Canada Post Service Standards

Canada Post switched to 2-day local delivery over 25 years ago.  That change was made as part of a massive restructuring of Canada Post's operations to deal with losses that equaled nearly 1/3 of revenue.

The Canada Post's service standards for lettermail,  the equivalent of First Class Mail in the United States, are relatively simple and are explicitly included in Canada Post Corporation's charter.  They are:

• Within a community within two business days;
• Within a province within three business days; and
• Between provinces within four business days.

These service standards are a day longer than what the United States Postal Service provides now for First Class Mail and probably close to what they will be once the Postal Service restructures its network.  

Canada Post's also has service standards for Publications, addressed admail and unaddressed admail.  These service standards differ from the Postal Service as they indicate that mail will be delivered on a specific day after it is tendered to Canada Post and not a range of days.   Therefore, advertising mailers have as much certainty about their delivery date as mailers of transactions, bills, payments and correspondence.

To put these service standards in context, here are service standards between Toronto and a number of Canada Post's largest cities for both lettermail and admail.  The chart shows that Canada Post follows it mandate generally for lettermail, although it does provide service between Montreal and Toronto a day faster than its service standard requires.   There are some other inter-provincial service that is three days as well including service from Ottawa, Ontario to points in Quebec.  The chart also shows that Canada Post has more precise service commitments for advertising mail than the United States Postal Service offers.

         

Service Information for a broader range of Canadian cities as well as service standards for Canada Post's parcel, expedited, and express products can be found in the Delivery Standards page of its website.

Network Restructuring and First Class Presort Mail

The Postal Service's network restructuring will add an extra day to most First Class Mail delivery standards.   While it is theoretically possible for bulk First Class mailers to avoid that delay by drop shipping, the viability of drop shipping depends on the Postal Service having clerks and mail handlers working in the evening to accept the mail and route the mail to the appropriate machine for the correct destination sort.

Early discussions with the Postal Service suggests that they want bulk First Class mailers to tender their mail before noon.  This would allow bulk mail to be sorted or dispatched to the facility doing destination sortation during the daytime shift.  This would suggest that the Postal Service plans to have critical dispatch times at or just after rush hour.   With these dispatch times, receiving facilities will have skeletal staffs in the evening to handle mail transported to the facility and not much else.  These entry times and dispatch times would appear to force bulk mailers to accept service that is a day slower than it is now and preclude drop shipping of First Class bulk mail even if they could convince the Postal Service to offer a drop ship discount.  

India Introduces Urban Franchises

The India Post Office has introduced franchised urban post offices in fast growing areas  The details of the franchise agreement provide a lot more details to franchisees than public information on Village Post Offices due.  The details illustrate that franchisees will have a broader range of Products than what a Village Post Office can sell.

 Here are some details:

Only counter services are to be franchised, while delivery and transmission will be continued through the Department. Linking arrangements for the franchised outlets will be provided by the franchisee.
The franchisee will provide service across the counter for a minimum defined time schedule with flexibility to work round the clock.

Products and services offered

• Sale of stamps and stationery
• Booking registered articles, speed post articles, money orders (on EDBO model), e-post, etc. (no bulk booking to be taken up in franchised outlets
• Functioning as an agent for PLI and provide related after sales service, including collection of premia. (subject to fulfillment of criteria for PLI agents)
• Marketing products for which the Department has a corporate agency or tie-up and provide related follow up services. (subject to agreement with the other organizations involved)
• Providing retail and bill/tax/fine collection/payment services of the Department. (subject to agreement with the other organizations involved)
• Facilitating the provision of e—governance and citizen centric services (subject to agreement with the other organizations involved)
• Any other service introduced by the Department in future through its outlets which is considered amenable to the franchise model. (subject to agreement with the other organizations involved)

The model has adequate flexibility built in to allow a range of services to be extended through the outlets according to the need / demand, and to increase the range when found necessary. Thus, the range of counter services that can be offered through different outlets can vary, keeping in view the location and its capacity to generate revenues.

Implementation Strategy:
In the initial phase and for the present, the urban franchise model will be implemented only in fast developing areas of urban growth like metros and their satellite towns, as also such urban areas where there is a justification for post offices on the distance and population norms but there is difficulty in providing the same through redeployment. The further extension of the scheme can be taken up after the results available from experience of the initial phase – say after six months of initial launch.
Viability:
The viability of each franchise only requires to be assessed by the concerned field unit so as to ensure adequate returns to the franchisee. The expected minimum revenue, would depend on the range of services, particular location, potential revenue, the investments that the franchisee is willing to make, the cost likely to be incurred by the Department in providing support facilities, etc.

COMMISSION SCHEDULE

Service	Commissioner per transaction
1.   Booking of Registered Articles	Rs.2.00
2.   Booking of Speed Post Articles	Rs.2.00
3.   Booking of Money Orders	Rs.3.50
4.      Sale of postage stamps and postal stationery and money order forms	5% of sale amount
5.   Retail Services	40%          of commission     earned      by                 Department of Post (rounded off in rupees to be 40% or less)

The Idle Postal Worker Myth

Stand-by time is a measure of the effectiveness of the Postal Service's workforce scheduling systems as well as its ability to adjust the total size of its workforce as volumes change and networks are modified.   Stand-by time has often been used to either bash management or union contracts.  The newest numbers suggests that while any stand-by time is not desirable,  standby time is only 23 minutes per postal employee per year.

The decline in stand-by hours over the past few years can be seen in this chart from the USPS-OIG report, Stand-by Time Management Advisory.  the chart showed that institutional stand-by time peaked between April and December 2009, a period that fell between fiscal years 2009 and 2010.  

Stand-by hours peaked during that period in both areas that had relatively low levels of stand-by time in previous quarters and those whose stand-by time was significantly higher than other areas.  The peak in stand-by time reflected a period of transition for the Postal Service as it made adjustments to its workforce to reflect the impact of the recession and competition from electronic communications.

