USPS Aims to Show Serious Effort to Shed Costs

USPS plans to move from 508 to fewer than 200 processing plants by the end of calendar year 2012, ending overnight delivery as it tightens its network and moves away from a design based on the declining First Class Mail product. Right now USPS is estimating it could save between $2.6 and $3 billion annually based on the change.

The bold plan, which is still in the development stage, would add a day to the service standard for First Class Mail and change critical entry times for bulk mail.

Dave Williams, vice president for network operations, said last week that he's still evaluating and modeling and doesn't yet have all the facilities and total employee numbers locked down but the savings from this change are significant. Williams said it is critical to implement the changes quickly because “every operating day is worth about $10 million to the Postal Service” if the changes are implemented.

Williams said the agency cannot afford to start from scratch and build new facilities in the ideal locations so it will consolidate and select from its existing processing real estate.

“First Class Mail drives our network requirements. It dictates how many machines we have to have and to a large extent the type of transportation and number of trips,” Williams said, but First Class Mail will continue to erode to the tune of about $7 billion over the next 10 years, he said. Williams explained to reporters last week that many machines now sit idle for up to 18 or 20 hours and operate only for a few hours to process overnight First Class Mail.

So USPS wants to flip its system design around and start by operating its machines at optimal efficiency for 20-hour runs and then service standards for First Class Mail would fit that system. First Class Mail standards would change from 1-3 days to 2-3 days. Standards for Standard Mail are not expected to change although there could be an impact for Periodicals.

The proposal will mean a 50% reduction in equipment, Williams said. USPS hopes to sell off some of the unnecessary machines, refurbish in some cases and retire machines that have gone past their projected life and are costly to fix. The broad proposal calls for all mail to arrive at the plants by 8:00 a.m. for processing until noon. Delivery point sequencing would be conducted from noon until 4:00 a.m.

This will have significant potential workforce savings because noncareer employees established in the latest American Postal Workers Union (APWU) contract who don't have set workhours could work until the load is complete and go home, allowing for significantly more flexibility, Williams said.

All told, Williams projects a 30,000-35,000 employees reduction after optimization. Transportation benefits are also expected because travel will be to fewer locations, while trucks will be fuller and pallets on those trucks will have more density.

As part of the aggressive timetable for making this sea-change in its processing structure, USPS will issue an advanced notice of proposed rulemaking in September, to give industry opportunity to comment. In October it will publish a proposed rule and file proposed service standard changes with the regulator. In January 2012 the regulator's decision is expected with a final rule to be published in February.

Lots of Questions; Few Answers

The business mailing industry applauded the bold approach but an enormous number of questions and concerns are outstanding. During last week's Mailers' Technical Advisory Committee (MTAC) meeting mailers broke out into small groups to outline concerns and questions and present them to USPS for consideration. This was the first in what USPS promises will be a lot of opportunities for mailers to have input into the proposal as it's being refined. Some of the most general concerns were questions about whether USPS would, in fact, have the capacity to handle all the mail arriving at one point, particularly because the optimization model also assumes a five-day delivery scheme. Mailers also suggested that if USPS costs come down significantly, perhaps mailers should share in those reductions via reduced rates. Other broad concerns had to do with public perceptions of the Postal Service as a result of slower service and the negative news coming out about its finances. Mailers are worried, too, that lack of confidence and slower First Class and Periodicals delivery could push remittance mailers and others out of the mail more quickly. After hearing these concerns, Susan LaChance, USPS vice president for consumer and industry affairs, noted that “it is evident, and we knew it would be, that what we presented is a concept and there aren't a lot of answers yet.”

Reprinted with permission. August 22, 2011 edition

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Dramatic Changes in Size, Benefits of USPS Workforce Proposed

The Postal Service is proposing sweeping changes in its employee benefits packages and its control over the size of its workforce in an effort to get a handle on its dramatically declining financial picture, which includes a projected $9 billion loss for fiscal year 2011. Postmaster General Pat Donahoe said these proposals are meant for discussion, to put more options on the table as USPS works to shed about $20 billion in costs between now and 2014.

Donahoe said USPS is still pushing its other legislative requests, which include a move to five-day delivery, relief from the more than $5 billion in required payments annually to prefund retiree health benefits and refunds of retirement overpayments. Donahoe said he isn't sure if those goals will be achieved. “But I didn't want to let the clock tick to zero without having other proposals on the table,” he said.

The agency is asking for legislative changes to enable it to:

•  establish its own health benefits program

•  administer its own retirement system

•  eliminate layoff protections to adjust the size of its workforce to match declining workload.

