Friday, September 16, 2011

The Proposed USPS Network: A Second Best Solution

Yesterday the Postal Service presented its proposal to restructure its processing and transportation network.   The proposal is a second best solution meaning that pricing,  financial, labor contract constraints prevented it from making a proposal that could provide better service or further reduce operating costs.

Pricing and Services

The change in First Class service standards mostly reflect the results of the constraints the Postal Service has on raising First Class rates to cover peak-load and transition costs.  Switching to a network of fewer than 200 plants would have some service impacts but would not require adding a day to the current service standards without changes to plant operating plans. An analysis of the proposed network could easily be completed comparing the cost difference of consolidating plants and consolidating plants and changing the operating plan to implement slower delivery standards.

A previous post illustrated that it is possible to retain current First Class service standards with higher single-piece rates. [Could First Class Mail Service Standard Be Retained?]  That post suggested that single-piece First Class Mail prices would have to go up by 6 to 10 cents over the next few years. However, pricing constraints prevented the Postal Service from evaluating whether higher First Class single-piece rates or slower service and lower costs is the more rational option for ensuring maximum contribution from this product as volume declines over the next decade.  In the review of the Postal Service's proposal, the Postal Regulatory Commission needs to evaluate both options as it is important to understand the impact that the pricing constraint has on potential contribution from single-piece First Class mail.   In addition, the Postal Regulatory Commission needs to clearly rethink its decision to maintain the link between single piece and bulk First Class mail rates. Both Congress and the Commission need to determine whether maintaining the Postal Service's First Class mail commitment should be retained at higher rates, a practice common in Europe, or whether First Class mail service should be allowed to decline.

Pricing Constraints and Rural Areas

The map of new facilities also raises questions about seasonal variations in First Class mail service quality.   Many of the areas that see significant reductions in mail processing facilities are in parts of the country with winter weather resulting in slower inter-city transportation  than in other seasons.  The seasonal difference in service quality needs study by the Postal Service and the Postal Regulatory Commission before it makes a final decision on an operating network.

Financial Constraints

The new Postal Service network represents a network that minimized capital spending.  It uses only existing facilities and existing mail processing equipment.  In addition by expanding processing windows, the Postal Service expands the use of its new letter sorting equipment and eliminates the need to replace its older automated sortation equipment.

The financial constraints have an impact on both the Postal Service's operating costs and the quality of service that the Postal Service can offer. 

The financial constraints affect the operating costs of a streamlined network in two ways.

  • First, the network must use existing facilities.  While some existing facilities are close enough to the cost-optimized locations for a 200 plant network that they would continue to be used, significant parts of the country would be better served by replacing an existing facility with one a significant distance from where existing facilities are located.  Also some plants in optimal locations may be too large or too small for its optimal service area and a less optimally located facility has the capacity in place.    Using facilities in locations that less than optimal eliminates the need for significant capital to build an optimal network but most likely will generate higher processing and transportation costs than would be found in an optimal network designed without the capital constraints.  Facility location has a big impact on decisions to transport mail by air or truck

    [Changes in the next few paragraphs reflect the first comment and presents a better understanding about the use of Postal Service sortation equpment. 9/16/2011 12:51 p.m.]
    Using existing facilities also limits the Postal Service to using the footprint of existing facilities.  This set the limit on the amount of sortation equipment that a facity can hold extending sortation times.   Longer sortation times may shift some mail from ground to air transportation to meet two and three day service commitments as wel as affecting mail processing costs.
  • Second, the network can use only a portion existing equipment.   The Postal Service operates multiple generations of automated sortation equipmen with varying levels of productivity.   The amount of equipment used reflects capital constraints that set limits on the amount of equipment that can fit into the proposed network   The focus on minimizing equipment use also focuses on improving capital utilization with an uncertain impact on labor utilization.   A network optimized to minimize total costs might be less constrained by the amount of equipment used and depending upon other constraints might require more equipment than is now in the Postal Service's inventory to minimize costs or sort mail over shorter periods of time in order to further reduce transportation costs.

    .  Most origination sortation is performed on older automation equipment while destination sortation and carrier route sequencing is performed on newer equipment.   The new operating plan minimizes the use of older equipment by using newer equipment over more hours in a day. 
    If the network was restricted by the amount of  newer equipment available, then some less than cost-optimal consolidations exist to accommodate the limits on available new equipment.  Capital to replace older equipment would have increased the flexibility of the network model builders to develop an operating-cost optimized network.
The financial constraints affect service quality in two ways as well. 
  • First, constraints on capital spending puts facilities in sub-optimal locations that result in increased transportation time between facilities and reduced time to sort mail to meet critical dispatch times in processing plants.   Combined, these factors will add a day or two to service in many locations that would not exist in a network not constrained by a lack of capital.
  • Second, restrictions on capital, combined with labor contract constraints, restrict the ability to reduce the time mail is not moving (i.e. transported, or being delivered) and total time from origin to destination.   Ideally, distribution networks, including networks of Deutsche Post, FedEx and United Parcel Service, minimize time spent at network nodes in order to maximize the distance between nodes and ensure overnight and two-day service commitments over geographic areas much broader than the Postal Service does now.   Their capital spending on plants and equipment accept the fact that its sortation facilities will be fully utilized only during limited peak periods and sit mostly idle for many more hours than the Postal Service plans to have its equipment remain idle.

