Developing a Flat Mail Distribution Network

The Postal Service is in the midst of deploying its automated FSS machines in a limited number of sites.   There has been significant criticism of the program given the significant decline in the volume of flat mail.   However, a map contained in a recent presentation by Quad Graphics suggests that the Postal Service's placement of FSS machines makes some sense if the goal is to create a network that is designed to optimize the transportation and handling costs without building a new flats distribution network from production location to delivery location.    

So here are the maps that allowed me to draw this conclusion

Quad Graphics Periodical and Catalog Printing Plants

 Similarities Between the Maps

What is clear from Quad Graphics map of plants is that catalogs and periodicals are printed in a limited number of locations.  The FSS Deployment locations are generally close to the location of the Quad's plants, although they tend to be in large facilities near the population centers that are closest to a Quad Graphics plant.

Completing the End-to-End Analysis

In order to complete a full end-to-end analysis, additional information on production locations and volumes would be needed from plants producing flats in significant volumes from the ten largest printers of catalogs, magazines and other high volume flat-shaped mail.   In addition, the Postal Service would need to add information on First Class single-piece flats and flats produced in smaller volumes but still eligible for discounts that are not produced by the largest printers in the United States. This information could then be analyzed along with transportation costs for moving flats from these plants to Postal Service plants, sorting the flats at origin plants and sorting the flat mail into carrier sequence order in high-volume flat sortation facilities that were optimally located given the location of production facilities and the ultimate destinations, and then transporting this carrier-route sorted flat mail to the delivery units.

This analysis would easily show whether the mailer (e.g. magazine publisher or advertiser) gets a better deal using an optimally designed flat-mail network or one that is designed using existing facilities that minimizes both capital spending and disruptions in where  Postal Service employees work.  This analysis could also show whether mailers do better with the current discount structure and the Postal Service's flats distribution network that uses a limited amount of automation or one with fewer drop-shipment locations but with a streamlined and more automated network.

The analysis could also be used to determine if the Postal Service could make flat-shaped mail more attractive by reducing the time it takes to move mail from printer to delivery.  If as I suspect, this streamlined network would reduce the time associated with moving mail, then mailers may find new uses for flat-shaped mail that require quicker concept to delivery time.

Unfortunately, given the financial problems of the Postal Service, this analysis would be little more than an academic exercise.   There is no money to build optimally located plants or handle the transition costs associated with moving employees into new plants, so the Postal Service must use facilities that have extra capacity even if they increase the total delivered cost of delivering flat-shaped mail.  

The fact that it is an academic exercise does not mean conducting the analysis, and a similar analysis for handling letter mail is not worthwhile.   In fact these analyses would be a critical step in understanding the full capital needs of the Postal Service and understanding that the financial problems of the Postal Service go far beyond a problem of not having sufficient cash to meet its current obligations.

Smart Post - What Does its Success Suggest for Letter and Flat Mailers

In my previous post, I noted that FedEx volumes for Smart Post exceeded the Postal Service's measured volumes for Parcel Select.   This implied that FedEx Ground, UPS and other parcel consolidators used other postal products, most likely Standard Mail Parcels, to handle the parcels that they want delivered less than 1 pound.  The attention that Smart Post received from analysts raised some additional questions that suggest that there may be Postal Service revival strategies that are not the focus of the current discussions about future business models for the Postal Service.

So lets start with what we know about Smart Post and how the Postal Service handles it.

What We Know

1. The volume of parcels that FedEx Ground and United Parcel Service employ the Postal Service to delivery are growing faster than the United States parcel market is growing.
2. The volume of parcels that the Postal Service is handling for all customers is not growing as fast as the overall market.  
3. The Postal Service's volumes for its products that that FedEx Ground and UPS use is declining while their volume using these products are increasing.  This trend means that the Postal Service is becoming increasingly reliant on FedEx Ground and United Parcel Service to market its delivery services to shippers.
4. The growth in the use of the Postal Service by FedEx Ground is attributed to the improvements in delivery service quality that came when the National Distribution Center network restructuring was implemented.
5. The growth in the use of the Postal Service also came at a time that the Postal Service held rates for parcels under 1 pound constant (due to the rate cap) making the Postal Service's delivery service more competitive with FedEx Ground or United Parcel Service using their own resources to deliver light weight parcels.  It is unlikely that costs that FedEx Ground or UPS would have incurred using their own resources remained constant during this period. 
6. The network distribution center realignment has reduced the cost of handling bulk parcels.  See USPS-OIG (Management Advisory Report – Network Distribution Center Phase 1Activation (Report Number EN-MA-10-001)
7. The cost savings from the network distribution realignment would have been larger if management had taken actions to reduce excess employees months earlier than they had.  (See (Management Advisory Report – Network Distribution Center Phase 1Activation (Report Number EN-MA-10-001. p 12) 

What Are The Implications?