The chart also shows that in most areas, the Postal Service has brought stand-by time below absolute levels at the beginning of fiscal year 2009.  As a proportion of total hours stand-by time has declined over this period as well.  It was 0.1% of total hours in 2009, 0.07% in 2010 and 0.02% of total hours in 2011.  These proportions suggest that while stand-by hours created some rather embarrassing newspaper stories, even during the highest period in late FY 2009, the measures of stand-by time do not indicate systematic mismanagement.

As the Postal Service begins to restructure its operating network, stand-by time will likely increase.   Managing a transition to a smaller processing network, or fewer Postal Service owned retail outlets will likely result in delays that put employees in a stand-by mode as they are waiting to retire, be RIF'ed, or transferred to another job or facility.  During the transition period, studies like the Inspector General may need to find other ways to measure management's effective use of its workforce than following standby time.  

One tool that the Inspector General should consider using to look at management effectiveness is the In-Office Cost System (IOCS).  While this data collection system is designed for ratemaking, it provides a wealth of information about what individuals clocked into a particular MODS operation code are actually doing.   For example, IOCS could be used to identify what individuals who stated that they were clocked in to a standby MODS code were doing while they were on standby.   It could also be used to identify how much time employees clocked into non-standby MODS code are on break or other activity not sorting or handling mail.     

As IOCS is a sampling system, developing statistically reliable information by tour, quarter or area may be limited, but work that I performed along this line some 20 years ago suggests that it could tell an awful lot about how the shifts in mail volume over the past few years have affected the ability of plant management to fully use employees clocked into an operation in a physical activity associated with that operation.  This information combined with the stand-by time information report would provide a better idea as to how volume changes and organizational transformations will affect management's ability to restructure the Postal Service's workforce quickly.

Every Door Direct Mail - How it is Being Used

The Postal Service has published its first quarterly report on the use of its newest product, Every Door Direct Mail .  Every Door Direct Mail creates a simplified process for small saturation mailings for local advertisers.  The early data suggests that Every Day Direct Mail is serving the types of customers that it was designed to serve.  A quick search of the web also indicates the product has created opportunities for small printers and mailing houses.

With an average mailing size under 2,000 pieces, Every Day Direct Mail clearly is being used by advertisers that mail to a rather limited geographic area.  

Most customers are new to the Postal Service with only 8.6% using other Postal Service products.    It is also clear that many customers used Every Day Direct Mail more than once as the average customer used the product 2.25 times in the quarter.  This figure may underestimate repeat customers as customers added near the end of the quarter would not have had the opportunity to use the service a second time.

Every Day Direct Mail likely generated a little over $1 million in the quarter.  Given that over 90% of the customers do not use other Postal Service products, most of this revenue is from new customers to mail advertising.

The Postal Service also reported data on mail volume by day of the week.  the data suggests that Every Day Direct Mail customers are choosing delivery days designed to drive end-of-the-week and weekend sales.

Every Day Direct Mail appears to have spawned marketing efforts among a number of printers who are promoting the product to sell printing and mail preparation services.   Some even are offering to handle the entire transaction process for a fee rather than have the advertiser deal directly with the Postal Service.  

Examples of vendors marketing Every Day Direct Mail on the web includes:

Sonic Print

 Printing for Less

 Postcard Wiz

Direct Mail Tools

Politics of Rural Post Offices and Smaller Processing Plants

Rural postal services is likely to be the primary stumbling block to getting Postal Service reform legislation through the House of Representatives.  Some of the most active opponents of changes that the Postal Service want to make are influential members of the House Republican caucus and many have been outspoken critics of federal spending.   What these Republicans have in common is that they represent some of the most rural areas in the United States. 

Here is some background on two of the harshest Republican critics of the changes that the Postal Service wants to make.  These two members of the Republican caucus that come from opposite wings of the caucus and illustrates that opposition to changes that affect rural areas will affect

Congresswoman Jo Ann Emerson (R-MO)  is a nine term Congresswoman from Southeastern Missouri  She is Chair of United States House Appropriations Subcommittee on Financial Services and General Government and Vice Chair of the Appropriations Subcommittee on the Legislative Branch.   She is a member of the moderate Republican Main Street Partnership, and the bipartisan Center Isle Caucus.  

Congresswoman Emerson has stated her opposition to both closing rural Post Offices and cutting delivery to 5-days per week most recently in an op-ed in the Rolla Daily News.

Congressman Steven King (R-IA) is a five term Congressman from northwestern Iowa.   He is well known fiscal and social conservative who was one of only 11 members of the House of Representatives to oppose supplemental funding for Katrina recovery.  He is a member of both the Tea Party Caucus and the Republican Study Committee.  

Congressman King has been actively working to prevent the closure of the mail processing plant in Sioux City Iowa as well as post offices in his district.  His office recently released a set of correspondence with the Postal Service and complained about Postal Service stalling in answering requests for more information about the Sioux Falls processing plant closure  Both he and Iowa's Senators are pushing to get a delay in plant's closure to allow local officials to present an alternative plan.  

Putting the Postal Service in Receivership

The Postal Service is broke.  It cannot pay its bills, even ones that no one disputes that it owes.  In the private sector, a firm in this position would shut down unless creditors believed that putting it in receivership gave them a better prospect of repayment then liquidation.  

The Postal Service's insolvency will have real consequence for its federal government creditors that it plans not to pay this fall. Reuters reported that the Department of Labor stated in a letter to Representative Darrell Issa, that it will not be able to make worker compensation benefit payments to more than 2 million non-postal Federal employees if the Postal Service does not pay its $1.2 billion bill due this fall.  The Postal Service's failure to pay either its non-PAEA or PAEA payments for retiree health benefits adds another $7 to 8 billion in  to the budget cuts that the budget super committee has to find.   [Correction made 8/30 pending further information on the Postal Service's cash position on September 30, 2011]

The Federal government creditors do not have the ability to demand liquidation or receivership , but they can put pressure on both the Obama administration and Congress to take action so that the Federal Government does not default on its own payments.

Congress and the Obama administration know that the Postal Service cannot be liquidated, cannot be shut down. The political and economic consequences are too great.  Approving major changes in Postal operations is the political equivalent of walking into a mine field blindfolded.  The $1.1 billion trillion in sales and over 8.4 million jobs that depend on the existence of the Postal Service cannot be put at risk in a struggling economy.

