Friday, January 28, 2011

Postal Policymaking: On the Front Burner

An article in James Fallows blog, written by John Tierney entitled "Postal Policymaking: A Political Laboratory" clearly puts postal policy on page 1 of the new Congress's agenda once it gets past dealing with the issues over which the last election was fought.  James Fallows, better than anyone else, lays out the core problem and the key part of the ultimate solution.  The following bullet points are highlights from his article.
  • ... the real problem is that the Postal Service labors under the burden of accumulated obligations. Over our nation's history, the postal system has been used by Congress to fulfill a wide variety of social and political objectives beyond the delivery of letters and packages: frequent, speedy and consistent delivery; universally available letter-mail services at reasonable and uniform rates; support of a large and well-paid work force; continuation of an expensive rural network; maintenance of numerous collection and distribution points; etc. 
  • The problem here isn't that nobody knows how to produce an efficient and cost-effective mail-delivery system.  That wouldn't be difficult -- at least, not if the Postal Service operated in a political vacuum. To operate the mail system in a more economically rational and sustainable way, postal executives would tailor services to economic demand.
  • ...whenever the Postal Service has tried to save the whole system by cutting its nails (much less cutting off a limb), members of Congress, who ultimately control all postal policy, squeal like cats on a hot tin roof and prevent postal executives from acting. They're afraid of the electoral consequences of imposing sacrifice on their constituents and on well-organized postal workers. 
Mr. Tierney concludes his comments on the Postal Service by stating, "Postal service?  A relatively easy problem to fix."   I agree with him that the policy solution is relatively easy and would require that all stakeholders, the U.S. Treasury, mailers, employees, consumers whose current method of buying postal services may change will have to bare some sacrifices.

I further agree that the real problem is Congress itself and the difficulty that it has in making decisions that could negatively affect any constituent.   Mr. Tierney notes that compared to the federal deficit, the problem facing the Postal Service is small and the sacrifices born by postal stakeholders would be relatively modest.  (This is not to say that the loss of one's job is a modest sacrifice for the individual.)  As he states:

If members of Congress continue to be unable to bring themselves to allocate some pain to us on something that we ultimately can handle with a bit of Tylenol, how can they possibly make the really hard decisions that may require morphine?  A big part of the problem is that it's their pain that they're worried about, not ours.  Legislators are fixated on avoiding the hard decisions that might negatively affect their reelection chances.  We're never going to solve any of our acute enduring problems as long as we have a Congress full of wannabe legislative careerists.

Mr. Tierney suggests that the Postal Service could be the laboratory through which Congress gets its feet wet in solving the more serious fiscal issues that have landmines that hit an even larger number of constituents and affects them even more deeply. If true, then postal policy will move fairly quickly over the next six months and postal stakeholders should be prepared.

Note:  Mr. Tierney has a wonderful description of the failure of the PRA and PAEA in a footnote.   I present it in full below.

The sad thing about that is that in the early 1970s, Congress dealt with a postal crisis of that time by transforming the governing arrangements of the postal system with the objective of freeing it from political constraints so that it would be free to operate in a more "businesslike" fashion.  The Postal Reorganization Act of 1970 changed the postal service from the old cabinet-level Post Office Department into an "independent establishment" of the federal government -- not quite a government corporation, but very much like one.  But the "freeing from political constraints" part of the reform was all pretense; Congress insisted on maintaining ultimate control over all important decisions of postal policy. So the autonomy of postal executives still doesn't extend to important decisions about the scope and form of postal services.  Their hands are continually stayed by members of Congress who fear that the political costs to designing a more rational and sustainable system would be too great.

Mission Statement for House Oversight Committee

Congressman Darrell Issa introduced the mission statement of the House Oversight and Government Reform Committee at the end of the January 26, 2011 hearing on Troubled Asset Relief Program.  The mission statement was introduced at the first hearing of the committee.   As the mission statement was mentioned at the close of the hearing, it has received limited press attention and most postal stakeholders and policymakers have not seen it.   The mission statement is as follows:

Americans deserve to know that money Washington takes from them is well spent. Americans deserve an efficient, effective government that works for them. Our job on the Oversight and Government Reform Committee is to help Americans secure these rights.

