Pricing Volume Mail

In my last post, President Burrus' Dilemma, I created significant concerns among mailers that my proposal to the APWU supported their idea to eliminate worksharing. Anyone proposing increasing rates 25% on the Postal Service's best customers in an environment where mail, and in particular First Class mail is at a real price disadvantage with electronic competitors is arguing for organizational suicide.

What I was trying to do was suggest that if the APWU wanted to make a proposal to handle mail now sorted by the private sector that would offer a better value to the Postal Service's customers, I would be glad to help. Given the current economic and competitive landscape, any APWU proposal would have to offer postal customers a better value or preparing such a proposal would be a waste of time and energy.

I would like to use this post to clarify my thinking on pricing volume mail to give my readers a better understanding of how difficult APWU's task of designing a product that offers a better value really is.

The Postal Service's rate structure is complicated and the use of worksharing discounts further complicates thinking about pricing. The primary problem is the word "discount." It suggests that the customer is getting a deal when in fact they are buying a more basic product from the postal service for a lower price. It also suggests that single-piece customers and volume customers are part of the same market for mail and that single piece prices are a real alternative for volume customers.

The alternative way of thinking of postal rates is to start with the basic service as the basis for all pricing. To how this alternative would work, below are two price charts listing prices as they are currently shown and the alternative bottom up alternative.

Current First Class 1 ounce rates table

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
• 150 pieces of barcoded mail sorted to the same 3- digit zip code - $0.357
• 150 pieces of barcoded mail sorted to the same distribution center - $0.360
• Barcoded mail that is unsorted (the residual rate) - $0.382
• Unbarcoded volume mail - $0.414
• Single piece mail (shown for comparison purposes) - $0.440

Bottom-up First Class rate table:

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
  
• Sorting 3-digit sorted mail to the 5-digit zip code - $0.022
• Sorting distribution center sorted mail to the 5-digit zip code - $0.025
  
• Sorting unsorted barcoded to the 5-digit zip code - $0.047
• Barcoding unbarcoded volume mail and sorting to the 5-digit zip code - $0.079

In this way, it becomes quite clear how difficult the task the APWU has. In order to compete with the private sector for the handling of mail that is not sorted to 5-digit level, it wold have to offer that service at a price less than the current charge for sorting mail, but less than what the private sector charges to do it.

In looking at the above list, the product that provides the largest margin is unbarcoded volume mail. The Postal Service charges 7.9 cents to barcode and sort this mail. Mailers have the choice of finding a presorters who will do it for less than that. The highest price the Postal Service could charge these mailers would be what the private sector charges for similar services. This is likely to be much less than the 7.9 cents the Postal Service now charges for this service. Assuming that the private sector charges half of the difference to cover their costs and profits, then the Postal Service could not charge more than 3.95 cents to compete. This is a lot less than the 10.4 cents that President Burrus offered in his challenge to mailers, and is why his response, while possibly appealing to his members was non-responsive to Senator McCaskill.

What this exercise further illustrates is why such a proposal could not be accomplished within the current regulatory structure or with the current business model. Allowing the Postal Service to truly compete would require some major changes. These include:

• Basing all volume prices on the price for the product that involves the least amount of Postal Activity. All other products could be purchased as options. For standard mail, finely sorted mail drop shipped to the lowest practical level would be the basis upon which all prices are based.
  
• Removing all links between single piece rates and volume rates. This approach requires treating single-piece and volume products as separate markets with totally different approaches to product pricing.
  
• Allowing volume based rates. By offering rates bases on the volume of individual mailings and total annual mailing volumes, the Postal Service could offer prices that reflect the impact that volume has on business relationship costs. This is similar to volume requirements for sale rates but differs in that there is no requirement for marginal increases in volumes. Volume based rates are a requirement for contract rates to provide additional handling at prices below list.
  
• Allowing private contract rates. In order for the Postal Service to compete with private sector firms offering sortation or other mail handling services, those prices should reflect local competition for these services. The published rates for providing additional handling services would reflect rate that any volume customer could get without negotiations. In this way, the Postal Service would offer its services to corporate customers in the same manner that its private sector competitors do.
  
• Specific financial self-sufficiency/profit objectives. The Postal Service cannot have the authority to offer contract rates that differ from published rates without a requirement that prevents it from offering prices below not only costs but below costs plus a reasonable margin. At a minimum it must be subject to the same profit discipline of its private sector competitors.
  

President Burrus's Dilemma

In August, APWU President William Burrus was asked by Democratic Senator Claire McCaskill to identify "the substantial steps the APWU is willing to take to assist the Postal Service in weathering its severe financial crisis? In crafting a response, he was faced with a dilemma: how does the APWU appear responsive without proposing anything that will affect upcoming contract negotiations with the Postal Service?

He could not offer any response that required changes in contract provisions as that would put the APWU in a weakened bargaining position even before negotiations have started. Instead he repeated his challenge to mailers and the Postal Service: "The American Postal Workers Union has challenged the postmaster general to discontinue the excessive discounts the USPS offers to large mailers, and instead to compensate postal employees for processing letters and flats at a cheaper per-piece rate. This would reduce the Postal Service’s costs; improve efficiency, and make better use of underutilized equipment and employees. As an added incentive, we propose to process parcels at no charge." (Answer to question 1, third paragraph) Unfortunately for the APWU, President Burrus's response will not appear to be responsive to Congress.