Receivership is therefore the only option.   It would allow the Postal Service to continue operating while allow management either current or new, makes decisions to streamline operations, cut services, lay off employees, and raise prices that under normal conditions would be impossible.  At the same time receivership would give management access to additional borrowing authority to pay bills and cover the transition costs of a leaner organization only if the actions that it proposes to improve Postal Service finances are approved by the receiver.

The bill introduced by Congressmen Darrell Issa and Dennis Ross recognized that the Postal Service needed more borrowing authority and that outside non-Congressional oversight is required to ensure it is used wisely.   Their bill however is severely flawed in two critical respects.  

• First, it does not recognize that the PAEA obligations cannot be covered through either postage revenue or increased debt without making the final problems worse in just a few years.  
• Second, it does not put within the scope of the financial receiver's power, the power to develop with the Postal Service  a network of processing facilities and retail outlets.  It makes little sense to separate restructuring the Postal Services finances from overseeing the Postal Service's network.    

There is another approach which was used to oversee the federal government takeover and restructuring of seven bankrupt Northeast railroads, that were later known as Conrail.  A single receiver, the United States Railway Association (USRA) had the broad responsibility that a receiver required because fixing Conrail required additional debt to fund its transition to become a viable enterprise  that required approval of the USRA before it could be issued.

The USRA was created as part of Regional Rail Reorganization Act, H.R. 9142 of the 93rd Congress.  (Public law 93-236)

The following is the Congressional Research Service's summary of of this bill the creation of USRA, the creation of Conrail, streamlines abandonment regulatuibs, a new role for the Interstate Commerce Commission regarding determining the need for rail service a process for abandoning rail lines, a specification of labor law provisions and a subsidy program for local rail service.  Parallels between these provisions and the financial, network, labor, and service quality issues facing the Postal Service are clearly apparent.,

Regional Rail Reorganization Act  (Public law 93-236)

Title I: General Provisions 
States the congressional findings and declaration of purpose and defines the terms used in this Act.

Title II: United States Railway Association
Establishes a Government Nonprofit Corporation to be known as the United States Railway Association, which shall maintain its principal office in the District of Columbia and shall be deemed for the purposes of venue in civil actions to be a resident thereof. Authorizes the Association to plan and assist, in the form of loans, rail service and facilities in the northeast region.

Directs the Association to: (1) prepare a survey of existing rail services in the region, including patterns of traffic movement; traffic density over identified lines; pertinent costs and revenues of lines; and plant, equipment, and facilities (including yards and terminals); (2) prepare an economic and operational study and analysis of present and future rail service needs in the region; the nature and volume of the traffic in the region now being moved by rail or likely to be moved by rail in the future; the extent to which available alternative modes of transportation could move such traffic as is now carried by railroads in reorganization; the relative economic, social, and environmental costs that would be involved in the use of such available alternative modes, including energy resource costs; and the competitive or other effects on profitable railroads; (3) prepare a study of rail passenger services in the region, in terms of scope and quality; (4) consider the views of the Office and of all Government officials and persons who submit views, reports, or testimony under this title or in the course of proceedings conducted by the Office; (5) consider methods of achieving economics in the cost of rail system operations in the region including consolidation, pooling, and joint use or operation of lines, facilities, and operating equipment; relocation; rehabilitation and modernization of equipment, track, and other facilities; and abandonment of lines consistent with meeting needs and service requirements; together with the anticipated economic, social, and environmental costs and benefits of each such method; (6) consider the effect on railroad employees of any restructuring of rail services in the region; and (7) make available to the Secretary, the Director of the Office, and appropriate committees of the Congress all studies, data, and other information acquired or developed by the Association.
Establishes in the Interstate Commerce Commission a new office to be known as the Rail Services Planning Office. States that the purpose of the Office shall be to solicit, study, and evaluate the views with respect to present and future rail service needs of the region from Governors of States within the region; mayors and chief executives of political subdivisions within such states; shippers; the Secretary of Defense; and other interested parties; and to assist States and local transportation agencies in making determinations whether to provide rail service continuation subsidies to maintain in operation particular rail properties.

Provides for judicial review of this Act.

Requires, within 300 days after the date of enactment of this Act, the Association to adopt and release a preliminary system plan prepared by it on the basis of reports and other information submitted to it by the Secretary, the Office, and interested persons in accordance with this Act and on the basis of its own investigations, consultations, research, evaluation, and analysis pursuant to this Act. Requires the Association to invite and afford interested persons an opportunity to submit comments on the preliminary system plan to the Association within 60 days after the date of its release.

Authorizes to be appropriated to the Secretary for purposes of preparing the reports and exercising other functions to be performed by him under this Act such sums as are necessary, not to exceed $12,500,000, to remain available until expended.

Authorizes to be appropriated to the Commission for the use of the Office in carrying out its functions under this Act such sums as are necessary, not to exceed $5,000,000, to remain available until expended.

Authorizes to be appropriated to the Association for purposes of carrying out its administrative expenses under this Act such sums as are necessary, not to exceed $26,000,000, to remain available until expended.

Title III: Consolidated Rail Corporation
Establishes a Consolidated Rail Corporation. States that such Corporation shall be a for-profit Corporation and shall not be an instrumentality of the Federal Government. Sets out the powers and duties of the Corporation.

Provides that rail service on rail properties of a railroad in the region which transfers to the Corporation or to profitable railroads operating in the region all or substantially all of its rail properties designated for such conveyance in the final system plan, and rail service on rail properties of a profitable railroad operating in the region which transfers substantially all of its rail properties to the Corporation or to other railroads pursuant to the final system plan may be discontinued to the extent such discontinuance is not precluded by the terms of the leases and agreements if: (1) the final system plan does not designate rail service to be operated over such rail properties; and (2) not sooner than 30 days following the effective date of the final system plan the trustee or trustees of the applicable railroad in reorganization or a profitable railroad give notice in writing of intent to discontinue such rail service on a date certain which is not less than 60 days after the date of such notice; and (3) the notice required by paragraph (2) of this subsection is sent by certified mail to the Governor and State transportation agencies of each State and to the government of each political subdivision of each State in which such rail properties are located and to each shipper who has used such rail service during the previous 12 months.

