Sunday, May 22, 2011

Comparing Labor Cost Proportions at the USPS, UPS, and FedEx

Update: this chart in this post has been replaced to correct a silly error.  The USPS delivers to residential addresses 6 days a week.  I know that and I know that all readers of this blog know this as well.  I would like to thank the reader who posted the comment that force me to fix this error. 

In a discussion today on his Facebook page, Representative Dennis Ross fell into a common trap in comparing the labor's portion of costs by the USPS, UPS and FedEx.  He states that:

UPS (Union) - about 66% of their total operating costs are labor. FedEx (non-union) - about 45% of their total operating costs are labor. USPS - 80-82%.

The differences in the proportion of labor costs can come from one of six factors:
  1. Compensation levels - what each company pays per hour worked
  2. Work rules - affects how efficiently each company uses employees
  3. Contracting - companies use different models regarding the use of contractors to handle the collection to delivery process, and in particular the labor-intensive delivery function
  4. Network differences - Differences in the network affects the amount of labor involved in delivery, sortation, transportation and retail portions of an end-to-end movement.
  5. Capital intensity -  The companies have very different capital requirements that affect the amount of non-labor costs needed to provide the services that they offer.
  6. Congressional requirements - Congressional requirements focus on the aspects of the Postal Service that add significantly more labor costs while making minimal impact on capital spending.
Compensation Levels

I have already presented a comparison of compensation levels between the Postal Service, UPS, and FedEx.   The comparison showed that total compensation of Postal Service employees in a delivery function clearly fall in between the compensation of UPS and FedEx.  

Employees who work inside processing facilities at the Postal Service on average are paid more than FedEx and UPS employees.  However, the new APWU contract will result in Postal Service compensation falling in line with what compensation of UPS and FedEx.   (It should be noted that UPS also offers significant college scholarships as a benefit to parcel sorting employees that are not included in these comparisons.)  The compensation levels of the new class of APWU members that could include 20% of APWU employees are very competitive with compensation of individuals with similar experience at UPS and FedEx.

Employees that provide retail services at the Postal Service have no real comparison with employees at FedEx and UPS.  Comparisons are usually made here with other retail occupations and bank tellers.  I have not looked at this comparison but the data is available to make this comparison is available from both private and public sources.
Finally, compensation of UPS and FedEx executives are significantly higher than Postal Service executives.   The compensation levels of managers and technical staff at UPS and FedEx are likely also higher.

On balance, it is unclear how much a compensation premium affects labor compensation's proportion of total costs.

Work Rules

Another factor that increases USPS compensation expenses are work rules used for mail processing, local transportation and retail services.  The new APWU contract, and in particular the new method of defining a full time schedule should go far to eliminate work rules that requires the Postal Service to overstaff its processing and retail facilities.   The new method of defining full time will likely result in employee schedules that are close to the part time schedules that FedEx and UPS use for its sortation centers.


The following table illustrates how the Postal Service, UPS and FedEx use contractors.  

Comparison of Contracting at the USPS, UPS, and FedEx

The three carriers have very different operating models that significantly affect the portion of costs that show up in expenses as "compensation and benefits" and "contracted transportation" This makes comparisons particularly difficult as both UPS and FedEx use contractors extensively for retail services and FedEx Ground uses contractors to deliver all parcels.
An accurate comparison would identify the labor component of contracted retail, transportation, and delivery services. This is nearly impossible and is the primary reason that I have never presented a comparison of the proportion of labor costs in my previously published analyses of the parcel industry.

Network Differences

The following chart looks at differences in the networks employed by the USPS, UPS and FedEx. 

 Comparison of USPS, UPS, and FedEx Networks
The Postal Service's delivery network is significantly more extensive than either UPS or FedEx and primarily delivers to residential addresses that are more expense to serve than business address due to volume of deliveries per delivery point.  Delivering 6-days to residential addresses increases the proportion of labor costs as capital expenses for buildings and vehicles are the same whether the Postal Service delivered 5 or 6 days per week, and some operating costs (heating fuel and electricity) do not change as much as labor costs. [added 5/23/2011 3:15 pm along with corrected chart] 
The Postal Service network has significant overcapacity.   To the extent that there is overcapacity in either UPS or FedEx's network it would affect short-term economic impacts or changes in population and economic growth across the United States.   Also both UPS and FedEx are face the prospects of growing volumes so they face some challenges of having sufficient capacity while the Postal Service faces shrinking volumes so its network faces the prospect of increasing levels of overcapacity and the prospect that over time existing facilities will be in sub-optimal locations.
The Postal Service's retail network focuses on less knowledgeable buyers of the services that it offers.  Also, the Postal Service's network faces regulatory and legislated constraints that neither UPS nor FedEx face.

