Courier, Express, and Postal Observer

Driving the Customer Away

2009-11-09T22:21:00.003-05:00

The Postal Service has many problems not of its own making. What it doesn't need are postal employees creating new ones that could drive its largest customers away. Mary Ann Bennett provides a detailed illustration of how that is happening today.

In her article, Ms. Bennett details how postal inspectors are using data gained from the introduction of the Intelligent Mail Barcode (IMB) to identify mailers associated with mail that did not meet standards even though the mailers had followed all proper procedures to ensure that mailing lists were updated to include the most recent move updates provided by the Postal Service.

She noted that mailers targeted are initial adopters of the IMB. The IMB allows the inspectors to identify the sender of the mail. Late adopters of the IMB are not at risk because the Inspection Service cannot find them. Given that the problems with move update exists for both early and late adopters of IMB, the IMB makes finding problems with mailings as easy for the Inspection Service as shooting fish in a barrel.

Unfortunately for the Postal Service, the Inspection Service's actions ruins any effort the Postal Service makes to improve its relations with its largest mailers as it tries to make a major shift in addressing and barcoding requirements. Once they were investigated and fined by the inspection service, the mailers, which Ms. Bennett wrote about, redoubled their efforts to shift their communications from mail to electronic delivery. The net effect of the Inspection Service's efforts was a loss in business and revenue far greater than the revenue recovered in their audits.

In many ways, the situation that Ms. Bennett describes, reminds me of the problems in customer service that led to the bankruptcy of the Converse company. In the 1960's and early 1970's, Converse was the dominant athletic shoe company in the United States with two of the biggest names in shoes, Chuck Taylors, and Jack Purcells. Converse was the official shoe of the NBA and many colleges. Converse lost its position in that period for a number of reasons. Most importantly its key customers, stores that sold its shoes, found the company difficult to deal with and its upstart rivals Adidas and in particular Nike easy to work with.

A survey comparing every factor affecting customer satisfaction, including payment terms, easy of sale, attentiveness of the sales rep, return policies, shipping speed, order accuracy consistently showed that Converse made the retailers life more miserable than its competitors. Over time, shoe stores decided that value of sales from stocking Converse shoes was not worth the hassle of dealing with the Converse company. Converse sales dropped, it lost its lucrative relationship with the NBA and eventually went bankrupt. In bankruptcy, Converse was bought by Nike, the upstart that beat it by offering a competitive product that retailers wanted because of superior customer service.

The Postal Service needs to take a serious look at what its Postal Inspectors are doing. Otherwise, it could end up like Converse, bankrupt and looking for a buyer.

Job Cuts or Wage Cuts

2009-11-09T07:58:00.003-05:00

According to Hellmail, TNT, the Netherlands postal operator, and its unions are expected to agree to a new offer for its contract soon. The agreement results in pay cuts of between 2 and 3.5% and layoffs of less than 1,000 employees. Much of the pay cuts will come from a proposed reduction in Sunday pay.

Prior to the agreement TNT had placed on the table the possibility of laying off 11,000 employees. This proposal was made after the Union had rejected a 15% pay cut in March, 2009.

The driver behind the contentious negotiations is the rapid drop in mail volumes at TNT. TNT like all postal operators have been hurt by both a severe recession and declining demand due to electronic competition.

TNT's contract may present a framework for upcoming negotiations that the United States Postal Service have with their unions. The Postal Service faces similar economic and competitive challenges to what drove TNT to offer sizable pay cuts, threaten massive layoffs and eventually agree to modest layoffs and small cuts in pay.

The Postal Service differs in that it has not previously made as extensive an effort to streamline and optimize its network and has less flexibility in the use of full-time and part-time employees. Therefore it enters the upcoming round of labor negotiations needing significantly more contract changes that what TNT was willing to accept. Without binding arbitration, the US postal unions and the Postal Service, just like TNT and its unions, would have to make the choice between cutting jobs and cutting real compensation levels.

