that is still underway. More importantly, the Postal Service needs a new business model and a growth strategy that will preserve a robust national network to serve the nation. That will require Congress and all the stakeholders in our industry to come together to reach a consensus on a vision for the future.
Back to top
Guest Blogger Roger Kodat, former official at the Department of the Treasury.
The legislative process often leaves us wondering if form trumps substance. Take the Postal Accountability and Enhancement Act of 2006, particularly Section 803. This section requires the Postal Service to make cumulative $58.8 billion of specified annual pre-payments from 2007-2016 into a Retiree Health Benefits Fund (CBO report on HR 6407); over $5 billion per year for 10 years in a row. In hindsight, we know now that the law’s payment schedule has since been modified – to date, the Postal Service has been permitted to pay $9.5 billion less than the amounts called for in the bill, but payments totaling $11.1 billion are now due by the end of this year. Even so, the question still remains: How could the Postal Service possibly survive such financially crippling, front-loaded, payments to cover unfunded retiree health liabilities?
As legislation was drafted, OPM estimated the Postal Service’s accrued unfunded retiree health liabilities to be about $64 billon; it is now calculated to be around $90 billion. Given the legal requirement for the Postal Service to meet all of its obligations through operating profits, it was deemed prudent that the Postal Service incrementally prefund such an enormous future cost to its employees. As a finance guy, I preferred a 30-year straight-line amortization schedule for Postal to incrementally prefund this future obligation, in keeping with how a private sector corporation might operate. Smooth and steady contributions help ensure a more secure future for the Postal Service and its employees – a key policy objective.
Due to budget rules, government does not always work this way. Enter CBO (and don’t forget fiscal constraints the nation faced at the time). In order to gain congressional and administration support to enact a Postal Service reform bill, it was imperative to structure the financial flows in order to minimize, or even zero-out, net cost to the unified budget over the 10-year period following enactment (CBO’s analytical scope in calculating budget cost impacts).
Once it was decided by congressional leaders to use this bill also to return the cost of military service retirement credits back to the Treasury (previously a Postal Service obligation), a balancing cash inflow had to be structured to gain support for the legislation. Credit those in Congress who worked creatively and tirelessly to weave a passable reform bill – we needed one. Also remember: the Postal Service had minimal debt at that time; and we could not know how extensive electronic diversion of mail would be; nor the depth of the economic downturn we would face.
The $5+ billion yearly obligation, passed with bipartisan support by Congress and the White House, kept the reform budget neutral and did not result in increased costs for the taxpayer.
What can be done? Remain vigilant to identify and implement cost savings; expand operating flexibility to drive greater efficiencies; evaluate whether excess CSRS and FERS account balances could be applied to satisfy a portion of this obligation (bear in mind that OPM, in future, could change its long term assumptions, which might result in the Postal Service having a negative fund balance); and ask Congress for a more smooth and steady prefunding schedule. As for the last prescription, I have come full circle.
What should be done about overfunding, overpayment, and other unfunded federal mandates?
As the Postal Service’s financial crisis deepens, we often hear about overfunding and overpayments by the Postal Service for retiree benefits. This issue is complex and controversial. While some argue that there are overpayments, others respond that the Postal Service has not overpaid but simply paid what is required to ensure that taxpayers are not burdened with future Postal Service liabilities.
Postal employees participate in federal pension and retiree health programs, and the Postal Service must set aside money to fund these obligations. On the pension side, the Postal Service has covered the obligations accrued to date. According to the most recent projection by the Office of Personnel Management, the Postal Service’s 2011 pension surplus was over $13 billion. (Most of this surplus was for the newer FERS pension plan.)
The Postal Service has only partially funded its retiree health obligations. The federal government does not prefund retiree health benefits, and the Postal Service only started funding these obligations in 2007. Since 2007, the Postal Service has amassed $44 billion, 49 percent of its $90 billion in current liabilities. However, because of its financial problems, the Postal Service is having difficulty making its annual payments to fund retiree health benefits. Last year, Congress delayed the $5.5 billion payment due at the end of September 2011 until August 2012. The Postal Service does not believe it will be able to make the $11.1 billion in retiree health payments it owes for both this year and last year. What should be done about these looming bills?
This issue is part of a broader issue of entanglements with the federal government. As part of the federal government, the Postal Service uses federal benefit programs but has little control over their structure; as a self-financed entity, the Postal Service is expected to set aside funds to pay for obligations incurred by these programs. In fact, to gain more control over the cost of health benefits, the Postal Service has proposed moving to a health benefit plan that it operates rather than using the federal plan.
Any effort to set the Postal Service on a course for financial sustainability will need to address the question of how to approach retiree benefit funding and federal entanglements. This week, we’ve asked the following guest commentators to discuss the topic over the next few days:
• Roger Kodat, former official at the Department of the Treasury.
• Jim Sauber, Chief of Staff, National Association of Letter Carriers.
• Elmar Toime, independent advisor to the postal sector.
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, April 6, we will summarize and conclude the discussion.
Our Guest Bloggers
|Roger Kodat||Jim Sauber||Elmar Toime|
Roger Kodat was Deputy Assistant Secretary of the Treasury from 2001 to 2007 and logged more than 130 different postal-related meetings while working on the reform bill enacted in 2006. In addition, he has over 20 years of investment and commercial banking experience with JPMorgan in Europe, NYC, and Washington, DC. He is currently Principal of The Kodat Group, a consulting firm specializing in helping businesses expand international markets, finance exports, and mitigate risk..