• A serious network realignment effort both cuts costs and improves service.
• Improvements in service and competitive prices increase use of the Postal Service's delivery service.
• The Postal Service could improve its competitive position in the delivery of printed advertising if it implemented a network realignment for its letter and flat mail streams that at least as aggressive as it just did for parcels.
• It may be time to rethink the current classification of some parcel services as market dominant products as most users of these products are buying delivery services from the Postal Service in a highly competitive market for the provision of services to deliver small parcels.

What is holding back the Postal Service?

1. Cost savings from network realignments require that plans to excess employees need to begin before it is known how many employees may be released.  The USPS-OIG report indicates that it takes between 4 and 11 months to complete the Article 12 provisions in its labor contracts.   So unless it begins the excessing process before a consolidation is approved, it will have excess employees in standby rooms for months waiting for the negotiated process to be completed. 
2. Currently network realignment including excessing unneeded employees takes as long as 18 months from the time a proposal is announced until all excess employees are reassigned.
3. Current facilities may not be the right size or in the right location to optimally restructure the network.  For example, consolidating carrier route sequencing in processing plants would reduce operating costs and increase the proportion of mail that the Postal Service handles that is route sequenced, as this consolidation reduces mailer transportation costs to the location where the sequencing occurs.
4. Capital does not exist to cover the costs of relocating or expanding facilities to meet the needs of a more streamlined network.   
5. Capital does not exist to cover the severance or early retirement incentive costs required to handle excess employees.
6. Political considerations make it difficult to consolidate facilities and just as importantly increase the time required to complete public hearings prior to announcing that a consolidation proposal will proceed.   The effort required to prepare and hold public hearings add to the cost burden. 

Network realignment should have been the Postal Service's first priority in its effort to cut costs as it is the one cost cutting move that actually improves the quality of service the Postal Service offers by streamlining the delivery process.  The combination of numerous actions of Congress that drained the Postal Service of needed cash, declining revenue due to electronic diversion and the recession, a nearly 18 month time frame from the time a proposal is proposed to the time all excess employees leave the payroll, the political minefield of reducing postal employment at any time and in particular during a recession put it on the back burner.

Instead the Postal Service is moving forward with actions that affect its core customers (mail that contains advertising, including advertising in magazines and accompanying bills and statements) the most: eliminating service on Saturdays and raising prices.   The impact of this strategy is clear.

• Valassis is expanding its use of alternative delivery networks in nearly every market where such services exist.
• Firms that provide alternative delivery in portions of markets are expanding the geographic reach to cover more households.  For example, Donnelley Distribution has just added Delaware County Pennsylvania to its coverage area and Power Direct is expanding into the Las Vegas market.  Both of these companies provide services that effectively compete on a price and service basis with the rates the Postal Service charges for saturation flats.
• The Economist is experimenting with home delivery using delivery services that provide newspaper or periodical delivery for other customers.  If the Economist's subscribers like the new method of delivery, it is likely that the Economist will continue to use alternative delivery. 
• Major media companies, in addition to expanding their use of alternative delivery for periodicals and saturation advertising, are discussing nationwide distribution deals with hand delivery companies to move items currently handled as First Class mail to alternative delivery using a combination of drop-shipping and same day delivery, a service that the Postal Service does not offer, to avoid violating the private express statutes.

Postal Policy: Now its Congress's Turn

Now that the Government Accountability Office report is out it is time for Congress to get down to the serious business of re-evaluating the current business model and regulatory framework.  Congress is starting this process with hearings in the House and Senate, this week and next. In preparing for these hearing, members on the relevant committees have a significant challenge preparing for the postal and other governmental witnesses.
Both hearings will focus on reports by the Postal Service, Government Accountability Office and the USPS Office of Inspector General.

• Federal Budget Treatment of the Postal Service by the USPS OIG
• The Postal Service’s Share of CSRS Pension Responsibility by the USPS OIG
• Final Management Advisory Report – Estimates of Postal Service Liability for Retiree Health Care Benefits by the USPS OIG
• Ensuring a Viable Postal Service for the Postal Service: An Action Plan for the Future by the U.S. Postal Service
• U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability by the Government Accountability Office
• The U.S. Postal Service’s Financial Condition: Overview and Issues for Congress by the Congressional Research Service

In addition to representatives of the entities that produced these reports, members of Congress will hear from the Office of Personnel Management and the Postal Regulatory Commission who have an interest in many of the suggested changes in law that the reports discuss.