With binding arbitration, the outcome is less certain. However, given the difficulty of selling eliminating long-standing contract provisions to their members, postal unions and the Postal Service are likely heading toward an arbitrated contract agreement where an arbitrator will be asked to make the choice between jobs and compensation.

150 plants and 400,000 employees

2009-11-08T08:39:00.003-05:00

On November 5th, former Deputy Postmaster General Michael Caughlin suggested that the Postal Service in order to survive must have a much smaller footprint with possibly 150 plants and 400,000 employees. He made his remark in response to a question of Representative Danny Davis at the hearing of the Federal Workforce, Postal Service and the District of Columbia Subcommittee of the House Committee on Oversight and Government Reform.

While the hearing was about potential sources of new revenue, the question and the answer suggested that revenue generating options suggested by the panel will not generate the $3-5 billion in additional revenue that the Postal Service will need to be truly a viable enterprise. His answer further suggested that the Postal Service's current approach to cutting costs, while more effective than they have been in the past does not do enough to shrink the operating network down to either current levels of demand or even lower levels that are expected in the years to come.

Given former DPMG Caughlin's experience, his response should be a considered a serious hypothesis about what a true redesign of the Postal Service would look like. His response raises an important question that opponents of shrinking the network will raise. Can the Postal Service maintain service levels if the network of processing plants shrinks to less than half of its current size?

To answer that question in the affirmative, and it can be answered that way, requires a major rethinking of the design of processing and transportation networks. If the Postal Service was to shrink to 150 processing facilities, two thinks would clearly change, the distance (and travel time) between processing facilities and delivery units would grow, and the time that mail is handled within each of the facilities must shrink.

For example, if the originating and potentially delivery facility moves from 10 miles to 90 miles from the delivery unit, then the time available for processing originating mail from open dump and cull to delivery point sequencing drops by 4 hours, assuming an average travel speed of 40 miles per hour. Fewer processing facilities means that facilities will be further apart, so critical dispatch times will likely be earlier to ensure on-time arrival.

Therefore the primary driver of 150 facility network would involve designing a facility that can handle turn-around times half of what they are today. Lower volume levels aid in cutting total sortation time. But new thinking about the use of automation and material handling systems must focus on reducing time as much as labor expenses. The 150 facility network would likely require larger facilities on average that can handle all of the sortation and material handling equipment that would be needed to cut handling time within each processing facility.

The 150 facility network would also require removing two key assumptions that drive all current network modeling. 1) Existing facilities must be used. The 150 facility network will likely have major processing facilities in locations further from population centers than current plants, with locations driven by access to the interstate highway system or major air facilities. It is possible that larger urban centers will retain some DPS sortation but only if it reduces total handling time. 2) The standard work shift within a plant is eight hours. The 150 facility network will likely have work for no more than 1 full time and 1 part time work shift. To the extent that DPS sortation remains close to delivery units, then that shift will likely also be part time. The proportion of full-time jobs could rise if divisions between crafts and all restrictions that prevent a person from having two different "jobs" within eight hours were eliminated.

The shift to a smaller network could have some significant management benefits. A smaller network is simpler to manage. While every node must operate as precisely as the finest Swiss watch, controlling variations from best practices would take less time to implement. Reducing time in plants requires a 6-Sigma, zero-defects, or whatever the current buzz-word is for eliminating errors that increase time and costs can be more quickly implemented in 150 facilities than in 350.

The shift to a network that is as much focused on reducing in-plant time reflects current mailer demand to both improve mail delivery reliability and reduce the time it takes to turn an idea into a delivery. Most importantly, the Postal Service has to be as reliable as e-mail when it promises a delivery date for all of its advertising customers to ensure that their direct mail campaign most effectively complements their broadcast, e-mail or Internet display advertising campaign.

There is one major drawback to implementing a 150 plant Postal Service, which is greater than the logistical and management challenge of shrinking the network; the elimination of 200,000 postal jobs at a rate between 20,000 and 40,000 per year in an implementation plan. Shrinking the network at that rate would create a far louder political outcry than even the first round of base closings. Shrinking the network at that rate would also create significant severance or early retirement costs and the Postal Service does not have the cash to pay them.

