Flooding in Pennsylvania will Delay Shipping

Flooding in eastern Pennsylvania will have a big impact on e-commerce shipping in much of the eastern United States.   The area facing record level flooding is home to fulfillment centers of nearly every large e-commerce company.  With roads closed, these centers will have difficulty both getting products delivered to the centers and shipments to customers out.   Among the e-retailers that will be affected is Amazon which has three fulfillment centers in the region.

Shipments from United Parcel Service, FedEx and the Postal Service that travel by ground through this region will need to find circuitous alternative routes as some major Interstates may remain closed for a few days.   The delay in opening highways in Pennsylvania is due to the task of inspecting 100's of bridges over flood swollen creeks and rivers.  UPS shipments may also face delays if the flood affects rail service that transports United Parcel Service trailers.

The Pennsylvania Department of Transportation has urged that travel in eastern Pennsylvania be curtailed.  Flooding in the Susquehanna, Schuylkill and Delaware watersheds are at or near record levels not seen since Hurricane Agnes in 1972.   Mandatory evacuation of areas flooded in 1972 is occurring in nearly all communities along the Susquehanna River.

The flooding has already closed both I-80 west of I-81 and I-81 north of Harrisburg as well as numerous U.S. highways and state roads.   Later today Harrisburg is expected to be isolated as I-81 and I-83 entrances to the city are closed.  

Senator Coburn on the Postal Service: Free Management

CNN interviews Senator Tom Coburn on the Postal Service.   In his answers to John King's questions his focus is on freeing management to run the Postal Service with the same flexibility any other business would have to meet market demand.  He does not indicate support for any approach to Postal reform but clearly states that operating subsidies are out of the question as far as he is concerned. 

Senator Coburn clearly shows his support for the current Postmaster General and appears to indicate that he would trust him to run the enterprise if he had the freedom to run it.  He also clearly states that there is no money to return the Postal Service to a government taxpayer supported model. 

Why he indicates his support for greater management flexibility in negotiating labor contracts, he does go further to suggest that existing contracts should be broken.

I apologize for the commercial at the beginning, but that was the only way to get the intro and the full interview.  It is worth a listen as it provides another clue as to what a bi-partisan postal reform bill might look like.

Comparing the Postal Service and Canada Post in Advertising

Today, I received the following e-mail   It shows how a company that sells envelopes, mailers, and folders is using the Postal Service's problems to sell its products.  What is striking in the copy is how it contrasts the management of the Postal Service with Canada Post.  This has got to hurt at L'Enfant Plaza.  It shouldn't as the difference between the two reflects not management ability but the business model that the enterprise most operate under.  The Postal Service still operates closer to a government department model than it often admits publicly.  Canada Post operates under a business model that is very close to the standard Canadian corporate model.

While Canada Post may not really be "a model of corporate efficiency," it has maintained its profitability as it handled the growth of electronic communications.   In doing so, Canada Post is the North American example of corporatized and privatized national posts that provide universal service profitably while facing increases physical and electronic delivery competition.

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Amazon Preparing For Postal Service Shutdown

On September 2, 2011, The Daily reported that Amazon is now preparing to test a locker based system for parcel delivery in the Seattle, Washington.   The lockers, to be placed in 7-11 gives Amazon an alternative means of delivering shipments that avoid home delivery and the issue of repeated delivery attempts.  If Amazon puts one in every 7-11, it will have 8,200 parcel pick-up locations nationwide.

Seattle is one of the markets that Amazon currently offers local express delivery. Items eligible for local express delivery can be ordered as late as 1 pm for delivery that day.   The parcel lockers allow Amazon to cut the delivery time on its shipments by reducing the number of locations where parcels need to be delivered. This should allow Amazon to expand its same day delivery service and possibly reduce shipment times for other shipments.

7-11 Seattle, WA

Geekwire published pictures from a 7-11 in the Capitol Hill section of Seattle.

The picture shows a set of lockers taking up a small portion of the 7-11's floor space.   7-11 most likely is leasing the space to Amazon.  The lease will likely cover all utilities and may include a requirements regarding how the area around the parcel locker is to be maintained  Putting the parcel locker in a 7-11 helps reduce security concerns that would exist if the lockers were put outside which is common in other applications.

The close-up photographs show lockers of different sizes that could fit everything from a book to a small appliance.

Amazon Parcel Locker

According to The Daily, a source with knowledge of the project, the idea is simple: these nondescript boxes will be in 7-Eleven stores across the country and act as a sort of P.O. box for Amazon purchases. Once a customer makes a buy on Amazon’s website he can select a 7-Eleven close to work, or on the way home and have the package dropped off there.

