Is the Brand Suffering?
The Postal Service has built a strong brand name around service, trust, and security. Few other organizations can lay claim to such a strong brand, one with more than 200 years of history and cultivated by the Postal Service’s consistent fulfillment of its mission to securely deliver mail to every American, regardless of location, at a reasonable price. For 6 straight years, the Ponemon Institute has named the Postal Service the most trusted government agency and one of the top 10 most trusted businesses in the nation. Many postal observers have encouraged the Postal Service to leverage this “trusted brand” to expand its offerings in the digital market.
But a steady drumbeat of bad news over the past few years around its financial situation, potential cuts in service, and uncertainty over its retail and network downsizing plans has unsettled stakeholders. The question many of them ask is whether the ongoing negative news coverage could be hurting the overall brand. Even the PMG noted earlier this year that the mailing industry is experiencing a “crisis in confidence.” Lingering uncertainty about the Postal Service’s future could further erode confidence. Further, competitors can use the turmoil to their advantage, touting their own services as easy and reliable in the face of uncertainty.
Read MoreNot Yet Closing Time
Americans are passionate about their post offices as they made clear when the Postal Service unveiled its original plan to close 3,700 post offices, most of them in rural areas. Last month, the Postal Service announced a new plan to keep post offices opened but reduce the operating hours at 13,000 locations. These low-activity post offices would be open only 2 to 6 hours a day, which the Postal Service says would save it $500 million a year. The Postal Service also plans to upgrade about 4,500 current part-time Post Offices to 8 hours of daily window service.
Post offices are viewed by many as a gathering place for citizens and central to a community’s social and cultural identity. Some argue the Post Office is not just a profit-based retail establishment; it is part of the Postal Service’s larger public service mission. Perhaps the Postal Service should consider expanding the services it offers at post offices before it closes them.
Read MoreWhat should be done about overfunding, overpayment, and other unfunded federal mandates?
This is the fifth topic in our “Five Elements of a Postal Solution” blog series. Link to last week’s topic.
Link to the blog by Elmar Toime.
Link to the blog by Jim Sauber.
Link to the blog by Roger Kodat.
Guest Blogger Elmar Toime, independent advisor to the postal sector
Elmar Toime
There is nothing new in the U.S. Postal Service’s concern about retirement liabilities, but this is part of a larger issue of employee compensation. In developed economies around the world, postal employees enjoyed or still enjoy civil service labor conditions. This is not just about take-home pay. Civil servants typically have better leave and medical arrangements, better working hours, and importantly, more generous pension and medical schemes. This is my first point. Comparisons of postal compensation to compensation in other industries must be made on the value of total remuneration.
In itself, higher compensation need not be a problem. The crucial element is whether superior remuneration can be matched by superior productivity. If it can, then the labor cost is justified. And to be fair, in this context, productivity should include both efficiency (as measured for example by labor cost per postal item) and service (for example timely delivery of mail). Whatever the situation, postal services have to be paid for, either by users (when they buy postage) or by the government through subsidies and market protection for mail services. That’s a public policy choice that governments cannot duck. If you want users to pay, then either postage prices have to increase, or services reduced, or labor productivity improved, or assets worked harder. We see all approaches being implemented in other countries.
In some places, total labor remuneration growth has been slower than the market, rebalancing in that way. We have seen dual pay structures emerge – existing civil servants retain all benefits, new employees simply don’t get them. We have seen service quality change, through post office closures or a five day service. Everywhere there has been investment in new sorting technology and work practices that require less labor for the volume of mail processed. And we have seen governments allow prices to rise more than inflation, protecting the postal company from competition at the same time. New services have emerged, such as banking in post offices, in order to better use assets or fixed costs.
It’s an optimization problem that can’t avoid difficult decisions. Want my 5 cents worth? Transfer existing pensions and medical insurance liabilities to the federal government. That is soon going to happen in the United Kingdom. Separate these ‘old’ benefits from a new employment contract based on existing conditions but which can be allowed to evolve with the business. Implement five-day a week delivery (Monday to Friday), accept private sector provision of retail services, rationalize the sorting center network, and increase prices to provide a 5 percent return on capital invested for the first three years. Announce that market liberalization will occur in the third year. In other words, do what most other countries have done!
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Guest Blogger Jim Sauber, Chief of Staff, National Association of Letter Carriers
Jim Sauber
Legacy costs: The Postal Service’s hidden strengths
I often joke that the Postal Service is the most financially sound ‘failing business’ in the country. It has two overfunded pension plans (FERS and CSRS), even with the application of grossly inequitable cost allocations methods in the postal portion of the CSRS fund and it has pre-funded nearly 50% of its future retiree health liability when the median level of funding for such benefits among Fortune 1000 companies is zero (0%), according to an annual survey by Towers Watson.
These strengths suggest that the financial crisis at the Postal Service is not hopeless. Smart policy on pensions and retiree health costs can help save one of America’s greatest economic assets, a last-mile delivery network that links 150 million households and businesses for an industry that employs 7.5 million Americans.
One solution already proposed would be to suspend the retiree health pre-funding during the near term emergency. Restructuring must take priority over pre-funding now. No other agency or private company faces such a mandate. The remaining unfunded liability for retiree health could be covered by implementing the recommendations of the PRC/Segal company audit of CSRS benefits as called for by H.R. 1351, a bill with bipartisan majority support in the House of Representatives.