So this leads one back to Representative Davis's implied question: Can the Postal Service be saved? DPMG Caughlin's response illustrates that saving the Postal Service will require serious and unpleasant steps. The scale of the change that he suggests, as well as the limitations of revenue generating ideas of all stakeholders, should force Congress to think more boldly as they try to find a new business model and regulatory framework that can save the Postal Service.

The Future of the Postal Sector

2009-11-04T11:46:00.002-05:00

Besides my presentation, the rest of the program is packed with speakers that should initiate the coming debate on future business models for the Postal Service. The topics cover viewpoints from many stakeholders, academics, comparable industries and should give attendees a good understanding of the challenges that the Postal Service faces in the years ahead. The workshop will cost $390 for those in the private sector and $200 for government and postal employees. To register follow contact the Center for Research in Regulated Industries. (The link is to the registration form.) The entire agenda is as follows:

Welcoming Remarks - Ruth Goldway, Chairman, Postal Regulatory Commission

The Future of the Postal Sector: the Elephant in the Room - Michael Crew, CRRI Professor of Regulatory Economic and Director – CRRI -

New Business Models for Tough Problems - Alan Robinson, President, Direct Communications Group

Lessons of the Great Recession from Electric Utilities - John Caldwell, Chief Economist, Edison Electric Institute

Operational Responses to Mail Volume Declines - Patrick R. Donahoe, Deputy Postmaster General and Chief Operating Officer, United States Postal
Service

The Future of USPS from a Union‟s Perspective - Fred Rolando, President, National Letter Carriers Association

USPS in Good Times and Bad: Results from an Aggregate Economic Model - William Miller, Economist, Postal Regulatory Commission

The History of Tomorrow - David C. Williams, Inspector General, Office of Inspector General, United States Postal Service

The Voice of the Customer - Jody Berenblatt, SVP Global Postal Strategy and Enterprise Operations, Bank of America

Public/Private Relationships – Creating a Successful Postal Alliance - Carl W. Asmus, Vice President – International Market Development, FedEx Service

Optimal Value-Added Discounts in the Future of the Postal Service - Paul Vogel, Deloitte and Touche

Managing Declining Demand: Lessons from the Railroads - David Levy, Partner, Venable LLP, and Matthew Field, Associate, Venable LLP

The Future of the Postal Service: Mail and Environment
Larry Buc, President, SLS Consulting, Inc.

Future Business Model for USPS - Mary Anne Gibbons and Linda Kingsley, Senior Vice Presidents, General Counsel and Strategic
Planning, United States Postal Service

Q&A/Concluding Discussion - Michael Crew

Eight Challenges for a Postal Business Model

2009-11-04T08:54:00.002-05:00

The recent economic challenges have forced nearly every country to rethink its national postal operator's business model and the regulatory framework within which the national postal operator must conduct business. On November 20th, I will be making a presentation at a workshop on the Future of the Postal Sector that will

detail these challenges,
illustrate how various postal operators and other entities have dealt with these challenges, and
identify and critique potential business models that may be chosen for a national postal operator.

As a preview of my presentation here are the eight challenges that I believe the Postal Service must handle under all potential business models ranging from government department to full privatization.