For postal policy, the mission statement provides little guidance as to Congressman Issa's or for that manner the committee's thinking.    It may provide some ideas for those interested in policy changes that may be proposed if they look carefully.  In particular, the line of thinking suggests that the Committee is looking for ways to understand:
  • What are the needs of individual, small business, and large business customers of the Postal Service, and how will they change over the next decade?  House members need to understand what those paying postage need from a postal system.
  • Is the Postal Service meeting the needs of its individual, small business and large business customers today and does current law allow them to make the changes necessary to meet those needs over the next decade?   Answering this question will likely require examining how law and regulation restrict the mail market and reduce the economic impact of the firms in the mail and parcel delivery supply chain.
  • Is the Postal Service providing services that its individual, small business, and large business customers need in the most efficient and effective manner possible?  The answer to this question could be used to bash postal management and labor or it could help postal management and labor figure out how to most efficiently serve customers and ensure good paying jobs in doing so in the same manner that United Parcel Service is able to offer good paying jobs to its union employees.
  • Is the money that Washington takes from its citizen in the form of postage to cover retiree expenses that either should not be the Postal Service's responsibility or are overstated well spent?  The answer to this question should focus on determining whether it is good fiscal policy to balance the budge budget by bankrupting the Postal Service and putting the service that generates over $1 trillion in sales and 8 million jobs at risk.
  • Would removing the disputed retiree obligations from the Postal Service be the equivalent of removing a "stamp tax" or a "bailout?"   How this issue is framed is critical in how the tea party faction within the Postal Service looks at changes in postal policy.   
In addition to introducing a mission statement, Congressman Issa managed the hearing in a non-traditional way that many who follow postal policy will appreciate.    He dispensed with the traditional practice of having members of Congress read or make a statement before the testimony of witnesses.   This increases the amount of time available for questioning witnesses and more than likely reduced the total time that Congressmen and women, witnesses, and interested observsers must spend to attend a hearing.  For postal policy, increasing the amount of time when witnesses answer questions is important for this Committee as many of the committee members have limited understanding of the postal market, the system of private sector companies in addition to the Postal Service that takes communications from concept to delivery, take a sale of an item from customer acquisition to delivery of the parcel, and the critical role that physical delivery provided by the Postal Service and private sector firms, most of whom are unknown to postal observers, will have in the future even with the expansion of communications options and mobile and and web based shopping.

Tuesday, January 25, 2011

Postal Service Shrinking its Urban Footprint

Numerous news outlets are report the Postal Service's plans to close stations and branches.   Almost every article focus on the potential affect on rural areas. The following two quotes are typical

Washington Post

The U.S. Postal Service plans to save up to $500 million in the next two years as it works to close or consolidate about 2,000 mostly small, rural and rarely visited retail locations, according to senior postal officials.

 Wall Street Journal

The news is crushing in many remote communities where the post office is often the heart of the town and the closest link to the rest of the country.

However, a cursory review of the list released by the Postal Service, shows that the impact of the first 2,000 closures will affect the nation's urban centers and have minimal impact on service to rural America.

The closures of the these locations only make sense for Postal customers if the Postal Service simultaneously expands its use of contract stations and self service kiosks in supermarkets, drug stores and other retail locations as well as expanding the hours of those Post Offices that remain open and the use of mail and web-based provision of services now provided in retail facilities.   Those plans have been mentioned in the past but there has not been a public announcement of a roll out of expanded use of non Postal Service brick and mortar retail access. 

The closures will have the biggest impact on postal employees that are members of the American Postal Workers Union and the National Association of Postal Supervisors.   While the Postal Service has stated that affected employees would have jobs in nearby facilities, there is no guarantee that the nearby facility will be within a convenient commuting distance.  These organizations along with their allies on the Hill will try to fight these actions but given the fact that the first round of closures affect primarily urban areas represented by Democrats in Congress, it is possible that Congressional action to slow the process may not happen in time.