The three reports by the USPS Office of Inspector General cover technical actuarial and accounting issues over which there is a dispute between the Postal Service and the Office of Personnel Management as well as a critique of Congressional budgetary actions relating to the Postal Service. The CRS, GAO and the Postal Service have recognized the importance of the resolving the CSRS accounting and retiree health care funding issues in their reports. The critique of Congressional budgetary actions provides some context as to how Congress and the Office of Management and Budget has historically viewed their responsibility for the Postal Service and how the Postal Service’s cycles of strong and weak financial performance can be used as part of the solution of meeting budget goals.

The Postal Service’s report provides an action plan for operating its business within the current business enterprise business model. The modifications requested are changes from current financial, operating, employment, and marketing efforts that Postal Service management and the Board of Governors are sufficient to return the Postal Service to financial stability.The Postal Service’s report does not address the overarching mail industry policy, corporate governance and regulatory framework issues in any detail. Nor does the Postal Service report provide a vision for the Postal Service’s role in the US economy in 2020 that is much different than what now exists with the exception that its impact will be much smaller.

The GAO’s report, like the one produced by the Postal Service, provides strategies necessary to improve Postal Service operating, and to a lesser extent revenue management, and highlights Congressional action necessary to allow those improvements to occur. The GAO report goes beyond previous reports in its examination of the Postal Service’s cost structure and the legal impediments that prevent it from adjusting its costs to match current and projected revenue. The GAO report, like the Postal Service report does not address in detail the mail industry policy, corporate governance and regulatory framework issues that affect the Postal Service’s ability to implement operating, and marketing plans to best meet the needs of mailers and parcel shippers.Neither does the GAO report provide Congress with information that would help it understand the role that the mailing industry, and the Postal Service as the core of that industry could have in the US economy in 2020 and beyond.

The Congressional Research Service (CRS)report focuses on a “number of ideas for incremental reforms have been put forth that would improve the USPS’s financial condition in the short term so that it might continue as a self-funding government agency, all of which would require Congress to amend current postal law.” The ideas that the CRS reviews are those previously presented by the Postal Service and the USPS OIG and include many included in the GAO report as well. The CRS notes the objections of the Office of Personnel Management to the changes in retiree benefit obligation calculation or funding schedules. CRS’s description of the report’s focus nicely summarizes the overall tenor of all of the reports that Congress will review in upcoming hearings.

Before developing their approach to questioning the witnesses, members of Congress have to first understand what the reports that the witnesses are presenting to them are and what they are not. The reports that Congress has before it present:

• Incremental reforms that proponents suggest would improve the Postal Service’s financial condition in the short term; and
• Incremental reforms that retain the current model of the Postal Service as a self-funding government agency

What Congress does not have before it is a framework for understanding the broader policy context within which these incremental reforms fit. As CRS notes, the incremental reforms in the various reports do not answer the question: “Is the USPS, as currently constituted, incapable of responding to a shifting, and possibly declining, market for its products and services?” It is this question that raises the fundamental questions about postal industry policy, governance of the Postal Service, and the regulatory framework that makes sense for the postal industry. If the answer to this question is yes, then the incremental reforms make little sense unless they are steps in the direction required to create an entity capable of responding to a shifting and possibly declining market for its products and services.

The following set of questions represent examples of the types of questions that Congress needs to ask witnesses in order to develop the framework within which incremental reforms make sense.   While some of the government entities can answer these questions, many of them go beyond the scope of the studies that they have just completed or their role in developing postal industry policy.
It may be time for Congress to begin the process of framing these questions so that GAO, CRS, the USPS OIG, the USPS or entities in the executive branch responsible for economic development, communications and transportation policy answer them.  After they are answered, Congress will be able to move forward on the incremental steps that the various reports suggest with an understanding of the broader policy context within the individual steps fit.

General Postal Industry Policy

1. What should the overall objective of postal industry policy over the next decade and beyond and where does the Postal Service fit into that objective?
2. Is that objective different from the objective of either the Postal Reorganization Act or the Postal Accountability and Enhancement Act both written when digital competition was less pervasive?
3. Is a self funding government enterprise, the best way to employ the postal market to generate economic growth and jobs in the United States or do other models provide greater opportunities to grow the US economy?
4. What impact do restrictions on entry of private sector entry into mail delivery and the Postal Service into non-postal products have on economic growth and jobs in the United States?
5. What benefits are generated by these restrictions and how do the benefits compare to the impact on economic growth and jobs?
6. What impact do current postal pricing law and the Postal Regulatory Commission’s interpretation of that law have on U.S. economic growth and jobs?  How would different postal pricing law affect or regulatory policy affect economic growth and jobs?
7. How does Postal Rate Commission regulatory responsibility affect economic growth and jobs and how does that compare to the benefits of regulation?