Jim Sauber is the Chief of Staff to President of National Association of Letter Carriers (NALC), where he served many years as its Research Director. He joined the staff of the NALC as an economist in 1985 and has participated in seven rounds of collective bargaining with the United States Postal Service. He is responsible for coordinating the research, collective bargaining, public policy and legislative activities of the union.
Elmar Toime is an independent advisor to the postal sector based in London. He is chairman of Postea, Inc, a postal technology group, and a member of the Supervisory Board of Deutsche Post DHL, the world’s leading logistics company. Elmar was the chief executive of New Zealand Post Limited from 1993 to 2003 and Executive Deputy Chairman of the Royal Mail Group from 2003 to 2004. In 2004 Elmar was awarded a life-time achievement award for leadership in the postal industry.
Back to top
This is the fourth topic in our “Five Elements of a Postal Solution” blog series. Link to last week’s topic.
Link to today’s recap.
Link to Thursday’s blog by John Waller.
Link to Wednesday’s blog by Jeff Colvin.
Link to Tuesday’s blog by Jessica Lowrance.
Recapping the week – March 30, 2012
In the fourth week of our blog series, we asked three experts to give us their opinions on an appropriate pricing regime for the Postal Service.
Our bloggers offered diverse ideas about a future pricing regime. Jessica Lowrance believes “eliminating the current concept of classes of mail is a natural step in streamlining operations and simplifying mail usage… [and]…it makes sense to adapt the product offering to how the USPS currently processes mail.” Jeff Colvin envisions “tailoring the price structure of bulk mail to the vast differences in delivery cost around the country.” Lastly, John Waller sees “current competitive market conditions warranting the exploration of a more flexible [price] cap with a narrower scope of application.”
Although Waller identifies the need for a more flexible price cap, he thinks the current requirement has had positive results because “it has forced cost cuts and attention on developing new business models.” However, Colvin points out that “the price cap freezes prices at inflation, effectively removing an important tool companies ordinarily employ to achieve financial stability.” Both do agree that a future price cap should factor in a continued decrease in mail volumes. Lowrance’s blog differs by focusing on Postal Service operations and mail classes. She states, “The major differences within operations are when and where the [mail] piece is accepted and the service standards surrounding the class of mail. The Postal Service could rationalize its services by creating shaped-based products that followed many of the same regulations that exist today.”
Comments to date on this week’s blog include varying ideas. Most agree there should be a responsible approach to increasing prices based on current market conditions. Others added that any Postal Service products or services that cost more than the revenue they bring in should be minimally priced at the breakeven level.
We thank each of the 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.
Next week’s blog series will examine the question: What should be done about the overfunding, overpayment, and other unfunded federal mandates?
Back to top
Guest Blogger John Waller, consultant on postal and regulatory issues – March 29, 2012
The CPI cap requirement has forced cost cuts and attention on developing new business models. These achievements should not be lost in any new pricing requirements. But a CPI cap does not account for the impact of on-going volume and revenues erosion due to electronic diversion and economic downturns. Current competitive market conditions warrant the exploration of a more flexible cap with a narrower scope of application.
Without annual pricing flexibility in excess of the CPI, the Service becomes dependent on exigent, breakeven or legislatively authorized price increases, with periodic rate shock impacts as in the pre-PAEA days. With more flexibility in the cap and more limited application, these impacts can be avoided through manageable, predictable, annual increases sufficient to ensure a financially viable Postal Service.
Ideally, a new pricing policy would mimic PAEA requirements for competitive products as closely as possible. Market conditions will act as a restraint on unreasonable price increases given the competition that exists between postal products and the Internet, especially for commercial mailers. However, as a matter of public policy protection for the individual citizen mailer, a cap may still be warranted for single-piece letters and packages.
While the cap could initially be applicable only to single piece letters and packages, a safety valve could be established for other products by authorizing the Commission to extend the cap coverage, if unreasonable prices or undue discrimination is detected. The recognition that excessive price increases could trigger a death spiral will keep the Service focused on cutting costs and developing new sources of revenue. The Service has exercised appropriate restraint with reasonable, but above CPI, price increases for competitive products. This pricing flexibility has allowed those products to remain affordable and profitable yet keep management attention on cost cutting and innovation.
As with competitive products, it is reasonable to require market dominant prices to cover cost plus a reasonable contribution for institutional costs. If a product suddenly fails to cover costs, then a specific period of time could be required for returning the product to profitability before mandating price increases through the regulatory process. Pricing requirements should also foster workshare discounts to continue the privatization of upstream functions.
At some point it may be reasonable to transfer most bulk mail products to the competitive category. But in the meantime, once a lean system is established, removing the cap for commercial products is a means of testing the feasibility and value of such a move.
To the extent that a cap is retained, it should take into consideration the financial impact of the steady erosion in volume due to competing media. As volume declines, non-volume-variable costs in a lean postal system become a larger share of total costs and average unit costs increase even if input costs (labor, transportation, etc.) are under the CPI. The percentage of total costs that are fixed accelerates as volume becomes ever smaller due to the structure of street delivery.
The cap should also allow for price adjustments to offset the loss of contribution due to the change in mail mix. Since 2006, Standard mail has become the largest component of volume with about 1/3rd the unit contribution of the previously dominant First-Class.
Additionally, universal service requirements should be taken into consideration. The need for an above CPI cap can by mitigated by reducing legal constraints, such as a required 6-day delivery or mandated price preferences for certain products. If Postal Service requests for changes, especially in delivery innovations, are rejected, then the resultant impact on profit can either be subsidized or be incorporated in the cap to allow recovery of these costs through postage.