The more interesting question is how will the Postal Regulatory Commission react to this proposal and whether the Commission's review reduces the number of locations that are actually closed. 

Thursday, January 20, 2011

Apology to Pat Donahoe

I must confess that I am a terrible speller and a worse proof reader.   In the last two posts, I never spelled the new Postmaster General's name right once.   The error has been corrected and I hope he accepts my apology for getting the first rule of journalism, spell all names correctly.

Attrition, VERA, Retirement Incentives and RIF's

The Postal News blog corrected an impression of mine that the Postal Service may be changing its approach to reducing the workforce.
Donahoe told the Washington Post’s Ed O’Keefe that the 7,500 positions being eliminated would be cut by attrition. Eliminating an entire area office requires the use of RIF rules- it’s nothing new. Those rules were followed in all of the previous area and district consolidations, and don’t automatically mean that any employees will actually be involuntarily separated from the USPS. 

My confusion reflects the difficulty of understanding the options available to the Postal Service to quickly reduce the workforce.  Pat Donahoe's statement clearly is consistent is with the strategy that the Postal Service had used under PMG Jack Potter to rightsize its workforce.   In addition the correction reminded me that all options for reducing the workforce have costs and that the options that can reduce the workforce the fastest have the highest costs.   

The lowest costs relate to reducing the workforce via attrition as this method may result in a mismatch between the individuals that leave their jobs at the Postal Service and the work that continues to be required.   The Postal Service must then cover training, transfer and other transition costs to fill those positions that continue to be required from those employees that continue to be on the payroll.

VERA adds costs associated with running an early retirement program and may result in higher levels of transfer and training costs to the extent that a VERA increases attrition.    

Finally offering retirement incentives and and RIF's further increase the cost of reducing the workforce because of the expense of the incentives or the severance payments involved.

To the extent that the Postal Service continues to use attrition to reduce the workforce, Postal management will likely to be challenged by Congress, the GAO, the Postal Regulatory Commission and mailers who have focused on Postal Service cost management in the past to explain why they are not using more rapid means to reduce the workforce than attrition.   When that occurs, the Postal Service needs to be able to explain the difference in cost of reducing its workforce using each of its four options as well as why it was to cost effective to use a more rapid method to match the postal workforce to the Postal Service's actual needs.   

How will Pat Donahoe Change the Postal Service?

A new Postmaster General can reflect either a change in business strategy and operating processes or just a change in tone.   With less than a week in office, Pat Donahoe clearly has created a change in tone.  Whether he changes more than the tone and presentation of continuing policies or makes real changes in the direction of the Postal Service set by Jack Potter remains to be seen.

The place where Pat Donahoe's mark is most clearly seen is in the new structure of Postal Management.   In particular, the new structure makes the follow statements about the future of the Postal Service:
  • Strategic planning appears to have been split.   Financial issues are placed within the Finance Department under the VP of Finance and Planning.   Public Policy Issues are placed within the realm of Government Relations and Public Policy.    These two departments are going to have to work closely together as many of the policy issues and expected proposals to change postal law focus on changes designed to ensure the financial viability of the Postal Service.  
  • The Postal Service organization of its marketing operation appears to recognize that it serves two different markets: retail (i.e. customers who send less than 500 pieces at a time) and wholesale (i.e. customers who send more than 500 pieces at a time).    What is unclear is whether the marketing department has the authority to focus the attention of operations management on making operating changes that reduce operating costs to the extent that regulated or unregulated prices can ensure margins that promote postal self sufficiency.  
  • The Postal Service has placed greater attention on both customer communications and the presentation of its public policy positions.  Susan LaChance's new mandate should give the Postal Service's customers, and in particular its larger customers, a headquarters contact that can cut through the bureaucracy in dealing with service and other complaints.  
  • Management at all levels faces continuing downsizing.   The new management structure reduces the number of officers, the number of areas by one and eliminates 10 districts.  The elimination of one area comes about a year after another consolidation in the Northeast.  The elimination of districts represents an initial effort to consolidate management at that level.   Postal Reporter has noted that the Postal Service is planning to use VERA and RIF rules to handle the reduction of 7,500 postal management employees that these reductions will require.  

