• on Feb 16th, 2010 in Delivery & Collection | 11 comments

    By Robert Cohen

    Should the Postal Service pursue a last mile strategy? A strategy that emphasizes delivery and deemphasizes the retail, processing, and transportation functions which are outsourced explicitly or through pricing incentives. In some ways, the Postal Service is already pursuing a last mile strategy. Historically, the Postal Service has generally set worksharing discounts based on cost avoided. In other words, the discount is set at the amount of money the Postal Service saves if it doesn’t do the activity itself. If a presorter can sort the mail more efficiently than the Postal Service, it will choose to do so. This is good for society as a whole because it provides the lowest overall cost for end-to-end mail service. It also means that the Postal Service receives the same profit per piece whether it is workshared or not. The profit from the 80 percent of the mail that is workshared comes from delivery. A last mile strategy would mean that the Postal Service should extend worksharing to provide discounts for dropshipping bulk First-Class Mail. This would benefit many bulk First-Class mailers because the printing of their mail could be distributed around the country eliminating mail processing and transportation costs and delays. It would provide a greater incentive for First-Class mailers to use the delivery system, and research has shown that new worksharing discounts are highly stimulative to new volume. (See "The Effects of Worksharing and Other Events on U.S. Postal Volumes and Revenues" by Edward S. Pearsall available at www.prc.gov.) The introduction of dropship discounts in Standard Mail was associated with a large expansion of Standard Mail volume. The strategy would also imply that the Postal Service should move towards 100 percent passthrough for all its worksharing discounts and thereby reduce upstream costs to the mailers. Again, this would maximize the incentive to use the delivery network. In some cases discounts are not set at 100 percent of avoided cost because these discounts are not defined well and and they lead to anomalous results (e.g. Standard mail dropship discounts). The Postal Accountability and Enhancement Act of 2006 may have given the Postal Service the opportunity to adjust worksharing discounts so that they are less than avoided cost. Setting discounts that are smaller than avoided cost adds a small additional amounts of institutional cost contribution relative to the large amount included in the implicit price for delivery. It is, however, inconsistent with a last mile strategy because it increases upstream prices. Looking at the Postal Service more broadly, the strategy would encourage contracting out upstream activities that can be done at a lower cost than in-house. It may be that savings and service improvements could be generated by contracting out significant portions of the ground transportation network in a way similar to the FedEx air transportation contract. There are presorters in almost every large city that would be prepared to sort single piece and bulk letter mail. This would be most attractive in cities where the Postal Service’s processing productivity is comparatively low. Retail also deserves attention because much of this function could be contracted out. Selling some retail facilities and then contracting for retail services from the new owners could allow the full utilization of their commercial potential. Worksharing began as presorting in the 1970s and was a significant move in the direction of a last mile strategy because it allowed the bypass of some upstream activities. Over the years worksharing has been further developed so that it now encompasses almost all upstream activities. The result has made mail service in the United States a collaboration between the Postal Service, mailers, and third party providers. A rate structure was created around worksharing that put virtually all the institutional cost contribution of workshared mail in the implicit charge for the delivery function and the one thing the Postal Service reserves to itself is the delivery of mail to the mailbox. An explicit last mile strategy would simply be a continuation of the successful outsourcing strategy that began over thirty years ago. An unabridged treatment of this topic is available here. Mr. Cohen was the manager of the Mail Classification Research Division at the U.S. Postal Service from 1974 to 1978 when he joined the Postal Rate Commission, now known as the Postal Regulatory Commission. In 1979 he was named the director of the Commission's Office of Rates, Analysis and Planning. He retired from that position in 2005 and has been an independent consultant since then. DISCLAIMER: The views expressed in this post are solely those of Mr. Cohen and do not necessarily represent the views of the United States Postal Service or the Office of Inspector General. The U.S. Postal Service Office of Inspector General cannot guarantee the source, originality, accuracy, completeness, or reliability of any statement, data, finding, or opinion presented by this guest blogger.
  • on Oct 31st, 2009 in Delivery & Collection | 65 comments

    In these challenging times, reducing the cost of delivery operations — one of the Postal Service’s largest expenses — could save millions. One option the Postal Service is considering is to discontinue Saturday city and rural delivery and collection services.

    Saturday is said to be one of the lowest mail volume days. It’s also a day when many businesses are closed. The September/October 2009 digital issue of Mailing Systems Technology included a survey of managers working in the mailing industry. Of those surveyed, 98 percent said changing to 5-day delivery would not require a change in staffing. The survey results also indicated that most managers surveyed (81 percent) preferred Saturday as the day of the week that the Postal Service would stop delivering mail. An additional 62 percent of the managers surveyed felt that once implemented, there should be no exceptions to 5-day deliveries such as for holiday weeks or high-volume mailing periods.

    Gallup also conducted polls on ways to help the Postal Service solve its financial problems. They found that 66 percent of Americans supported reducing mail delivery days from 6 to 5 days, and 66 percent also supported reducing the number of days the Post Office is open from 6 to 5 days.

    The Postal Service is currently studying the reduction of mail delivery from 6 days to 5 days. Should the Postal Service consider eliminating delivery, collections, retail, and remittance services only for delivery units with low mail volume? Should the Postal Service eliminate these services for all delivery units nationwide?

    This blog is hosted by the OIG's Delivery directorate.

  • on Oct 26th, 2009 in Delivery & Collection | 27 comments
    Providing mail delivery is central to the Postal Service’s mission.  Delivery is the Postal Service’s largest operational function and accounted for approximately one-third of its nearly $78 billion in total expenses during 2008.  Postal Service management is working hard to reduce delivery costs while continuing to deliver to 149 million[1] addresses in the most efficient manner possible.  Despite declining mail volumes, the Postal Service is challenged to provide cost efficient and effective service to a delivery network growing by more than 1 million addresses each year. The mode of delivery plays an important role in determining the cost and efficiency of delivery.  The Postal Service provides three modes of delivery for existing delivery points — to the door, to a mailbox on the curb, and to a centralized point that serves several addresses.  Door-to-door delivery is the most costly mode and is no longer available for new delivery points.  When new developments are established, curbside and centralized deliveries are the only options.  Since centralized delivery is the cheapest mode, the Postal Service favors installing centralized delivery.  However, the decision on mode of delivery is sometimes left to the developer. Curbside delivery is the most widely-used mode of delivery for residential delivery points.  As of September 1, 2009, there were 49 million curbside delivery points.  The second most utilized mode of residential delivery is “other” which includes door-to-door.  Table 1 below shows the total number of possible residential deliveries by delivery mode. Delivery Table 1 For business delivery points, the “other” mode of delivery, which includes door-to-door, is the most utilized mode with 5 million delivery points as of September 1, 2009.  Table 2 below shows the total number of possible business deliveries by delivery mode. In response to decreasing mail volumes and revenues, the Postal Service needs to make every effort possible to decrease the cost of delivery operations.  Although the Postal Service’s goal is to maximize the use of centralized delivery with the developer’s input, this is not always possible.  Additionally, existing costly delivery points could be converted to more cost effective modes. Delivery Table 2 What do you think? Is the Postal Service making every effort to promote centralized delivery in new developments and convert existing costly door-to-door and curbside deliveries?

    [1] This number includes delivery to all residential, business, and Post Office box addresses. This topic is hosted by the OIG's Delivery directorate.

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