Provides that rail properties over which rail service has been discontinued may not be abandoned sooner than 120 days after the effective date of such discontinuance.

Allows rail service to be discontinued and rail properties to be abandoned notwithstanding any provision of the Interstate Commerce Act or the constitution or law of any State or the decision of any court or administrative agency of the United States or of any State. Prohibits rail service from being discontinued or abandoned pursuant to this Act: (1) after 2 years from the effective date of the final system plan or more than 2 years after the final payment of any rail service continuation subsidy is received, whichever is later; or (2) if a shipper, a State, the United States, a local or regional transportation authority, or any responsible person offers specified subsidies.

Title IV: Local Rail Services
Requires that the Secretary of Transportation provide financial assistance for the purpose of rail continuation subsidies. Authorizes the Secretary to provide loans to state or local transportation authorities for the purpose of aiding in the purchase of rail properties or for rail modernization.
 
Title V: Employee Protection
Provides that the Corporation and the Association shall be subject to the provisions of the Railway Labor Act.

Provides for: (1) collective bargaining agreements; (2) compensation allowance for displaced
employees; (3) contracting out; (4) arbitration; and (5) payment of benefits.

 Title VI: Miscellaneous Provisions
Sets forth miscellaneous provisions dealing with the applicability of antitrust laws, the Interstate Commerce Act, and the Bankruptcy Act.

Directs the Interstate Commerce Commission to expedite proceedings which will eliminate discrimination against the shipment of recyclable materials.

Why Mail Matters: Express

In the man bites dog tradition, Express announced this week that it will mail its first catalog.  That's right, its first catalog.  The print catalog will have a digital counterpart, but Express's decision to use a print catalog illustrates that brick and mortar retailers realize to get their web sales juiced they have to use mail as web based advertising is not enough to get web-based sales.

Express is a specialty apparel and accessories retailer of women's and men's merchandise, targeting the 20 to 30 year old customer. The Company has over 30 years of experience offering a distinct combination of fashion and quality for multiple lifestyle occasions at an attractive value addressing fashion needs across work, casual, jeanswear, and going-out occasions. The Company currently operates 599 retail stores, located primarily in high-traffic shopping malls, lifestyle centers, and street locations across the United States and in Puerto Rico, and also distributes its products through the Company's e-commerce website, www.express.com.

Why the Postal Service Should Not Reduce Priority Mail Service Standards

All the details are not known about what the Postal Service will propose when it makes its presentation to the Postal Regulatory Commission about changing First Class service standards.  Given that Priority Mail has nearly the same service standard as First Class mail, it is possible that Priority Mail service standards could be affected. 

The following maps from United Parcel Service show why the Postal Service cannot afford to reduce Priority Mail service standards if it wants Priority Mail to remain service competitive for zone 2, 3 and a significant portion of zone 4 parcels. 

Silver Spring MD

Saint Paul MN

Los Angeles, California

Bluefield, WV 

Sioux City, IA

Temple TX

Philadelphia, MS

Dallas, TX

Could First Class Mail Service Standard Be Maintained?

In a major effort to reduce costs to match projected revenue, the Postal Service has proposed eliminating overnight delivery of single-piece mail.   The Postal Service projects substantial cost savings that would come from eliminating full time positions and reducing its use of clerks and mailhandlers during periods when they would be paid a premium for nighttime work.  Support for the Postal Service's cost savings assertion comes from "Cost of Service Standards," a recent report of the Office of Inspector General - United States Postal Service (USPS-OIG).

While the "Cost of Service Standards," report illustrates that cutting service standards could save money, it also illustrates that current service standards could be saved by raising the price of single piece mail.  To estimate how much single piece mail would need to increase over the next ten years, I developed a simple model that suggests that the Postal Service cold maintain current First-class single piece service at rates that remain below the rates that foreign posts charge for similar service.  The model suggests that single-piece First Class mail could maintain current service standards if letter prices was raised to between 50 and 53.5 cents in 2012 and service could be maintained at current levels in 2020 if single piece letter rates were between 51 and 55 cents per letter.

Details of Analysis
The estimate of price increases is based on a simple trend forecast of single-piece letter and card volumes, the peak load cost estimates developed in "Cost of Service Standards." The model also includes a number of critical assumptions that would need to be modified in a more robust analysis of raising prices as an alternative to cutting service standards.  These assumptions include:

1. The long-run inflation rate for Postal Service peak-load costs will be 2.19%, a rate equal to the current rate for the 10-year Treasury bill.  If labor or other costs rise faster than 2.19% annually, then the price increase would need to be higher.
2. The Postal Service can adjust peak load costs proportionally with volume declines.  This assumption is not realistic as capital and maintenance costs will not decline proportionally with volume costs.   Also, reducing labor costs for single-piece mail will be difficult as reduced single-piece volumes can be dumped, culled, faced, cancelled and sorted at origin in less time which makes it exceedingly difficult to continue to use full-time clerks and mailhandlers to handle this mail.  Even the changes in the APWU contract that allow non-traditional full time assignments and an increase in part-time employees may not be sufficient to deal with such a rapid decline in work preparing and sorting single-piece mail at origin. 
   
   Finally, reduced volumes will increase some transportation costs as the cost of inter-facility truck transportation is less than 100% variable with volume and the decline in volumes may shift some volumes from truck to air transportation. The decline in volumes could reduce transportation costs if the Postal Service can reduce the time associated with taking raw single-piece mail and preparing it for dispatch by shifting some transportation from air to truck transportation.  Reducing time in sorting this mail requires higher levels of part-time labor and more sortation equipment than would be required if current critical dispatch times are maintained.
3. Peak load costs per piece are the same for cards, letters, flats and parcels.  Peak load costs will vary depending on whether an item can be sorted using automation or manual sortation.  Single-piece letters and cards are more likely to avoid high-cost manual sortation than flats and parcels and therefore are likely to have a lower per-piece peak-load cost than flats or parcels. Therefore, the per-piece price increases listed below more than likely overestimate the increases associated with letters and cards and underestimate increases for single-piece First class flats and parcels.
4. Users of single-piece First Class mail are insensitive to price changes.  The sensitivity to price changes, or price-elasticity, is different than the sensitivity to technological changes.   Users of a  product with technological alternatives may remain price inelastic even if they are very sensitive to the convenience of alternatives.  While the demand for buggy whips has dropped to nearly zero over the last century, those users of buggies, including carriage drivers in Central Park and the Amish may be relatively insensitive to price changes in the cost of buggy whips while nearly everyone else has abandoned them. 
   