Maintaining Mail’s Importance to the Economy – The mail industry is responsible for over eight million jobs and $800 billion in economic activity. The business model can accelerate or retard economic growth depending on how well it serves customers that need mail delivery.
Minimizing Financial Risks to the Federal Treasury – At the end of the third quarter of 2009, the Postal Service’s obligation to the Treasury for debt, retiree health benefits and workers compensation payments is $ 72.7 billion.
Ensuring Financial Self Sufficiency – Since the passage of the Postal Reorganization Act, financial self sufficiency has been an objective of postal policy but was never defined much beyond the concept of accounting break even. While the Postal Accountability and Enhancement Act (PAEA) has as its objective that revenue and retained earnings of the Postal Service should be sufficient to endure financial stability, the current operating losses and limited cash reserves suggest that the Postal Service faces a significant challenge of being truly self sufficient.
Adjusting to New Market Realities Serving Wholesale Customers – With the decline of the Postal Service’s business handling transactions and correspondence, both the Postal Service’s ability to provide universal service and its financial viability will depend upon meeting the service needs of its wholesale customers that send 500 or mail pieces at a time and will in the future generate more than 70% of revenue and 80% of the volume that the Postal Service handles.
Adjusting to New Market Realities Serving Retail Customers – Over the next decade the Postal Service will see demand from retail customers declining below the 30% of revenue it is today. Adjusting the retail interface and operating network serving these customers creates significant financial, operating and political challenges.
Adjusting Operating Costs to New Competitive Realities – The market realities of serving postal customers requires a leaner processing and transportation network that matches the demand for mail service and a modernized retail network that provides better access at a lower cost.
Funding Transition and Modernization Costs – Rationalizing Postal Service operations to reflect new market realities in wholesale and retail markets will require substantial cash outlays to cover the costs of right-sizing the network and workforce, modernizing the retail network and optimizing the processing network. The business model must find ways to raise this cash when operating losses, retiree health care payment schedules, and debt to cover prior-year losses provide few options
Creating a Workforce for the Long Term – The new market realities and the operating and retail networks that serve them can provide good jobs for postal employees. However, the existing civil service based employment law framework, labor agreements and consultative requirements with management associations all reflect significantly different market and operating realities and the labor-management environment that existed four decades ago. Furthermore, the existing employment compact provides employees from top to bottom few rewards for dealing with the pain associated with transitioning to new market realities.

Pricing Volume Mail

2009-10-31T10:03:00.010-04:00

In my last post, President Burrus' Dilemma, I created significant concerns among mailers that my proposal to the APWU supported their idea to eliminate worksharing. Anyone proposing increasing rates 25% on the Postal Service's best customers in an environment where mail, and in particular First Class mail is at a real price disadvantage with electronic competitors is arguing for organizational suicide.

What I was trying to do was suggest that if the APWU wanted to make a proposal to handle mail now sorted by the private sector that would offer a better value to the Postal Service's customers, I would be glad to help. Given the current economic and competitive landscape, any APWU proposal would have to offer postal customers a better value or preparing such a proposal would be a waste of time and energy.

I would like to use this post to clarify my thinking on pricing volume mail to give my readers a better understanding of how difficult APWU's task of designing a product that offers a better value really is.

The Postal Service's rate structure is complicated and the use of worksharing discounts further complicates thinking about pricing. The primary problem is the word "discount." It suggests that the customer is getting a deal when in fact they are buying a more basic product from the postal service for a lower price. It also suggests that single-piece customers and volume customers are part of the same market for mail and that single piece prices are a real alternative for volume customers.

The alternative way of thinking of postal rates is to start with the basic service as the basis for all pricing. To how this alternative would work, below are two price charts listing prices as they are currently shown and the alternative bottom up alternative.

Current First Class 1 ounce rates table

150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
150 pieces of barcoded mail sorted to the same 3- digit zip code - $0.357
150 pieces of barcoded mail sorted to the same distribution center - $0.360
Barcoded mail that is unsorted (the residual rate) - $0.382
Unbarcoded volume mail - $0.414
Single piece mail (shown for comparison purposes) - $0.440

Bottom-up First Class rate table:

150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
Sorting 3-digit sorted mail to the 5-digit zip code - $0.022
Sorting distribution center sorted mail to the 5-digit zip code - $0.025
Sorting unsorted barcoded to the 5-digit zip code - $0.047
Barcoding unbarcoded volume mail and sorting to the 5-digit zip code - $0.079

In this way, it becomes quite clear how difficult the task the APWU has. In order to compete with the private sector for the handling of mail that is not sorted to 5-digit level, it wold have to offer that service at a price less than the current charge for sorting mail, but less than what the private sector charges to do it.