In white papers used to launch the proposals, USPS said that despite cost cutting efforts, of about $12 billion over the past four years, its financial position is becoming precarious. The agency estimates it needs to trim its workforce by 220,000 career positions to reach an optimal workforce of 425,000 by 2015. This assumes a five-day delivery week, which is something USPS would also need congressional approval to implement. Attrition will lead to about a 100,000 reduction. Layoff restrictions with postal unions will make it impossible to get the remaining 120,000 cuts “given the nature of collective bargaining and interest arbitration,” the white paper states.

Donahoe said he wants to see employees retire so that USPS can begin to see the benefits of the lower-wage, noncareer category of worker established in the recent contract with the American Postal Workers Union. The contract says 18% of the APWU workforce can be made up of this lower-cost employment category.

Donahoe told a mailers group last week that he understands union concerns but “we have to put this on the table. We cannot kick this can down the road.”

“The bottom line is we need fewer people and we have to try to get to that number with as many different options as possible,” he said.

USPS said it has plans to reduce the number of plants that process mail from 500 to 200 and it will reduce workload as a consequence but it won't be permitted to eliminate positions without the changes it is seeking ( see story, page 4 ). “Therefore we would be paying employees who were not performing any work and would not achieve the needed savings.” The layoff protections were put in employee contracts by a contract arbitrator in 1978 and USPS has not succeeded in eliminating them from contracts since then, it said. The agency said these protections are separate from its reduction-in-force (RIF) for competitive services.

USPS wants to extend the RIF procedures to bargaining unit employees, with preference given based on military service and seniority. USPS says this would enable it to quickly reorganize and right size its bargaining unit while issues related to lay-off and reassignment to lower levels would be removed as subjects for collective bargaining.

USPS: Hard Times Call for Extreme Move

USPS said it doesn't take this step lightly and generally is in favor of keeping legislators out of the collective bargaining process. “However, exceptional circumstances require exceptional remedies,” USPS said. The agency said that if it were a private company it would have filed for bankruptcy protection in order to reorganize. Because that option is not available, USPS says it thinks this extreme request is needed for its recovery.

In a separate white paper the Postal Service also spelled out its plans for establishing separate plans for employee health benefits and pensions, which, combined, make up one-third of total labor costs.

Focusing first on health care, USPS noted that its obligations to prefund future retiree health costs by $59 billion by 2016, over and above annual premiums to current retirees that are approaching $2.5 billion annually, means 12% of annual revenue projected for FY 2011 will go to retiree healthcare.

This is an obligation that is not shared by other public or private entities while under the Postal Reorganization Act USPS is required to provide wages and benefits that are comparable to the private sector. USPS said it is in the best interest of the Postal Service and its employees, as well as the federal government to separate it once and for all from the federal system.

Simply put, USPS can't get control of its overall finances if it can't control its legacy costs, the white paper stated.

Given that obligations for retiree health benefits for annuitants are already more than fully funded, USPS said that if it controls its own program there are opportunities for savings. These include adopting some private sector best practices such as health promotion and wellness incentives, aggregating purchasing power for discounts and setting benefit choices “in which there is a consistent alignment between the value of the plans and their cost.”

A key change would be the requirement that employees use Medicare as their first plan with the Postal Service plan as a backup. “We pay more than anyone into Medicare but there's no requirement that our people use it,” Donahoe said, adding that this would “save a ton of money.”

USPS wants to withdraw the existing 480,000 annuitants and 600,000 active employees from the Federal Employees Health Benefits (FEHB) program and wants the $42.5 billion it has prepaid for future retirees to offset the retiree health benefits it assumes.

To be fair, USPS said it would offer current employees benefits comparable to the FEHB program while a new program would be established for incoming employees.

Similar arguments are put forward to justify USPS's proposal to set a separate retirement program. USPS said that disputes about whether it has overfunded the Civil Service Retirement System (CSRS) will continue as long as it is connected to the federal system. “This is especially true because, by any accounting, the Postal Service has funded at least 94% of its pension obligations while the federal government has funded only half.”

USPS said it would continue with levels comparable to the CSRS and the Federal Employee Retirement System for existing employees. For new hires, retirement benefits would reflect trends in the private sector, with defined contribution plans that incorporate best practices concerning employer contributions, portability, investments, eligibility, designated providers and overall administration.

Not surprisingly the employee unions oppose the plans. American Postal Workers Union President Cliff Guffey condemned them, calling them “a clear attempt to abrogate our contract and destroy postal collective bargaining.”

