Saturday, February 5, 2011

Unbundling Postal Prices

Currently most postal customers have their rates set as a discount from a base rate for the class of the product being mailed.   The discount is based on an analysis of the savings generated from reductions in the amount of work that the Postal Service that the Postal Service does for the customers.

One of the most common discounts for Periodical, Standard, and Parcel products are drop shipment discounts.  These discounts allow customers to reduce their rate by tendering the mail or parcels at a facility close to the destination.

In order to get the drop shipment discounts, the mailer must either provide or purchase transportation services from their plant to the location where the mail is tendered.     In order for the mailer to justify paying for the transportation costs, they must have sufficient volume to generate discounts greater than the transportation costs.    Making drop shipping pay requires larger volume levels the closer the mailer gets to the final destination.

Since 2009, the Postal Service has conducted the Collaborative Logistics Market Test which has tested the sale of less-than-truckload transportation services over its existing transportation network.   The most recent quarterly report indicated that the customers for this service represented "traditional freight companies as well as mail consolidators."

The interest of mail consolidators in this service makes perfect sense.  By using the Postal Service's transportation service they can then use an agent at the destination who can both claim the pallet and direct that the pallet be moved to the appropriate location at the facility for acceptance and/or processing.  In doing so the consolidator can then provide its customers with a service that allows them to pay the lowest possible rate for both postage and transportation of the mail from origin to destination.  

If the Postal Service had to charge the "official" rate for mail that was dropped in Dallas rather than Shreveport, La the mailer would pay more than the charges that they can pay with the market test that allows them to pay the postage for mail entered at Shreveport and the transportation from Shreveport to Dallas separately.   The mailer's only additional cost is for the agent of the consolidator or the freight firm who will ensure that mail that arrives in Shreveport is moved to the location in the facility where paperwork can be checked and the processing and delivery process begins.

The Postal Service currently can offer services in an unbundled way if it keeps a Chinese wall between the two services.   This prevents the postal service from handling the movement of the mail from its loading dock area that handles the Collaborative Logistics services to the area on the same loading dock for drop-shipped mail as well as collecting the paperwork for the transportation and processing charges at the origination facility.  Clearly, mailers would benefit if this Chinese wall was removed.

Removing the Chinese wall requires rethinking how postal products are costed and priced.  In this case, the Postal Service would generate profitable prices by first estimating the cost of only providing acceptance, processing, transportation and delivery service from the destination processing facility to the recipient and then estimating the cost of providing transportation service from another facility.  
The customer's price would then be the price for delivery from the destination facility plus an add-on charge for transportation from another facility where the pallet of mail is dropped off.

Fixing this problem requires the Postal Regulatory Commission to agree that postal costs should be measured from the bottom up and not from the top down as they are now.  It would require it to accept the use of imperfect automated data systems as a replacement for costly sampling systems that were not designed to develop precise product costs at the level of product and customer detail necessary for today's Postal Service.   

Once product costs were measured from the bottom up, the Postal Service would have the ability to expand this market test and introduce a bundled service that combines a mail processing and delivery service for mail dropped at the destination facility and a transportation service for moving a pallet of mail from another facility on a Postal Service truck.   The sooner this occurs, the sooner the Postal Service can offer lower rates to mailers who can palletize their mail but can't justify the transportation costs to move the pallet to a destination facility.   Given the Postal Service's financial challenges, there is no time to wait to shift to a pricing system based on bottom-up costs that would allow this to happen.

1 comment:

William Tyndale said...

Nice analysis of a complex problem. One of the greatest impediments to ensuring the future of the Postal Service is the navigation of its Byzantine rate and measurement systems.
Much of the rationale underlying the current approach is based on the first class letter monopoly. I think it's fair to say that there wouldn't be a rush of competitors to deliver mail door to door if the monopoly were rescinded.
The mailbox monopoly is more problematic since it deals with access and security issues although in many places competing delivery outfits could easily add to the current mailbox.
The point is that much of how we view pricing is tied to our understanding of the supposed monopoly privileges granted to the Postal Service in exchange for the responsibilities of universal service.
Perhaps it's time to view universal service as a driver of infrastructure development and base pricing solely on network utilization.