Although the October 2011 GAO report on this issue backed the OPM’s interpretation of the law, and the methods it used for allocating pre-1971 pension costs between USPS and the Treasury, it also concluded that the methods endorsed by the OIG and PRC audits were “reasonable” and that the choice of methods is essentially a “policy decision.” I agree – Congress should make the policy decision, not OPM.
There is more that can be done to handle future legacy costs.
First, Congress should allow USPS and its employees to invest the assets in the Postal Service Retiree Health Benefits Fund (PSRHBF) in a more appropriate manner. A fund with $45 billion in it, operating on a 75-year time horizon that will pay out $3 billion per year for retiree insurance premiums, should not be invested exclusively in low-yielding Treasury securities. The group of diversified index funds in the Thrift Savings Plan (which also invest for employees’ retirement years) have earned 7.3% annually since their inception. Raising the returns in the PSRHB to this level would cut prefunding cost significantly.
Second, legislation to facilitate the intelligent integration of FEHBP and Medicare benefits as well as bargaining between the Postal Service and its unions on health benefits within a FEHBP context could dramatically reduce future retiree health benefit costs. NALC is aggressively exploring the options right now.
Of course, these policy changes alone won’t be enough to save the USPS. NALC knows that costs must be properly aligned with the economic realities of the 21st Century through pain-staking collective bargaining – a process that is still underway. More importantly, the Postal Service needs a new business model and a growth strategy that will preserve a robust national network to serve the nation. That will require Congress and all the stakeholders in our industry to come together to reach a consensus on a vision for the future.
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Guest Blogger Roger Kodat, former official at the Department of the Treasury.
Roger Kodat
The legislative process often leaves us wondering if form trumps substance. Take the Postal Accountability and Enhancement Act of 2006, particularly Section 803. This section requires the Postal Service to make cumulative $58.8 billion of specified annual pre-payments from 2007-2016 into a Retiree Health Benefits Fund (CBO report on HR 6407); over $5 billion per year for 10 years in a row. In hindsight, we know now that the law’s payment schedule has since been modified – to date, the Postal Service has been permitted to pay $9.5 billion less than the amounts called for in the bill, but payments totaling $11.1 billion are now due by the end of this year. Even so, the question still remains: How could the Postal Service possibly survive such financially crippling, front-loaded, payments to cover unfunded retiree health liabilities?
As legislation was drafted, OPM estimated the Postal Service’s accrued unfunded retiree health liabilities to be about $64 billon; it is now calculated to be around $90 billion. Given the legal requirement for the Postal Service to meet all of its obligations through operating profits, it was deemed prudent that the Postal Service incrementally prefund such an enormous future cost to its employees. As a finance guy, I preferred a 30-year straight-line amortization schedule for Postal to incrementally prefund this future obligation, in keeping with how a private sector corporation might operate. Smooth and steady contributions help ensure a more secure future for the Postal Service and its employees – a key policy objective.
Due to budget rules, government does not always work this way. Enter CBO (and don’t forget fiscal constraints the nation faced at the time). In order to gain congressional and administration support to enact a Postal Service reform bill, it was imperative to structure the financial flows in order to minimize, or even zero-out, net cost to the unified budget over the 10-year period following enactment (CBO’s analytical scope in calculating budget cost impacts).
Once it was decided by congressional leaders to use this bill also to return the cost of military service retirement credits back to the Treasury (previously a Postal Service obligation), a balancing cash inflow had to be structured to gain support for the legislation. Credit those in Congress who worked creatively and tirelessly to weave a passable reform bill – we needed one. Also remember: the Postal Service had minimal debt at that time; and we could not know how extensive electronic diversion of mail would be; nor the depth of the economic downturn we would face.
The $5+ billion yearly obligation, passed with bipartisan support by Congress and the White House, kept the reform budget neutral and did not result in increased costs for the taxpayer.
What can be done? Remain vigilant to identify and implement cost savings; expand operating flexibility to drive greater efficiencies; evaluate whether excess CSRS and FERS account balances could be applied to satisfy a portion of this obligation (bear in mind that OPM, in future, could change its long term assumptions, which might result in the Postal Service having a negative fund balance); and ask Congress for a more smooth and steady prefunding schedule. As for the last prescription, I have come full circle.
What should be done about overfunding, overpayment, and other unfunded federal mandates?
As the Postal Service’s financial crisis deepens, we often hear about overfunding and overpayments by the Postal Service for retiree benefits. This issue is complex and controversial. While some argue that there are overpayments, others respond that the Postal Service has not overpaid but simply paid what is required to ensure that taxpayers are not burdened with future Postal Service liabilities.
Postal employees participate in federal pension and retiree health programs, and the Postal Service must set aside money to fund these obligations. On the pension side, the Postal Service has covered the obligations accrued to date. According to the most recent projection by the Office of Personnel Management, the Postal Service’s 2011 pension surplus was over $13 billion. (Most of this surplus was for the newer FERS pension plan.)
The Postal Service has only partially funded its retiree health obligations. The federal government does not prefund retiree health benefits, and the Postal Service only started funding these obligations in 2007. Since 2007, the Postal Service has amassed $44 billion, 49 percent of its $90 billion in current liabilities. However, because of its financial problems, the Postal Service is having difficulty making its annual payments to fund retiree health benefits. Last year, Congress delayed the $5.5 billion payment due at the end of September 2011 until August 2012. The Postal Service does not believe it will be able to make the $11.1 billion in retiree health payments it owes for both this year and last year. What should be done about these looming bills?
