Postal Service Needs Fundamental Changes to Ensure Viability

The U.S. Postal Service is a cornerstone of our democracy because of its mission to “bind our nation together through the [distribution of the] personal, educational, literary and business correspondence of the people.” This timeless goal is understood by most stakeholders to mean “universal service at affordable rates.”

Since it first drafted this mission, the distribution landscape has changed. An entire industry has evolved to serve the delivery needs of the people, leveraging the USPS’ unique ability to provide distribution for all, regardless of whether the merchandise to be delivered is a letter, magazine or consumer goods.

Because we believe in the mission of the USPS, we support changes that ensure its continued health and viability well into the 21st century. This is why we are submitting testimony to the presidential commission on postal reform on behalf of our customers from the mailing industry.

What works. There is much about the USPS that should not be changed. It does a very effective job of delivering information and consumer goods to every household in the nation six days a week.

Preserving these capabilities depends largely upon the USPS retaining economy of scope and economy of scale. By maintaining all current services, the postal service is able to provide convenience, privacy and security. Protecting its unrivaled “last mile” is essential to its ability to continue to serve the public.

What doesn’t work? Despite the clear advantages that the USPS’ last-mile capabilities provide, there are limitations in the current operating model:

• Upstream processing. According to the USPS, total upstream processing costs in fiscal year 2001 exceeded $19 billion, nearly 30 percent of its revenue. To reduce these costs, legislative action is required that lets the USPS collapse its infrastructure, eliminating many of the inefficient upstream processing facilities – i.e., the bulk mail centers – and outsource the labor to private-sector businesses.

• Rate-making inefficiencies. The current process is costly, cumbersome, overly political and outmoded. The classic cost-of-service model has been discarded in all other government utilities. The process is unwieldy because of the exhaustive, highly political testimonial review that is conducted before implementing a new rate case.

• Work-sharing inequities. Proper forecasting models have never been developed to assess the effect of work-sharing initiatives on demand. Moreover, because of complexities in the cost accounting system, work-sharing discounts do not adequately reflect all of the variable costs the private sector helps the USPS avoid.

The USPS struggles with other operational problems, including failure to achieve productivity increases; inability to optimize the upstream distribution; lack of support for optimizing the retail network; sporadic use of information technology and business data to pinpoint operating inefficiencies; and inconsistent/suboptimal use of its assets.

What do mailers need? Operationally, the mailing industry wants to see the same dynamic take hold of the USPS as we see in the private sector – over time, quality improves while costs decrease.

Service improvements would take several forms: Delivery should become faster, with a much more precise delivery window that could make using the postal service as predictable as using some of its private-sector competitors.

Better information systems are critical for many reasons: Better data integrity enables service improvements; electronic filing reduces paperwork and eliminates errors; information systems provide greater visibility to the entire postal stream, letting the postal service pinpoint service issues and institutionalize accountability.

While the USPS is building up its technology infrastructure, it should streamline its upstream network. Inefficient facilities should be closed and the work consolidated or outsourced to private industry.

Several financial changes would let the USPS serve its constituents yet remain financially strong. Regulatory changes should shift how the USPS views revenue, efficiencies and continuous improvement, and a mandate for financial transparency should hold it accountable to the same standards as its larger, private-sector counterparts.

Recommended changes to rate making would make rates more predictable and eliminate the politics by establishing solid limitations and a structure to protect the interests of users of all classes of mail.

Rate increases should be annualized to let mailers plan for their effect. Caps should be set to tie rates to the Consumer Price Index. Whenever rate increases exceed pre-established business rules, the rate case would be subject to regulatory review.

New lines of business also would be reviewed to guarantee they represent a natural extension of the core mission, that adequate market testing has been done to prove the new product viable and self-sustaining and that appropriate public review has taken place to protect free trade and prevent the postal service from unfairly leveraging its monopoly status.

No discussion of relaxing rate making should be undertaken without ensuring that rate controls don’t come at the expense of service. Not only should service standards be clearly defined, but performance to standards should be publicly reported. Management incentives should be established to hold rates in check through increased efficiencies.

The postal service’s delivery guidelines have not been subjected to a review for decades. Because of inconsistent documentation, it is impossible for service standards to be reviewed by an independent authority. Certainly, no penalties are in place for non-performance.

The task before the presidential commission is complex, with many areas to be examined and many opportunities for improvement readily at hand. We look forward to reviewing the commission’s findings.

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