The Dead Tree Edition has clearly laid out the case that Postal Customers will make in refuting President Burrus's proposal in its post, "Mathematically Challenged Burrus Proposal Doesn't Add Up For USPS." Mailers look at President Burrus's proposal only as a significant increase in rates. The greatest increase would be born by those mailers that currently can sort mail while they print. These mailers are mostly likely now paying on average 35.1 cents for First Class mail. For these mailers, President Burrus's proposal represents a 25% increase in postage prices without changing the work that either the Postal Service or the mailer performs. Even the least business savvy member of Congress will understand that raising postage prices by 25% for a major group of customers will drive business away and make the current financial difficulties even worse.

President Burrus's proposal does provide the framework for developing postal products that will both make mail more attractive to some customers and provide jobs for unionized postal workers. These products would serve those customers that cannot sort mail while they print, or cannot sort mail while they print with sufficient density to pay the lowest postage rate the Postal Service offers. His proposal states suggests that the APWU would support the development of products for mailers that produce mail in quantity that requires physical sortation prior to delivery sequencing at rates less than the full letter rate of $0.44. Given that his first proposal of 43.9 cents is unlikely to have any takers among postal customers, President Burrus and his staff at the APWU has to come up with a more realistic price to sort mail currently physically sorted by private sector firms.

In a previous post, "Could the USPS Turn a Jobless Recovery into a Job Full Recovery?", this blog laid out the basic parameters of such a product. If the APWU, or for that matter any other postal union, is serious about competing for the physical sortation of mail now sorted in the private sector, they could contact me at the e-mail listed on this page and I would be glad to assist them in putting together a proposal that they can take to the Postal Service and eventually the Postal Regulatory Commission that would secure more jobs for postal union members.

This post created some consternation among postal stakeholders. A subsequent post, Pricing Volume Mail, clarifies the challenge of developing a product to compete with private sector sortation of mail.

Irrational Pricing at the Postal Service

The Postal Service may be on the verge of having an irrational price structure. The irrationally of the Postal Service's price structure is driven by the regulatory constraints within which it must price its products. Until the Postal Service is free from those constraints, irrational pricing will have detrimental effects on the Postal Service, its customers and its competitors.

How is the price structure made irrational?

The Postal Service had only two choices in setting prices for its regulated products. 1) It could not raise prices and adhere to the requirements of the legislated price cap. 2) It could file an exigent rate case and open up its entire price structure for review by the Postal Regulatory Commission. The first option freezes rates that should rise due to price changes of competitors and changing cost structure affecting particular products. The second option opens up the entire rate structure to regulatory review and would force prices to confirm to nearly 40 years of PRC precedent on pricing and relationships between the prices of various postal products. In particular, this precedent would have likely required that the Postal Service institute a major rate increase on nearly all products at a time when customers are most sensitive to postal prices. Furthermore, an exigent rate case would have the effect of protecting preferred classes of postal customers from rational price changes that violate PRC interpretation of postal pricing law and would most likely cause the most economically and price sensitive mail to see price increases that market-based pricing would not justify.

The choice the Postal Service had is known as Morton's Fork, a choice between two bad options. In choosing to adhere to the price cap, the Postal Service held prices constant at a time that competitive pressures, rising operating costs and substantial operating losses would justify some increases. Opening up its entire pricing structure to regulatory review would reinforce decisions on price relationships made in market environments unlike what now exists and could raise rates far beyond what the Postal Service would want in the depressed economy. Given the difficulty of over tuning PRC precedent, and especially precedent on rate relationships, the Postal Service would have little confidence going into an exigent rate case that the new rate structure would have the rate structure changes that it needs to get back on the path to financial self-sufficiency. Given its options, sticking to the price cap appears to be marginally better for the future of the Postal Service, but it was still not a "good option."

To understand why both options are bad, one only has to look at the pricing decisions of Postal Service competitors, UPS and FedEx and foreign postal operators. All of these firms are expected to raise rates in 2010 and none of these firms are expected to raise rates uniformly across their product lines, delivery locations, or type of customers.

UPS and FedEx are raising rates, after taking into account the decline in the fuel surcharge by around 4%. FedEx's published rates are rising the most for envelopes and parcels under 2 pounds, parcels delivered to residential addresses, and parcels traveling the greatest distance over the FedEx network. (A full price comparison was produced by Parcel Magazine.) The price increases are changing rate relationships across FedEx's range of services.

The published rate changes only affect the rates that parcel customers pay when they tender a single parcel or single envelope at a FedEx Office location or at an independent franchisee, or purchase the service on line and drop the single parcel in one of FedEx's drop boxes. FedEx's largest customers expect that their rate increase will be less due to negotiated discounts that vary based on the volume the customer tenders and the distribution patterns of the parcels shipped.

By not raising its single-piece parcel rates, the Postal Service is likely to gain market share over UPS and FedEx in parcel markets that it already dominates. It will do so at a cost to its financial well being as it will bear rising costs without additional revenue. Without the legal constraints, the Postal Service could raise its First Class parcel, Standard parcel, and single-piece Parcel Post rates as a price follower without affecting the market share of competitors.

Not raising single-piece parcel rates also creates problems for the Postal Service's competitive parcel products. By holding its single piece rates constant, the Postal Service reduces its negotiating room with large scale parcel shippers. The difference in rate between the heaviest First Class parcel and the lightest Priority Mail shipment will grow, possibly encouraging shippers to split parcels to take advantage of lower single-piece rates. It is possible that a profitable contract with a large-scale shipper would be at prices above what single-piece rates are and the Postal Service would be forced to sell services at a loss to customers who can use the capped single-piece rate.