Once the package is actually delivered, the customer receives an email notification along with a bar code to his smartphone and heads to the 7-Eleven. There he’ll stand in front of the locker system, which looks like the offspring between an ATM machine and a safety deposit box. The machine will scan the bar code on his handset to receive a PIN number. He’ll punch that PIN number and retrieve the package.

DHL Packstation

This is similar to how DHL describes the use of its Packstation: 1) register for the service; 2) choose a packstation; and 3) pick-up a parcel when notified by e-mail or text message.  DHL now has 2,500 Packstations in urban, suburban and rural areas.   Packstations have been installed in many small rural towns in Germany, with some of these towns as small as 7.000.
The difference between the Packstation and Amazon's kiosk is that Packstations are designed for shipping parcels as well.  The credit card reader in the Packstation is missing as well as the slot for printed shipping labels.  Also as most Packstations are located outside, they also include a canopy to allow use in inclement weather.

The front-on picture of the Amazon kiosk provides a better image of what are likely a touch-screen interface and the lockers of various sizes designed for small parcels.

Amazon Parcel Locker

According to the Daily's source, Amazon is testing the system now and could begin roll-out by next summer.
The look of the Parcel locker clearly shows that it is a direct threat to the parcel business of the Postal Service.   The size of the lockers fit smaller parcels.  This  includes parcels that United Parcel Service and FedEx deliver using the Postal Service's Parcel Select or Standard Parcel products, as well as shipments that fit into any of the Postal Service's Priority Mail flat rate boxes.

While Amazon is installing these parcel kiosks, the lack of branding raises some interesting questions about Amazon's long-term strategy for this significant capital investment.

• Are the kiosks only going to be available to only Amazon and Amazon marketplace sellers or will they be open to all shippers of parcels?
• If they are open to all shippers, what brand will Amazon chose to give it universal appeal?
• Could Amazon license the Postal Service brand to give it universal appeal? 
• Who will have access to the lockers to put parcels in? 
• Will Amazon have a single local carrier handle this or will the parcel lockers be open to UPS, FedEx, Postal Service and other parcel carriers? 
• If they are open to all carriers, will Amazon charge a fee for their use, turning parcel pick-up into a profit center?
• Will Amazon open these parcels in all states or will its fight over sales taxes determine where it puts them?
• If the sales tax issue creates problem would Amazon operate these parcel lockers through a subsidiary with which it has an arms-length relationship?

Post Danmark (Denmark)

Outside of the United States, investments in parcel lockers have been made by the national post because the national post is the largest parcel carrier delivering parcels, and in particular small parcels to residences.   The United States Postal Service has known about the Packstation, which is made by Keba, AG  and parcel locker solutions from other vendors for at least the last two years that they have been mentioned on this blog.  [Should the Postal Service Close all Post Offices?]  However, it had neither the available capital nor the willingness to make hard choices about its retail strategy to choose what will likely be the small parcel delivery method of the future.

Investments of this type take a fairly long time to consider and an even longer time to implement.  Amazon's decision to make this investment clearly indicates that it needed a different way to deliver to smaller and in particular smaller high-value parcels than what FedEx, United Parcel Service or the Postal Service now offer or appear to be likely to offer in the future.

Most importantly, the Postal Service's financial problems, legal and regulatory constraints, and Congressional meddling made it impossible for the Postal Service to provide the service that Amazon receives from the national post in every country where the national post has been corporatized or privatized.  Furthermore, the seriousness of the Postal Service's financial condition has resulted in proposals that could add an additional day for drop-shipped parcels or eliminate delivery on Saturdays, options that make Amazon less competitive with stores like Walmart and Best-Buy that offer in-store pickup in an hour or less.

The risk that the Postal Service may not be able to meet Amazon's delivery needs in the future coupled with the high price of alternatives from FedEx and United Parcel Service that forced Amazon's hand.  Given that the investment in a network of parcel lockers will be in hundreds of millions if not billions of dollars range, the size of the risk that the Postal Service could close or offer lower quality parcel delivery services clearly was material to revenue growth and profit prospects of Amazon.   This made the investment both prudent for Amazon and a great concern for Postal Service, postal stakeholders, and lawmakers trying to rewrite the law to ensure a future for the Postal Service and the customers it serves.

Postal Service Seeks 7% Cut in Contract Spending

The following article from behind the Bloomberg paywall identifies how the Postal Service's plan to cut contract costs will affect a wide range of contractors.  The cuts in capital spending, which come off of severely constricted levels reflect a short-term focus of an enterprise focused only on survival.   Other cuts, including those to truck transportation contracts will likely open up transportation of mail to firms that provide dedicated fleets to multiple customers and reduce the number of Postal Service contracts that firms that now get all or most of their business from the Postal Service receive.

