Thursday, July 22, 2010

If UPS can do it why can't the USPS

In its conference call discussing its 2nd Quarter 2010 results,  UPS explained that the growth in its profitability this quarter reflected the fact that while volumes grew slightly, both labor hours and miles driven were down.    The decline in the use of labor and transportation assets reflected a more streamlined network than what existed a year earlier. The streamlining put downward pressure on the total work hours of its Teamster employees.

In addition to streamlining its network, the total complement and work hours of Teamster employees, UPS also made major strides in cutting layers of management by eliminating a significant portion of its district and regional management.   Elimination of middle management reflects the fact that UPS's standards based management approach and strong information technology platform allows fewer managers to manage more territory and employees effectively.

The Postal Service, even though it has reduced work hours and employees, has not been able to get ahead of the curve in streamlining either its facility or transportation network.  The Postal Service has not been as aggressive as financial conditions warrant in streamlining regional and area management.

Looking forward into 2011, the Postal Service expects that single piece First Class mail will decline by double digits from current levels and bulk First Class mail will decline by 6% further increasing over-capacity in its collection, mail preparation and origination sortation operations and may reduce demand for destination sortation capacity as well. 

No one knows how well the consolidation efforts now in the evaluation stage will work to reduce the over-capacity problem.  However, the public method projecting savings underestimate the benefits of plant consolidation because 1) they do not use volume forecasts which would identify the impact of declining First Class volumes on capacity needs; and 2) they do not use a net present value analysis that would show the impact over 2 to 5 years that would clearly show the value of early retirement incentives and some capital expenditures to speed the consolidation process and operating cost savings. 

In addition, consolidation efforts are limited due to three reasons:
  1. the lack of capital that forces the Postal Service to use existing facilities that may not be ideally located for the most cost-efficient means of providing high quality service;
  2. the lack of a employment plan that includes focused early retirement incentives and severance pay that would reduce head count more quickly than now occurs; and
  3. full time job requirements which are increasingly difficult to justify given both declining originating volumes and the efficiency and service quality requirement that proportion of time that mail spends inside the walls of a processing plant decrease and the the time the mail spends in transit increases. 
 As both the shareholder and bondholder of the Postal Service, Congress needs to have a clearer understanding as to:
  • the network that could optimally handle mail volume in 2020 while improving on or maintaining current service levels and how the constraints listed above prevent the Postal Service from having such a network;
  • the additional costs that are imposed by the constraints identified above;
  • the cost impact of not having such a network and the impact of those costs on postal prices and to a lesser extent on employee compensation; 
  • the risks of not having such a network creates for the Postal Service's ability to pay its obligations to the treasury and be self-sufficient; and
  • the impact of not having an efficient operating network on economic growth.
Additional Comments:

Retirement Liabilities:  I do recognize that the Postal Service has expenses for retiree benefit liabilities that no private sector company does in addition to having had its obligation for pension liabilities overstated.   However, even if these expenses were liabilities were removed from the balance sheet, the Postal Service would still face the challenge of dealing with flat or declining volumes total mail and declining First Class mail volumes which has created the need to adjust the sortation and transportation networks.     In order to be financially self-sufficient, the Postal Service has to move from behind the curve to ahead of the curve in its efforts to ensure that operating capacity fits the demand for mail.

Cuts in Management:   As one reader noted, the Postal Service has made some cuts in district and area management.   However,  UPS has made an even larger proportional cut in middle management than the Postal Service.   UPS made these cuts in order to deal with profitability challenges that exist due to competition from FedEx and slow growth in demand.   The Postal Service's profitability challenges are even greater which would suggest that further consolidation of area and district management may be warranted on top of its efforts to streamline its production operations.

    27 comments:

    Anonymous said...

    Have UPS pre fund their retirement system 10 years in advance. Fed Ex too. Alan you are not comparing apples to apples here.

    humbug said...

    If you read the article the UPS has reduced management. The USPS has reduced craft workers by over 30% since 2001 yet they have INCREASED MANAGEMENT. Until the USPS has someone hold this management happy 3 to 1 ratio this institution will fail.

    Anonymous said...

    By far the largest factor contributing to USPS financial state is the $5+ BILLION payment required by the PAE act of 2006. Why does your editorial ignore it?