USPS said it is open to input on how to implement its various proposed changes, all of which would require congressional action. One of the key lawmakers USPS would need to get behind it to succeed, Sen. Tom Carper, D-DE, was receptive to reviewing the plans. Carper, who chairs the Senate subcommittee with jurisdiction over the Postal Service, said the latest USPS proposals underscore its serious financial predicament.

He declined to support the proposals until he gets more details. “I am particularly interested in learning whether these proposals would be fair to employees and effective in reducing the Postal Service's costs,” Carper said in a statement.

“Simply put, the Postal Service is on the brink of total financial collapse, and we need to do all that we can to keep that from happening. I will continue to work with my colleagues, stakeholders and the Administration to save the Postal Service before it's too late,” he said.

But mailers applauded the Postal Service for proposing bold moves at this time. During last week's Mailers' Technical Advisory Committee meeting, it was suggested that USPS's “ace in the hole” might be a congressional subsidy if it can't get the other legislative changes it needs because mail is a public service that is necessary to the nation.

Donahoe said there had been much discussion about that within the organization but he is concerned that if such a proposal was put forward legislators would ask for other strategies. Donahoe said he thinks USPS has a strong argument that it should not be prefunding retiree health benefits when it is losing money and has a surplus in the fund. But so far Congress has not responded. That doesn't bode well for general appropriations, he noted.

“That's my fear about asking for an appropriation and holding our breath to hope we get it,” he said. Given the difficulty getting congressional action on issues such as Medicare and Social Security, “I don't know if anyone right now would take up the cause for this type of appropriation,” he said.

Deputy Postmaster General Ronald Stroman told BMR that USPS “felt we had to be more proactive in pushing legislation and providing options.”

He said USPS would still like to get Congress to agree to legislation to give USPS an estimated $50-$75 billion it thinks it has overpaid into the Civil Service Retirement System but that option doesn't seem to be gaining traction. It's really important to get some relief this year, Stroman said, adding that he is cautiously optimistic that can happen.

Reprinted with permission. August 22, 2011 edition

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OIG Looks to Smaller Network by 2020

USPS could maintain quality service with about half of its current network of 260 major Processing and Distribution Centers (P&DCs), according to a new study by the Office of Inspector General for the Postal Service (OIG).

A network of 135 P&DCs, compared with the current 260, including 15 operating as consolidation hubs, would reduce net processing and transportation costs while meeting or exceeding current service performance for all mail other than non-presorted Priority Mail.

This new network would cost $2 billion less per year to operate, the OIG said in a study entitled, “A Strategy for a Future Mail Processing & Transportation Network.”

Since 2006 USPS has closed 145 mail processing facilities, including nine major processing plants. But the OIG said a comprehensive, long-term plan is needed to evolve USPS processing, as well as transportation, in line with current and future demand.

The decline in mail volume, which is expected to continue into the future, is certainly one factor that drives the need to make changes. But just as significant are work content and mail mix changes, the OIG points out. The Postal Service built its network to match the demands of single-piece First Class Mail letters and flats but now presorting and drop-shipping, the major forms of worksharing, require less processing and transportation. More than 60% of First Class Mail is now workshared and that figure is over 80% for Standard Mail.

The existing design of the processing network is primarily driven by service standards, the OIG notes, with the network's evolution directed at ensuring mail reaches its destination in the required time. “It is important to note that the national 1-to-3 day standard for First-Class Mail is a primary factor that drives the number of facilities needed in the network as well as determining if the mail travels by highway or air,” the OIG report said. This observation is important because the OIG found that most mailers are more interested in knowing, with a high degree of certainty, when the mail will be delivered than with how quickly it will be delivered.

The OIG thinks the incremental approach to network rationalization USPS has taken in the past will not be enough to adapt to future trends. The watchdog group, instead, created a model to simulate a future USPS mail processing and transportation network using projected FY 2020 mail volumes and simulated mail flow for 13 major mail products based on class, shape and presort level.

This was not meant as a precise replica of the real-world postal network. Rather, it is meant “to provide a framework for testing the performance of hypothetical network designs and thereby inform the debate over possible future changes in the mail processing and transportation network,” the OIG said.

From this model the agency came up with the preferred network of 135 mail processing facilities, including 15 hubs, combined with a hybrid transportation distribution approach. This, the OIG found, matches future volume workload and cuts costs. While the model would save an estimated $2 billion annually, excluding the cost to implement it, there is a clear tradeoff in terms of service degradation.