Foreign postal operators have expanded the difference between single-piece rates and rates charged to large volume mailers well beyond the cost differences. A recent strategic review of Canada Post examined the impact of a price cap on single piece rates at Canada Post and recommended that higher rates are required for the financial well-being of Canada Post and the continuation of universal service within a financially self-sufficient entity. (Recommendation 30(iv)) In response, Canada Post has announced a five year pricing plan for the 30 gram (approximately 1 ounce) single-piece First Class letter. Single-piece letter rates are rising 3 cents in January, 2010 and 2 cents each year from 2011 through 2014. To offset the impact on small business, Canada Post is offering a rebate on the first $1,000 of postage equal to the January, 2010, 3 cent increase. Rates for large volume mailers are set within contracts so the actual increases for these customers are unknown.

The Postal Service's single piece First Class rates are still set under two assumptions. First, there should only be a current-cost based relationship between single-piece and volume-tendered mail. Second, the only differences between First Class single-piece mail and volume tendered mail should be the cost differences in handling the two types of mail.

These assumptions worked as long as single-piece First Class volumes were rising or steady. The decade long decline in single-piece First Class mail have shattered both assumptions.

The decline in First Class single-piece mail creates significant transition costs to handle the costs of reducing the workforce, equipment, and facilities that handle this mail that are no longer needed. The decline in First Class single-piece mail also requires that current users of this product bear the future cost of debt (including debt for current losses), retiree benefits, and workers compensation claims. Otherwise rate increases in the future will have to be even greater to cover the annual cash outlays to cover debt payments, retiree benefits, and workers compensation claims in the future.

Limiting price differences between single-piece and volume tendered First Class mail to just cost differences ignores real market differences between postal customers. The two types of customers differ in terms of sensitivity to both price and economic cycles. These differences logically support removing links in price setting for single-piece and volume tendered mail.

The two examples are similar in that the rational solution would require a major change in precedent and conventional thinking, and mostly changes in legislation. Instead it was left at Morton's fork, a place with two directions neither one offering a path to self-sufficiency.

Dealing with Fear

The combination of the recession and electronic conversion has created a new market environment that requires new ways of thinking about the postal workforce. Naturally, postal employees fear that the new market environment will mean changes to decades-old compact between national postal operators and their employees. The fear is driving actions by unions and postal employees to strike national postal operators refuse to cooperate in annual assessments of employee satisfaction, and lash out at customer unwillingness to pay higher prices that would support the old employment compact.

The old compact includes four parameters:

1. career long employment without the threat of layoffs;
2. full-time jobs for all craft employees;
3. explicit barriers between crafts;
4. civil-service based employment law, compensation and hiring and dismissal processes.

The old compact held as long as strong customer demand and normal employee attrition allowed management to incorporate limited efforts to optimize the network and introduce automation at rates that would not require adjustments to the compact and still keep postal product prices at levels acceptable to both large volume and single piece customers. (In this context, acceptable is used in a manner similar to the idea that lines at the department of motor vehicles are acceptable.)

Also, national postal operators, operating within a monopoly and regulatory and policy constraints had little pressure to move postal prices from acceptable to competitive levels. Nor did they did do all of the research necessary to understand what makes its prices and services levels competitive for specific market segments (retailers, banks, insurance companies, local real estate agents, etc.) and so even if they felt the desire to offer a more competitive product as such information was considered unnecessary for designing and pricing products within the existing regulatory structure.

An alternative more-efficient, more-flexible employment compact was well known to policymakers and both postal management and union leaders. That compact, first employed by United Parcel Service (UPS) in the late 1960's as it expanded its parcel delivery network nationwide involved using mostly part-time workers to sort and load parcels and full-time workers to deliver them. While all of UPS's drivers and sortation center employees were unionized Teamsters, UPS retained great flexibility in its union agreements to adjust its workforce to both optimize employee time and adjust the total workforce as demand changed.

The compact was designed around the idea that the fastest way to move parcels by ground minimized the amount of time that parcels spent in any facility. The flexibility imbedded in its union contracts that allowed UPS to continually optimize employee time and adjust workforce size reflected the fact that the parcel delivery market was highly sensitive to economic cycles. Using lots of part time employees, and later fully automated facilities, UPS limited the number of sortation centers while continuing to provide better service at lower prices than either Railway Package Express or the Postal Office Department could at that time.

UPS has maintained its employment compact until today. The expansion of FedEx Ground nationwide stressed the compact by adding the complication of price and service competition. Competition required that UPS redouble its employee optimization, plant modernization, information system modernization efforts in order to reduce the labor component of delivering parcels. However, competition did not break the flexible framework that UPS created in the 1960's. UPS has had to bend somewhat in its mix of full and part-time jobs but still over 50% of UPS employees are part-time. UPS has changed its pension benefits for one-third of its full-time employees by withdrawing from the Central States Pension Plan but in doing so, it agreed to retain an equivalent benefit in a new UPS-Teamster managed corporate plan.

Today, national postal operators still tied to the old employment compact can no longer hide behind growing volumes and attrition of an older workforce to avoid tough operating decisions that require changes in the employment compact. As the proportion of transaction and correspondence mail, both single-piece and bulk, declines, mail becomes increasingly sensitive to economic cycles and competition from other advertising modes. The impact of this switch is greatest in the United States, where the use of paper checks to pay bills still remains the primary payment method among those over 40. Even these customers may soon desert the mailstream as their preferred method to receive and pay bills as incentives from banks and other creditors become too enticing to pass up.

Clearly the new framework must accommodate the following:

1. Lower total volume levels;
2. Much lower volumes of single-piece mail requiring sortation at origin;
3. Total volume and revenue that is sensitive to business cycles.
   