Capital Intensity

Capital intensity affects the proportion of costs that are labor costs.  Companies that are more capital intense have a lower portion of labor compensation costs and vise versa.   For example, an electric utility is a more capital intense business than a nationwide retail chain.   The following chart illustrates differences in capital intensity between the delivery services offered by the USPS, UPS, and FedEx. 

Comparison of Capital Intensity of USPS, UPS and FedEx
FedEx has the most transportation capital needs as they operate the largest fleet of freighter airplanes in the United States. UPS has the second largest fleet of freighter airplanes. Both FedEx and UPS use their aircraft to fly Postal Service mail and parcels, relieving the Postal Service from making substantial capital investments.  The Postal Service's transportation needs focus on its delivery fleet.   However, it has not had the capital needed to replace its aging fleet, so its capital spending on transportation assets are below what may be required for cost-efficient operations.
Both FedEx and UPS are among the leaders in information technology spending among transportation companies.    They both look at their IT investments as a competitive advantage.   The Postal Service, on the other hand, has tended to underspend on information technology resulting in long implementation schedules for needed infrastructure, management information systems, customer information and transaction systems, and track and trace systems for mail and parcels.
Finally, both UPS and FedEx have managed their processing network using network models for years without constraints set by Congress on closing or moving operations.    When additional facilities are needed, or upgraded to ensure proper maintenance and worker safety, they have the resources to make these investments.   The Postal Service is limited to use the facilities that it now has and faces significant backlogs in facility maintenance.   To the extent that facilities are located in the wrong location, or too small to handle sortation of a larger geographic territory, the Postal Service does not have the capital to make those investments. 

Congressional Requirements

The Postal Service face two requirements from Congress that increase the labor cost's proportion of total costs.
  1. Restrictions on how retail services are provided -  Both regulatory and legal restrictions on the Postal Service's retail network increase the proportion of total costs that are labor costs.  These costs come from both operating a retail network and managing the process to implement changes in the network.     In addition, Congressional efforts to slow changes to the retail networks add additional labor costs to managing the network to handle questions and concerns of members of Congress.
  2. Restrictions on delivery frequency - Requiring the Postal Service to provide delivery services 6 days a week has a larger marginal impact on labor costs  than it does on all other expenses.   The proportion of labor costs would be lower if the Postal Service only delivered mail 5 days per week.

Comparing the proportion of labor costs at the Postal Service with the proportion of labor costs at FedEx and UPS is a nonsensical exercise.   It tells one little about what the appropriate proportion would be for an efficient or properly capitalized Postal Service. 

Focusing on unionized labor costs may be an easy political target for a Republican member of Congress. However, Congressman Dennis Ross would find his time better served if he now focused his time on examining, the Postal Service's financial goals, its capital structure and its real annual capital needs to replace the delivery fleet, optimize the network, modernize retail, upgrade the IT infrastructure and customer interfaces, and cover the transition costs of downsizing the workforce.   By making this shift, Congressman Ross would make a real contribution to postal reform.  His efforts would for the first time address one of the key failures of both the Postal Reorganization Act and the Postal Accountability and Enhancement Act, the failure to adequately recognize that "accounting break-even" is not an appropriate fiancial goal and that an under-capitalized Postal Service is an inefficient Postal Service.


Anonymous said...

What about the fact that Poatal workers work weekends? Some for more than thirty years. Take it from me , it messes up your life!!!!

Anonymous said...

Anonymous1...It does? Messes up your life? How so? A day off is a day off....

Anonymous said...

According to the comparison chart it says the USPS delivers 5 days a week? WHAT???? I still get my mail on Saturdays. . .

Alan Robinson said...

The error in the chart comparing networks has been corrected. Thanks for pointing it out. I am sure anyone reading the post picked up the error before I did.

Anonymous said...

Shakin' the Bush Boss
The only thing Rep. Ross is familiar with is his inflated ego. He's starting to spout off on other topics where his knowledge is the same or less than that of the USPS. ATTENTION FLA RESIDENTS....... IN NOV 2012 VOTE THIS IGNORANT CLOWN BACK TO THE PRIVATE SECTOR AND ELECT SOMEONE WITH ENOUGH COMMON SENSE TO REPRESENT YOUR INTERESTS.

Thank you.


Shakin' the Bush Boss

Anonymous said...