“There is a direct, significant relationship between network size and service performance,” the report said. As the network moves towards one huge, central plant, service performance will erode. Mail products with tighter service standards would be impacted first. The OIG thinks that these impacts could be somewhat mitigated by “appropriate network sizing, transportation and intelligent processing.”

The model affirms that USPS is pursuing the right approach with its consolidation transportation distribution strategy involving a hub-andspoke design to create the shortest path. It also shows USPS can lower costs by consolidating processing in central hubs that establish economics of scale.

The OIG found that changes in mail processing and transportation costs are not the same, with processing cost savings likely to be larger than transportation savings in a move to consolidate an oversized network.

This gives USPS an opportunity to manage its cost structure, the report said. Labor costs drive processing costs while transportation costs are driven by procurement contracts. Among its key observations, the OIG thinks that USPS could gradually change its network in a way that would respond to worker attrition so changes could be made without hurting too many jobs.

The report also emphasizes that business mailers would be open to relaxing service standards in return for delivery certainty.

Finally, despite concerns about stakeholder opposition, the OIG thinks that many potential partners among employees, customers and Congress are willing to help the Postal Service.

Also excerpted from this issue in the Short Takes section:

The debate surrounding the Postal Service's growing financial problems and what to do about them can be seen, as one postal lobbyist pointed out, to be a mini version of the larger political and philosophical tug-and-pull going on right now over the national debt. And, just as many feel certain that Congress will not allow the federal government to go into default, postal observers hope those with different views of how USPS should be helped will come together to save this important institution.

But when Rep. Darrell Issa, R-CA, introduced his postal reform measure last month (see BMR 06/27/11, p. 3), it was clear that there is a wide divide between his approach to Postal Service financial solvency and that proposed earlier by Sen. Tom Carper, D-DE. As USPS begins to shed financial responsibilities in order, it says, to keep the lights on and keep paying employees, some business mailers who have had discussions on Capitol Hill think a compromise between the two legislative approaches is possible, but it will be increasingly difficult to get that done by the end of the fiscal year, when USPS must make a $5.5 billion payment into the a retiree health benefits prefunding account.

USPS has made it clear that it cannot make any part of that payment this year. Issa, who chairs the panel with oversight over the Postal Service, showed with his legislation that he doesn't think USPS has done a good enough job to get its costs in order so Congress must step in and make aggressive changes as quickly as possible, one analyst told BMR. Issa's bill creates a Commission on Postal Reorganization to find $2 billion annually in cost reductions from post office and mail processing facility closings. Carper, who heads USPS oversight on the Senate side, wants to give USPS much of the financial relief it has called for as well as giving it more freedom to chart its own course (see BMR 05/30/2011, p. 3).

Compromise might be elusive, however, given statements made last month by Rep. Dennis Ross, R-FL and chair of the House subcommittee with USPS oversight. He said it is a myth that USPS has overpaid $50-$75 billion into the Civil Service Retirement System because USPS agreed to the formula for sharing retiree obligations with the federal government when it was created to replace the Post Office Dept. Similarly, he said USPS is not unfairly saddled with an annual $5.5 billion retiree health care obligation because if it stopped making that advance payment it would have an unfunded liability of nearly $100 billion by 2017. Finally, he does not think the $6.9 billion USPS surplus in the Federal Employees Retirement System should be returned. He said USPS has a “temporary, projected surplus” because interest rates are extremely low. But those rates could change and melt away the surplus, Ross said.

Reprinted with permission. July 11, 2011 edition

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USPS Suspends FERS Payments to Stay Afloat

USPS June 24 stopped making a $115 million biweekly payment to the Office of Personnel Management (OPM) that is part of its Federal Employees Retirement System (FERS) obligation in order to have enough money to stay afloat through the end of September.

There is no end date for the unprecedented suspension at this point, with the decision made by the USPS Board of Governors focused on the agency's current liquidity crisis through the end of fiscal year 2011. The move is expected to free up about $800 million through September.

USPS says this decision will not impact employees because it has a $6.9 billion FERS surplus that can provide a cushion. “We felt we had to take this step so we'd have enough cash to pay employees and suppliers and keep the mail moving,” said USPS spokesperson Dave Partenheimer. It won't affect our current retirees or employees, he said, adding that this is not a step the agency wanted to take, and “this is not a long-term solution.”

USPS has been saying that it will need to take steps to conserve cash and make payroll since the April and second quarter financial results were released. They show a $4.3 billion cash shortfall, rather than the $2.7 billion shortfall USPS had planned for.

