Turns out the U.S. Postal Service isn’t just about collecting and delivering mail. It also has an essential role in the middle. Sorting and long-haul transporting, that is.

That may run counter to the arguments of those who believe the Postal Service could be more efficient if it focused only on collecting and delivering mail (also known as first mile and last mile) and let private companies take over sorting and long-distance transporting (the middle mile). The argument has gained traction among some stakeholders and observers, but our new white paper – The First and Last Mile Strategy: A Critical Assessment  – says the opposite may be true.

With the Postal Service beset by financial challenges, anything that might improve efficiency and the bottom line merits consideration. But outsourcing mail processing would be a pretty radical measure, not to be taken lightly. That’s why we asked Dr. John Panzar, a noted expert in postal economics, to look at the economic implications of the Postal Service completely abandoning mail processing and focusing exclusively on collection and delivery. We asked him to look only at letters and flats because parcels constitute a different market.

Dr. Panzar developed a theoretical model based on key economic principles and found that overall efficiency would likely decrease should private companies take over the middle mile. Mailing costs, in turn, would likely go up for postal customers. The only winners would be the companies sorting and transporting the mail, but their combined gains would be less than the losses to the Postal Service and customers. Simply put, the Postal Service’s participation in mail processing is necessary for overall efficiency.

Like all theoretical models, Dr. Panzar’s relies heavily on particular assumptions that are open to challenge. Still, his intriguing conclusions invite thoughtful discussion and debate. So, what do you think? Should outsourcing the middle mile be studied further? Do Dr. Panzar’s findings surprise you? What other ways could the Postal Service gain efficiencies? 

Comments (7)

  • anon

    Most discussions of the “last mile” including this one don’t place enough emphasis and understanding on how destination mail processing contributes to the efficiency of delivery at the “last mile”. DPS processing is required to maintain delivery efficiency. DPS processing requires a local monopoly on processing mail at the destination. This study does not address the fact that to outsource all middle mile processing would require local private monopolies which would have degree of pricing power that would tend to increase processing costs even more than the model this study uses.

    Dec 11, 2014
  • anon

    The "Last Mile"? The USPS is in process of destroying the last mile! By definition the last mile is the delivery of mail including 1st class, periodicals, flats and PARCELS to the customers door step. The USPS is installing cluster boxes, these ARE NOT customers door steps and if the customer has a parcel being delivered, now they get a note in their cluster box telling them to go to the local PO to pick it up, this is NOT the customers door step. And on top of that the local PO may only be open from 9 am to noon requiring the customer to take time off from work to pick up their parcel. All in all just bad for business.

    Dec 10, 2014
  • anon

    A quick "down and dirty" review of this white paper......When you wade through all the equations and esoteric language a question should scream back out of this report. The professor states that if USPS abandons processing then there would be no control left on keeping costs down for mailers. USPS somehow acts as a market controller. AND, if USPS abandoned processing, it would lose PROFIT. The question which begs to be asked is the following: If the market needs USPS processing and USPS sees a profit from processing, just why the hell is USPS dismantling its processing network? Workshare came about when USPS processing was maxed out. Any business would outsource, but they'd bring business back in house as soon as capacity was available. It appears OIG should take the next step and investigate the basic premise of outsourcing and compare it to reducing this outsourcing and increasing inhouse work...Would USPS increase profit from this strategy?

    Dec 09, 2014
  • anon

    Thank you for your comment. The paper somewhat addresses this issue, in that it finds that if the assumption that Efficient Component Pricing is being used properly (discounts are based on the actual cost savings USPS incurs as a result of workshare), that the current mix of workshare mail is the most efficient result. In other words, it leads to the Postal Service processing the mail when it can do so more efficiently, and the private industry doing the sorting the mail when they can do so more efficiently. A more thorough examination of workshare and whether or not its prices accurately reflect the costs avoided would be an interesting topic, but are beyond the scope of this paper.

    Dec 10, 2014
  • anon

    The further study needed on outsourcing the middle mile is an audit of actual USPS mail processing costs and associated work share discounts. Is Efficient Component Pricing actually happening as is being assumed? This is a fairly monumental task to audit completely so a component approach would be a more realistic first step. For example a study that audited the cost of the USPS converting AADC automation letters to 5 digit automation letters would not be that big of an undertaking. By comparing that cost to the work share discount difference between the categories an evaluation of whether that portion of a work share discount is actually Efficient Component Pricing could be relatively easily determined. I think you will find that PRC legacy work share cost models tend to overstate current USPS letter processing costs by at least 50%.

    Dec 11, 2014
  • anon

    Thank you for your additional comments. The Postal Regulatory Commission reviews the discounts and the associated costs savings every year in its Annual Compliance Determination (ACD), as the current law requires discounts to be no more than the associated cost savings with a few exceptions. You can find their ACD on their website at www.prc.gov.

    Dec 11, 2014
  • anon

    You have a VERY BIG IF in your comment. If the ECF is being used properly then the mail mix is the most efficient. Possibly. It appears that a paper by you on the basic assumption of workshare would be appropriate.......To get to the nitty gritty------If USPS can make a profit by absorbing more of the processing, any idiot would go for it.......So If I was OIG I'd dig deep and see where extra income and profit could be determined from readjusting all this workshare business. Thanks for your response.

    Dec 10, 2014

Recent Comments

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