4. Volume and revenue that is sensitive to price such that the sender must generate a positive return for spending to design, print, and deliver a hard copy document or ship a parcel.
5. Optimized processing and delivery operations that reflect the new characteristics of demand with costs at levels that permit product prices that allow mailers to earn a positive return on their mail spending Increased levels of customer service and sales efforts to identify and accommodate specific customer needs
   

The UPS employment compact could handle all of these factors. The challenge that national postal operators have is installing a similar compact. Without the ability to install a compact similar to UPS, efforts to optimize sortation and delivery networks through expanded use of information technology, and automation equipment installed in fewer, larger plants cannot be made financially viable. To the extent that a national postal operator needs to make significant capital investments to optimize the network, the lack of a new employment compact makes it nearly impossible for the investments to make returns to justify the spending. (To the extent that legislative actions prevent changes, national postal operators may put off optimization efforts that could provide a positive return even under the current compact and optimization efforts that require a change in the compact are not even considered.)

Royal Mail has developed an operating framework that exists in a leaked "Next Steps" document. In this document, Royal Mail outlines a vision for duty cycles based on 4 and 8 hour increments, increments that are nearly identical to those that UPS uses in the United States. While the public focus and rhetoric from both sides focus on issues of privatization or maintaining Royal Mail as a “public service,” in truth, the real conflict is over delaying the end of the old employment compact that postal jobs were full-time jobs with security for an employee’s lifetime.

The United States Postal Service faces similar issues for its delivery carriers (rural and city), clerks, mailhandlers, supervisors, and postmasters.The changes in the market have smashed the basis for the old employment compact and employees have real concerned about what comes next.

Clerks, mailhandlers and supervisors can see workloads declining; employees placed in standby rooms, and not help but wonder how much longer their plant or job will exist. Postmasters and retail clerks can see declines in retail traffic and the growth in postal franchise operations of non-US postal operators and wonder how much longer will the Postal Service use corporate post offices as the primary means of providing retail services.

What employees see is pain and they fear that postal management has nothing but pain to offer them. The economic downturn intensifies this fear as the thought of transfer, demotion, reduction in hours, or job loss raise anxiety about how bills will be paid, college education will be funded, and loss of connections to long-established relationships in one’s community. What employees don’t see at either Royal Mail or the Postal Service is something that they will gain in return for the pain to come. In many ways, what they perceive is not much different from what a young child sees when getting their first vaccination. They fear the pain of the shot and know of nothing else. How do doctors deal with this problem? They give the child a lollypop or small toy as a reward for dealing with the pain. By the time the child leaves the office, he/she may still have memory of the pain but have in their hands the reality of candy or a toy. The next time the child is vaccinated; they then know of the pain but know they will leave with something that is sufficient to deal with the shot.

What policymakers in the Great Britain and the United States have to fine is the reward for employees for dealing with the pain coming in the transition to new market realities. Employee unions and associations should also be looking for potential rewards that would enhance the new employment compact, including rewards that the current business model may not be able to offer, as policymakers and postal management have not publicly offered anything to ease the fear of changes to come.In the past, this blog has written about the experience of Conrail. Conrail had to significantly downsize its network, reduce its workforce, eliminate a number of railroad crafts and find a way to negotiate out of contracts that guaranteed jobs. Employees from top to bottom suffered greatly during the transition to a leaner and profitable railroad. At one point, employees even had to take a substantial pay cut to turn the company around. Employees did receive rewards for their pain.

The pay cuts were restored as soon as Conrail returned to profitability. Conrail employees received 15% share of Conrail stock in return for concessions in work rules and wages. The shares that employees received at the public offering price of $28.00 in 1987 were worth $214.67 when Norfolk Southern bought the company a decade later. Right now neither Royal Mail nor the Postal Service could offer employees any rewards that approximate what Conrail employees received for the change in their employment compact. As both postal operators face the possibility of new business models employees need to think hard about which models could include rewards sufficient for them to accept the pain that they are likely to endure in the transition to new market realities.

Labor Problems at FedEx Ground

FedEx Ground has now received a new challenge to its practice of using contractors to delivery parcels at FedEx Ground. The challenge comes from a threat by the the attorney generals of New York, New Jersey and Montana to sue FedEx Ground for violation of state employment laws by classifying its delivery drivers as contractors and not employees. FedEx Ground has until October 27th to respond and explain why no suit should be filed. A similar letter was sent to FedEx Ground by eight attorney generals in June including New Jersey and Montana which are part of this effort. (New York's attorney general was not a signatory to the earlier letter.)

The attorney generals contend that "the level of control FedEx Ground exercises over its drivers merits, under New York, Montana and New Jersey state law, employee status and the protections inherent in that status. FedEx Ground strictly controls all aspects of the work of drivers doing pick-up and delivery. Hours are prescribed by FedEx Ground with drivers having almost no discretion as to the hours they work. Workers’ performance of their tasks - from the loading of their trucks to their hand-off to customers - is directed and supervised by FedEx Ground. Drivers’ uniforms are mandated by FedEx Ground, even down to the colors of drivers’ socks, and drivers’ opportunities to engage in non-FedEx Ground related work are also almost entirely constrained by FedEx Ground rules. Drivers are only allowed to use their own trucks for non-FedEx Ground purposes if the trucks are used outside of FedEx Ground working hours. Additionally, the work of FedEx Ground drivers is at the very core of FedEx Ground’s business activities; drivers are completely integrated into the overall business functions of the company."

The above quote comes from the letter that the appropriate state offices for enforcing labor law violations sent to FedEx Ground.

Not surprising, the Teamsters applauded the actions of the three state law enforcement officials. The Teamsters have long been active in efforts to force FedEx Ground to end its use of contractors for delivery. They have a website promoting changes in the legal framework within which FedEx works at its Express and Ground divisions with a goal of making it easier to organize everyone that works for FedEx or its contractors.