    Anonymous said...

    UPS miles driven were down (Fewer homes to deliver to)

    USPS has to deliver to nearly every home in the USA each day!!!!

    You can't compare a business and a service!!!

    Anonymous said...

    UPS miles driven were down (Fewer homes to deliver to)

    USPS has to deliver to nearly every home in the USA each day!!!!

    You can't compare a business and a service!!!

    Mailman said...

    Firing secretaries, etc. is NOT cutting Postal mgmt.

    And that is ALL the "management" that has been cut.

    In fact, since 2000, Postal mgmt. numbers have *increased* %38.

    In other words, by stating that there have been cuts in Postal mgmt., once again, they are shown to be liars.

    How can anyone believe a word from a group that didn't know they were missing $78 billion dollars until an outside source told them ?

    Anonymous said...

    UPS does about 4 billion deliveries a year with 240,000 employees. USPS does about 175 billion with 590,000. Draw you own conclusions about efficiency.

    Anonymous said...

    Did anyone know that UPS is taking all their small parcels to the USPS for delivery? I deliver dozens of parcels with UPS labels daily.

    Anonymous said...

    about time someone addresses the excess layers of management...

    Anonymous said...

    According to David Ip of the economist Magazine.....the bulk of UPS's gains have been in the overseas markets, namely China. As you can guess the labor costs do not compare!

    Anonymous said...

    Also not mentioned is the fact that it's almost impossible to close a facility because of Congressional interference. And here's a note to the author: in the future, please report ALL the facts not just another rip-job on labor. You actually made this one a two-fer by going after UPS' Union employees as well. You should be SO proud of yourself.

    Anonymous said...

    I see no mention of the "last mile" contracts that both UPS and FedEx have with the USPS. If neither company has to deliver the "last mile" then of course their transportation/labor cost would be down.

    tchamp said...

    I'll give you the only reason why the USPS can't do it. "POLITICIANS"

    All 535 of them have something to say about what the USPS can and can not do.

    UPS and FEDEX just pays them to get what they want. You know, campaign contributions.

    Timeless said...

    You left out the most important obstacle that the USPS faces that UPS can avoid, congressional interference. UPS makes a few significant campaign contributions and problems go away USPS doesn't have that luxury we have congress as a parasitic partner. I would like to see how UPS management would cope with congress "helping" manage their business.

    Alex said...

    More IGNORANT comments by a Free Market Necon. Alan you are TOTALLY CLUELESS how the Postal Service Operates.

    It is a PUBLIC SERVICE overseen and run by the FEDERAL GOVERNMENT! It is NOT A PRIVATE COMPANY that is free to do what it wants ANYTIME IT WANTS!

    Unlike UPS which answers to no one!

    UPS does not have to answer to CONGRESS, the POSTAL RATE COMMISSION, and comply with hundreds of FEDERAL REGULATIONS, hold PUBLIC HEARINGS on any significant change it wants to make. Do impact studies on the changes it wants to make.

    ALL OF WHICH THE POSTAL SERVICE IS REQUIRED TO DO!

    Any Postal Customer can complain to their Congressman who will demand an explanation from the Postal Service. UPS can ignore any complaint it wants to.

    There are hundreds of Federal rules governing hiring, placement, and movement, of Postal Employees. There are FEDERAL MANDATES the USPS has to comply with. UPS has none of these problems.

    NOW YOU KNOW WHY IT CAN'T DO WHAT UPS DOES.

    You are comparing apples and oranges.

    Anonymous said...

    The problem of the USPS is the prefunding of the retirement system that the Government conviently uses at their discression and the incompetence of Postmaster General Jack Potter. He is continually cutting Custmer service, window hours, and Post Office hours, while he continually hires made up positions in his administration paying exhorbant salaries. All the higher ups at the PO in DC should be sent on a deatil to the PO's in various states and try running those facilities for 6 months with the cuts he has made. They all need a reality check as to what is actually taking place. They look at numbers, not the actual offices or the necessary work that is involved to deliver that one piece of mail or waiting on a line of customers out the door, due to his cuts and the budgets that he is dishing out to Post Offices. Wipe out the people at Headquarters and start with the real people that make the Post Office run on a day to day basis. They know howto move the mail and service their customers at the window. Potter and his staff have truly lost sight of the Organization.