This issue is part of a broader issue of entanglements with the federal government. As part of the federal government, the Postal Service uses federal benefit programs but has little control over their structure; as a self-financed entity, the Postal Service is expected to set aside funds to pay for obligations incurred by these programs. In fact, to gain more control over the cost of health benefits, the Postal Service has proposed moving to a health benefit plan that it operates rather than using the federal plan.
Any effort to set the Postal Service on a course for financial sustainability will need to address the question of how to approach retiree benefit funding and federal entanglements. This week, we’ve asked the following guest commentators to discuss the topic over the next few days:
• Roger Kodat, former official at the Department of the Treasury.
• Jim Sauber, Chief of Staff, National Association of Letter Carriers.
• Elmar Toime, independent advisor to the postal sector.
We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, April 6, we will summarize and conclude the discussion.
Our Guest Bloggers
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| Roger Kodat | Jim Sauber | Elmar Toime |
Roger Kodat was Deputy Assistant Secretary of the Treasury from 2001 to 2007 and logged more than 130 different postal-related meetings while working on the reform bill enacted in 2006. In addition, he has over 20 years of investment and commercial banking experience with JPMorgan in Europe, NYC, and Washington, DC. He is currently Principal of The Kodat Group, a consulting firm specializing in helping businesses expand international markets, finance exports, and mitigate risk..
Jim Sauber is the Chief of Staff to President of National Association of Letter Carriers (NALC), where he served many years as its Research Director. He joined the staff of the NALC as an economist in 1985 and has participated in seven rounds of collective bargaining with the United States Postal Service. He is responsible for coordinating the research, collective bargaining, public policy and legislative activities of the union.
Elmar Toime is an independent advisor to the postal sector based in London. He is chairman of Postea, Inc, a postal technology group, and a member of the Supervisory Board of Deutsche Post DHL, the world’s leading logistics company. Elmar was the chief executive of New Zealand Post Limited from 1993 to 2003 and Executive Deputy Chairman of the Royal Mail Group from 2003 to 2004. In 2004 Elmar was awarded a life-time achievement award for leadership in the postal industry.
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What would an optimized Postal Service infrastructure look like in the 21st century and beyond?
Alan Robinson, President, Direct Communications Group, is one of our guest bloggers in the “Five Elements of a Postal Solution” blog series. This is the full version of Alan Robinson’s blog.
In trying to define an optimized Postal Service infrastructure, I was stuck at trying to define what “an optimized Postal Service infrastructure” meant. The problem that I had was not with the mathematics of optimization which is focused on either cost minimization or profit maximization but with four sets of constraints that affect the formulation of an optimization model. These constraints are:
• Customer service needs which determine product characteristics;
• Labor management constraints that impact operating costs;
• Capital spending constraints that limit options for infrastructure optimization; and
• Regulatory constraints which modifies a market-driven optimal network to reflect political considerations.
While in the future, the Postal Service’s customers are going to need a postal infrastructure that offers both physical and digital delivery, this post will focus on the physical delivery infrastructure. Information infrastructure will be discussed only to the extent that an information infrastructure is needed to manage a physical infrastructure or provide product features that are a component of a physical delivery product. Information infrastructure that would be needed to either provide coordination between digital and physical delivery of different documents or transform a digital document into a physical one or visa-versa that an optimal Postal Service should offer will not be discussed.
Customer service needs determine product characteristics
The service needs of the Postal Service’s customers have six dimensions:
1. Access to services in a convenient manner;
2. Delivery to a location that satisfies the needs of recipients documents and parcel;
3. The speed that a document or parcel must be delivered from point A to B;
4. The reliability of a promised delivery commitment;
5. Information on delivery status and reliability provided on a real time or near real time basis; and
6. A price that makes the service financially viable.
The discussion below reflects current customer needs. However, customer needs constantly change. Communications access, processing, transportation, and delivery infrastructure will need to be re-optimized constantly.
For the Postal Service’s communications customers (i.e. bulk mailers), the existing network will likely need to adjust over time to improve the ability of Postal Service customers to coordinate delivery with communications sent digitally. This will likely require shorter cycle between when a physical document begins printing and when it is delivered.
For small parcel shippers (i.e. parcels under 10 pounds), the real challenge, is having a parcel delivery network that can assist in reducing the time from order-to-delivery, handle volumes growing by 20% or more annually, and provide the service at prices that allow the e-retailer to offer free shipping to their customers. This will likely require the Postal Service to constantly adjust its parcel processing and transportation infrastructure to reflect growing volumes while seeking new delivery methods that offer both secure and inexpensive delivery.
Access Infrastructure
The issue of access is usually focused on retail access but includes access to a delivery network for bulk mailers and digitally created documents.
An optimal retail network has to have access points determined primarily based on customer demand tempered by USO requirements to serve rural and lower-income communities. The optimal network can have any combination of corporate and contract offices. Based on international experience, it appears that an optimal network requires that individual locations have the commercial freedom to offer any product or service that can generate revenue to sustain a retail enterprise in addition to postal services. This generally means that most retail locations are contract locations but corporate locations are an option if they are given the needed commercial freedom.
The access infrastructure will likely need to include self-service options such as GoPost. While useful for general parcel shipping, the growth in single-piece parcels will likely come from recipient-paid parcel returns and a low cost acceptance location is critical both to handle the expected growth in volume and e-retailers need for a very low cost return option.