USPS and OPM are taking the suspension decision to the Office of Legal Counsel (OLC) of the Justice Dept. for review. In a statement OPM said it is “sympathetic” to USPS's financial plight and acknowledged there is a surplus in the Postal Service employee portion of the Retirement and Disability Trust Fund.

OPM said that it will be able to continue giving employees who retire credit for service rendered after USPS ceased making FERS annuity contributions on June 24.

“This determination is supported by the Postal Service's assurance it will make the FERS annuity contributions it is now ceasing if OLC disagrees with its position,” the agency said in a statement released June 22. FERS covers about 84.5% of USPS employees. The other 15.5% - individuals who worked under both the old Post Office Dept. and USPS - are covered by the Civil Service Retirement System. The action only suspends employer payments to the FERS annuity. All other payments - employee contributions to FERS and employer and employee contributions to employee Thrift Savings Plans and Social Security - will continue, USPS said.

Suspension Draws Attention

USPS's move last week quickly got the attention of major stakeholders. Sen. Tom Carper, D-DE and chairman of the Senate subcommittee with jurisdiction over postal matters, said the “drastic action … underscores the urgent need for Congress and the administration to act quickly to address the serious financial problems facing the Postal Service.”

Carper said suspended payments are one of several steps USPS might need to take in the short run but that long-term solutions, as outlined in his POST Act legislation, are needed (see BMR 5/30/2011, p. 3).

American Postal Workers Union (APWU) President Cliff Guffey also said the unprecedented step highlights the need for legislation. The APWU is backing H.R. 1351, sponsored by Rep. Stephen Lynch, D-MA, which addresses what USPS argues is its excessive burdens under the Civil Service Retirement System relative to the federal government's share.

Reprinted with permission. June 27, 2011 edition

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Carper Unveils Comprehensive Reform Bill

Sen. Tom Carper, D-DE, this month unveiled his legislation that would give USPS much of its wishlist of changes to return to financial strength.

The bill aims to address key financial issues that require legislative action and would give the Postal Service more flexibility in managing its business. Carper announced his plan at a May 17 hearing of the Senate Federal Financial Management, Government Information, Federal Services and International Security Subcommittee he chairs.

During the hearing Postmaster General Pat Donahoe cautioned that USPS is now looking at an $8.3 billion loss for the year. And Chief Financial Officer Joe Corbett highlighted how quickly the agency's finances are deteriorating at a meeting with mailers last week, saying that he is projecting a startling $26.6 billion debt in fiscal year 2012 if Congress doesn't step in.

Carper's proposal directs the Office of Personnel Management to recalculate the Postal Service's Civil Service Retirement System (CSRS) obligations to fairly divide pension obligations for employees who served under both the old Post Office and the current Postal Service. This would give USPS access to over $5 billion annually from a $50 billion overpayment. The money would be used to help make retiree health payments.

The plan also gives USPS the freedom to change delivery days and frees it to close post offices that are no longer necessary and expand to more cost-effective retail options.

USPS would also gain the freedom to get into nonpostal products that make use of its existing network, although Donahoe has said that he wants to focus on delivery, rather than branching off into financial services or products such as cell phones. Restrictions on shipping wine and beer would be removed so USPS can compete with UPS and FedEx in this area.

Carper wants to give the Postal Service more freedom to negotiate specific contracts with customers and would set a time limit on Postal Regulatory Commission reviews of negotiated service agreements. Finally, the bill directs that when a union contract goes to arbitration, the arbitrator must consider the financial position of the Postal Service in setting wages and benefits.

Reprinted with permission. May 11, 2011 edition

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USPS to Cut 20 Percent of Top Staff

USPS is cutting its nonunion staff by 20% and expects to see $750 million in savings by March 2012 as a result.

The reduction of 7,500 positions will mean reductions in force (RIFs) but the plan also includes early retirement incentives, incorporates positions eliminated through attrition and will see seven district offices shut down.

“This is not just a reduction in total numbers but a redesign of the executive, managerial and administrative functions,” said Anthony Vegliante, USPS chief human resources officer and executive vice president. USPS looked at the reduced mail volume and the reductions in the employee workforce and came up with the 20% reduction, he said.

The process, which follows a 15% reduction in 2009, was data driven, Vegliante told BMR. “We used the data to understand the workload and the workers needed and adjusted accordingly.” Several thousand of the reductions in positions come from the decision not to “backfill” the large number of positions made vacant through retirements in January, Vegliante said.

The seven district offices that will close under the plan are Columbus, South East Michigan, Northern Illinois, South East New England, South Georgia, Big Sky and Albuquerque. In a March 23 letter to postal officers, Postmaster General Pat Donahoe said the new structure better aligns functions, dramatically reduces “shadow organizations” and eliminates layers of reporting.