A future cap should be less than CPI if volume trends turn around. When volume is growing, price caps less than the CPI are reasonable. The Service could propose the mechanics of a new cap with adoption requiring regulatory approval based on public hearings. To allow a capability to respond to new price impacts, a legislated cap could be a simple CPI plus an x factor to be determined by an expert body informed by public hearings. The legislation could specify certain factors that must be considered in future caps, such as volume per delivery point.
Back to top
Guest Blogger Jeff Colvin, Director, U.S. Postal Service Office of Inspector General – March 28, 2012
You hear it all the time.
Question: What company, facing a precipitous decline in demand for its product, would raise prices?
Answer: A state-owned monopoly, with a mandate to meet a multi-billion dollar service obligation.
Question: What company, losing billions a year, would not raise prices?
Answer: A business facing such powerful multi-modal competition that its captive market is slipping away like time into the future.
So the Postal Service, and the $900 billion industry it supports is in a huge mess – but what’s price got to do with it? And what can be done, via pricing, to make things better?
The problem is well-known. The Postal Service’s most profitable product First Class Mail was already battered by e-substitution, when the postal ship sailed into the greatest recession in recent memory. And it’s still taking on water, losing $1.3 billion in January 2012 alone, according to unaudited results filed with the PRC. January volume fell by 2.3% from last year.
While there is some improvement in shipping services, there isn’t enough to make up for the gigantic losses in the letter market. Like it or not, the action is all in letters, and increasingly, in bulk letters.
But raising the bulk letter price is not easy. The price cap freezes prices at inflation effectively removing an important tool companies ordinarily employ to achieve financial stability. Of course, Congress could soften its impact by loosening it to compensate for falling volumes, but it may not be enough. But Royal Mail and its regulator Ofcom recently concluded that even a cap watered down by such a volume-adjustment mechanism fails to provide for adequate pricing flexibility in labor intensive industries like postal.
More importantly, the pricing problem is not strictly a legislative issue. The Postal Service says that it wants to raise the stamp price to 50¢, but is much more cautious when it comes to raising bulk mail prices.
The worry is that demand might now be significantly more sensitive to price increases, because of e-substitution, than in the past. The jury is out on that one. The available research on what economists call ‘elasticity’ says First Class Mail, and even Standard Mail, are still pretty price insensitive, so much so that an increase in price would actually raise revenue and contribution. It may be that e-substitution to letters is more a trend, whose ebbs and flows depend more on technology and culture than on incumbent pricing.
Still, the question is an empirical one, and short of the basic research on whether demand characteristics have really changed, the obvious test – raise prices and see what happens – does carry risk. So, what can be done with prices to improve the Postal Service’s bottom line?
Let me offer a modest proposal. Why not tailor the price structure of bulk mail to the vast differences in delivery cost around the country. Delivery costs vary dramatically by ZIP code according to the density of the population. It would improve efficiency if prices tracked those differences.
In fact, simulations indicate that, even keeping total revenue constant, adjusting prices to delivery costs, could increase contribution by $800 million by shifting volume from high cost to low cost delivery areas.
It won’t solve the problem, but as they say, a billion here and billion there . . .
N.B: The views presented in this blog posting do not necessarily reflect the views of the OIG or any other organization. They are the views of the author alone.
Back to top
Guest Blogger Jessica Lowrance, Executive Vice President for the Association for Postal Commerce (PostCom) – March 27, 2012
Today, the Postal Service offers an array of products that ultimately deliver a piece of mail from point A to point B. This original product has been sliced and diced to over 4,000 price points. From this price list, mailers pick the shape that best fits their mailing – a letter, flat, or package. Next, the mailers chooses a class of mail (First-Class, Standard, Periodicals, or Package Services/Parcels) based on rules and regulations established by the Postal Service. The Postal Service further distinguishes classes of mail by delivery or service standards. Additional services are available to mailers that occur pre- or post-delivery, especially if the piece is found to be undeliverable.
Eliminating the current concept of classes of mail is a natural step in streamlining operations and simplifying mail usage. From my perspective, it makes sense to adapt the product offering to how the USPS currently processes mail. Today, shape influences how a piece gets processed and which machines are used to move the mail through the system. This, then, affects how much it costs the USPS to process the piece and ultimately the price of the service.
In the eyes of a postal machine, a letter is a letter. The major differences within operations are when and where the piece is accepted and the service standards surrounding the class of mail. The Postal Service could rationalize its services by creating shaped-based products that followed many of the same regulations that exist today. Under such a revised product list, the Postal Service could offer a letter product that was differentiated further by where the piece was entered and the services purchased through the IMb.
For example, if the piece contained a bank statement and the mailer wanted 1-3 day service, it would be entered at a facility that met those service standards as well as any presort and destination entry requirements. The Intelligent Mail barcode on the piece could indicate that it was sealed against inspection and would be automatically forwarded if the recipient changed addresses. If the mailer wanted or needed additional return services, it could indicate which services were requested via the IMb. The Postal Service would no longer have to be concerned with processing preferred over deferred service letters, as all letter pieces when processed would be processed together.
This a la carte price offering would provide the mailing community with the opportunity to reach deeper presort levels and dropship further downstream in postal operations. Over time this should reduce upstream operations and postal costs.