    The announcement that RIF rules will be used suggests that the Postal Service may have shifted its strategy for reducing its workforce and will no longer primarily use attrition as a means to reduce the workforce.    The announcement of cut of an area  and 10 districts most likely represents only the first wave of reductions in postal management.    Given that financial challenges will likely remain beyond this fiscal year, additional reductions are likely in fiscal year 2012 and beyond.
Pat Donahoe's mark is less clear in other areas as many of the current legal, financial, marketing, and operating actions of the Postal Service were in place well before he was selected.  The most visible of these actions are the appeal of the Postal Regulatory Commission's recommendation on the exigent rate case, the negotiation of a new contact with the American Postal Workers Union, and the recent acceleration of plant consolidation studies.  Watching how he handles these two areas may provide guidance as to how he plans to change the Postal Service's efforts to modify current postal law and regulatory policy and manage postal operations.

Thursday, January 13, 2011

Debunking the Forever Stamp Meme

In a recent commentary, Newt Gingrich repeated a mistaken understanding of the Postal Service's business and the impact that the forever stamp will have on Postal Service finances.   According to the latest polls, Newt Gingrich is one of the top four contenders for the Republican nomination for President so his comments on the Postal Service need to be taken seriously as they will influence the debate among Republicans about the future of the Postal Service.
Unfortunately for postal stakeholders, Newt Gingrich's comments are problematic in three ways:
  • First, they suggest a significant misunderstanding of the business of the Postal Service and in particular the financial impact of the forever stamp.   
  • Second, his reference to his comments on the Postal Service that are contained in his book, "To Save America," reflect a dated critique of Postal management that do little more than bash postal employees and their unions without an understanding that his solution would not be sufficient to solve the long-term financial problems of the Postal Service.  
  • Third, his comments reflect an understanding of the Postal Service workforce management strategy that has been placed in the waste bin by the new Postmaster General Pat Donohue.
This post will provide some comments on the forever stamps that I hope Mr. Gingrich and others that look to him for guidance for conservative public policy thinking read in order to allow them to begin talking about the Postal Service and its problems in a manner that seriously works to ensure that core delivery component of an industry that employs more than 8 million people and generates sales of well over one trillion in revenue in the private sector.

The Facts on the Forever Stamps

Congressman Gingrich argued that "Congress should block the Post Office from implementing this genuinely dumb move" [making all First Class stamps, forever stamps.]   What Mr. Gingrich misses is that the forever stamp is popular with the Postal Service Customers, reduces the Postal Service revenue minimally and saves significant costs by eliminating transactions for the purchase of 1 and 2 cent stamps when rates change.

The following bullets provide a rough estimate of the lost revenue of the forever stamp.
  • The Postal Service in FY 2010 sold $8.8 billion in stamps, most of which were forever stamps.  
  • Based upon the calculations reported in the United States Postal Service - Inspector General Report on postage in the hands of public, 69% of the postage sold but not yet used is in the form of unused stamps.   
  • At the end of FY 2010 the Postal Service had $2.584 billion in deferred postage revenue.   Therefore, the value of unused stamps is $1.782 billion.
  • Unused stamps represent the equivalent of 2.4 months spending on stamps.  This suggests that most "old" forever stamps will be used within three months of purchase.   
  • If all unused postage is one-ounce letter stamps, then the $1.782 billion in postage represents 4.05 billion stamps outstanding.
  • A rate increase of one cent would "cost" the Postal Service $40.5 million from those not purchasing make-up stamps.
Now, how much would it cost to sell those $40.5 million in 1 cent stamps?   The answer depends on how many people buy at a time.   Assuming that individuals buy ten make-ups stamps at a time, selling make up stamps will involve around 405.2 million retail transactions.    At one minute per transaction, and a clerk's cost of $24 per hour, selling those makeup stamps would cost the Postal Service $163 million.   (405.2 million transactions x $24 per hour/60 minutes per hour)

So getting the $40 million in lost revenue of offering forever stamps would cost the Postal Service $163 million.  The shift was clearly a good business decision for an enterprise looking to cut costs where ever possible. 