   Single-piece mail is generally thought of as price-inelastic.  However, a major price increase could result in a greater price impact (i.e. reduced single piece volume) than what current models now estimate.

Single Piece Mail Volume Trend

Figure 1

Single Piece mail volumes are rapidly declining creating real stresses on controlling costs of handling this mail.  Between FY 2009 and 2010, single-piece First Class mail declined by 9.8% and through three quarters it has declined 9.4% from 2010 levels.  The decline in single-piece mail reflects the shift in bill payments and correspondence to electronic alternatives.   The chart illustrates that the Postal Service could be handling less than 40% of the volume of single-piece letters and cards that it does today.


Peak Load Costs
Peak load costs for 2010 are the estimates generated by Christensen and Associates for the USPS-OIG.  The upper bound represents the largest estimate in their report and includes all mail processing, transportation, and delivery costs that may be service related.  (Source: Bullet #1 in the Christensen executive summary)  The lower bound only reflects Mail Processing costs.  (Source: Page 3 of the USPS-OIG report) 
Figure 2 illustrates the change in peak-load costs over time using the assumptions detailed above.  The chart illustrates that peak load costs will likely decline as peak-load First Class single-piece volumes decline.

Figure 2

The rate of decline is dependent upon the assumptions listed above.  As the discussion on the assumptions show, cost related assumptions are more likely to be biased toward producing peak load costs that are lower in out years than illustrated in the chart.  The volume assumption produces a potential bias in the opposite direction as volume could decline faster than projected.

Increase in Single Piece Rates

Estimating an increase in single piece rates to cover peak-load costs was estimated by dividing estimated peak load costs by single piece volume.  The estimate for 2010 reflects 2010 volumes and Christensen Associates estimates of peak load costs.  Increases in other years reflect the impact of inflation and volume losses. For 2012, single piece rates would have to increase between 5 and 8.5 cents to keep current service standards.  Figure 3 illustrates the increases that could be required between now and 2020 to maintain current service standards.

Figure 3

Single Piece Letter Rates

Figure 4 illustrates prospective single-piece letter rates that would  allow the Postal Service to continue to offer service at current service standards.   The chart illustrates that the standard letter rate would need to rise to a level between 50 and 53.5 cents in 2012 to cover peak load costs and maintain current service standards.   The kink in the two lines in the chart reflects the fact that CPI related price increases are incorporated in 2010 and 2011 rates but not in rates for 2012 and beyond. These prices reflect both a 1 cent price increase due to the price cap that will reflect the cost increase that will occur even if service standards are reduced and a 5 to 8.5 cent increase needed to maintain current service standards.   

Figure 4

 Regulatory and Legal Constaints

The Postal Service will soon present its proposal to reduce service standards for single piece mail for review by the Postal Regulatory Commission.  The Commission will examine the cost, revenue and policy implications of the change.   Upon the completion of its review the Commission will issue a non-binding recommendation on whether the Postal Service should reduce service standards or not.

Instead of the proposal to reduce service standards for single-piece First Class mail, the Postal Service could have decided to present an alternative that would maintain current service standards but at higher rates.  However, to implement higher rates, the Postal Service would have to file the proceeding as an exigent rate case.  Given the difficulty that it had in the last exigent case, the Postal Service logically chose reducing service and costs rather than maintaining service and raising rates, even if that option makes more business sense.

Current service standards at current rates could still happen depending on what the Commission and/or Congress does.

The Commission could examine the Postal Service's proposal cutting First Class single-piece service standards and recommend higher prices rather than lower service standards.  In doing-so it would have to determine that the benefits of current service standards over reduced levels of service exceeded the differences in price that would be required to maintain existing service levels.   If it did that, it would be making a policy judgement based on its understanding of United States postal policy, thereby creating a new explicit component of the Postal Service's universal service obligation (USO).  In doing this, it would need to also indicate that if the Postal Service filed an exignent case that it would be favorably viewed using reasoning consistent with the information available and recent court cases.

Congress could get involved in the issue of service quality as a matter of policy.  If it did so, Congress would be adding an additional cost associated with the USO.  If Congress added a condition to the USO, then it would be appropriate for it to also allow the Postal Service to raise its prices to cover the additional cost of this new obligation.  Without an explicit permission to raise prices, Congress would force the Postal Service to use the exigent process to cover the additional costs created by the new specifications of the USO.

PAEA, Retiree Health Benefits and Postal Finances

An error in the original wording of the post "How Bad is the Postal Service's Financial Condition?"   listed PAEA retiree healthcare payment as one of the undisputed obligations of the Postal Service that it will not have the cash to pay this fall.   The post has been corrected to state that the Postal Service will not have the cash to pay the non-PAEA retiree healthcare payment. 

PAEA adds an additional $5.6 billion obligation.  That obligation is on top of the $3.292 billion in undisputed obligations assoicated with non-PAEA retiree health benefit costs, workers compensation costs, and interest on Postal debt.  Clearly, the Postal Service will not be able to make its PAEA retiree benefit payment either.  In total, adding the PAEA obligation would appear to raise the Postal Service's unpaid bills to $8.9 billion.

The confusion that I caused regarding PAEA and non-PAEA retiree healthcare payments unfortunately reinforced a belief among many postal stakeholders that fixing PAEA alone would be enough to solve the Postal Service' financial problems.   The identification of uncontested obligations that the Postal Service cannot pay clearly shows that this is not the case.

The separation of PAEA obligations and the unpaid uncontested obligations also shows that the Postal Service's problems cannot be fixed only by raising the debt ceiling.   In order for the Postal Service to pay all of its obligations this year, its debt ceiling would have to rise by $9 billion and in all likelihood the debt ceiling would need to rise by billions for the next few years as well.   The debt only approach raises real questions about the ability of the Postal Service to pay back debt that could double from current levels fairly quickly.