In order to move forward with this suggested alternative, the Postal Service would need to go before the Postal Regulatory Commission to change its mail classification schedule (MCS). This process would allow for interested parties to comment to the Commission on the Postal Service’s new product categories and how it translates to existing service performance reporting, pricing, and costing.
Back to top
What is the appropriate pricing regime for the Postal Service?
The pricing of postal products is critical to ensure value for Postal Service customers. Although, the Postal Accountability and Enhancement Act of 2006 streamlined the pricing and classification process, no significant changes have been made in almost 6 years. Additionally, law requires that all market-dominant product price increases to be tied to a Consumer Price Index (CPI) price cap. Is this an adequate pricing approach for a 21st century postal service?
Are there other objectives that should be achieved with modern pricing? The Postal Service’s president and chief marketing/sales officer said ―”…when we make it simple to mail, our customers will do business with us.” However, mailers, employees, and the public do not always understand all of the prices the Postal Service offers. Stakeholders have noted that complex rates aren’t necessarily a bad thing for mailers and that most large mailers calculate their postage with a computer rather than paper and pencil. Is the use of computerized pricing by mailers a 21st century solution or a symptom of a disease?
In fiscal year (FY) 2010 the Postal Service had more than 7,600 domestic prices with 2,361 prices (31 percent) not used in FY 2010 and another 1,237 (17 percent) used on less than 10 mailpieces. This means that nearly half of the Postal Service’s domestic prices were not used by customers at all or not used often. Today there are over 8,000 domestic prices for the Postal Service’s three primary product lines: letters, flats, and parcels, along with additional services such as insurance, delivery confirmation, and certified mail. Does it make sense to have so many prices or should pricing be simplified?
Continuing pricing discussions include how to establish prices — a top-down or bottom-up pricing model? What pricing tools could potentially promote better efficiency and incentivize good performance? Are work sharing pass-throughs an efficient measure of costs avoided by the Postal Service? Is the CPI an adequate safeguard to ensure efficiency and financial viability for the future?
We would like to hear from you about how the Postal Service should or should not redefine pricing in support of a lean and simple national infrastructure with a right-sized workforce 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:
• Jessica Lowrance, Executive Vice President for the Association for Postal Commerce, on Tuesday, March 27.
• Jeff Colvin, Director, USPS Office of Inspector General, on Wednesday, March 28.
• John Waller, consultant on postal and regulatory issues, on Thursday, March 29.
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 30, we will summarize and conclude the discussion on this important topic.
Our Guest Bloggers
|Jessica Lowrance||Jeff Colvin||John Waller|
Jessica Dauer Lowrance is the Executive Vice President for the Association for Postal Commerce (PostCom). She has been with PostCom for almost four years working with and representing business mailers to all postal stakeholders. Prior to joining PostCom, she was a pricing economist for the Postal Service.
Dr. Jeffrey Colvin has published many articles on postal issues. After 23 years with the Postal Service, he is now with the USPS Office of Inspector General.
John Waller is a consultant on postal and regulatory issues. Previously he was the Director of the PRC’s Office of Accountability and Compliance.
Back to top
What Opportunities Exist for the Postal Service to Integrate Its Traditional Role in the Digital World?
Recapping the week – March 19, 2012
This week our panel of prominent commentators examines whether or not the Postal Service can integrate its potential digital role(s) with its physically-based business. The Postal Service has been a trusted third party intermediary since the eighteenth century. But now, in the twenty-first century, it faces unprecedented challenges. Digital technology is developing rapidly and changing the nature of communications and of many businesses, especially those based in brick and mortar. As a brick and mortar-based communications backbone of the nation, the Postal Service is doubly affected by the disruptive technologies of the digital revolution.
While approaching the question from different perspectives, our guest bloggers are adamant: They all agree that there are multiple digital roles for the Postal Service in this brave new world. Further, they state that without taking on these new roles, the Postal Service will not survive. Among opportunities discussed are:
o Digital communication and storage
o Digital identification as well as digital and physical authentication
o Enforcement against digital fraud
o Other mobile applications to minimize customer time in Post Offices
Tactically, they suggest that lessons can be learned from retail banking, which has responded to customer demand for more mobile applications, and the Internal Revenue Service (IRS), which partnered with private sector providers to help individuals transition to digital transmission of tax returns.
Strategically, the Postal Service must become more customer-focused and work on short-term opportunities leveraging and protecting its traditional role, while looking for longer-term opportunities. Steve Ressler, Founder and President of Govloop.com, says that “the future is moving online” and that the health of the US Postal Service depends on its becoming a provider of trusted delivery solutions regardless of channel. He also advocates secure digital storage for sensitive information, an application which is being requested by some consumers now. Dan Combs, CEO of eCitizen Foundation, highlights new uses of the Postal infrastructure and the Postal Service’s legal standing in offering both secure communications and specific credentialing services. He stresses enforcement as being a unique competitive advantage. John Payne, CEO of Zumbox, urges the Postal Service to “remember the consumer”—and consumers’ needs for convenience—or face extinction.
Comments on this week’s blog to have to date offered a range of ideas, but most have had a common theme: The Postal Service has to change with the digital age and take advantage of at least some of the opportunities that leverage its core strength as a trusted branch of government with a wide-ranging geographic presence and long history of delivering secure communications from point-to-point and person-to-person. However, not every commenter agreed that public-private partnerships are an effective tool for implementation or that the Postal Service culture can adapt to its potential digital roles.
The OIG would like to thank this week’s guest bloggers for their key insights on digital issues. In next week’s blog we will discuss what should be the appropriate pricing regime for the Postal Service.