Mr. Gingrich needs to reverse his comments on the forever stamp and praise the Postal Service for making this move rather than calling for Congress to overturn it.

Tuesday, January 11, 2011

How UPS Packages are Really Delivered

Surveillance video shows why we get so many door tags.  

What is remarkable is that the video is so similar to the packstation commercial created for Deutsche Post

Tuesday, January 4, 2011

Why Capital and Flexibility Matters stories about service or safety failures seem to pop up nearly weekly.   Two stories today illustrate the need why the financial problem may be even greater than the Postal Service's inability to pay its bills at the end of the year.

  • The Lima News reports of the problem the Postal Service is having in getting mail delivered on time in west central Ohio.  The story describes  mail arriving for delivery late from the processing plant in Toledo which caused carriers to be paid waiting for its its arrival and then forcing delivery well into the evening.   The story also describes a number of instances in which advertising mail is delivered well after the in-home date.   Most telling is this quote from a retired Lima letter carrier Michael Wright, “In Toledo, they don’t have room. It’s chaotic.”

    How could this be fixed?   One option would be to expand the plant in Toledo and its automation capabilities to handle the increased volume.   This would require capital expense that the Psotal Service does not have.  A second option would be a better early warning system that allows senior management at the Chief Operating Officer level to know when a plant is receiving more volume than it can handle so that appropriate changes in sort plans and distribution schemes are made so that mail is delivered on time.    A third option would be flexibility that would allow shifting mail from a plant that has back-ups to one that has more capacity on an ad-hoc basis or permanent basis.  There are three plants near Lima that could take some or all of the mail that Toledo (i.e. Columbus, Cincinnati or Fort Wayne) appears to have difficulty handling.  Finally, management needs greater flexibility for part-time and temporary employees to allow local managers to bring in extra staff on short notice during peak months, or days of the month.

    As the proportion of mail that is advertising increases, the importance of timely delivery increases.   Mail demand shifts from an "as soon as promised" delivery standard of First Class mail to a "specific in-home date" requirement of advertising, periodical, and parcel mail.  Having sufficient operating capacity for peak periods and flexibility to handle variable levels of volume requires both increased capital and flexibility in labor agreements and management thinking.
  • Occupational Health and Safety News reported that the Postal Service faces $238,000 in fines for safety violations in Central Massachusetts Processing and Distribution Center in Shrewsbury, Mass.  Just five days earlier, The Gwinnett Daily Post reported that the Postal Service recieved $80,000 in fines for similar safety violations in the Dultuth Georgia facility.

    These are just the latest of a set of fines the Postal Service has received for electrical safety and training issues in facilities across the country.   Fixing the problems required requires cash to make necessary repairs, provide proper safety equipment, and provide proper training to ensure that all safety procedures are followed and safety equipment is used.   Again, the shortage of cash most likely causes the Postal Service from spending the funds that would be necessary to prevent these fines. 

    The OSHA safety fines raise another question, that is particularly important given how much of the mail is sorted on automated equipment all of which requires electrical power.   Could the problems that cause safety violations be the canary in the coal mine in regards to equipment downtime that could affect service quality and the competitiveness of the Postal Service as a means to handle financial transactions and deliver advertising?  

Did Issa Provide an Entry for Postal Reform?

According to Politico, Congressman Darrell Issa sent letters to more than 150 trade associations, companies and think tanks last month requesting a list of existing and proposed regulations that would harm job growth.   Postal regulations should be included on this list as Postal regulations and law affect nearly 8.5 million jobs in the United States with over 90% of all jobs in the private sector.

This effort now is critical as it does not appear that Congressman Issa has included postal issues among his top priorities for investigations as the new Congress convenes.  The Washington Post summarized his agenda as follows:

Rep. Darrell Issa (R-Calif.), the incoming chairman of the House Oversight and Government Reform Committee, will launch six far-reaching investigations in the first three months of the year. An overview:

Of these six items, only the first can be linked to the problems of the postal industry.   Postal Stakeholders need to develop a concise list of regulations and laws that raise the cost of managing the Postal network, prevent the Postal Service from offering market-based prices to its customers, limits the Postal Service's ability to fully use its existing human, capital, and intellectual property assets to offer services and generate revenue, and impose unwarranted costs on the Postal Service for workers compensation or retiree benefits that it should not be responsible for or have already paid.