For bulk mailers, access is determined by the processing and delivery network. Within an optimal network, bulk mail access will occur only at places which fit the Postal Service’s operating plan. This will likely include only processing plants and delivery units. Bulk mail access at other locations will need to have prices that include the additional transportation and handling costs to move the mail to or parcel to the nearest processing plant. Optimal access for bulk mailers will remain constant only as long as the processing and delivery network does. Optimally, acceptance locations will change whenever processing and/or delivery activities change their locations.
Delivery Infrastructure
The optimized physical delivery infrastructure will need to include two delivery options. These options are:
• Door, curbside or cluster box delivery for most items and only door delivery for signature items; and
• A retail outlet or parcel locker that provides parcel pick-up for customers that are not home for delivery.
The Postal Service has proposed shifting some door delivery to curbsides or cluster boxes and some curbside delivery to cluster boxes. It is clear that cost and service are important for both document and parcel delivery. Alternative delivery firms have prospered in door delivery when either the Postal Service’s service quality is too low or existing prices are too high. While moving delivery away from the door is cheaper, it is unclear to me whether shifting delivery location to reduce costs is the optimal solution to serving sender needs and ensuring financial self-sufficiency. However, other constraints affecting the ability of the Postal Service to control costs or set prices may force a sub-ideal solution regarding delivery location.
Regardless of the delivery location, the delivery infrastructure must have an information infrastructure that allows for route adjustments on a frequent basis. Ideally, delivery routes need to adjust to reflect seasonal changes in mail volume. As parcel shipments increase, parcel routes may become more common and these routes need to be able to be adjusted on an even more frequent basis.
The key to an optimal parcel delivery network in the future is finding ways to cut costs so that e-retailers can offer free delivery on more sales as well as finding a way to provide delivery to recipients that are not at home during normal delivery hours. Therefore, an optimized Postal Service’s delivery infrastructure will also need to have delivery locations that permit recipients to pick-up their parcels at the recipient’s convenience. While Post Offices are an option, limited hours suggest that a parcel locker system like GoPost could more easily meet both recipient need for access to their parcel shipments on nearly a 24-7 basis and e-retailers need for a low-cost delivery option that is secure. Given the expected growth in small parcel delivery volumes, and acceptance of similar lockers in other countries, an optimal GoPost network could include ten to thirty thousand locations in order to meet both shipping volume and recipient demand.
Delivery Speed and Reliability
Both the current network, and the one that the Postal Service plans to implement in May make assumptions about the delivery speed required by customers. The current network meets the expectations of most single-piece mailers but has difficulty consistently meeting the expectations of many bulk mailers and its delivery standards for Priority mail are not competitive for most short distance shipments.
The Postal Service’s proposed network meets the current delivery speed expectations of about 75% of its customers and arguably can meet those expectations with more reliability than the existing network. It cannot meet the current service levels of single piece mailers, some periodical mailers, and would likely have even more challenges meeting expectations of Priority Mail shippers. While problems with meeting the expectation of periodical and Priority Mail customers are known, little is known as to whether the new slower service standards meet the expectations of single-piece mailers or not.
Ideally, the Postal Service would have the option to maintain the current network and service standards by charging single-piece and Periodical mailers the additional cost associated with the infrastructure needed to provide current service levels. However, current law and regulatory precedent would not permit the large increases in single-piece First Class mail and Periodical rates that would be required even if customers would be willing to pay the higher rates for maintaining current service levels. While the willingness of First Class mailers to trade higher rates for maintaining current service levels is unknown, periodical mailers would likely find the rate increases required could force magazine subscription rates above levels that make mail-delivered subscriptions a profitable business.
Given that pricing adjustments are off the table, setting an optimal network requires making some choices among customers. The Postal Service has little chosen but to focus on the current expectations of bulk mail and Priority Mail customers and fit service levels provided to other customers around what that network can provide. This makes sense given the expectations of volume growth (or losses) over the next decade for the full range of current Postal Service products.
Regardless of decisions to make a processing and transportation network as close to optimal today given other constraints, that network is unlikely to remain optimal for long. Both mail volumes and current expectations of delivery speed for mail and parcel shippers today are unlikely to reflect the volumes or expectations of Postal Service customers 10, 20 or 30 years from now. This means that the optimal infrastructure needed to meet customer expectations while minimizing costs will change over time.
Right now it would appear that an optimal infrastructure may need to adjust to mailers’ interest in reducing the cycle time from when a document is printed until it is delivered in order to coordinate with digital communications and the needs of parcel shippers interest in reducing the time from when an order is accepted until delivery to the preferred delivery location is made. Reducing delivery time for mail and parcel will require a larger infrastructure but also changes in labor contracts and availability of capital to make sure that the reduction in delivery time can be accomplished without unacceptable increases in rates.
Delivery and Management Information
The Postal Service’s infrastructure needs to provide real-time or nearly real time information on delivery status and reliability. While the Postal Service has developed systems that can provide this information, capital constraints have slowed deployment. As mailers expand their coordination of physical and digital communications, this information will be increasingly important and delays in implementation create the risk that the Postal Service’s delivery of physical documents will become even less competitive.
For Parcels, the problem is even more important. The Postal Service has become a critical link in e-retailing. It now delivers nearly 30% of FedEx Grounds parcels and UPS has just begun promoting SurePost service. Both carriers expect that the Postal Service will handle most of their parcels under 10 pounds. In order to meet this demand, the Postal Service’s parcel tracking system needs to become fully integrated with the systems of FedEx, UPS, DHL-Global Mail, Newgistics and any other firm that wants to use its delivery network. This includes integration of whatever information system is used for GoPost delivery lockers as well.