Voluntary Early Retirement (VER) and financial incentives will be offered to eligible groups. To voluntarily retire, employees must be 50 years old, with at least 20 years of service, or any age with 25 years of service. Qualified employees will receive $20,000 in two separate installments as an incentive to retire. The payments will be made in November 2011 and November 2012. About 54% of the total number of positions to be cut could come from retirement-eligible individuals, Vegliante said.

The incentive is also being offered to employees who are not of retirement age but want to voluntarily separate from USPS. This is the first financial incentive offered to nonunion personal for early retirement since 1992. In 2009 the American Postal Workers and the National Postal Mail Handlers were offered financial incentives for those qualified to retire.

Reprinted with permission. April 4, 2011 edition

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PRC Sees Less Benefit from Five-Day Plan

Regulators think the plan to eliminate Saturday delivery won't save as much money as USPS projects and will drive more mail out of the system than has been expected. The anxiously awaited Postal Regulatory Commission (PRC) advisory opinion doesn't say explicitly that USPS should not go forward with its plan for five-day delivery. But the commission says USPS will only save around $2.3 billion annually, instead of the projected $3.3 billion (see chart for breakdown), from reduced delivery days.

The PRC also thinks that it will take a few years for USPS to reach that level of savings. How quickly savings are achieved will depend on how fast the Postal Service is able to downsize its non-career workforce.

In addition, the commission thinks about $587 million worth of mail will leave the system because of the reduction in delivery days, whereas USPS put that loss at $201 million. All together, the PRC thinks the change will mean a net savings of $1.7 billion compared with the USPS's projected net savings of $3.1 billion.

Market research was used to determine what the impact on volume might be, but that's an imprecise yardstick, the PRC noted. In an interview with BMR, PRC Chairman Ruth Goldway said the commissioners could not agree on a single up or down characterization of their position on the five-day plan. “But what we could agree upon was the facts. Any decision for or against is difficult, fraught with uncertainty and unfair to at least some group of people,” Goldway said. She added that the decision really rests with Congress, which would have to enact legislation before USPS could move forward. “We thought it would be better to emphasize the options,” she said.

Goldway explicitly argues that five-day delivery would violate the Postal Accountability and Enhancement Act. She reasons that such a broad reduction in service is essentially a rate increase, and it therefore violates the annual CPIbased cap on rate increases. She told BMR that she can foresee circumstances where reductions in service would not be rate increases - specifically where there is a compensating change, such round-the-clock availability of digital mail to compensate for reductions in physical delivery. “But there needs to be a tradeoff,” she said.

USPS's research suggests First Class Mail volume will drop 1.2%; Standard Mail will decline 0.3%; Periodicals will not decline (based on a 1.4% increase in nonprofit Periodicals and a 0.4% decrease in regular Periodicals); Express Mail will decline 4.5%; and Priority Mail volume will increase 0.4%

Applying a “confidence” analysis to the market research USPS conducted showed a large range of uncertainty, suggesting anywhere from a $576 million revenue loss to a $114 million gain from the delivery day change. The PRC concluded this suggests little certainty regarding the exact magnitude of the loss.

The PRC also questioned USPS's effort to forecast consumer behavior using a likelihood or intention scale, arguing this tended to underestimate the likely volume loss. The PRC eliminated this approach and relied on its “best estimate” from the market research to reach its $587 million revenue loss figure.

More than 25% of First Class and Priority Mail would experience a delay under the five-day plan, the PRC said, and most of that mail would see a two-calendar-day delay. Parcels would have the greatest delivery delays. USPS has proposed that mail processing would continue on Saturdays even though there would be no mail delivery. But there is no information on how providing outgoing mail processing on Saturdays would reduce these delays. USPS has suggested that Express Mail and PO Box delivery can be used for those who must have Saturday delivery but the PRC thinks this is inadequate because of the expense of the former and the inconvenience to recipients of the latter.

The regulators emphasized that individuals in rural, remote or noncontiguous areas would be especially hard-hit by the USPS plan because they tend to be more reliant on the Postal Service for essential supplies. And those without a post office nearby need to rely more heavily on their carriers for postal needs, the PRC noted.

The Postal Service is not giving up on the plan, however, and stands by its analysis of the cost savings and service impacts. In a statement following release of the PRC's analysis, Postmaster General Pat Donahoe said, “On March 30, 2010, we presented a compelling case to the PRC, reflected in the testimony of postal experts in operations, marketing and finance, as well as a highly respected market research firm and academician. Their testimony demonstrated that the plan would effect a $3.1 billion annual saving and allow the Postal Service to continue providing excellent service in an economical and efficient manner.”