Postal Governance

1. Is the USPS, as currently constituted, incapable of responding to a shifting, and possibly declining, market for its products and services?
2. Is the USPS as currently constituted handicapped in responding to a shifting and possibly declining, market for its product and services?
3. How does the current governance structure as a government sponsored enterprise affect the Postal Service’s ability to manage the types of changes that the GAO, the CRS and the Postal Service describe?
4. How does the governance structure affect the speed at which the Postal Service reacts to changes in the postal market?
5. Does the current Postal Service board have sufficient experience in managing similar enterprises?
6. What would be required to ensure that it does?
7. How does the choice of a governance model (i.e. private sector vs. government enterprise) affect the choice of regulatory policy for the industry?

Financial Objectives

1. What is the financial measure that determines whether the Postal Service’s action plan or for that matter any action plan succeeds?
2. Is that financial measure sufficient to ensure that the Postal Service is self sufficient?
3. What is the financial measure that determines that a government enterprise is self-funding and is that the same measure that would determine if it is self sustaining?
4. Does self sustaining require only accounting break even or does it require a positive operating margin and rate of return?

The Postal Market

1. What is the fundamental role in the US Postal Service in the US communications and goods distribution infrastructure today?
2. By 2020, what proportion of mail will contain advertising whether in the form of direct mail, inserts in bills and statements or periodicals? How much greater is that from today?
3. How will the increased importance in revenue from advertising change the fundamental role of the Postal Service?
4. What impact does digital delivery of transaction documents, advertising, and personal communications have on the value of the Postal Service monopoly?
5. How should that impact be measured?
6. How does the existence of digital alternatives affect the price competitiveness of mail?
7. In particular, which industries using mail to distribute periodicals, send documents and correspondence, handle business transactions or advertise of customers are most sensitive to competition from electronic alternatives?
8. How does the proposal to eliminate a day of delivery affect individual vertical mail markets (i.e. personal correspondence, weekly newspapers, real estate advertising, supermarket advertising, utility bills and payments, etc.)?

Employee Costs

1. How do Postal Service wages and benefits compare with those offered by private sector firms in the postal industry such as FedEx, United Parcel Service, and Pitney Bowes?
2. What was the difference in the retirement rate of early retirement offers using voluntary early retirement authority and the incentives granted last fall?
3. How many months prior to normally planned retirement date do those that retire with an incentive retire and how much does that save the Postal Service?
4. What is the difference in net present value cost of offering an early retirement incentive to an employee as compared to retaining an employee whose position is excessed and paying them a salary above what their new position normally calls for?
5. How does attrition rate affect the decision to reduce network capacity?

Network Optimization

1. (For the GAO) How long have you presented recommendations that the Postal Service take effort to reduce its operating network?
2. What are the impediments in the Postal Service’s governance structure, labor agreements, cash flow, or culture that has prevented it from acting on network realignment faster?
3. How do attrition rates affect the decision to restructure the network?
4. How would the restructuring differ if the proportion of part-time employees increased?
5. How would the speed of the processing network optimization change if retirement incentives were readily available to handle the reduction in the need for employees?
6. What would be the upfront cost of using retirement incentives as part of a network restructuring?
7. What should the overall objectives of a postal network / retail network realignment commission be set?
8. Should a postal network / retail network realignment commission have the authority to make recommendations in regards to policy, governance, or regulatory impediments to the development of an efficient and effective network of processing and retail facilities?

Retail Access

1. What should the metric be for determining retail access to the services the USPS offers?
2. What proportion of users of retail customers of households and what proportion of users are non-households?
3. How often do households on average use a retail postal outlet? Does it vary by age, geography, or rural area?
4. What is the difference in access to retail services today in urban, suburban and rural parts of the United States?
5. How does access to USPS retail services compare to access to retail services of UPS and FedEx in urban, suburban and rural parts of the United States?
6. How have UPS and FedEx managed with primarily a contract/self-service model and are there differences in their retail customers that could affect the use of that model by the Postal Service?
7. What is the experience in other countries with their satisfaction with postal retail services before and after a switch to self-service and contract models?