From a management standpoint, the information needs of the customers fit right into the information needs of management. Management information infrastructure must have the capability to shift operating flows on a real time or nearly real time basis to prevent network bottlenecks and to monitor and adjust delivery networks to minimize cost and maximize service on nearly a real time basis.
Price
Mailers budgets currently reflect existing postage prices. This means that the Postal Service’s ability to provide a certain level of access, a particular delivery method, and a service speed is limited by the price that its customers pay and the need to ensure that prices provide a sufficient return to cover operating costs, legitimate long-term liability obligations and sufficient cash for future emergencies and capital investments. This forces the Postal Service to make choices as to how it provides access and delivery, and the speed of service that it offers the various market segments that it serves. The optimal access, delivery, processing, transportation and information infrastructure therefore is constrained by the prices that the Postal Service can charge.
In the future, changes in prices for all postal services will affect demand for the product and the infrastructure needed to provide each service. The impact on volume of prices changes will vary based on the sensitivity of a product’s customers to price. For products like First Class single-piece mail, the impact of price changes on volume and therefore the infrastructure needed to handle the volume is small. For other products, the impact of price on volume and the Postal Service’s infrastructure needs is likely larger. For all products the actual relationship between price and volume is less clear than it has ever been as the growth of competitive web-based and mobile-based communications alternatives have created significant non-price related reasons for shifting from postal to digital delivery.
Labor-Management Constraints Affect Infrastructure Decisions and Service Quality
As labor costs will always represent the majority of operating costs, any deviation from competitive levels of employment costs raise the cost inputs of optimization models and force an optimization modeler to generate a sub-optimal infrastructure to serve customer needs at prices the Postal Service can charge. Currently the Postal Service’s greatest constraints affecting managing the labor component of its infrastructure include:
• The legal obligation to continue to fund pension accounts (i.e. FERS and CSRS) that are already overfunded;
• The legal obligation to fund a retiree health benefit account on a schedule that is not based on a current estimate of the underfunding and on a pace that forces significant financial losses at current rates;
• Inability to control health and other benefit expenses by offering a benefit package designed for postal employees and not all Federal employees;
• Restrictions in offering retirement and other incentives to adjust the size and skill mix of the workforce; and
• Labor contracts that restrict flexibility in regard to part-time and full-time employees, and adjust schedules based on changes in seasonal demand.
Networks designed under current contracts must take into account the increased costs and reduced flexibility that these constraints create. All of the constraints that raise the Postal Service’s average hourly employment costs raises the total cost of the network forcing the modeling exercise to develop the network that provides a service quality less than would could otherwise be provided given the price and therefore the overall cost constraints. Limitations on full and part-time employees, as well as seasonal adjustments to schedules force the modeler to identify operating plans that maximize the use of full time employees in order to minimize cost, even if those operating plans result in a lower service level than an operating plan that can incorporate a higher proportion of part-time employees could offer.
Removing or relaxing constraints imposed by law or contained in existing labor contracts would affect decisions about the size of the network infrastructure that the Postal Service deploys. Lowering labor costs would likely increase the size of the optimal Postal Service infrastructure as the lower labor cost would allow the development of operating plans (which affect the infrastructure within individual plants and used in retail and delivery operations) and the number of Postal Service facilities as they allow the Postal Service to provide a higher level of service within a price constraint.
Removing or relaxing In the future, customers are likely to require an infrastructure that can provide a physical delivery service that can provide service at current or near current prices, as adjusted for inflation, with shorter cycle times than now are possible at current prices in order to work with the short cycle times available in both digital and broadcast media. This need will likely require a larger infrastructure than the Postal Service envisions in its network optimization initiative. However, these future customer needs cannot be met as long as constraints imposed by law or contained in existing labor contracts remain.
Capital Constraints Result in a Sub-optimal Infrastructure
The issue of capital constraints on the Postal Service infrastructure can be illustrated by the network optimization that the Postal Service plans to implement in May, delays in implementing its information architecture, and delays in replacing its delivery fleet. In all cases, capital constraints have resulted in a sub-optimal solution.
The Postal Service’s network optimization used only existing facilities and existing equipment. A green field optimization would have continued to use many existing plants but in many parts of the United States a new or expanded plant would have provided the proposed service commitments at a lower cost or even better service commitments at the same or lower operating costs than what were possible using only existing facilities. The issue of capital constraints also reflects the need to keep certain annexes open as a more optimal solution would merge operations now conducted in the primary facility and the annex into one facility but the primary facility is too small or has other problems that force keeping the annex open.
The problem with capital constraints has also affected the Postal Service’s ability to have optimal information architecture. Systems that track mail and parcel location, manage delivery routes, manage vehicle routes, manage plants and ensure accurate information on in plant volumes and costs have seen budgets cut and project schedules extended by months and in some cases years. As such, the Postal Service has fallen behind current needs of its customers and more than likely is not near having an optimal information infrastructure.
The problem of capital constraints has affected the Postal Service’s replacement of its delivery vehicle fleet. Fleet replacement is a multi-year, multi-billion project for a fleet as large as the Postal Service. Not having the capital to replace the fleet increases operating expenses for repairs and maintenance and increases risk of service failure due to vehicle breakdowns. Not having the capital to replace the fleet may even influence decisions over 5-day delivery as eliminating one delivery day reduces vehicle use and may extend the life of the existing fleet.