Yes , the corps. of ups and fedex use long range planes more w/ usps riding along for a fee.
Both fedex and ups deliver hundreds of parcels to our postal station every day for us to scan and add to our deliveries. Spread over the entire country?
Usps is a service and is supposed to break even as far as expenditures go. Profits are supposed to go to the service and infrastructure , not to subsidize the many businesses paying less for a letter that requires the same (I repeat...the same)handling by Postal employees. The usps is also planning on giving bigger discounts to them for this summer. Please stop trying to demonize unionized workers for seeking a living wage ( which all companies should be paying to their workers) for shame!

Anonymous said...

Another item affecting UPS' costs is they do not deliver where it is not cost effective - they drop ship parcels at post offices and let the postal service deliver them. If UPS actually delivered to every address in the Uited States, UPS's labor costs would be higher.

Anonymous said...

The Postal Service must deliver to everyone, even the non-profitable deliveries. Fedex and UPS have the luxury of delivering to whoever they want. The postal service is not in place to make money - it is a public service which until recently has covered its own expenses.

M. Jamison said...

Even with the error an excellent breakdown that shows the fundamental lack of similarity between the three organizations.
Now let's factor in the cost of meeting the USO, something neither UPS or FEDEX have to do, actually they can pick their customers and jettison unprofitable businesses.
After that let's account for the fact that under present conditions all retirement and health benefits are fully funded into eternity - something that no other entity, public or private sector does. The most conservative actuarial plans generally call for funding in the 80% range and by all accounts the Postal Service has over-funded its obligations. What would the percentage look like if retiree benefits were funded at a more realistic rate?
Comparisons breakdown quickly when one looks at what the three organizations actually do. The fact is that is postal labor costs were seriously out of alignment the agreements that place an increasing amount of last mile delivery with the USPS would break down very quickly.

Anonymous said...

There appears to be some numbers that don't properly represent the labor portion of the USPS. First, the percentage is closer to 78% not 80% to 82%. Second, of the appx. 78%, approximately 27% is management. Since when are non-billable, non-revenue producing positions considered labor instead of overhead?
Also, it states that the compensation for UPS and Fed Ex is higher for their management positions. This is probably because the private sector requires fewer people to accomplish their administrative duties.

Anonymous said...

Hey Alan,

That 80% of USPS does that included all payroll costs, including mgmt & administration? What about the UPS & Fed Ex numbers. I think that is where some of that difference is.

Anonymous said...

Does the USPS labor cost also include the unfair 5.5 Billion dollar pre funding requirement and EAS employees as well because I believe it would reduce the TRUE labor costs significantly.

Anonymous said...

Another Fact: UPS and FEDEX are in Business to make a profit. They adjust thier rates to be profitable and this would lower their labor percentage. The USPS is designed to break even so Labor will look like a higher expense percentage wise compared to if they raised thier rates to be a for profit business.

Patrick van Lammeren said...

USPS is focued on decreasing costs without making the necessary organisational change. It has already been recommended that USPS should benchmark its Operations and Delivery in aprticular with European Posts in order to find the appropriate way to get things done (delivered) "easier, better, more performant".
Patrick van Lammeren, E-BISS International

Anonymous said...

Testing: For some reson, some of my comments never get posted on your blog. It's probably a technical glitch. Have a nice day. OG

Alan Robinson said...

When I have done comparisons of the proportion of labor costs, I used the required financial filings of UPS and FedEx. They make no distinction between compensation for a delivery driver and the CEO.

Anonymous said...

Yeah I love working every weekend while friends and family plan outings , sounds great .Try it for thirty years.

Dick said...

I am a rural carrier and so what that we work Saturday's? Anonymous is right, "a day off is a day off." Just like all comparisons they simply are deficient. Fed and UPS serve Business and we serve, primarily the consumer. If the Post Office wishes to really make money they need to have Letter Carriers carrying letters and Package Carriers carrying packages. That latter group can then compete against Fedex and UPS, while the letter carriers can be considered "Loss Losers." Then you provide both groups with the latest technology to minimize labor costs.


As a 3 year member of the USPS, I have seen too much "micro" management, too many "bean counters" and not enough "let's get the job done" attitude. Every mistake or lack of vision the USPS has makes the fed ex and ups boys money. The USPS "should" be the most efficient, the most organized, most cost effective government game around. But they have been allowed to NOT be by choice. The choices of ego, political motivation to do your job as to doing your job for the public you serve is no longer a priority in government. "What's in it for me" has prevailed for too long. I saw this in the DOD over a 12 year period. Senior management should be held accountable, and are not. "Lip service" is not a leadership skill. These comments could apply to many government groups. Who is "really" being held accountable? HOTEL CHARLIE