First-Class Costs, Third-Class Mail Stream

The recent Mailers Technical Advisory Committee meeting offered much to be impressed with but also much to be depressed about.

First, the good news. The U.S. Postal Service has continued on its productivity path with a reduction of 21 million work hours versus fiscal year 2003. This resulted in a reduction of more than 21,000 career employees. As an aside, note how much publicity SBC, one of the regional Bells, received when it announced recently that it planned a staff reduction of 10,000 over two years. Considering how many tens of thousands of career employees have left the postal roles, it’s amazing that there’s been nary a word of it in the general business press.

John Rapp, senior vice president of operations at the USPS, gave an in-depth update on progress to automate the processing and delivery of flats. Letter carriers now case 40 billion non-saturation flats at a rate of eight per minute. Increasing this number is one of the major productivity opportunities for the USPS. The postal service is in the early stages of evaluating two competing alternatives.

The two technologies would put flats into carrier walk sequence. Letters already are sorted, by barcode reading sorters, into carrier walk sequence. One of the new concepts, called FSS, would sequence flats into walk sequence but would require the carrier to separately handle bundles of letters and flats and then merge them at the delivery location(s). The other, more complex, technology, called DPP, would, on a machine, merge letters and flats together into walk sequence.

Both machines would be quite large. Rapp estimated the FSS machine at 13,000 square feet, with the DPP machine undoubtedly larger. However, even assuming successful development, these machines are easily five years from production deployment. So productivity help in this area won’t be on the way for a long time.

Chief financial officer Dick Strasser gave a look back at FY 2004 and a look ahead at FY 2005. For next year, the postal service assumes inflation at 1.9 percent, a slowing in retail sales and continued electronic mail diversion. The financial forecast is for a breakeven year.

To my thinking that would be quite an accomplishment, especially since the USPS forecasts a 2 billion-piece decrease in First-Class mail. Also, as a result of the new check-clearing law, known as “Check 21,” more copies of checks will be returned with bank statements rather than actual checks. Therefore, the USPS should see a decline in highly profitable First-Class mail weighing more than one ounce.

More revealing to me about Strasser’s presentation were his comments that the postal service’s health benefits expense was nearing $6 billion annually, and unlike many domestic corporations, the USPS has a cost of living increase built into its union contracts. The expectation is that it will be extremely difficult to eliminate the COL increase in any future labor negotiations.

From a cost standpoint, it’s a double hit of annual COL wage increases and health benefits increases likely to exceed COL. The picture is no better on the workload front. Declining First-Class volume increasingly is being replaced by Standard mail. But Standard mail has an average revenue per piece of more than 15 cents less than First Class. And the processing cost differential is nowhere near that revenue difference.

The problem the USPS faces is painfully obvious: a First-Class cost structure and an increasingly Third-Class revenue stream.

Strasser said: “We need to build the business.”

But how? For various reasons the joint USPS/industry product redesign project failed to devise concepts that could affect top-line growth. Therefore, until postal leadership becomes less risk adverse, it will be necessary to continue to stress cost control.

One area the postal service needs to look at is addressing. For too many years it has spent about $2 billion annually to process incorrectly addressed mail. According to the USPS, more than half of that money is spent returning First-Class mail to senders when it can’t be forwarded.

A solution may be at hand. Recent negotiated service agreements with financial institutions have shown that significant savings can be achieved by returning to mailers electronic images/data of name/address information rather than the actual mail piece. Perhaps this processing change should be made mandatory for automation-rated mail.

The filing for the next rate case, expected early in spring 2005, provides an excellent chance for the postal service to propose major changes to change-of-address processing and pricing.

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