The full impact of capital constraints on the Postal Service infrastructure today is not known. Clearly it affects both operating costs and service quality and makes it difficult for the Postal Service to provide the information interfaces that customers demand.
As customer needs change, capital constraints will continually ensure that the Postal Service will have a sub-optimal infrastructure to meet those changing needs. This will most likely result in Postal Service operating costs (and therefore modeling costs for designing the optimal infrastructure) being higher than they would otherwise be, and the Postal Service will have a less extensive infrastructure than makes business sense. In particular, I am concerned that capital constraints will make it difficult for the Postal Service to adjust the network in order to improve service or reduce costs and have the information, facility, equipment and vehicle infrastructure to meet future customer needs for shorter cycle times at or near current prices (as adjusted for inflation) for postal services.
Regulatory Constraints Affect How Optimal a Network Can Be
The Postal Service’s regulatory constraints come from both laws set by Congress and regulations set by the Postal Regulatory Commission. Regulatory and legal constraints have affected nearly all aspects of management decision making. Most importantly regulatory and legal constraints have slowed the ability of the Postal Service to:
• Fully integrate its delivery services up and down the communications and parcel delivery supply chain;
• Fully exploit the economic value of its intellectual, physical and labor assets;
• Adjust to changing demand for mail and parcel delivery services as quickly as the changes occur;
• Adjust its costs as quickly as its customers and suppliers can; and
• Set prices based on real market distinctions.
All of these constraints have the impact of either raising the cost of operations or lowering the potential revenue that the Postal Service can generate from its infrastructure. This forces the Postal Service to adjust its infrastructure to meet political and not business goals which results in products and an infrastructure that provides a less optimal level of service at a given price for both commercial and individual customers.
An optimal network would be free from nearly every regulatory and legal constraint that affects how the Postal Service serves its customers with two and possibly three exceptions. First, the Postal Service must deliver to every address that a sender demands. Second, The Postal Service must provide retail access to all citizens using objective criteria for measuring access. The third exception involves a very limited set of regulations of rates with a focus on single piece rates and the floor for rates for all other products.
Customer need changes over the next few decades will come faster than either Congress can pass laws or the Postal Regulatory Commission can issue opinions just as those changes have occurred faster in the past five years. Removing as many regulatory restrictions as possible would allow the Postal Service to more nimbly adjust its infrastructure as those needs change.
Conclusion
The optimal Postal Service infrastructure is not an ideal infrastructure. It reflects the level of service that the Postal Service can offer at set prices and costs and still generate a return sufficient to allow it to be self-sufficient. As such, the Postal Service cannot maintain an infrastructure that offer all customers exactly the level of service that they want but must try to provide an infrastructure that meets the needs of customers that it believes are most likely to require its services for the next decade or more.
The optimal Postal Service infrastructure is not static as customer needs continually change. Demand for the various services that the Postal Service offers change over time. Demand for many existing services is expected to decline over the next decade. The service and other product characteristics demanded by customers for current products will evolve as alternative communications and parcel delivery options develop.
Labor-management, capital availability, and regulatory constraints all have the effect of making the Postal Service infrastructure sub-optimal for both meeting customer needs and ensuring that the Postal Service’s financial goals are met. To the extent that that these constraints can be relaxed, the Postal Service’s infrastructure will move closer to an optimal level.
Read MoreShould the Postal Service be a competitive business, an enabling infrastructure, or something in-between?
This is the first in our “Five Elements of a Postal Solution” blog series.
Link to the blog by Richard Kielbowicz.
Link to the blog by Steve Hutkins.
Link to the blog by James Campbell.
Link to the recap of the week.
The Postal Service is at a critical juncture – over $20 billion in losses in the past 4 years and now facing a possible financial insolvency. In addition to trying to solve the immediate financial problem, there is a need to step back and take a deeper look at some unanswered foundational questions – one such question concerns the fundamental role of the Postal Service in the future: Is the Postal Service a competitive business or an enabling infrastructure?
What’s the best structure for the Postal Service — a competitive business that maximizes profits or a national public infrastructure with a universal service obligation? The answer depends on the nation’s purpose for the Postal Service.
Is profit maximization the best way to ensure that the Postal Service carries out its 21st century mission most effectively? Or is it better that the Postal Service’s first responsibility be to maintain an infrastructure that facilitates the nation’s communications and commerce?
Competitive businesses can be extremely creative, capable of jettisoning failing product lines and transforming entire operations around new areas of opportunity. This innovation can bring great benefits, but a business is also focused on the bottom line and naturally puts shareholder value first. It may decide that, in a period of declining mail volume, it cannot afford to deliver as frequently as it does currently or that it should deliver only to lucrative locations and limit service to poor and remote areas. It may even move out of mail delivery into other business areas.
If the Postal Service is a public infrastructure, it may have fewer incentives to innovate than a profit-oriented business. Instead, it will concentrate on maintaining its network and providing access to all customers regardless of size or financial profitability. It will remedy gaps and fill holes in existing service systems to ensure the broadest access possible. Universal service obligations would be better protected, but ensuring an effective level of financing and innovation would be an increased concern.
Whether the Postal Service is a business, an infrastructure or has characteristics of both is a question at the heart of deciding how it should be financed and governed. It also sets the stage for determining the Postal Service’s responsibilities to its customers, relation to competitors, and obligations to society.