In addition to creating this list, Postal Stakeholders need to identify their links to as many of the 150 trade associations and think tanks as possible to ensure that the list of Postal regulations and laws are on that industry's list of regulations that affect job creation.   Mail is a key part of nearly every industry from health care, to retail, to financial services. 
Tying postal reform to job creation should not be hard.   Postal reform creates jobs as mail is now and will remain a core method of communicating with existing and potential customers that are difficult to reach through traditional advertising modes (i.e television, cable television, radio, newspapers, and billboards) as well as web and mobile based methods. Mail remains the primary method of handling financial transactions and will likely remain so for the next few years.  Finally, and most importantly, the mail industry which includes FedEx and United Parcel Service are the backbone that allows for the growth of e-commerce by ensuring delivery of goods purchased over the web or on a mobile device.    The Postal Service is core part of that network as it handles most of the deliveries of light weight parcels regardless of whether the sender has the Postal Service, United Parcel Service, FedEx or some other carrier sell the transportation service. Any regulation that restricts competition in the parcel industry, including competition from the Postal Service, or raises costs of the providers of transportation services reduces the growth of e-commerce by making the products sold by e-retailers less competitive.

Saturday, January 1, 2011

Prediction for 2011 from Fox Business News

Charles Payne made the following prediction on the Fox Business News website. 

"UPS and FedEx will enter into a bidding war for the Unites States Postal Service. The deal is close, but unions balk."
The prediction provides another illustration of how difficult it will be to fix the Postal Service, when commentators are paid to make statements that have no basis in reality.

So what is wrong with this statement:
  • There is no business reason for UPS or FedEx to buy the Postal Service.    The markets that the Postal Service serves best (advertising and document delivery) are markets that do not fit into either FedEx's or United Parcel Service's business of marketing parcel delivery, air express and cargo transportation, truck transportation, and global logistics. 
  • UPS and FedEx find not owning the Postal Service to be profitable. UPS and FedEx make money providing air and other transportation services to the Postal Service and using the Postal Service to deliver light weight parcels to households.   Buying the Postal Service would add additional management challenges and could put the benefits of the current relationship with the Postal Service at risk.

  • Both FedEx and United Parcel Service have corporate cultural issues that would keep buying the Postal Service off the table.  FedEx has made numerous purchases of existing firms in the past in trucking, logistics, and retail printing services.  None of its purchases have been unionized firms and it would seem unlikely that FedEx would start with the Postal Service.  

    United Parcel Service has a close working relationship with its union, the Teamsters and adding the Postal Service could create conflicts between Teamsters and Postal Union leadership.   New labor agreements that the Postal Service will sign in the next year will likely result in wage and benefit structures that are not as generous as what UPS offers its delivery drivers.   Adding the Postal Service could create unwanted pressure to raise wages and benefits to levels offered to Teamsters by UPS.  (The higher compensation levels would likely be linked to strict performance standards and flexibility in the use of part time workers that does not currently exist at the Postal Service.)

  • Both FedEx and United Parcel Service understand that buying the Postal Service requires fixes to retiree benefit issues recommended by the USPS-Office of Inspector General.     Purchase of the Postal Service, or for that matter privatization requires a clean balance sheet  and sufficient cash flow to allow the private owner to use profits to invest in plant, equipment, training, and transition costs.    The current payment schedule does not allow for investments needed to make the Postal Service a financially viable private sector firm.
There are probably other reasons why this idea makes no sense.   Given how bad Mr. Payne's prediction was, clearly business stakeholders in the future of the Postal Service should spend some time working with the commentators, producers and  on-air hosts at Fox Business Channel, CNBC, and other influential business news sources that do not regularly cover the Postal Service in order to reduce the noise that could prevent progress in passing legislative changes necessary to ensure a viable postal industry for then next decade.