Back to top
Guest Blogger John Payne, CEO of Zumbox – March 22, 2012
Remember the Consumer!
For most people, their relationship with the USPS is as follows:
1. The USPS puts some unknown quantity of mail into your mailbox six days a week
2. You periodically check your mailbox
3. You sift through your mail, pulling out the important items and trashing or recycling the rest
4. Rinse and repeat
The really sad thing about the process above is that it hasn’t improved . . . . ever. In fact, if anything, we simply have more unwanted mail to deal with today, which just exacerbates the problem. In an age where consumers are demanding that more information be delivered digitally, across multiple devices, can the USPS improve the aforementioned experience?
For the USPS to stay relevant in the digital age, the answer has to be YES. The USPS needs to think more about what the consumer wants, and let that line of thinking dictate future product strategy. Today’s consumer wants to visit the post office less (or any store, for that matter), and do more on the go, at their convenience.
One industry that has similar features, and has embraced this line of thinking, is the retail banking industry. The retail banking industry has seen its customer base demand more and more products that keep them away from branches. It is natural to fight this change, but the retail banking industry has instead, developed extensive mobile applications to help its customers reduce their visits to branches. A recent report from comScore supports this view. Today, you can deposit checks, pay bills, transfer money, check balances, etc., all from the comfort of your phone.
While the USPS has a mobile application, it is generally limited to shipping information, or looking up the nearest post office location. With all due respect, 99% of my interaction is with my USPS delivery representative at my home. If the USPS wants to spend time on mobile applications, or new features on their website, ask this question first, “how is this feature materially improving the consumer experience?”
A recent article with the title “Three keys to saving the U.S. Postal Service” misses the mark as its three keys are all non-consumer centric. In contrast, an opinion piece in the New York Times summed it up nicely. “Like other retailers, the Postal Service needs to sit down with its customers and talk to them about how it can serve them better, then come up with new, innovative products and services that will be competitive in today’s marketplace. If it does not do this, it will not survive, whether it cuts costs or not.”
Back to top
Guest Blogger Dan Combs, CEO, eCitizen Foundation – March 21, 2012
Answering the title question requires a couple of precursor activities. First is accepting that any separation between the digital and physical worlds is artificial and misleading. There are numerous reasons that we want the physical and digital worlds connected, for instance enforcement. When someone does bad things in the digital part of our world we want to be able to find the physical person responsible. The two, the physical and digital, for some time to come, are inextricably bound together. Second, the “traditional role” of the Postal Service needs re-conceptualization. While the Postal Service receives and delivers physical packages, letters and others, this concept is too narrow and simplistic to capture the value provided by the Postal Service. More appropriate would be a concept that includes creation and operation of an infrastructure for secure, enforceable communication among the U.S. population.
Based on the above, the Postal Service is faced with a number of opportunities. The focus here is on near term opportunities building on existing work or capabilities. There are a number of gaps and needs between the physical and digital portions of our world. Currently, one area of particular focus is the identification and authentication of individuals. Generally, this involves the collection and verification of information, attributes about an individual, issuance of perhaps a credential or token such as a password or smart card, and some activities binding or connecting the token to the holder. The Postal Service has an organization, personnel, infrastructure, enforcement capability, and current operations to meet several related needs. Some of these are as follows:
1. Intake and/or Registration
2. Attribute verification
3. Binding of attributes to individuals
Intake and registration: current practices often include the checking of physical documents in a person’s possession, sometimes the scanning of documents, collection of a picture or other biometric, and the checking of this and other information. The Postal Service has lots of physical infrastructure, established locations that could serve well to play some role in intake/registration processes for credential issuance perhaps building on current Passport related services. This infrastructure could fill a gap by providing a trusted institution that is relatively very accessible for the U.S. population.
Attribute verification: much work is underway to develop the means for verification of attributes of individuals, the connecting of those attributes to individuals, and use of such attributes in transactions. One critical attribute is the address, especially connecting a physical address to an individual or transaction. The Postal Service acts as an authoritative source for U.S. addresses and could well provide address related value added services for digital interactions. It also does not seem a huge leap to anticipate that there may well be a need for parallel capabilities for virtual addresses, particularly when a connection between a virtual address and a physical address is desired. The Postal Service seems well suited to take advantage of opportunities to provide address-related services and to play a part in attribute verification.
Binding to individuals: often there is a desire or requirement to take some measures to ensure that an attribute, a document, or a credential is connected to a particular individual. One way of doing this leverages an in-person visit. For instance a person appears at a physical location, perhaps presenting a document such as a birth certificate claiming it as his or her own, or a credential is delivered to the individual, for example the driver’s license issuance event. During these in-person appearances something may be done, such as the taking of a picture or fingerprint, as evidence that a particular person was there, that helps to connect the individual to the documents and transaction. The Postal Service has a substantial infrastructure distributed across the country, personnel conducting similar activities currently, a supporting organization, and other related capabilities.
Enforcement: the digital portion of our world is a difficult environment for many enforcement organizations. Often their scope and capabilities are inappropriate for pursuing and prosecuting digital crimes. The Postal Service has a long history both of developed law and enforcement capabilities that snare criminals. Recently, the Postal Service has performed with distinction in operations and collaborations to identify, pursue, capture and prosecute criminals using digital means in their criminal activities. This is a vital need for the future growth and operation of the “digital world.” The Postal Service is particularly, if not uniquely, qualified to fill this need.
