Tuesday, July 8, 2008

The Challenge of Declining Single-piece Mail Volumes

One of the purposes of this blog is to present the postal community with the facts on the ground and provide some guidance on why those facts are important to the postal regulator, postal administration, employees, customers and suppliers. This post presents the current facts about single piece mail, one of the biggest challenges facing the United States Postal Service. This challenge is best illustrated by two exhibits presented in my submission to the PRC on Universal Service. (I will add the exhibits to this post as soon as I figure out how to add an excel graph. If someone can help, please e-mail me

Exhibit 1 (page 19) presents First Class letter volume since 1988. It shows that a clear shift in the market for single piece mail happened around 1999. Since then mail senders have been consistently reducing their use of this product. In 2007 mailers sent only 75% of the single piece letters that they sent in 1999.

While the absolute change is striking, looking at the year-to-year percentage change raises the importance of this issue to the Postal Service. Exhibit 2 (page 20) illustrates this trend. The single piece volume in the first half of 2006 suggests that the volume decline is still accelerating.

The trend in First Class single-piece mail suggest four questions that need to be answered if the Postal Service is going to properly react to this trend.

1. Why is the decline occurring?

The decline in single piece mail reflects competition from the internet and e-mail. While this answer seems trite, it needs to be stated. While most research focuses on the expansion of high speed internet access in the home, probably a more important cause of the change illustrated to date is the expansion of high speed internet access at businesses and business acceptance of the importance of websites, wiki’s, e-mail, and other electronic means of communication. The change in business use of hard copy is illustrated by how e-mail and wiki’s have become indispensible for the dissemination of documents for local printing or for collaborative editing. In 1999, many of these documents would have been mailed.

The importance of changes in business use of the internet is illustrated by the decline in business share of single piece mail. In 2001, business generated 49% of all single piece volume. By 2007, their share declined to 45%.

As single piece mail reflects the decisions of millions of individuals and businesses on billions of individual pieces of advertisements, correspondence, bills, and payments. Each individual or business is choosing hard copy or electronic delivery based on set of convenience and financial considerations. A decline, as illustrated, suggests that the Postal Service is not only losing individual mailers but losing whole applications for hard copy communications. The most obvious example is airplane tickets which during this period went from primarily delivery by mail to electronic delivery. The question for Postal Service strategic planners is to identify individual applications for single piece mail and determine the risk that the Postal Service faces that it will lose these applications to electronic alternatives and the time frame that the loss could occur.

2. How should this trend be projected?

Forecasting future volumes of single piece mail is a difficult proposition. It is a market in transition. However, there is some evidence in other markets that went through a similar transition from being a dominant product to one that became either less dominant. The trend illustrated above suggests the beginning of a backward-S shaped decline curve. Such a curve will have a period of ever increasing declines followed by a period of shrinking declines ending with a new base level of volume.

One can imagine such a curve for the market for horse carriages. At one point, horse carriages had 100% of the market for passenger road transportation. However, the introduction of the automobile quickly resulted in the replacement of the horse carriage for nearly all customers. Today, there still is a horse carriage market but it is limited to the Amish and carriage operators serving tourists.

There is probably enough data now to develop such a forecast for single-piece First Class mail. What is not known includes what the base level of volume will be and what the shape of the S-curve will look like. Starting that investigation is critical both for the Postal Service and policy makers concerned about the future of single piece mail users.

3. How should Postal Service operations react to this trend?

If one assumes that the existing postal network is sized to reflect the volumes of 1999, then the existing capacity for handling originating mail is as much as 25% greater than it needs to be. Postal capacity has four components, facilities, transportation, sortation equipment, and labor. Of these, the Postal Service has had the most flexibility in dealing with labor as it can chose not to hire replacements for people retiring. However, the rate of decline suggests that normal retirement rates may not be sufficient to meet the decline in volume.

The Postal Service has asked for authority to offer early retirement to accelerate retirements and allow it to better match the decline in volume. If the decline in volumes is perceived to be a continuing issue, then in may want to open early retirement options for an extended period. This may allow it to accelerate the normal retirement rate to match the decline in volumes without too large of a bump in retirements that could hurt service.

As for facilities, transportation, and sortation equipment, excess capacity can only be handled through restructuring the network. To the extent that service can be provided in fewer facilities or smaller facilities then economies can be made through network realignments. Reduction in space used for originating mail could also free up space for automation equipment for flats and parcels which will allow the Postal Service to consolidate activities previously performed at Air Mail Facilities and Bulk Mail Centers.

4. Are there any opportunities from the downturn in single piece letters?

Another way to ask this question is, “can you turn a sow’s ear into a silk purse?” The answer may be yes. As the excess capacity is on machines handling originating mail, this is capacity that is designed now to directly compete with the services of pre-sort mailers of First Class mail. It may be possible to use this capacity for a new product handling unsorted, trayed, metered mail. Clearly, the per-piece cost of sorting letters on automated equipment is not that different whether you pay an employee $22.00 an hour or pay him $8.00. The Postal Service may even be able to offer a superior product as it may have the capacity to sort this mail on the day it received from the mailer, reducing mailing time by as much as day for mail now being presorted. However competing with pre-sorters may take innovative thinking of the Postal Service, the American Postal Workers Union, and the Mailhandlers Union. The pick-up and intra-facility handling costs have to be kept to a minimum to offer a competitive price to mailers. Also the Postal Service will have to run a streamlined process moving mail through acceptance and from acceptance to processing to ensure that mail accepted on a particular day are handled in timely manner.

The decline in single piece mail is just one of the Postal Service’s many challenges. As the questions above show, meeting that challenge will not be easy but avoiding the challenge is impossible.

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