The financial problems suggest that the solution to the Postal Service will likely include all five of the following elements:

• Resolution of the retiree obligation dispute in the Postal Service's favor.  The Federal Government will have not choice but to take a cut in what the law now states that it is owed for retiree benefits. 
• Increased access to debt - increased debt is needed to cover operating losses and undisputed obligations for workers compensation and retiree benefits payments set after resolution of retiree obligations dispute.
• Cuts in operating costs - these cuts will require significant cuts in management and well as negotiations with the Postal Service unions on how the cuts in labor costs will be implemented. 
  
  The management cuts will likely focus on Area and District management.  Cuts large enough to reduce Area and District management to levels reccomended by the USPS-OIG are possible.
  
  The Postal Service's proposals on ending no-layoff clauses, eliminating limits on the use of part-time employees, and taking over all employee benefits are not far from what management facing liquidation from creditors would propose to its unionized employees in order to get the restructuring of financial obligations and increases in access to debt.  (The first two parts of a solution.)  Unions will likely be forced to negotiate significant changes in both recently signed, expired and soon to expire contracts as part of a legislative package.  Postal Unions have a real challenge working their members to ensure that the package of cuts are the least bad ones available.
• Increases in postage rates - the Postal Service has ruled out contesting the exigent case  which eliminated the possibility of rates higher than CPI next year.   While mailers were pleased with this decision, the finances of the Postal Service are so dire that increases above inflation are likely necessary even if the Postal Service gets all that it might want in regard to retiree expenses, debt, and freedom to cut costs.  
  
  The focus of price increases will likely be on products that currently do not cover their attributable costs, products that have discounts due to their "social value" (i.e. non-profit mail and media mail) and on single-piece First Class mail.  Of these, adjusting First Class mail rates is most critical as it's e-communications based decline is adding millions if not billions of short-term transaction costs relating to network restructuring, retirement incentives and severance payments.  Without an increase in single-piece First Class rates, the products that remain in the mailstream  will need to cover these transistion costs which are unrelated to the production of the service that they will receive.
• A study of Postal Service capital needs - The four other elements of this proposed solution do not ensure that the USPS can be financially viable once the immediate crisis is over.   The other four elements above may ensure only that the Postal Service breaks even within a few years.  It does not include room for investments in the network, information systems, vehicles, and employee training that will be needed to ensure that delivery needs of advertisers, parcel shippers, financial institutions, governments, and ordinary citizens in 2020.  
  
  Right now little is known about the capital needs of a Postal enterprise in a digital communications era.  Therefore any package will require an independent study of the capital needs of the Postal Service in order to both provide a full understanding of its current financial troubles and the development forward that ensures that the United States has a financially viable postal market.

How Bad Is the Postal Service's Financial Position?

The Postal Service released its preliminary financial result for July, and as expected they were not good.  Combined with information provided in it 3rd quarter 10-Q, a fairly clear picture of the Postal Service's financial situation at the end of the year and beyond appears.

Measure of Financial Insolvency
The Postal Service is insolvent when it cannot pay its undisputed obligations.   In order to cover these obligations, the Postal Service needs to have sufficient net revenue and borrowing capability to pay undisputed obligations As of July 31, these were as follows:

Revenue Less Undisputed Obligations (Through July, 2011)

• Total Revenue:      $55.821 billion
• Total Costs:            $59.921 billion
• Operating Expenses $56.667 billion
• Net Interest Payments $0.123 billion
• Retiree Health Benefit Premium (non-PAEA) approx. $2.020 billion
• Workers Compensation Expense approx. $1.111 billion
• Solvency Focused Net Income (Loss): ($4.1 billion)  

With two more months to go in the fiscal year, the Postal Service's solvency focused net losses will increase by over $1.5 billion.  This will leave the Postal Service with around $5.6 billion in FY 2011 obligations that it will not have cash coming from postage revenue to cover. 

Ability to Borrow:
As of the end of June, 2011, total Postal Service debt is 12.692 billion.  This gives the Postal Service $2.308 billion in unused borrowing capacity.  This is less than the $5.6 billion in debt the Postal Service would need to add to cover non PAEA obligations.  

Extent of Insolvency
The Postal Service's insolvency at the end of fiscal year 2011 will be the difference between its undisputed obligations and its ability to pay.  Based on the estimates above, the Postal Service will have to default on $3.292 billion of its bills and interest payments.  As the Postal Service pays most of its bills within 30 days and payroll more frequently, it is clear that the Postal Service will not pay the following bills over the next 90 days:

• non-PAEA retiree health benefit payment
• Workers compensation liability premium
• Interest on debt

If losses are larger than projected in the last two months, the Postal Service may have to delay payments to Postal Service contractors until it has sufficient cash to cover its September bills and may have to pick and choose which contractors receive payment within 60 days and which ones may find even longer delays before their bills are paid.

Measure of Financial Viability

The Postal Service's financial problems go beyond insolvency.   In order to come up with cash to cover current bills, the Postal Service has been cutting nearly all investments designed to make the business relevant 5-10 years into the future.  These include investments in information technology, vehicles, facilities, retail modernization, and sortation equipment.   The continuing problems with OSHA violations also are symptomatic of the problems that deferred maintenance and training has on the physical plant and safe operation of postal facilities.  Finally, the Postal Service has to come up with cash to cover early retirement incentives and severance expenses if the Postal Service downsizes to meet the expected volumes of mail that the Postal Service will deliver in 5 and 10 years.

There is no information available as to the difference between the capital that is needed to ensure that the Postal Service remains a viable delivery entity for the next decade and what it is now spending or expects to have to spend in 2012 and beyond.  The cost of vehicles recently was estimated at $ 7 billion.  The Postal Service has estimates of the capital costs of information system and other capital programs that have been deferred.   The cost of severance and early retirement payments can be calculated.   If I were to guess, and this is only a guess, the Postal Service most likely needs $2 to 4 billion in cash for the next 5 years to cover its capital needs and the cost of transitioning to the volume reality of 2020. 