These are a few of the opportunities available to the Postal Service, based upon existing operations and capabilities. Building upon these could well lead to further business opportunities consistent with the traditional role of the Postal Service as updated for our changing world.
Back to top
Guest Blogger Steve Ressler, Founder and President of GovLoop.com – March 20, 2012
Fix My File Cabinet Please
As I write this in my home office, my file cabinet is staring right at me. The file cabinet is a mess – it’s bursting at the seams with financial statements, health records, stock certificates, property taxes, and gobs of receipts. If you are like me, you are always fighting a losing battle trying to keep it organized.
In 2012, I do not want to live like this – I want to live in a digital world and I want the USPS to help me solve my file cabinet problem. I no longer want to receive important information in paper but at the same time I’m never quite sure how to handle sensitive digital information. Do I just store my tax pdfs just on my hard drive? What if it fails or I’m not properly backed up? I do not want to just store my health record in my Dropbox or iCloud and I’d rather not be tied to just one provider. Should I email my property tax statement to my broker when putting my house on sale – how do I know if he received it? Do I feel comfortable knowing that my email provider may be reading the contents of the document? In the end, where’s my trusted solution – where’s the equivalent of my online savings box (trusted and secure) and registered mail?
The USPS should be in the business of providing the American public with trusted delivery solutions regardless of channel (digital or print). The future is moving online and USPS can play a great role as an official convener. There are lots of companies that are starting to address these problems but they lack the mission of USPS – which is creating trusted, official solutions at affordable prices. USPS does not need to even build all the tools themselves – they can model their efforts off of IRS e-filing where government created an ecosystem of trusted private sector providers to help transition individuals to electronically submitting their tax statements at affordable prices. Good for government, good for business.
So how do we make this happen? If you’ve read Clayton Christensen’s book The Innovator’s Dilemma, you know innovation is hard and often the biggest roadblocks are internal in your own office. The USPS’s future depends on becoming digital postal solution provider so they need to invest it – create a team of 20-30 folks, get them authority to make partnership decisions, locate them outside of DC, and give them a grand mission that is true – help make USPS relevant in the digital age.
Back to top
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.
Back to top
Alan Robinson, President, Direct Communications Group, is one of our guest bloggers in the “Five Elements of a Postal Solution” blog series. This is 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. Information infrastructure will be discussed only to the extent that an information infrastructure is needed to manage a physical infrastructure or provide product features that are a component of a physical delivery product. 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 determine product characteristics
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.
The discussion below reflects current customer needs. However, customer needs constantly change. Communications access, processing, transportation, and delivery infrastructure will need to be re-optimized constantly.
For the Postal Service’s communications customers (i.e. bulk mailers), the existing network will likely need to adjust over time to improve the ability of Postal Service customers to coordinate delivery with communications sent digitally. This will likely require shorter cycle between when a physical document begins printing and when it is delivered.
For small parcel shippers (i.e. parcels under 10 pounds), the real challenge, is having a parcel delivery network that can assist in reducing the time from order-to-delivery, handle volumes growing by 20% or more annually, and provide the service at prices that allow the e-retailer to offer free shipping to their customers. This will likely require the Postal Service to constantly adjust its parcel processing and transportation infrastructure to reflect growing volumes while seeking new delivery methods that offer both secure and inexpensive delivery.
The issue of access is usually focused on retail access but includes access to a delivery network for bulk mailers and digitally created documents.
An optimal retail network has to have access points determined primarily based on customer demand tempered by USO requirements to serve rural and lower-income communities. The optimal network can have any combination of corporate and contract offices. Based on international experience, it appears that an optimal network requires that individual locations have the commercial freedom to offer any product or service that can generate revenue to sustain a retail enterprise in addition to postal services. This generally means that most retail locations are contract locations but corporate locations are an option if they are given the needed commercial freedom.
The access infrastructure will likely need to include self-service options such as GoPost. While useful for general parcel shipping, the growth in single-piece parcels will likely come from recipient-paid parcel returns and a low cost acceptance location is critical both to handle the expected growth in volume and e-retailers need for a very low cost return option.
For bulk mailers, access is determined by the processing and delivery network. Within an optimal network, bulk mail access will occur only at places which fit the Postal Service’s operating plan. This will likely include only processing plants and delivery units. Bulk mail access at other locations will need to have prices that include the additional transportation and handling costs to move the mail to or parcel to the nearest processing plant. Optimal access for bulk mailers will remain constant only as long as the processing and delivery network does. Optimally, acceptance locations will change whenever processing and/or delivery activities change their locations.
The optimized physical delivery infrastructure will need to include two delivery options. These options are:
• Door, curbside or cluster box delivery for most items and only door delivery for signature items; and
• A retail outlet or parcel locker that provides parcel pick-up for customers that are not home for delivery.
The Postal Service has proposed shifting some door delivery to curbsides or cluster boxes and some curbside delivery to cluster boxes. It is clear that cost and service are important for both document and parcel delivery. Alternative delivery firms have prospered in door delivery when either the Postal Service’s service quality is too low or existing prices are too high. While moving delivery away from the door is cheaper, it is unclear to me whether shifting delivery location to reduce costs is the optimal solution to serving sender needs and ensuring financial self-sufficiency. However, other constraints affecting the ability of the Postal Service to control costs or set prices may force a sub-ideal solution regarding delivery location.
Regardless of the delivery location, the delivery infrastructure must have an information infrastructure that allows for route adjustments on a frequent basis. Ideally, delivery routes need to adjust to reflect seasonal changes in mail volume. As parcel shipments increase, parcel routes may become more common and these routes need to be able to be adjusted on an even more frequent basis.