    The difference between the network optimization approaches of Deutsche Post, FedEx and United Parcel Service and the Postal Service reflects the approach of companies with easy access to capital from retained earnings and private capital markets and an enterprise with no retained earnings or access to capital markets.  The difference in capital makes a significant contribution to the ability of these enterprises to offer better service than the Postal Service does now or will under the proposed operating plan.

Labor Constraints

Even with the new American Postal Workers Union contract, most employees working in processing plants have full time jobs.   The full-time job requirement constrains the optimization of network costs and origin-to-destination delivery times.   Also the full time requirement results in operating plans that use more labor relative to capital than would be optimal from both a cost and service basis. 

The labor contract constraint combined with the financial constraint on capital purchases results in the Postal Service having a higher proportion of its costs as labor than would be optimal.  In many ways, the proposed daily operating schedule that maximizes the use of sortation equipment over a 24 hour day illustrates a constraint driven by the combination of labor contract and financial constraints.

A higher proportion of part-time employees would allow the Postal Service to more easily substitute capital for labor.  Plants would likely be larger and further apart as part-time employees allow the Postal Service to sort mail over short processing windows.   The shorter processing windows would allow the Postal Service to more easily increase distance between facilities without affecting service quality.

Opportunities for Improved Profitability and Service Quality

The constraints illustrated show that a Postal Service operating without these constraints could offer better service at lower costs that generate profits.   The Postal Service's proposal to allow layoffs may have some impact on its labor contract constraints.  It would allow it to increase its proportion of part-time workers to contract limits more quickly but would not give the Postal Service as much flexibility as would be needed to operate an optimal network.

Neither the pricing or the capital constraints are adequately addressed in either the Postal Service's proposal or in any legislative proposal.  

Discussion of increases in Postal Service prices is limited to mail that travels at rates below costs or receives a legislatively mandated discount.   No one has raised removing the constraint on First Class single piece rates in order to minimize service disruptions as the Postal Service downsizes it network.

The capital constraint illustrates the significant investments in plant and equipment could reduce costs and increase profits.   The capital constraint illustrates than maintaining the current payment schedule for retirement obligations, or adding more debt to cover those obligations would not help the Postal Service develop a netowrk that optimally minimizes cost or sets a the capital/labor ratio.  The capital constraint hints that the Postal Service, cleared of the disputed portion of its retirement obligations, would be attractive to private investors who could use their capital to make network improvements that the Postal Service could not afford as long as it remains a government enterprise. 

1 comment:

uncommonsense said...

“The Postal Service operates multiple generations of automated sortation equipment. Most origination sortation is performed on older automation equipment while destination sortation and carrier route sequencing is performed on newer equipment.”
This statement is incorrect. With the exception of single piece first class cancelations, originating and destinating mail use the same equipment, some a little older some a little newer but all with very similar performance characteristics.
Only some of the equipment is capable of coding non-barcoded letters and it must be used on originating mail that is not barcoded. This equipment however is usually newer, not older, and is equally capable of sequencing letters once they have been barcoded. There is a surplus of this equipment available during origination because mailers have been incentivized to pre-barcode mail. This equipment is usually in use at each originating site as sequencing equipment for barcoded mail far more than it is used as originating equipment to barcode mail at the same site.
Single piece first class cancelations are performed on a different type of equipment. In some small rural originating offices with very low volume that is older equipment. In any remotely urban area, that equipment is newer than almost all equipment performing destinating sortation.

“The new operating plan minimizes the use of older equipment by using newer equipment over more hours in a day.”
Actually the new operating plan minimizes the use of building space by allowing the elimination of significant amounts of equipment (old and new) that won’t fit into the existing smaller mail processing footprint.
P.S. The majority of the USPS’s basic letter processing equipment was originally manufactured between 94 and 98. Some is as old as 1990 and some is as new as 2006. The equipment manufactured between 94 and 01 is the most productive. The equipment manufactured before 94 is a few percent less productive but results in less employee injuries because it is more ergonomically friendly than the newer equipment. The 06 equipment is the least productive. It was designed to sort Readers Digest and while capable of that the compromises made in the design to allow for sorting thick items have made it slightly less capable than the other machines at sorting typical letter mail.