The actions of the the attorney generals are likely to be opposed by the Express Carrier Association and the Messenger Courier Association of America. Both of these organizations represent local and regional parcel firms that heavily use the contractor model in their delivery services. Members of these associations could become collateral damage in the conflict between the attorney generals, the Teamsters and FedEx Ground.

FedEx Ground has had mixed success in defending its contractor model. It settled a suit in California that required it to switch from single-driver contractors to multiple driver contractors. It has received a number of unfavorable employment law rulings at the state level. NLRB has issued unfavorable rulings that were overturned in court. FedEx Ground successfully defended IRS suits.

Given the politics of the issue, FedEx Ground will likely face some legal action in New York, New Jersey, and Montana even with a vigorous defense in the next week. Given the pace at which these and similar cases proceed, industry stakeholders can expect that the issue will continue to garner headlines for many years to come.

The labor issues will not affect FedEx Ground service as the delivery personnel themselves are rarely parties to the disputes between labor law officials and FedEx Ground. Shippers will want to stay informed about the process of the latest challenge to FedEx Ground's contracting model as it could affect long run competitive structure of the parcel delivery industry.

Rethinking the Parcel Market

The parcel market is at the cusp of change. Long established distribution patterns are changing as e-comerce competes more aggressively against brick-and-mortar retailers. The latest example is provided by Amazon which just introduced same-day delivery in in seven cities - New York, Philadelphia, Boston, Washington, Baltimore, Las Vegas and Seattle. This will soon expand to Chicago, Indianapolis and Phoenix.

Amazon's new "Local Express Delivery Option" allows order placed in the morning to be delivered that afternoon. In Seattle, orders as late as 1 pm can be delivered same day. The service is not cheap costing Amazon Prime members $3.99 for delivery and $6.99 for everyone else. As the service grows, stock analysts expect that Amazon's same-day delivery charges to drop as the delivery service gains density.

This same day delivery follows Amazon's entry into local delivery with its "Amazon Fresh" service in Seattle that offers delivery of everything from ice cream to digital cameras with same-day or next day delivery. This service is delivered in trucks painted with an Amazon logo. The late delivery offered in Seattle for Amazon's local express delivery option most likely reflects the capability of the already established delivery operation for Amazon Fresh.

Amazon is not alone in offering same day delivery. Barnes and Noble has offered same day in Manhattan for a number of years. That service is free for orders over $25.

The same-day service that Amazon and Barnes and Noble offer does not use the usual parcel delivery suspects, FedEx, UPS, and the Postal Service. Instead, They use national companies that offer local delivery and dedicated fleet services in numerous cities. For the launch of the Local Express Delivery Option, Amazon is using Dynamex and A-1 Express Delivery Service.

These two local delivery carriers are just two of the largest of set of local and regional parcel carriers that are shrinking the time between when an on-line order is made and the parcel is delivered. Amazon's service succeeds only because Amazon can cut the time from order to placement on a delivery truck to less than 4 hours and it has multiple warehouses close to major population centers.

Other on-line retailers offer service that is nearly as speedy. Staples offers next day delivery on most on-line orders and it recently purchased an office supply firm that specialized in next-day delivery to offices using a private fleet of delivery trucks. (In fact the firm that Staples bought had a private delivery fleet because it bought its primary supplier of delivery services.)

On-line retailers are looking for ways to cut the time from order to delivery and find that the FedEx, UPS, and the Postal Service all are too inflexible to allow for later pick-ups and early-morning deliveries that on-line customers want. They are turning to not only same day couriers but to regional parcel carriers that operate out of one or more distribution hubs to cover most of the United States. The rise of these regional carriers was note at the recent Document Forum, where their presence as exhibitors was given a special place in the exhibit hall. The largest of the regional carriers are:

• Capital Express - covers the Midwest with a focus on delivery of medical and other time sensitive and high-security delivery customers
  
• Dunham Express - covers all of Wisconsin and parts of surrounding states
  
• Eastern Connection - covers Maine to Virginia with next day service
• Edge Logistics - provides regional parcel delivery with nationwide coverage
  
• Lone Star Overnight - covering Texas, Oklahoma and Louisiana
• OnTrac - covers the West Coast plus Nevada and Arizona with next day and 2- day service and same day service throughout the plains and mountain west
• Skyline Messenger Service - covers Georgia and the Carolinas
  
• Spee-Dee Delivery Service - covers 7 states in the Midwest from Illinois through the Dakotas
• Transtek - covers Colorado, western Nebraska and parts of Wyoming
  
• US Cargo - covers 11 states from terminals in Ohio and Pennsylvania

Combined the regional and local delivery carriers are still small. At best their total revenue does not exceed $2 billion. However they are growing faster than any of the three largest carriers and their lower costs, focus on specific markets and willingness to accommodate special needs of specific customers, allow them to accommodate the new faster delivery services that Amazon and other shippers now demand.

Can the big three compete? Probably, but they have to add new services and become more flexible in how they operate. For example, the Postal Service could offer a new competitive next-day service if they offered a combined pick-up to delivery service under the "Postal Service brand" with the pick-up operations operated by contractors. The key is focusing on local delivery and a well run pick-up operation could handle a late pick-up with a-drop-off to a delivery office in the early morning of the day of delivery. Worksharing does not allow for as seamless a process as one provided under a single corporate identity.