In looking at the above list, the product that provides the largest margin is unbarcoded volume mail. The Postal Service charges 7.9 cents to barcode and sort this mail. Mailers have the choice of finding a presorters who will do it for less than that. The highest price the Postal Service could charge these mailers would be what the private sector charges for similar services. This is likely to be much less than the 7.9 cents the Postal Service now charges for this service. Assuming that the private sector charges half of the difference to cover their costs and profits, then the Postal Service could not charge more than 3.95 cents to compete. This is a lot less than the 10.4 cents that President Burrus offered in his challenge to mailers, and is why his response, while possibly appealing to his members was non-responsive to Senator McCaskill.

What this exercise further illustrates is why such a proposal could not be accomplished within the current regulatory structure or with the current business model. Allowing the Postal Service to truly compete would require some major changes. These include:

Basing all volume prices on the price for the product that involves the least amount of Postal Activity. All other products could be purchased as options. For standard mail, finely sorted mail drop shipped to the lowest practical level would be the basis upon which all prices are based.
Removing all links between single piece rates and volume rates. This approach requires treating single-piece and volume products as separate markets with totally different approaches to product pricing.
Allowing volume based rates. By offering rates bases on the volume of individual mailings and total annual mailing volumes, the Postal Service could offer prices that reflect the impact that volume has on business relationship costs. This is similar to volume requirements for sale rates but differs in that there is no requirement for marginal increases in volumes. Volume based rates are a requirement for contract rates to provide additional handling at prices below list.
Allowing private contract rates. In order for the Postal Service to compete with private sector firms offering sortation or other mail handling services, those prices should reflect local competition for these services. The published rates for providing additional handling services would reflect rate that any volume customer could get without negotiations. In this way, the Postal Service would offer its services to corporate customers in the same manner that its private sector competitors do.
Specific financial self-sufficiency/profit objectives. The Postal Service cannot have the authority to offer contract rates that differ from published rates without a requirement that prevents it from offering prices below not only costs but below costs plus a reasonable margin. At a minimum it must be subject to the same profit discipline of its private sector competitors.

President Burrus's Dilemma

2009-10-30T05:41:00.005-04:00

In August, APWU President William Burrus was asked by Democratic Senator Claire McCaskill to identify "the substantial steps the APWU is willing to take to assist the Postal Service in weathering its severe financial crisis? In crafting a response, he was faced with a dilemma: how does the APWU appear responsive without proposing anything that will affect upcoming contract negotiations with the Postal Service?

He could not offer any response that required changes in contract provisions as that would put the APWU in a weakened bargaining position even before negotiations have started. Instead he repeated his challenge to mailers and the Postal Service: "The American Postal Workers Union has challenged the postmaster general to discontinue the excessive discounts the USPS offers to large mailers, and instead to compensate postal employees for processing letters and flats at a cheaper per-piece rate. This would reduce the Postal Service’s costs; improve efficiency, and make better use of underutilized equipment and employees. As an added incentive, we propose to process parcels at no charge." (Answer to question 1, third paragraph) Unfortunately for the APWU, President Burrus's response will not appear to be responsive to Congress.

The Dead Tree Edition has clearly laid out the case that Postal Customers will make in refuting President Burrus's proposal in its post, "Mathematically Challenged Burrus Proposal Doesn't Add Up For USPS." Mailers look at President Burrus's proposal only as a significant increase in rates. The greatest increase would be born by those mailers that currently can sort mail while they print. These mailers are mostly likely now paying on average 35.1 cents for First Class mail. For these mailers, President Burrus's proposal represents a 25% increase in postage prices without changing the work that either the Postal Service or the mailer performs. Even the least business savvy member of Congress will understand that raising postage prices by 25% for a major group of customers will drive business away and make the current financial difficulties even worse.

