March 13, 2017 (RARC-WP--17-005)
- The OIG worked with an expert in postal costing and economics to analyze product cost changes in four traditional USPS products: First-Class Mail, Standard Mail, Periodicals, and Package Services. The analysis compares costs from fiscal year (FY) 2006 to FY 2015.
- Four external factors drove product cost changes: inflation, change in product mix, individual volume change, and overall volume decline. The report attributes the remaining change in unit costs to other factors, some which are at least partially within the Postal Service’s control.
- When the main cost factors over which the Postal Service has no real control over are accounted for, unit costs were lower in FY 2015 than in FY 2006 for First-Class Mail, Standard Mail, and Package Services. Only Periodicals’ unit costs increased.
How have changes in the overall business environment and Postal Service operations affected specific postal product costs? Over the past 10 years, the U.S. Postal Service has experienced both sharp declines in overall mail volume and substantial changes in the volumes and proportions of the different types of mail deposited in its system. In response, Postal Service management has cut overall costs using a variety of strategies, including rationalizing its network, hiring lower-priced labor, and, in some cases — such as local First-Class Mail delivery — lowering service standards.
The OIG worked with Professor Michael Bradley, an expert in postal costing and economics, to examine and analyze product costs and cost changes from FY 2006 to FY 2015.
Our paper quantifies the main drivers behind cost changes for the Postal Service’s four main traditional products: First-Class Mail, Standard Mail, Periodicals, and Package Services. It includes four key external factors that have driven cost changes from 2006 to 2015: inflation, product mix, individual volume change, and overall volume change. With these external factors accounted for, we attribute the remaining change in unit cost to other factors associated with management activity, such as productivity improvements, service modifications, and wage reductions. Such factors are at least partially within the Postal Service’s control.
This is especially important to note because this analysis finds that via such factors, the Postal Service was able to reduce the costs of all products but one, Periodicals. These cost reductions occurred despite a growth in delivery points during this time.
Another important relationship highlighted by the study is the impact of volume change of one product on costs of other products.