He added that USPS remains convinced that its findings are accurate and it will continue to press its case with Congress. Sen. Tom Carper, D-DE, who chairs the Senate subcommittee with jurisdiction over the Postal Service, is standing by the position advocated in legislation he introduced last year to give USPS the authority to decide whether to reduce delivery days.

“I do believe that decisions on operational matters such as delivery frequency should be handled by postal management. At a time when the Postal Service is struggling with record budget deficits and facing insolvency, it makes no sense, in my opinion, to tie their hands when it comes to making difficult operations decisions,” he said last week.

Reprinted with permission. April 4, 2011 edition

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Mailers Explain Impacts of Five-Day Delivery

The Postal Regulatory Commission will be pretty hard-pressed to find a supporter of five-day delivery as it reviews comments filed last week.

The commission has just concluded a series of hearings around the country as well as a number of days where the Postal Service presented its direct case in support of moving from six delivery days to five. The Postal Service says this move, which it estimates will save $3.1 billion annually, is essential in order to reduce what it projects will be a $238 billion cumulative loss for 2010-2020.

Despite USPS’s obvious financial problems it is not getting much mailing industry support at this stage for eliminating Saturday delivery as a cost-savings measure.

The Financial Services Roundtable, which represents 100 of the largest integrated financial services, called Saturday delivery the linchpin of the mailing industry. The group highlighted a number of consequences for financial institutions under the proposed plan.

Individuals who get their pay via paper check would be disproportionately impacted and companies would lose interest on delayed receipts. “A reduced delivery schedule would directly impact the ability of the nation’s financial institutions to efficiently serve their customers. Billing, renewal/cancellation notices, claims, payments and account document delivery would be affected,” the group said, and credit card and insurance companies as well as banks that mail hundreds of millions of documents would incur significant costs and reduced operational efficiencies. (article continues but is not included here…)

Also excerpted from this issue in the Briefs section:

Six-day mail service will continue, at least for another fiscal year. Legislation with the standard language defining mail delivery service as six days a week was in the appropriations bills that passed Congress last month, just as it has been for years. This was not surprising to postal management or the mailing community. Insiders said it was expected that Congress would wait on pursuing such a major change in such a ubiquitous public service until the idea is thoroughly vetted. That vetting is taking place at the Postal Regulatory Commission, which is in the midst of reviewing USPS’s proposal so it can make a recommendation on the merits of the change. One of the biggest considerations is just how much the move to five days a week will actually save. There is some concern that USPS’s projections might be a bit too optimistic and that the annual savings may be significantly off the $3.1 billion mark.

Reprinted (and excerpted) with permission. August 9, 2010 edition

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USPS Makes Official Plan for Five-Day Service

USPS says it will save about $40 billion over the next decade if it can move forward quickly with the five-day delivery plan it filed last week with the Postal Regulatory Commission (PRC).

A little over a year after Postmaster General Jack Potter first announced at a Senate hearing that USPS wanted the authority to move to five-day delivery if necessary, the idea is now firmly a part of the agency’s plan to rescue itself from a $238 billion cumulative deficit it projects over the next 10 years.

Because the plan would have a nationwide impact on service USPS is required to seek an advisory opinion from the PRC and that’s what the March 30 filing asks for. Regardless of the result of what is expected to be a six-month-plus review process by the regulator, USPS cannot go forward without congressional help. The current fiscal year 2011 appropriations bill relating to the Postal Service includes language requiring that delivery of mail “must continue at not less than the 1983 level.”

If Congress removes that language USPS said it will give six-months’ notice before implementing elimination of Saturday mail delivery. Sam Pulcrano, the USPS vice president of sustainability who has been spearheading the effort, said industry has indicated that’s enough time to adapt operations and mailing plans. USPS will need about that much time to adapt its own operations and to reprogram 45 different programs involving everything from payroll systems to Full-Service Intelligent Mail.

The sooner the program is put in place the better in terms of savings, Pulcrano told reporters last week. It will save an estimated $3.1 billion a year using fiscal year 2009 as a starting point. Using projections for inflation that will impact cost-of-living adjustments among other things, USPS projects that one less delivery day could save as much as $5.2 billion annually by 2020.

The vast majority of the savings come from payroll savings for city and rural carriers. Those two categories make up 36,327 of the 39,938 workhours savings estimated for one less delivery day.