Northrop May Feel Squeeze of Postal Service $1 Billion Cost Cuts

2011-09-06 04:00:01.3 GMT

 By Angela Greiling Keane

     Sept. 6 (Bloomberg) -- The U.S. Postal Service, which spends about $15 billion a year on products and services, is pressing its more than 20,000 suppliers for $1 billion a year in cost cuts as it faces possible insolvency as soon as Sept. 30.

     Postmaster General Patrick Donahoe on Sept. 15 is scheduled to announce a plan to eliminate mail processing facilities and cut transportation and equipment costs. Donahoe is slated to testify today before the Senate Homeland Security and Governmental Affairs Committee, which is probing proposals to prevent a postal shutdown.

     “It’s becoming more competitive to do work for us and it’s going to have to be done at slimmer margins from a standpoint of our supplier base,” Chief Financial Officer Joseph Corbett said in an interview. Corbett said he wants to cut at least $1 billion a year from supplier spending.

     The cost-cutting has implications for many of the largest Postal Service contractors, said David Hendel, a Husch Blackwell LLP partner who specializes in postal contracting. He compiles a list of top service contractors from documents obtained through the Freedom of Information Act.

     Companies at risk of losing postal revenue range from Northrop Grumman Corp. and Siemens AG, which supply sorting equipment including barcode readers; to FedEx Corp., the largest contractor; to closely held trucking company Pat Salmon & Sons, which doesn’t list any business line on its website other than hauling mail.

 ‘Stark Reality’

      The Postal Service’s mail volume has declined 20 percent since peaking at 213 billion pieces in 2006. It has said it may lose $9 billion in the fiscal year ending Sept. 30 and run out of money by that date to make all payments required by law.

     The service has asked Congress to let it delay a $5.5 billion payment for future retiree health benefits and shift what it says are over payments to federal pension funds to cover that payment. It wants to end Saturday mail delivery, cut 220,000 jobs by 2015 and close 3,700 post offices.

     Corbett is continuing an initiative he started after becoming financial chief in 2009 by sending a letter to suppliers explaining the “stark reality” of postal finances and asking for “significant price reductions on both existing and future work.”

     The service is bidding contracts for services from transportation to custodial work, renegotiating existing contracts “wherever it makes good business sense,” simplifying its requirements to suppliers and lowering use of consumable products, Douglas Glair, the service’s manager of supply chain management strategies, said in an e-mail.

FedEx Tops List

      FedEx, which operates the world’s largest cargo airline, is the largest Postal Service supplier, receiving $1.4 billion in the 2010 fiscal year, according to Hendel’s list. Hendel has compiled the list annually since 2001.

     FedEx’s postal revenue is more than twice the $495 million of No. 2 Northrop Grumman Corp., according to the list. Most of FedEx’s postal revenue comes from a seven-year, $1 billion-a- year contract to fly about 4 billion pounds of mail per day until 2013, an agreement the service negotiated “from a position of extreme weakness,” Hendel said.

     FedEx’s mail volume will decrease after the contract runs out as the service moves more mail on the ground, Corbett said.  The service will continue to use FedEx to transport priority mail and some first-class mail, he said.

     FedEx receives about 3.5 percent of its revenue from the Postal Service, based on Hendel’s listed amount as a percentage of the company’s last-reported annual revenue. The company, based in Memphis, Tennessee, declined to comment on whether it’s under Postal Service pressure to cut costs.

     “FedEx values its alliance relationship with USPS, both as a supplier and a customer,” Maury Donahue, a FedEx spokeswoman, said in an e-mail.

 One-Way Pay

     From 2009 to 2010, the service cut transportation expenses $148 million, or 2.5 percent, and non-transportation supplier expenses by $60 million to $9.2 billion, or 12 percent of its operating expenses, according to a regulatory filing.

     In a 2009 letter from transportation contract managers to trucking suppliers, the service proposed rate reductions, a request it called “extreme” while also saying contracts without rate reductions may not be renewed.

     The Postal Service is asking trucking suppliers that have to make round-trips to haul mail to be paid for only the half the journey when the truck is full of mail, rather than for round-trip mileage, Hendel said. “If the contractor will not agree to this, the Postal Service is threatening to terminate their contract,” he said.

 Equipment Freeze

      In a plan the service circulated to lawmakers in August, it said it wants to cut its more than 500 mail processing facilities down to fewer than 200. It didn’t say how much money it expects to save.

     Among other things, the service “will not be buying mail processing equipment, period,” Sue Brennan, a Postal Service spokeswoman, said in an e-mail.

     Munich-based Siemens AG, the service’s fifth largest supplier in its 2010 fiscal year with $135 million in revenue according to Hendel’s data, is taking notice.