Will they compete? Making the changes necessary to handle the new distribution needs requires flexibility from both management and labor at the three largest carriers. Standard operating procedures, sometimes contained in operating manuals, and sometimes in union agreements reflect the old paradigms of parcel distribution. Top management learned the delivery business in a world with different distribution patterns than what Amazon is now looking for. Justifying changes in what appears to have worked for many years is not easy. All three have shown that they will make the effort and the delivery products available today are far superior to what was available two-decades ago.

How soon will they compete? This is the great unanswered question. My hunch is that the regional and local carriers will grow their business and nibble away market share for many years before a serious move is made in this market by FedEx, the Postal Service or UPS. What may force the pace of entry into the quick-delivery market is the challenge of the recession that has made selling delivery services more difficult and finding volumes to fill existing distribution networks more challenging. Maybe by next year's parcel forum we will see what the big three plan to do pick-up the business that they have lost to carriers that can offer the quick-delivery services that they cannot.

Creating a Self Service Footprint

This blog has noted earlier the efforts of Deutsche Post and Post Denmark to automate their acceptance process and solve the problem of delivering parcels to people who are not at home.

Hellmail has just reported that Post Denmark will install an additional 60 of these Døgnposten bringing the total number to 108. To put this in perspective, this Postal Service would need to install nearly 25,000 to have the same level of customer access as will exist in Denmark.

To see how the Danish version of this parcel locker works, I have attached this video.

The Courier, Express, and Postal Business and the Nobel Prize

The research that Oliver Williams completed that brought him the Nobel Prize in Economics highlight key issues in the transformation of the courier, express and postal (CEP) business over the past two decades. In its press release, the Nobel Committee stated that "Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets."

So what does that mean in plain English? More importantly, why am I writing about this award in a blog dedicated to the courier, express, and postal industry?

Simply, operators in this business have a choice as they try to provide service across a broad geographic area or across the range of transportation and communications needs of their customers within a firm rather than through contractual arrangements between regional or modal partners. With few exceptions, when faced with the choice of providing service with a partner through a contract or within the constructs of a corporate structure, operators in this business have chosen corporate structures. The expansions of Deutsche Post, FedEx, TNT, and United Parcel Service all followed this path.

These firms succeeded by out-competing national postal operators that had to offer international service through bi-lateral or multi-national contractual arrangements, many of which were negotiated through the Universal Postal Union. The key problem of these contractual arrangements were that the operator selling the international service could not truly tell the buyer how long it would take to get delivery because they could not control the end-to-end service. Nor could the originating operator offer a seamless track-and-trace service until many years after the global corporate operators had made them a requirement of international express and parcel delivery.

The choice of a corporate model reflects a choice on a less global scale as well. Efforts by La Poste (France) and Royal Mail to provide service throughout Europe illustrate attempts to create a corporate structure within the Europe for parcel delivery to replace the contractual service that involved each national postal operators. The Austrian Post has purchased a number of firms focused in Eastern Europe with a goal of creating a stronger regional delivery competitor. The recent decision to merge the post offices in Sweden and Denmark also illustrates the choice of a corporate rather than a contract model to provide service within the CEP markets that the two independent posts now operate. Finally, Purolator Courier, a Canada Post subsidiary, and Canada Post itself, have established a strong corporate presence to handle cross-border traffic. Purolator is using its presence in the cross-border market to begin a domestic United States service.

Now there are limits to the use of a corporate model in the CEP industry. Firms in the industry use both a corporate and contractual or franchise model to provide retail services. The cost of maintaining a stand-alone retail infrastructure that has different business challenges than the rest of the CEP business has driven many firms to switch from the corporate to the contract model for this part of the business.

The last area that may fall under the contract model is the pick-up and delivery services themselves. Here the question is whether it is better to manage the delivery process with employees or contractors. The local courier business has always used a contractor model reflecting the uncertainty of the traditional on-demand unscheduled delivery service that they offered. FedEx Ground has used that model since its founding as Roadway Package Express. The recent court cases, IRS rulings, and NLRB rulings illustrate the challenge of maintaining the delivery function as a contractual arrangement and still maintaining proper control over the delivery portion of the service. However, both FedEx and local couriers believe that the cost advantages of managing delivery with contract drivers rather than employees is worth creating the proper legal structures to both ensure a reasonable level of control while still maintaining the driver's contractor status.

The question of corporate vs. contract models will likely come up as Congress looks at potential business models for the Postal Service. The work of Oliver Williams suggests that use of contract model could work for the retail side of the business where a franchiser that does not live up to its end of the bargain could be replaced. His work also suggests that delivery contractors could work in those areas where control over the appearance and schedule of the deliverer was not an issue. This is precisely what the Postal Service does with box-route contractors that serve many rural areas.

More importantly, his work explains why breaking the Postal Service into regional franchises or separating the delivery from processing and collection processes make little sense. Once the separation occurred the various parts would still have to contract with each other to provide end-to-end service. There is no competitive market for large-scale sortation. The growth of UPS’s and FedEx’s use of Parcel Select suggests that the collection and sortation companies would still have to contract with a company running the existing delivery network. Mr. Williams research suggests that there would be significant coordination issues and contractual gamesmanship between the various parts of what is now a unified Postal Service. The experiences of Citi Mail in Sweden and TNT, DX and others in UK illustrate the preference of operators to offer end to end service and the coordination issues and contractual gamesmanship that exists in developing interline agreements when these firms have to contract with either a national postal operator or another independent operator. [One of the drivers behind mergers and territorial expansion of railroads and less-than-truckload trucking firms in the US was the failure of a regulated interline process to resolve contractual and service issues when one firm passedfreigt to the other]

Finally, his work suggests the mail business will see more consolidation and not less in the future. The current process in which multiple firms handle the process a taking a document from concept to delivery with each handoff handled via a contracted or regulated process, could soon involve fewer firms as the advantage of integrating more of these processes within a single firm becomes clear to firms on either ends of these processes merge.