We’ve asked the following guest commentators to discuss this topic over the next three days:
- Richard Kielbowicz, Associate Professor, Communication Networks, on Tuesday, March 6.
- Steve Hutkins, Editor and Administrator, Save the Post Office Blog, on Wednesday, March 7.
- James Campbell, Attorney and Consultant, on Thursday, March 8.
We hope you can join the debate. Please check in throughout the week for their thoughts, and share your comments along the way. On Friday, March 9, OIG will summarize and conclude the discussion on this important topic.
Our Guest Bloggers
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| Richard Kielbowicz | Steve Hutkins | James Campbell |
Richard Kielbowicz, who teaches in the Department of Communication at the University of Washington, has written a book and about two dozen research articles and technical reports about the history of postal policy.
Steve Hutkins teaches literature at the Gallatin School of New York University and runs the website savethepostoffice.com.
James Campbell is a lawyer and consultant on postal policy based in the Washington, D.C. area. He has advised numerous government agencies in the United States, the European Union, and other countries on postal policy and is the author of several books and many articles on express services and postal policy.
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Guest Blogger Richard Kielbowicz – March 6, 2012
Richard Kiebowicz
Almost everyone who follows the fortunes of the U.S. Postal Service points to competition from the Internet and other electronic media as the major reason for plummeting revenues. In one sense, though, little is new. As the original information highway, the postal system has operated in a communication environment with competing and complementary private services since the mid-1800s, if not earlier.
The institutional history of the postal system suggests that it exists to contribute to universal communication service. It has pursued this goal by providing unique services, filling gaps in private offerings, facilitating private-sector communication, and occasionally even competing with private firms.
The USPS’s predecessor, the Post Office Department, added, dropped and adjusted its services in response to competing offerings by the private sector. Like today, earlier innovations in telecommunication prompted postal changes. The Post Office discontinued important news-gathering aids for the press in 1874 once telegraph-based wire services matured. When phone use became more efficient than letter mail for some timely communication, the Department cut the frequency of mail delivery for businesses and households.
At other times, the Post Office launched services to complement or selectively compete with private firms. Parcel post—highly controversial at its birth in 1913—delivered packages in rural areas underserved by private firms, and government competition provided price discipline for private carriers. For similar reasons, Congress authorized the Post Office to offer a non-mail service, postal savings (1911-1967), structured to augment private banking rather than fundamentally challenge it.
As these historical snapshots imply, the overarching goal of postal policy is to assure that vital services are provided to society one way or another, often with a mix of public and private enterprise. Accordingly, policymakers might consider the postal system’s universal service obligation together with similar policies for private communication networks, notably the Internet.
Regulatory mandates for the public mails and private-sector telecommunication express identical purposes. The 1970 Postal Reorganization Act directs the USPS to “provide prompt, reliable, and efficient services to patrons in all areas and . . . render postal services to all communities.” The Telecommunications Act of 1996 directs the FCC to devise regulations mindful that “[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation.”
Thus, maintaining rigid boundaries between public and private services, postal and electronic communication, ignores history and frustrates efforts to maximize the benefits of modern communication networks. Lawmakers could craft comprehensive policies that transcend media sectors. Such policymaking would entail reaching across jurisdictional boundaries in Congress and between administrative agencies. One modest possibility: subsidies for upgrading broadband in rural areas could be targeted to compensate for adjustments (probably cutbacks) in mail service.
More far-reaching lessons for the postal system’s future can be learned by looking across technological and regulatory domains. If, for instance, lawmakers allow private carriers to enter fields now dominated by the USPS, the firms could be required to contribute to universal postal service in much the same fashion as private telecommunication firms, subject to the FCC’s jurisdiction, contribute to universal telecommunication service.
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Guest Blogger Steve Hutkins – March 7, 2012
Steve Hutkins
What kind of a Postal Service do you want?
Most Americans probably don’t care if the Postal Service is a “competitive business” or “enabling infrastructure.” Many don’t even know that the Postal Service is self-supporting and doesn’t use tax dollars.
Americans just want the Postal Service to function properly. They don’t want to see their post office close, and they want enough workers at the windows so the lines aren’t too long. They don’t want their mail to get lost in the ozone, and they want it delivered in a timely way, six days a week.
But what are Americans getting instead? The Postal Service’s new business plan will close half the country’s post offices, eliminate Saturday delivery, slow down First Class mail, and raise postage rates for average Americans while keeping them low for big bulk mailers.
That’s not a business plan. It’s a plan to dismantle the Postal Service.
The forces behind the plan are private corporations that stand to reap larger profits and free-market ideologues who oppose workers, unions, and government services. Their goal is to turn the Postal Service into a lean, mean, profit-making machine, unencumbered by what they view as a large, overpaid workforce, a network of money-losing post offices, and the drag of a universal service obligation. Once they’ve turned the Postal Service into their idea of a successful business, they can go looking for investors, using the huge surpluses in the postal retirement funds as an irresistible enticement. The dream of privatization will become a reality.
So instead of asking whether the Postal Service should be a competitive business or enabling infrastructure, perhaps we should pose the issue this way:
Do you want a Postal Service that’s shaped to serve its hundred biggest customers, or one that serves the country as a whole?
Do you want a Postal Service that’s a delivery system for ad mail, or do you want a postal system that offers innovative products and services designed to benefit the many rather than the few?