Pricing

1. Is the issue of money losing products more an issue of cost levels or price levels?
2. What impact would only solving the problem with raising price have on the volumes handled and the ability of the Postal Service to meet its policy objectives?
3. GAO in its list of highlights for revenue generates suggests that the Postal Service revise pricing for market-dominant products, such as First-class Mail and Standard mail?
4. What revisions does the GAO suggest the Postal Service make?
5. How does current regulatory precedent and pricing objectives affect the ability to make the changes that GAO would suggest?
6. How do pricing objectives in the law and PRC precedent affect the ability of the Postal Service to implement the pricing flexibility that GAO and others suggest?

150 plants and 400,000 employees

On November 5th, former Deputy Postmaster General Michael Coughlin suggested that the Postal Service in order to survive must have a much smaller footprint with possibly 150 plants and 400,000 employees. He made his remark in response to a question of Representative Danny Davis at the hearing of the Federal Workforce, Postal Service and the District of Columbia Subcommittee of the House Committee on Oversight and Government Reform.

While the hearing was about potential sources of new revenue, the question and the answer suggested that revenue generating options suggested by the panel will not generate the $3-5 billion in additional revenue that the Postal Service will need to be truly a viable enterprise. His answer further suggested that the Postal Service's current approach to cutting costs, while more effective than they have been in the past does not do enough to shrink the operating network down to either current levels of demand or even lower levels that are expected in the years to come.

Given former DPMG C0ughlin's experience, his response should be a considered a serious hypothesis about what a true redesign of the Postal Service would look like. His response raises an important question that opponents of shrinking the network will raise. Can the Postal Service maintain service levels if the network of processing plants shrinks to less than half of its current size?

To answer that question in the affirmative, and it can be answered that way, requires a major rethinking of the design of processing and transportation networks. If the Postal Service was to shrink to 150 processing facilities, two thinks would clearly change, the distance (and travel time) between processing facilities and delivery units would grow, and the time that mail is handled within each of the facilities must shrink.

For example, if the originating and potentially delivery facility moves from 10 miles to 90 miles from the delivery unit, then the time available for processing originating mail from open dump and cull to delivery point sequencing drops by 4 hours, assuming an average travel speed of 40 miles per hour. Fewer processing facilities means that facilities will be further apart, so critical dispatch times will likely be earlier to ensure on-time arrival.

Therefore the primary driver of 150 facility network would involve designing a facility that can handle turn-around times half of what they are today. Lower volume levels aid in cutting total sortation time. But new thinking about the use of automation and material handling systems must focus on reducing time as much as labor expenses. The 150 facility network would likely require larger facilities on average that can handle all of the sortation and material handling equipment that would be needed to cut handling time within each processing facility.

The 150 facility network would also require removing two key assumptions that drive all current network modeling. 1) Existing facilities must be used. The 150 facility network will likely have major processing facilities in locations further from population centers than current plants, with locations driven by access to the interstate highway system or major air facilities. It is possible that larger urban centers will retain some DPS sortation but only if it reduces total handling time. 2) The standard work shift within a plant is eight hours. The 150 facility network will likely have work for no more than 1 full time and 1 part time work shift. To the extent that DPS sortation remains close to delivery units, then that shift will likely also be part time. The proportion of full-time jobs could rise if divisions between crafts and all restrictions that prevent a person from having two different "jobs" within eight hours were eliminated.

The shift to a smaller network could have some significant management benefits. A smaller network is simpler to manage. While every node must operate as precisely as the finest Swiss watch, controlling variations from best practices would take less time to implement. Reducing time in plants requires a 6-Sigma, zero-defects, or whatever the current buzz-word is for eliminating errors that increase time and costs can be more quickly implemented in 150 facilities than in 350.

The shift to a network that is as much focused on reducing in-plant time reflects current mailer demand to both improve mail delivery reliability and reduce the time it takes to turn an idea into a delivery. Most importantly, the Postal Service has to be as reliable as e-mail when it promises a delivery date for all of its advertising customers to ensure that their direct mail campaign most effectively complements their broadcast, e-mail or Internet display advertising campaign.

There is one major drawback to implementing a 150 plant Postal Service, which is greater than the logistical and management challenge of shrinking the network; the elimination of 200,000 postal jobs at a rate between 20,000 and 40,000 per year in an implementation plan. Shrinking the network at that rate would create a far louder political outcry than even the first round of base closings. Shrinking the network at that rate would also create significant severance or early retirement costs and the Postal Service does not have the cash to pay them.

So this leads one back to Representative Davis's implied question: Can the Postal Service be saved? DPMG Coughlin's response illustrates that saving the Postal Service will require serious and unpleasant steps. The scale of the change that he suggests, as well as the limitations of revenue generating ideas of all stakeholders, should force Congress to think more boldly as they try to find a new business model and regulatory framework that can save the Postal Service.