Interview with Deutsche Post CEO

Forbes has just published an interview with Frank Appel, the CEO of Deutsche Post. While the entire short interview is worth reading, his response to one question is in line with the research that I have conducted on the future of the mail business.

With the imminent end of the mail monopoly in the EU by 2011, what are the new revenue sources you're looking at?

"The monopoly has already gone thanks to the Internet. There's a movement from physical delivery of mail to electronic delivery. People are writing less letters. As you know, we're currently in tough talks with the unions in our mail business. I'm very conscious of the fact that the success of the past doesn't help in the future."

In this answer CEO Appel makes three key points that reflect my recent research on the postal market.

The monopoly has already gone thanks to the Internet.

In this statement, CEO Appel tries to calm the fears of shareholders regarding the impact of eliminating the monopoly. In doing so, he suggests that Deutsche Post has bigger problems in the mail business than removing the monopoly.

The Internet clearly is a problem for national postal operators. Nearly all documents that could be mailed have electronic alternatives that can deliver the same information. Four barriers are holding back senders from using electronic delivery: 1) recipient preference for mail; 2) not knowing or trusting the recipient's e-mail address; 3) difficulty of targeting display, search, and e-mail advertising without violating privacy concerns of Internet users; and 4) lack of a coherent, return-focused document management strategy which includes a coherent approach to transition to a recipient-friendly, electronic content delivery.

The impact of electronic alternatives is different for the United States Postal Service than it is for most foreign postal operators as the United States Postal Service still handles a significant share of all remittances that are easily diverted to the Internet. Foreign postal operators never had as large a share of payments and therefore new payment technologies have less effect on them.

Where the impact of the Internet is similar is in the delivery of information contained in a range of documents including bills, statements, shareholder communications, member communications, acquisitions advertisements, and retention advertisements. Figuring out how to keep mail relevant for transmitting information contained in these documents for as long as possible is critical for national postal operators to manage their transition to a world in which mail is not the primary means of document delivery.

Compared to the problem of dealing with the challenge of the Internet, the removal of the monopoly looks less problematic. Competition from physical delivery competitors is easier to understand and deal with. In fact, it may hasten the changes necessary to keep mail relevant in in an Internet-centered communications world.

We're currently in tough talks with the unions in our mail business.

Current contracts with postal unions worldwide reflect the results of negotiations completed within different market environments that now exist. Previous agreements had to deal with the challenge of introducing new information technology, mail sortation and material handling technology that reduced the need for postal labor. Those national posts that successfully handled the technological transition were able to sign agreement with flexible labor rules that allowed them to operate fewer, larger facilities which operated with short operating windows for sorting originating mail and mail delivered within a sortation facility's delivery area.

Today's negotiations have to deal with challenges from outside the corporation, including competition from electronic and physical delivery. As such, nearly all of the agreements will have to deal with the transition to a smaller, and even more-flexible workforce than current agreements now allow. The labor strife in Belgium, France, Great Britain, and the Netherlands all illustrate that negotiations will not be easy. Finding a way for the national operator's management and postal union leadership to prepare employs for change will be key to minimizing labor conflicts as the postal workplace changes.

Success of the past doesn't help in the future.

This is the clearest statement that nothing is sacrosanct for a postal operator. Every idea for streamlining processes to reduce costs and improve service or developing new products have to be considered. For example, as mail becomes increasingly tied to advertising, national postal operators have to find a way to provide day-certain, low-priced delivery as an advertising campaign is most effective if physical mail arrives on the same day as the e-mail. Without day-certain delivery, advertisers send multiple e-mails to match the actual physical delivery, increasing the cost and reducing the effectiveness of the advertising campaign.

The Myth of Independence

Since its inception, the Postal Service and its supporters have touted its existence as a self supporting entity. In practice, self-supporting has not meant independence.

The lack of independence reflects the Postal Service’s ties to the federal budget. Since the 1980’s Congress and the President have manipulated both the budget process, measurement of Postal Service liabilities for retiree benefits, and payment schedules for retiree benefits as means to reduce the deficit. Currently two issues have the biggest financial impact: 1) requiring the Postal Service to pay for retirement benefits of its employees that were accrued during military service; and 2) requiring the Postal Service to pay fund retiree health benefit at a rate that is faster than is required by private sector GAAP. In addition, Congress has used legislation to direct management regarding the shape of its operating network, its ability to adjust pay and benefits, and the quality of service offered.

All of these actions are well documented in a recent report of the USPS Office of Inspector General entitled, “Federal Budget Treatment of the Postal Service.” The report has a major failing for use in the upcoming postal policy debate. It does not quantify the impact of each of the budgetary and legislative actions on the Postal Service’s finances. The USPS OIG would serve the postal community well if it would provide a second report quantifying the impact of each of the Congressional and Executive actions that it documents.

The budgetary impact is most pernicious because Congress has caused the Postal Service to charge its customers higher rates, and hold investment spending and cash reserves below prudent levels. In essence, the actions of Congress and prior administrations have treated the Postal Service as a cash cow that could provide needed real or accounting contributions to the Federal Budget in order to meet specific deficit targets or as a condition for passing postal reform legislation.

Congress’s actions are nearly the equivalent of a board of directors leveraging a companies assets and raising dividends to drain corporate cash to the point that when more challenging economic times come the corporation is thrown into bankruptcy. In such situations, customers would generally be upset as service quality would drop and prices would rise to deal with the financial strain.