The key to an optimal parcel delivery network in the future is finding ways to cut costs so that e-retailers can offer free delivery on more sales as well as finding a way to provide delivery to recipients that are not at home during normal delivery hours. Therefore, an optimized Postal Service’s delivery infrastructure will also need to have delivery locations that permit recipients to pick-up their parcels at the recipient’s convenience. While Post Offices are an option, limited hours suggest that a parcel locker system like GoPost could more easily meet both recipient need for access to their parcel shipments on nearly a 24-7 basis and e-retailers need for a low-cost delivery option that is secure. Given the expected growth in small parcel delivery volumes, and acceptance of similar lockers in other countries, an optimal GoPost network could include ten to thirty thousand locations in order to meet both shipping volume and recipient demand.
Delivery Speed and Reliability
Both the current network, and the one that the Postal Service plans to implement in May make assumptions about the delivery speed required by customers. The current network meets the expectations of most single-piece mailers but has difficulty consistently meeting the expectations of many bulk mailers and its delivery standards for Priority mail are not competitive for most short distance shipments.
The Postal Service’s proposed network meets the current delivery speed expectations of about 75% of its customers and arguably can meet those expectations with more reliability than the existing network. It cannot meet the current service levels of single piece mailers, some periodical mailers, and would likely have even more challenges meeting expectations of Priority Mail shippers. While problems with meeting the expectation of periodical and Priority Mail customers are known, little is known as to whether the new slower service standards meet the expectations of single-piece mailers or not.
Ideally, the Postal Service would have the option to maintain the current network and service standards by charging single-piece and Periodical mailers the additional cost associated with the infrastructure needed to provide current service levels. However, current law and regulatory precedent would not permit the large increases in single-piece First Class mail and Periodical rates that would be required even if customers would be willing to pay the higher rates for maintaining current service levels. While the willingness of First Class mailers to trade higher rates for maintaining current service levels is unknown, periodical mailers would likely find the rate increases required could force magazine subscription rates above levels that make mail-delivered subscriptions a profitable business.
Given that pricing adjustments are off the table, setting an optimal network requires making some choices among customers. The Postal Service has little chosen but to focus on the current expectations of bulk mail and Priority Mail customers and fit service levels provided to other customers around what that network can provide. This makes sense given the expectations of volume growth (or losses) over the next decade for the full range of current Postal Service products.
Regardless of decisions to make a processing and transportation network as close to optimal today given other constraints, that network is unlikely to remain optimal for long. Both mail volumes and current expectations of delivery speed for mail and parcel shippers today are unlikely to reflect the volumes or expectations of Postal Service customers 10, 20 or 30 years from now. This means that the optimal infrastructure needed to meet customer expectations while minimizing costs will change over time.
Right now it would appear that an optimal infrastructure may need to adjust to mailers’ interest in reducing the cycle time from when a document is printed until it is delivered in order to coordinate with digital communications and the needs of parcel shippers interest in reducing the time from when an order is accepted until delivery to the preferred delivery location is made. Reducing delivery time for mail and parcel will require a larger infrastructure but also changes in labor contracts and availability of capital to make sure that the reduction in delivery time can be accomplished without unacceptable increases in rates.
Delivery and Management Information
The Postal Service’s infrastructure needs to provide real-time or nearly real time information on delivery status and reliability. While the Postal Service has developed systems that can provide this information, capital constraints have slowed deployment. As mailers expand their coordination of physical and digital communications, this information will be increasingly important and delays in implementation create the risk that the Postal Service’s delivery of physical documents will become even less competitive.
For Parcels, the problem is even more important. The Postal Service has become a critical link in e-retailing. It now delivers nearly 30% of FedEx Grounds parcels and UPS has just begun promoting SurePost service. Both carriers expect that the Postal Service will handle most of their parcels under 10 pounds. In order to meet this demand, the Postal Service’s parcel tracking system needs to become fully integrated with the systems of FedEx, UPS, DHL-Global Mail, Newgistics and any other firm that wants to use its delivery network. This includes integration of whatever information system is used for GoPost delivery lockers as well.
From a management standpoint, the information needs of the customers fit right into the information needs of management. Management information infrastructure must have the capability to shift operating flows on a real time or nearly real time basis to prevent network bottlenecks and to monitor and adjust delivery networks to minimize cost and maximize service on nearly a real time basis.
Mailers budgets currently reflect existing postage prices. This means that the Postal Service’s ability to provide a certain level of access, a particular delivery method, and a service speed is limited by the price that its customers pay and the need to ensure that prices provide a sufficient return to cover operating costs, legitimate long-term liability obligations and sufficient cash for future emergencies and capital investments. This forces the Postal Service to make choices as to how it provides access and delivery, and the speed of service that it offers the various market segments that it serves. The optimal access, delivery, processing, transportation and information infrastructure therefore is constrained by the prices that the Postal Service can charge.
In the future, changes in prices for all postal services will affect demand for the product and the infrastructure needed to provide each service. The impact on volume of prices changes will vary based on the sensitivity of a product’s customers to price. For products like First Class single-piece mail, the impact of price changes on volume and therefore the infrastructure needed to handle the volume is small. For other products, the impact of price on volume and the Postal Service’s infrastructure needs is likely larger. For all products the actual relationship between price and volume is less clear than it has ever been as the growth of competitive web-based and mobile-based communications alternatives have created significant non-price related reasons for shifting from postal to digital delivery.