President Burrus's proposal does provide the framework for developing postal products that will both make mail more attractive to some customers and provide jobs for unionized postal workers. These products would serve those customers that cannot sort mail while they print, or cannot sort mail while they print with sufficient density to pay the lowest postage rate the Postal Service offers. His proposal states suggests that the APWU would support the development of products for mailers that produce mail in quantity that requires physical sortation prior to delivery sequencing at rates less than the full letter rate of $0.44. Given that his first proposal of 43.9 cents is unlikely to have any takers among postal customers, President Burrus and his staff at the APWU has to come up with a more realistic price to sort mail currently physically sorted by private sector firms.

In a previous post, "Could the USPS Turn a Jobless Recovery into a Job Full Recovery?", this blog laid out the basic parameters of such a product. If the APWU, or for that matter any other postal union, is serious about competing for the physical sortation of mail now sorted in the private sector, they could contact me at the e-mail listed on this page and I would be glad to assist them in putting together a proposal that they can take to the Postal Service and eventually the Postal Regulatory Commission that would secure more jobs for postal union members.

This post created some consternation among postal stakeholders. A subsequent post, Pricing Volume Mail, clarifies the challenge of developing a product to compete with private sector sortation of mail.

Irrational Pricing at the Postal Service

2009-10-28T08:00:00.008-04:00

The Postal Service may be on the verge of having an irrational price structure. The irrationally of the Postal Service's price structure is driven by the regulatory constraints within which it must price its products. Until the Postal Service is free from those constraints, irrational pricing will have detrimental effects on the Postal Service, its customers and its competitors.

How is the price structure made irrational?

The Postal Service had only two choices in setting prices for its regulated products. 1) It could not raise prices and adhere to the requirements of the legislated price cap. 2) It could file an exigent rate case and open up its entire price structure for review by the Postal Regulatory Commission. The first option freezes rates that should rise due to price changes of competitors and changing cost structure affecting particular products. The second option opens up the entire rate structure to regulatory review and would force prices to confirm to nearly 40 years of PRC precedent on pricing and relationships between the prices of various postal products. In particular, this precedent would have likely required that the Postal Service institute a major rate increase on nearly all products at a time when customers are most sensitive to postal prices. Furthermore, an exigent rate case would have the effect of protecting preferred classes of postal customers from rational price changes that violate PRC interpretation of postal pricing law and would most likely cause the most economically and price sensitive mail to see price increases that market-based pricing would not justify.

The choice the Postal Service had is known as Morton's Fork, a choice between two bad options. In choosing to adhere to the price cap, the Postal Service held prices constant at a time that competitive pressures, rising operating costs and substantial operating losses would justify some increases. Opening up its entire pricing structure to regulatory review would reinforce decisions on price relationships made in market environments unlike what now exists and could raise rates far beyond what the Postal Service would want in the depressed economy. Given the difficulty of over tuning PRC precedent, and especially precedent on rate relationships, the Postal Service would have little confidence going into an exigent rate case that the new rate structure would have the rate structure changes that it needs to get back on the path to financial self-sufficiency. Given its options, sticking to the price cap appears to be marginally better for the future of the Postal Service, but it was still not a "good option."

To understand why both options are bad, one only has to look at the pricing decisions of Postal Service competitors, UPS and FedEx and foreign postal operators. All of these firms are expected to raise rates in 2010 and none of these firms are expected to raise rates uniformly across their product lines, delivery locations, or type of customers.

UPS and FedEx are raising rates, after taking into account the decline in the fuel surcharge by around 4%. FedEx's published rates are rising the most for envelopes and parcels under 2 pounds, parcels delivered to residential addresses, and parcels traveling the greatest distance over the FedEx network. (A full price comparison was produced by Parcel Magazine.) The price increases are changing rate relationships across FedEx's range of services.

The published rate changes only affect the rates that parcel customers pay when they tender a single parcel or single envelope at a FedEx Office location or at an independent franchisee, or purchase the service on line and drop the single parcel in one of FedEx's drop boxes. FedEx's largest customers expect that their rate increase will be less due to negotiated discounts that vary based on the volume the customer tenders and the distribution patterns of the parcels shipped.