     “We’re affected by their budget and their spending,” Daryl Dulaney, chief executive officer of the Siemens Industry division, said in an interview at Bloomberg’s Washington office. “It causes us to react and adjust.”

     Randy Belote, a spokesman for Northrop Grumman, based in Falls Church, Virginia, declined to comment.

Cheaper Ads

      The Postal Service’s advertising spending increased 40 percent as the service promoted its profitable package-delivery businesses. Most of the increase went to advertise flat-rate boxes through a campaign created by Campbell-Ewald, making it the eighth largest USPS supplier according to Henkel.

     Jim Palmer, chief client officer for the advertising agency based in Warren, Michigan, said they understand the Postal Service’s requests for cost-cutting. He declined to discuss what cuts the service has requested.

     “When the Postal Service comes to us, we do our absolute best to react to their situation,” he said in an interview.  “As their business has ebbed and flowed, and it’s no secret that there are some challenging times, we react in kind.”

     While some of the Postal Service’s suppliers have diversified businesses, others are more dependent on the mail revenue for their livelihoods, Hendel said.

     One is Pat Salmon & Sons, the fourth-largest contractor with $143 million in revenue. The company was founded in 1946 to move mail in Arkansas and has more than 100 postal contracts and moves mail in 26 states, according to its website.

     “We wouldn’t be interested in commenting at all,” said a man at the company’s headquarters in North Little Rock, Arkansas, who didn’t identify himself before he hung up.

     The Postal Service may have a hard time squeezing more savings out of suppliers, Hendel said.

     “About the only thing left is for USPS to reduce the services and goods that USPS buys, or relax contract requirements and specifications so that the cost of performance is less,” he said.

For Related News and Information:

Postal stories: NI POS

For top government stories: GTOP

 --Editors: Bernard Kohn, Timothy Franklin

 To contact the reporter on this story:

Angela Greiling Keane in Washington at +1-202-654-1287 or agreilingkea@bloomberg.net

 To contact the editor responsible for this story:

Bernard Kohn at +1-202-654-7361 or bkohn2@bloomberg.net

Newspaper Calls for Shutting Down the Postal Service

In an editorial, the Delaware County Daily Times called for the shut down of the Postal Service  The paper called the Postal Service "a prime example of a service the federal government in the very near future will longer need to provide. It should be planning for that day right now instead of looking for ways to prop up a huge and expensive bureaucracy that has served the country well but has been made expendable by progress."

The editorial illustrates why postal stakeholders have failed to explain why mail matters to the economy today and will 10 years from now.   This editorial, from a newspaper whose editorial page leans somewhat left of center, that public support for having a government entity deliver items consisting of some correspondence and transactions but mostly advertising and parcels may not be all that strong.

Senate Hearing Witnesses Suggests Retiree Benefit Fix Still on Table

The list of witnesses included testifying to the Senate Homeland Security and Governmental Affairs Committee on Tuesday includes a witness that is not one of the "usual suspects."  By including Thomas D. Levy, Senior Vice President and Chief Actuary, the Segal Company, the Committee signals that it believes that adjusting the retiree obligations will likely be part of legislation that the Committee proposes.

The Segal Company conducted the actuarial analysis of the Postal Service's pensions.  Mr. Levy's testimony will likely cover the conclusions of that report.  Given the primary focus of Segal Company, he may also be asked questions about actuarial issues relating to the Postal Service's retiree healthcare obligations.

Mr. Levy's appearance is designed to provide a legislative record to support the Senate Committee's legislative proposal.  As he will likely testify that changes to retiree obligations is logical and in concordance with actuarial standards, this would suggest that the Committee will likely include legislative changes that follow actuarial standards.

The Senate Committee's choice of witnesses shows a contrast with the House Oversight and Government Reform Committee.  The House Committee, in the last Congress had Jonathan Foley, Director of Planning and Policy Analysis, U.S. Office of Personnel Management testify in which he testified that OPM did not have the authority to change formulas used to calculate the Postal Service's obligations for retiree benefits.   The report of the Inspector General of the Office of Personnel Management which came out in February 2011,was entered into the record at a hearing held in the current Congress.  This report of the Inspector General of the Office of Personnel Management reinforces the impression that the primary concern of the House Committee is supporting the interests of the Office of Personnel Management over that of the Postal Service.  With this position set, the Issa-Ross bill therefore uses increased Postal Service debt to ensure that the Office of Personnel Management's financial interests are not adjusted.  [Italizized edits made 9/6/11 10:52 to clarify when OPM testified]

By the end of the hearing tomorrow, postal stakeholders should be clear that there will be two drastically different bills for solving the Postal Service's financial problems.  With only a limited number of legislative days between now and October 1, 2011, a path to agreement appears difficult at best.