What Congress Needs to Do

Within two weeks, the Senate committee that oversee the Postal Service will hold ahearing on the future of the Postal Service.  This hearing will focus on the proposals that the Postal Service has made to transform its business strategy to one that would have ensure that revenue each year covers its undisputed obligations.   The numbers above suggest that this focus does not go far enough.

Congress needs to ask the Postal Service what its cash needs are so that the full extent of the Postal Service's financial problems are known.   Until that happens, no one will know whether any legislative solution or all of the legislative solutions introduced to date would be enough to ensure that the Postal Service continues to serve the American people in 2020.

*************
Update: 8/28/2011
Additional discussion regarding the framework of a legislative package that can be found in the Post:
PAEA, Retitee Health Benefits and Postal Finances.   This post was written as a response to confusion created by an error in the original version of this post that listed PAEA retiree health benefit payment as one of th undispusted obligations that he Postal Service will not pay instead of the non-PAEA obliation to cover year-to-year changes in the liability.  The recommendation includes five parts:

1. adjustments to the Postal Service's retiree beneifits liablity and payments;
2. increased acccess to debt to cover losses and capital spending needs to allow the Postal Service to handle the switch to a leaner organization;
3. changes to labor contracts in order to allow adjustments in the workforce to reflect the loss of First Class mail volume;
4. Increases in rates; and
5. A study of the capial needs of the Postal Service in order to fully frame its capital needs.  

Purolator International Doubles Presence in US

Purolator International has announced that it will open 10 new branch offices during 2011, more than doubling its presence in the U.S. Srven of these offices have already opened, with the remainder due to open by the end ofd the year.   Purolator's expansion in the United States heats up both cross-border US-Canada competition as well as competition in the United States domestic parcel market.

Upon completion of its expansion, Purolator will have 20 offices including 18 in the top US markets.   Purolator's regional office expansions illustrates the impact of the surge in demand transporting goods between the United States and Canada.

By the end of the year Purolator will have offices in:

• Atlanta,GA
• Boston, MA
• Buffalo, NY
• Chicago, IL 
• Cincinnati, OH
• Cleveland, OH
• Dallas/Ft. Worth, TX
• Detroit, MI
• Farmingdale, NY (New York City and Long Island) 
• Houston, TX
• Los Angeles, CA
• Miami, FL
• Milwaukee, WI 
• Minneapolis, MN
• Philadelphia, PA
• Raleigh/Durham, NC
• Salt Lake City, UT 
• San Francisco, CA
• Seattle, WA 

Expanision already planned for 2012 will add offices in:

• Baltimore, MD
• Denver, CO
• Charlotte, NC
• Indianapolis, IN
• Phoenix, AZ
• Pittsburgh, PA
• St. Louis, MO
• San Diego, CA

The following map illustrates the offices that Purolator now expects to have by the end of 2012.

About Purolator International
Purolator International is a subsidiary of Purolator Inc., Canada’s leading Logistics Company, and Canada Post Corporation. Purolator International specializes in the air and surface forwarding of Express, Freight and Parcel shipments, customs brokerage, fulfillment and delivery services to, from and within Canada as well as parcel sipping within the United States.

Is it Christmas in August?

Yesterday, my 10 unit condo building in Silver Spring MD saw two deliveries by a letter carrier.  In the early afternoon,  letters, flats and some small parcels were delivered.  Later in the afternoon a second carrier delivered small parcels. The small parcels all appeared to be less than 10 pounds and all were Parcel Select shipments.

A second delivery to handle parcel shipments is not uncommon in the month leading up to Christmas.  But could demand for parcel delivery be so strong that a second delivery is needed in August?  Looking just a few months ahead, will the Postal Service have sufficient delivery carriers in December to handle the crush of e-commerce purchases that will come from a combination of peak-level retail sales and delivered retail sales coming closer to 25% of all deliverable retail sales.

The growth of e-commerce has shifted the proportion of all parcels that are delivered to consumers at home and has changed the mix of merchandise consumers have delivered. Home-delivered e-commerce is the reason that Parcel Select volumes are growing at seven (7) times the growth rate of the parcel industry as a whole.     Parcel Select is growing so rapidly because when combined with the sales, pick-up and transportation services of FedEx/UPS/DHL/Neugistics/Streamlite and others it provides the service quality shippers need at a price that makes free shipping possible.  

The cost savings of using a consolidator and Parcel Select have been obvious for some time.  Retailers, even those who can negotiate large discounts off of the commercial tariffs including discounts off of minimum charges and home delivery charges are able to meet their customer's delivery requirements at a combined consolidator-USPS price that can be between half and 80% of what UPS or FedEx ground delivery would be.   However, it is the service quality, and in particular service quality driven by drop-shipping parcels close to the recipient that makes Parcel Select delivery work.  Without service quality that meets a retailer's service quality requirements, no price differential would be sufficient.

The growth of Parcel Select and other Postal Service delivered parcel services sold to retailers by consolidators raises a number of interesting operating, cost and pricing issues for the Postal Service.

• Does the Postal Service need real-time carrier routing optimization models to minimize the impact on delivery labor requirements of the growth of parcels?
• Is the cost of delivering parcels under 10 pounds changed as the volume of parcels that must be delivered grows?
• Is there a cost different in urban and rural areas, or in areas where delivery points are a few miles from a carrier depot and those where the delivery point may be 20 miles or more?
• How much would it cost to upgrade information systems to integrate Parcel Select delivery information  into the tracking systems of UPS/FedEx/DHL/Neugistics/Streamline and how quickly could those upgrades be implemented? 
• Is there an interest from UPS/FedEx/DHL/Neugistics/Streamline to provide financial support for this upgrade to make the joint-line product better?
• Is there a differential in the market price for last-mile delivery of parcels in urban and suburban areas as opposed to ex-urban and rural areas?
• How can prices for Parcel Select delivery reflect the Postal Service's full pricing power without undermining the price-advantages of Parcel Select delivery?
• How can prices for Parcel Select delivery maximize the use of the service in urban and suburban areas where private sector delivery costs are lower?
• How can the Postal Service price deliveries through its rural and ex-urban delivery networks to take advantage of higher costs of competitors without discouraging the use of the service?