Labor-Management Constraints Affect Infrastructure Decisions and Service Quality
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. Currently the Postal Service’s greatest constraints affecting managing the labor component of its infrastructure include:
• The legal obligation to continue to fund pension accounts (i.e. FERS and CSRS) that are already overfunded;
• The legal obligation to fund a retiree health benefit account on a schedule that is not based on a current estimate of the underfunding and on a pace that forces significant financial losses at current rates;
• Inability to control health and other benefit expenses by offering a benefit package designed for postal employees and not all Federal employees;
• Restrictions in offering retirement and other incentives to adjust the size and skill mix of the workforce; and
• Labor contracts that restrict flexibility in regard to part-time and full-time employees, and adjust schedules based on changes in seasonal demand.
Networks designed under current contracts must take into account the increased costs and reduced flexibility that these constraints create. All of the constraints that raise the Postal Service’s average hourly employment costs raises the total cost of the network forcing the modeling exercise to develop the network that provides a service quality less than would could otherwise be provided given the price and therefore the overall cost constraints. Limitations on full and part-time employees, as well as seasonal adjustments to schedules force the modeler to identify operating plans that maximize the use of full time employees in order to minimize cost, even if those operating plans result in a lower service level than an operating plan that can incorporate a higher proportion of part-time employees could offer.
Removing or relaxing constraints imposed by law or contained in existing labor contracts would affect decisions about the size of the network infrastructure that the Postal Service deploys. Lowering labor costs would likely increase the size of the optimal Postal Service infrastructure as the lower labor cost would allow the development of operating plans (which affect the infrastructure within individual plants and used in retail and delivery operations) and the number of Postal Service facilities as they allow the Postal Service to provide a higher level of service within a price constraint.
Removing or relaxing In the future, customers are likely to require an infrastructure that can provide a physical delivery service that can provide service at current or near current prices, as adjusted for inflation, with shorter cycle times than now are possible at current prices in order to work with the short cycle times available in both digital and broadcast media. This need will likely require a larger infrastructure than the Postal Service envisions in its network optimization initiative. However, these future customer needs cannot be met as long as constraints imposed by law or contained in existing labor contracts remain.
Capital Constraints Result in a Sub-optimal Infrastructure
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.
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. The issue of capital constraints also reflects the need to keep certain annexes open as a more optimal solution would merge operations now conducted in the primary facility and the annex into one facility but the primary facility is too small or has other problems that force keeping the annex open.
The problem with capital constraints has also affected the Postal Service’s ability to have optimal information architecture. Systems that track mail and parcel location, manage delivery routes, manage vehicle routes, manage plants and ensure accurate information on in plant volumes and costs have seen budgets cut and project schedules extended by months and in some cases years. As such, the Postal Service has fallen behind current needs of its customers and more than likely is not near having an optimal information infrastructure.
The problem of capital constraints has affected the Postal Service’s replacement of its delivery vehicle fleet. Fleet replacement is a multi-year, multi-billion project for a fleet as large as the Postal Service. Not having the capital to replace the fleet increases operating expenses for repairs and maintenance and increases risk of service failure due to vehicle breakdowns. Not having the capital to replace the fleet may even influence decisions over 5-day delivery as eliminating one delivery day reduces vehicle use and may extend the life of the existing fleet.
The full impact of capital constraints on the Postal Service infrastructure today is not known. Clearly it affects both operating costs and service quality and makes it difficult for the Postal Service to provide the information interfaces that customers demand.
As customer needs change, capital constraints will continually ensure that the Postal Service will have a sub-optimal infrastructure to meet those changing needs. This will most likely result in Postal Service operating costs (and therefore modeling costs for designing the optimal infrastructure) being higher than they would otherwise be, and the Postal Service will have a less extensive infrastructure than makes business sense. In particular, I am concerned that capital constraints will make it difficult for the Postal Service to adjust the network in order to improve service or reduce costs and have the information, facility, equipment and vehicle infrastructure to meet future customer needs for shorter cycle times at or near current prices (as adjusted for inflation) for postal services.
Regulatory Constraints Affect How Optimal a Network Can Be
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 affected nearly all aspects of management decision making. Most importantly regulatory and legal constraints have slowed the ability of the Postal Service to:
• Fully integrate its delivery services up and down the communications and parcel delivery supply chain;
• Fully exploit the economic value of its intellectual, physical and labor assets;
• Adjust to changing demand for mail and parcel delivery services as quickly as the changes occur;
• Adjust its costs as quickly as its customers and suppliers can; and
• Set prices based on real market distinctions.
All of these constraints have the impact of either raising the cost of operations or lowering the potential revenue that the Postal Service can generate from its infrastructure. This forces the Postal Service to adjust its infrastructure to meet political and not business goals which results in products and an infrastructure that provides a less optimal level of service at a given price for both commercial and individual customers.
An optimal network would be free from nearly every regulatory and legal constraint that affects how the Postal Service serves its customers with two and possibly three exceptions. First, the Postal Service must deliver to every address that a sender demands. Second, The Postal Service must provide retail access to all citizens using objective criteria for measuring access. The third exception involves a very limited set of regulations of rates with a focus on single piece rates and the floor for rates for all other products.
Customer need changes over the next few decades will come faster than either Congress can pass laws or the Postal Regulatory Commission can issue opinions just as those changes have occurred faster in the past five years. Removing as many regulatory restrictions as possible would allow the Postal Service to more nimbly adjust its infrastructure as those needs change.
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.Read More