Pulcrano indicated there is significant wiggle room for USPS to achieve these workhours within its current arrangements with union workers.

He noted that a category of about 25,000 “tech-six” employees would not be needed. They cover the off-day for a group of five separate routes for employees who work a five-day week. Attrition will also be a major source of reductions. About 10,000 city carriers leave through attrition each year, for example.

Overtime workers, a category that makes up about 8% of the city carriers, as well as special tech workers who can be let go due to automation such as the Flats Sequencing System will also be sources of reductions.

USPS expects implementing the program will have some impact on mail erosion, no doubt encouraging some into electronic substitution.

USPS is trying to reassure its customers that it will not have difficulties handling mail load after what will now be three days of delivery shutdown when national holidays occur on a Monday or a Friday, but some mailers are skeptical about that.

Shippers are also concerned about fewer delivery days around the holidays, with some requesting that USPS consider Saturday delivery between Thanksgiving and Christmas.

Based on quantitative market research done by Opinion Research Corp. to look at the impact of five-day delivery on volume, USPS expects to lose $0.2 billion in total annual revenue, based on a FY 2009 test case.

USPS is billing the program as a seven-six-five plan: providing seven days of network processing and transportation, six days of service and five days of delivery. The elements are similar to what USPS has previously announced:

• No Saturday street address delivery, except Express Mail deliveries
• Post offices that currently are open on Saturday would remain open (although hours may change) and mail accepted at post offices will be processed on Monday, with the exception of Express Mail
• Delivery to post office boxes will con tinue Monday-Saturday
• PO Box addressed remittance mail will continue availability seven days a week
• No scheduled box collections will occur Saturday or Sunday except Express Mail collection boxes
• The only processing of outgoing mail on Saturday will be for Express Mail
• Continued Saturday/Sunday acceptance of bulk mail and entry of drop shipments at facilities that currently are open on those days
• Incoming mail will be processed every day
• Continued transportation of outgoing, intransit mail during weekends between plant and network distribution centers.

Pulcrano said these plans include as many accommodations as USPS could make to address the most common concerns stakeholders had regarding a reduction in delivery days.

He acknowledged that no one wants to have to take this step but that the prospects for volume declines moving forward mean delivery of fewer pieces of mail, and fewer high-contribution pieces – namely First Class Mail – to at least 1 million additional delivery points per year create an unworkable equation for the Postal Service.

Reprinted with permission. April 5, 2010 edition

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System Consolidation Key to Cost Cutting

A major consolidation and reworking of the 21 Bulk Mail Centers (BMCs) into Network Distribution Centers (NDCs) is the latest plan to optimize the centers in a time of declining volume and an ongoing trend toward mail introduction deeper into the postal system.

Speaking at last week’s Mailers’ Technical Advisory Committee (MTAC) meeting, Bill Galligan, USPS senior vice president of operations, said USPS had been moving forward with a plan to contract out its BMC network but when volume dropped the agency decided it makes the most sense to restructure.

He acknowledged there is little detail on the plan at this time but said the agency has to move forward to eliminate excess capacity. Galligan said machines in the 21 BMCs are losing run time because there isn’t sufficient product to put in them. The changes being proposed will also provide reduced benefits from workhours.

Under the plan 10 BMCs would be relegated to destination functions and all of their outgoing functions would be consolidated in a next tier bulk mail center. BMC and Surface Transfer Centers containerization and dispatch plans would be combined to eliminate redundant networks and improve use of transportation. Induction of originating products will be aligned into a single ground network.

USPS plans to implement a first phase of the approach in the Northeast as early as April. Meanwhile, USPS is moving forward with the political minefield of the area mail processing (AMP) reviews for facility closures. Galligan said after being on hold for about a year the agency can move forward and is looking at consolidations of 30-40 plants. He said he expects this to come with enormous political consequences and “not-in-my-backyard” campaigns as politicians fight to keep facilities and jobs in their districts. “But it’s necessary to do. We cannot have that excess capacity in our system,” he said.

USPS is also moving ahead with its dramatic route adjustment process, which involves eliminating 2,500 routes in the January-March timeframe. Galligan said it could impact as many as 30 million delivery points. Presort and carrier route mail will be impacted so he urged mailers to be closely involved in updating address information. The implementation schedule for route changes will be available on the RIBBS website.

Galligan said USPS has aggressively moved forward to remodel equipment runs for its 6,000 barcode sorters and other equipment. This has allowed for a massive manpower adjustment in which about 4,000 employees have moved from the day shift to the night shift.

Reprinted with permission. February 23, 2009 edition

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