Senate Meeting in Former Post Office: Does that Provide Hope or Not?

Due to concerns about the structural integrety of the Capitol building, the Senate will be meeting in the Post Office Square Building today.  The building was the former main post office and mail processing facility in Washington, DC and now holds federal offices and the National Postal Museum. 

Unfortionately, the meeting is only a pro-forma session and only two Senators will be in attendance, Senator Chris Coons (D-DE) and another Senator who either lives in the area or just happens to be in town.   It is too bad the whole Senate could not meet there and then take the short trip down an escalator where they could learn something about the Postal Service before they let the politics of the day overwhelm decent policymaking.

For More information click on this link: the Smithsonian Institution National Postal Museum

Pictures from the National Postal Museum

Why UPS May Be Falling Behind in B-2-C Delivery

For some reason, one of the most frequent Google searches that lead people to this blog is "UPS Surepost"  I checked out that search and I found that while UPS offers this product, it makes almost no effort to tell customers looking for cheap delivery of parcels between 1 and 10 pounds that it has a price competitive service.  Here is the top part of the page that a Google Search of UPS Surepost looks like. (click on the UPS Surepost to see the full page)



Does that look like a page written by someone who wants to market a service? For postal people, it looks a lot like what the domestic mail manual may have looked like 20 years ago, a document written by bureaucrats for bureaucrats.   Click on the competitor's websites and see how companies that really want to market this service. 

FedEx SmartPost

DHL Global Mail Parcel Plus

Neugistics

Equaship

As noted, in a previous post, the Postal Service's fastest growing products are Parcel Return Service and Parcel Select.  UPS may be offering both services, but I am willing to bet they will have a tougher time selling their customers on what are the fastest growing parcel products in the United States as long as they keep advertising this service on the web as poorly as they do. 

The Debate over the Gas Tax and Post Roads

There is an interesting debate going on in comments section on an article in Bloomberg about a proposal to end the federal gas tax and phase out funding for new construction under the federal roads program.

The idea Senator Tom Coburn of Oklahoma and Representative Jeff Flake of Arizona, want to abolish the tax that pays for the federal highway program and replace the whole system with one overseen by individual states. 

So how did the United States get into the business of constructing roads?

It is in the constitution, Article 1, Section 8 which gives the power to Congress "to establish post offices and post roads."

Post roads were built in New England and New York state. The Post Road Act of 1912 began the first modern Federal involvement in highway funding in order to allow mail transported by truck to get through. The rest, including the Interstate System is history.

Post Offices Saved in Alaska are Unique

The removal of 25 of the 36 Post Offices in Alaska under consideration for closure should not give hope to other communities that they have a good chance of saving their Post Office.  As the Fairbanks News Minor reports, "the offices all have one thing in common: none of them are on the Alaska road system."

It is unlikely that there are many Post Offices that the Postal Service is considering closing in either Hawaii or the continental United States that are off the highway system.  Therefore, few communities will find saving their Post Office as easy as these 25 communities did in Alaska.

Postal Employees Need a New Plan

For well over a year, Postal employees and their unions realized that their jobs were at risk as the Postal Service's financial situation worsened.   Recently the Postal Service proposed cutting 220,000 full time jobs in a major re-envisioning of the Postal Service.  There is little that Postal Unions can do through lobbying Congress, the Postal Regulatory Commission or in negotiations with the Postal Service to stop that.

Just yesterday, the APWU repeated its support for H.R. 1351 allow the USPS to use the billions of dollars in pension overpayments to meet its financial obligations.  As their post on the web notes, Representative Issa is blocking consideration of this bill in the Government Reform and Oversight Committee.  Given the potential impact of H.R. 1351 on the budget, the prospect of a similar legislative bill getting the 60 vote necessary for passage in the Senate seem equally unlikely.

The prospects of stopping the Postal Servie's new network in Congress appears limited, as Congressman Dennis Ross has indicated support for the Postal Service's actions in an interview with the Government Executive. "The rightsizing and pension changes suggested are dramatic and are encouraging," he said. "I remain hopeful that any USPS transformation will serve as a model for other government agencies in how to adapt to the 21st century."

What is most telling in Congressman Ross's quote is how he wants the USPS transformation to "serve as a model for other government agencies in how to adapt to the 21st century."  He looks at the Postal Service not as a quasi-government, quasi-business entity, but just another govenment entitiy.  

The APWU and other unions are facing a fight for their existence, and more importantly a fight for the jobs of their members.  This is a worthy fight and should be fought with vigor.  

However, to win this fight Postal Unions have to realize that the battlefield has changed and they need to find a way to press the interests of their members in a venue outside of Washington.  Continuing to fight for their members with the tools that they have will lead to little more than frustration as long as the Postal Service is controlled by Congress and cannot fully use the talents of its employees and its physical and intellectual property assets to serve Postal Service customers.

The problem facing the Postal Service is money.  There is none coming from the Federal Government, and PAEA prevents the Postal Service from raising rates, on products that are now or will soon be costing more than the revenue that they generate, or to ensure that single-piece mail prices today generate sufficient revenue to cover not  only the cost of delivering the mail today but also cover the Postal Service will need to provide severance and early retirement incentives to employees let go as single-piece mail volume declines.

Even though the Postal Service is still losing money, it is clear that a properly run Postal Service should be a profitable organization even as it pays wages competitive with what UPS and FedEx pay their employees and contractors.  No other Postal adminstration in the developed world faces financial financila losses like the Postal Service even though they all are experiencing the same pressure from web and mobile communications competition.  It is also clear that the Postal Service has significant assets locked up in excess real estate that could be used to provide the capital needed for major modernization efforts.

So where do the Unions fight?

They take their fight to Wall Street.  The APWU should hire Goldman Sachs; the NALC, Morgan Stanley.  It is time for the unions to put together a plan for joint private sector, employee-ownership of the Postal Service.   It is only by taking this bold step that Postal Unions would take their fight onto a field that gives them an advantage and more importantly a real possibility that their members would find that in the next ten years they have more than just fewer jobs, lower pay, and fewer benefits to look forward to.