The Postal Service‘s connections to the federal budget is unique among national postal operators. Equally unique is the Postal Service’s dire financial position. Unfortunately, rectifying this problem and making the Postal Service truly “independent” will have an impact on the federal budget in the year that this occurs. Also there is no guarantee that if the Postal Service generates reasonable levels of cash reserves in the future, that Congress or the executive would attempt to raid those reserves to reduce the federal budget deficit.

Not being independent also means that the Postal Service cannot be self sufficient in a way that best serves the interests of its customers and employees. Self-sufficiency requires a specific level of return or operating margin in order for the Postal Service to have sufficient cash for investments, transition costs when restructuring operations, and covering losses during difficult economic times.For most of its existence, the Postal Service focused on a “budget-like” definition of self-supporting that required only that it break-even over-time on an accounting basis. As such it ran its finances within a three-year rate case cycle that on average generated no operating margin so that it had to use its borrowing capacity and limited cash reserves to deal with the losses that occurred within a cycle.

By not having a target return or operating margin, the Postal Service was financially ill prepared for necessary investments in automation, material handling, and backbone computing systems that were necessary to keep mail competitive. As such, these investments were spread out over an extended period of time that made getting the full benefits of modernization more difficult. The lack of investment capital also required the Postal Service to encourage mailers to make investments in automation equipment that the Postal Service could not.

The lack of independence has had two impacts on employees. First, by weakening the Postal Services ability to have necessary cash for investments, the Postal Service encouraged worksharing to sort mail that required equipment that it could not afford to buy. Second, pay may have been held down because slowing down the benefits of automation and material handling equipment resulted in lost “profits” that would likely have been shared by customers and employees.

With the Postal Service's current financial challenges likely to continue at least through fiscal year 2010, stakeholders are now beginning to discuss the possibility of new postal reform legislation. Making the Postal Service truly independent may provide stakeholders the only hope to ensure that the Postal Service has reasonable prospects for a stable future.

Parcel and Document Forums

Monday through Wednesday of next week I will be attending the Parcel and Document Strategy Forums in Chicago. I will be reporting back on what the various speakers have to say and exhibitors are offering and sharing that with the readers of this blog.

These are the sessions that I plan to attend:

PC200 - Customer Communications Management: Document Output for Customer Communication Investments that Pay Off

E401 - Introduction: Defining Electronic Communications Management (ECM)

E402 - What is Driving ECM; uncovering business Drivers

MC503 - Easy and Results-Driven Web-Based Benchmarking

TP104 - Reducing Expenses by Using a Regional Carrier

OE305 - Today's Trends in Supply Chain Management

TM206 - Tour of UPS's Chicago Facility (This will be a guilty pleasure.)

P307 - Use What You Have: Capitalizing on the Print Network

M108 - State of the Industry: The Transactional Marketplace

E408 - Delivery and Presentation, Trends and Directions

Fortunately, this schedule only puts me in two places at once for 45 minutes. If anyone who reads this is interested in the programs, here they are:Parcel Forum, and Document Strategy Forum. I would be interested in your thoughts about the sessions that I picked and others that interest the readers of this blog.

Postal Retirement and Plant Consolidation

Today, the Washington Post reported that 23,000 postal clerks and mailhandlers have either already accepted the retirement offer and left the Postal payroll or are likely to leave the Postal Service by the end of the year. This reduced the full time complement of clerks and mailhandlers by 11.5%. The 31,000 Part-time workers have an additional month to accept the incentive.

In all likelihood, the acceptance rate of clerks and mailhandlers met management expectations. In some plants, this will reduce or eliminate the need to place employees in "stand-by rooms." More importantly, it may reduce the workforce sufficiently to allow the current efforts to consolidate facilities to occur and still allow remaining employees to retain a job.

As noted in the Dead Tree Edition, the Postal Service announced the possible closing or downsizing of 15 additional postal facilities in the past two weeks and adding those already announced the Postal Service has 29 consolidation efforts under consideration. The active proposals are concentrated in three areas: Capital Metro (7), Eastern (6), and Western (7). The New York, Northeast, and Southeastern areas account for 11 of the 17 consolidations that the Postal Service announced as approved or implemented. Given that it takes six months from announcement to approval, all areas could announce additional consolidations in the next two months for approval and implementation before fiscal year 2010 starts and take advantage of the reduced head count from early retirements.

Given the current financial challenges, the Postal Service should seriously think about re-opening consolidation proposals in at least Quincy, IL, Hattiesburg, MS, Mansfield, OH, Zanesville, OH and Utica, NY. The studies of Hattiesburg, MS, Mansfield, OH, Zanesville, OH sugeests that by not going throgh with these consolidation efforts, the Postal Service incurs around $2 million extra expenses annually.

Unfortunately, even if the Postal Service doubles the number of active consolidation proposals, the total savings will only put a small dent in the operating deficit. Given the six months that it takes to get a proposal approved, the Postal Service could save half of he $100 million that the Dead Tree Edition estimates in FY 2010. Clearly, additional consolidations will come given the current financial hole.

Finding additional consolidation options will become increasingly difficult as long as 1) political interference colors management decision making; 2) new facilities remain off the table due to lack of investment capital, and 3) postal management will not propose changes that have a net impact of slowing service for 15% or less of the mail originating in a facility.

Designing a new postal network without these constraints is needed now. Mailers have indicated in testimony before the PRC that they would accept changes in service as the cost of a more efficient network. Postal Management should prepare such a plan, and the capital costs associated with it, or find that Congress imposes as conditions for modifying the retiree benefit payment schedule a network operating plan of its own.