    Anonymous said...

    There are too many obstacles that prevent rapid consolidation and closings of plants and post offices. The public always is opposed to the relocation and consolidation of plant or post office operations. In addition, local elected officials always oppose these efforts in order to gain support with their election districts. The unions fire up he public who in turn fire up the politicians which results in a process that moves at a snails pace. Since the USPS receives ZERO tax dollars they should be separated from political pressure and be able to freely make and implement sound cost cutting decisions. As for shrinking management, the USPS is woefully overloaded with layer upon layer of useless management from disrict to area to headquarters. A 50% reduction would have no effect on operation s other than to save money.

    Anonymous said...

    Not only did you fail to mention the pre funding of heath care benefits, you also failed to mention several other factors that the USPS is constrained by, that the other companies do not. First and foremost is universal service. Fed Ex and UPS do not make deliveries to every address in America, as they are not bound to. Next is Congress, the menial twits have no intellect to make decisions for an organization that they know nothing about. The Postal Service has tried to cut costs, but since the dim wits in Washington do not want their constituents to lose either service or their post office the congressional stalemate of the USPS perpetuates. There simply is not enough time and space to explain the differences of the Postal Service and Fed Ex of UPS, but anyone with any knowledge of this will tell you they are not apples to apples in any way shape or form

    Anonymous said...

    i imagine part of that profit margin comes from UPS taking advantage of USPS Parcel Select to have the postal service deliver that last mile in rural areas. The purchasing customer pays UPS shipping, then UPS pays USPS less to deliver the parcel. Nice little profit, I imagine.

    Anonymous said...

    WHAT ABOUT THE FACT THAT WE CONTINUE TO GIVE DEEP DISCOUNTS TO THE BULK MAIL COMMUNITY. HOW COME THIS IS HIDDEN INFORMATION. THE POSTAL SERVICE IS A VIABLE ENTITY! IF THE PREFUNDING AND THE DEEP DISCOUNTS WOULD GO AWAY THEN THE REAL PICTURE WOULD SHOW.

    Anonymous said...

    ups pays the usps $1, that's right folks, ONE DOLLAR to deliver their package the last mile.

    Anonymous said...

    Problem is WAY TOO many levels of USPS management. I worked in the private sector for years, I know!

    Anonymous said...

    USPS serves everyone. UPS does not. I am not referring to delivery. I am referring to sending services. UPS provides sending services only in profitable areas. USPS provides sending services to everyone-rural or not. I live in a rural area, and I know what this means. You are not comparing apples to apples indeed.

    Anonymous said...

    Most of the other comments show that you clearly have NO IDEA what you're talking about when you blather about the Postal "Service," especially its management.

    And you clearly have done ZERO homework.

    There is NO WAY that postal management has ANY ability to do ANYTHING like you propose, which, itself is UTTER nonesense, once again demonstrating your TOTAL ignorance.

    Do you understand ANYTHING about your "government"?

    WHERE is your head? Up your ass?

    WAKE UP!!!!!!!!!!

    You're TOTALLY clueless!

    Anonymous said...

    That's right!

    Censor that which you don't want known.

    The other comments, however, clearly demonstrate that you have NO IDEA what you're talking about when it comes to postal "management."

    Doubtless you're looking to government subsidy from Congress -- just like the failing Postal "Service."

    All that needs to happen is for your failing operation to finish its process -- together with the Postal "Service."

    All based on taxpayer handout.

    Tweedledee-tweedledom.

    Anonymous said...

    More censorship!

    Don't expect YOU to publish the truth, especially when gorging yourself from the public trough!

    adams401 said...

    Having to fund $5 billion yearly payments to satisfy the PAE Act of 2006 puts the USPS at a disadvantage. Without that payment the USPS would have earned $700 million. The USPS is a "service" that must operate under congressionally mandated levels-of-sevice. The military service is not required to show a profit. That would be ridiculous. If Fed-Ex or UPS were required to deliver to every address in the USA, six days a week, first class letters sent across country would be $5-$7. Please compare apples to apples.