Do you want a Postal Service that guts the workforce while it outsources $12 billion to private businesses like FedEx, or do you want a postal system that values worker morale and focuses on job creation?
Do you want a Postal Service whose leaders disingenuously blame the Internet for the postal deficit, or do you want leaders who accept responsibility for their lack of vision and find creative ways to adapt to the digital era?
Do you want a Postal Service that turns a deaf ear to communities suffering the loss of a post office or processing plant, or do you want a Postal Service that views serving American citizens as its number-one priority?
Do you want a Postal Service committed to dismantling itself so that private corporations can buy it, or do you want a Postal Service that honors its past and shows a commitment to its future, a Postal Service that continues to help build the country and bind it together?
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Guest Blogger Jim Campbell – March 8, 2012
Jim Campbell
Should the Postal Service be a competitive business, an enabling infrastructure, or something in-between? Although this question has framed postal policy debates since the end of World War II, it no longer sheds much light on the path forward.
Instead, I believe the key question is, “Should Congress give the Postal Service the tools and the incentives to manage the Postal Service efficiently?” Other issues are important, but secondary. Unless the Postal Service is managed efficiently and effectively, there will be no quality universal service, no fix for financial hemorrhaging, and no protection of postal jobs. Without a healthy horse, it does not matter where the cart is placed or what it carries.
What happened? New technologies have rent the ground beneath the Postal Service. Not only is the volume of mail declining drastically, but the nature of the demand for mail is shifting. Today, 90 percent of mail is posted by businesses (including organizations); another 7 percent is posted to businesses who increasingly prefer electronic responses via the internet. The Postal Service has ever fewer customers that it can count on. Even mailers, like catalog companies, who have no alternative, adjust the frequency and size of mailings items based on a fine calculation of whether the service is worth the cost. The Postal Service of the future will have to be smart and nimble to satisfy the needs of mailers who will use — or refrain from using — the mail based on its value to them. This new dependence on winning and retaining customers represents the critical break with the Postal Service’s past.
So what is the way forward? More detailed statutory requirements? More Congressional oversight? More scrutiny by the Commission? More political pressure from mailers and unions? More outside studies? No. Such measures cannot substitute for capable management. The only potentially viable approach is to reform the Postal Service’s statutory charter so that, while still a government corporation, it has both the tools and the incentives to manage inputs (employees, machinery, facilities, contracts) and outputs (prices, classes of service, delivery frequency, delivery modes, retail services) efficiently and effectively so that they satisfy the fast changing needs of business mailers.
What about Aunt Minnie? Universal service and other public services? Unjust discrimination and anticompetitive practices? For the foreseeable future, the Commission must remain the guardian of such public interest concerns, guided by clear instructions from Congress. And as the Postal Service gains managerial flexibility, the Commission must take over governmental functions now exercised by the Service. In short, governmental and operational functions must be separated and clarified.
Last point. The days are gone when Congress can direct the Postal Service to offer politically popular services without regard to who pays the bill. It cannot be assumed that captured mailers will cover the costs of Congressional largesse. Congress may require a higher or lower level of public services, but what Congress requires, it must pay for.
The sky is not falling. The U.S. still has two or three times as much mail per capita as other industrialized countries. But the time for incremental political solutions has ended. Like other industrialized countries, the U.S. must face up to the fundamental nature of changes in postal markets and revise the legal charter for the Postal Service accordingly. A new charter must permit and motivate the Postal Service to manage its services for business mailers efficiently and effectively. At the same time, the new charter must protect universal service and other public services and control abuses of market power with appropriately focused regulatory controls and compensation for obligatory services.
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Recapping the week – March 9, 2012
To start our new blog series, we asked three experts to give us their opinions on a fundamental question of postal public policy: Should the Postal Service be a competitive business, an enabling infrastructure, or something in-between? Our guest bloggers were chosen for their articulate and insightful observations on the state of the Postal Service.
As expected, our guest bloggers disagreed on many aspects of the question before them. Still, they all agreed on one critical issue: America deserves a Postal Service that meets its needs. As Steve Hutkins so succinctly put it,”Americans just want their Postal Service to function properly.” There was also agreement that the Postal Service needs to be nimble and flexible in this ever-changing communications environment. Richard Kielbowicz pointed out that there is a long history of the Postal Service adapting to the changing needs of the American mailer. All agree that some amount of regulation is needed to ensure that the Postal Service continues to meet its universal service obligation to bind the nation together and, as James Campbell says “control abuses of market power”.
Our panelists disagree on where the public policy emphasis should lie. James Campbell believes that a priority must be placed on putting the Postal Service on a solid financial basis, “Without a healthy horse, it does not matter where the cart is placed or what it carries.” He believes that the Postal Service needs competent executive leadership with the flexibility to adapt inputs and outputs to the changing needs of mailers. Steve Hutkins believes that the Postal Service has lost touch with its broader social responsibilities of providing a sense of community, good middle class jobs, and reliable postal services to American households. He believes the current Postal Service business plan, instead of binding the nation together, will dismantle the postal system as we know it. Richard Kielbowicz sees the Postal Service as a part of a continuum of communications services, public and private, hard copy and electronic. He believes that postal regulation can be improved by borrowing concepts from telecommunications regulation.
We thank each of these bloggers for their insightful comments and will continue to keep these blogs open for additional input from the public.
Next week’s blog series will examine the question: What would an optimized Postal Service infrastructure look like in the 21st century and beyond?
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