By not raising its single-piece parcel rates, the Postal Service is likely to gain market share over UPS and FedEx in parcel markets that it already dominates. It will do so at a cost to its financial well being as it will bear rising costs without additional revenue. Without the legal constraints, the Postal Service could raise its First Class parcel, Standard parcel, and single-piece Parcel Post rates as a price follower without affecting the market share of competitors.

Not raising single-piece parcel rates also creates problems for the Postal Service's competitive parcel products. By holding its single piece rates constant, the Postal Service reduces its negotiating room with large scale parcel shippers. The difference in rate between the heaviest First Class parcel and the lightest Priority Mail shipment will grow, possibly encouraging shippers to split parcels to take advantage of lower single-piece rates. It is possible that a profitable contract with a large-scale shipper would be at prices above what single-piece rates are and the Postal Service would be forced to sell services at a loss to customers who can use the capped single-piece rate.

Foreign postal operators have expanded the difference between single-piece rates and rates charged to large volume mailers well beyond the cost differences. A recent strategic review of Canada Post examined the impact of a price cap on single piece rates at Canada Post and recommended that higher rates are required for the financial well-being of Canada Post and the continuation of universal service within a financially self-sufficient entity. (Recommendation 30(iv)) In response, Canada Post has announced a five year pricing plan for the 30 gram (approximately 1 ounce) single-piece First Class letter. Single-piece letter rates are rising 3 cents in January, 2010 and 2 cents each year from 2011 through 2014. To offset the impact on small business, Canada Post is offering a rebate on the first $1,000 of postage equal to the January, 2010, 3 cent increase. Rates for large volume mailers are set within contracts so the actual increases for these customers are unknown.

The Postal Service's single piece First Class rates are still set under two assumptions. First, there should only be a current-cost based relationship between single-piece and volume-tendered mail. Second, the only differences between First Class single-piece mail and volume tendered mail should be the cost differences in handling the two types of mail.

These assumptions worked as long as single-piece First Class volumes were rising or steady. The decade long decline in single-piece First Class mail have shattered both assumptions.

The decline in First Class single-piece mail creates significant transition costs to handle the costs of reducing the workforce, equipment, and facilities that handle this mail that are no longer needed. The decline in First Class single-piece mail also requires that current users of this product bear the future cost of debt (including debt for current losses), retiree benefits, and workers compensation claims. Otherwise rate increases in the future will have to be even greater to cover the annual cash outlays to cover debt payments, retiree benefits, and workers compensation claims in the future.

Limiting price differences between single-piece and volume tendered First Class mail to just cost differences ignores real market differences between postal customers. The two types of customers differ in terms of sensitivity to both price and economic cycles. These differences logically support removing links in price setting for single-piece and volume tendered mail.

The two examples are similar in that the rational solution would require a major change in precedent and conventional thinking, and mostly changes in legislation. Instead it was left at Morton's fork, a place with two directions neither one offering a path to self-sufficiency.

Dealing with Fear

2009-10-22T12:23:00.004-04:00

The combination of the recession and electronic conversion has created a new market environment that requires new ways of thinking about the postal workforce. Naturally, postal employees fear that the new market environment will mean changes to decades-old compact between national postal operators and their employees. The fear is driving actions by unions and postal employees to strike national postal operators refuse to cooperate in annual assessments of employee satisfaction, and lash out at customer unwillingness to pay higher prices that would support the old employment compact.

The old compact includes four parameters:

career long employment without the threat of layoffs;
full-time jobs for all craft employees;
explicit barriers between crafts;
civil-service based employment law, compensation and hiring and dismissal processes.

The old compact held as long as strong customer demand and normal employee attrition allowed management to incorporate limited efforts to optimize the network and introduce automation at rates that would not require adjustments to the compact and still keep postal product prices at levels acceptable to both large volume and single piece customers. (In this context, acceptable is used in a manner similar to the idea that lines at the department of motor vehicles are acceptable.)

Also, national postal operators, operating within a monopoly and regulatory and policy constraints had little pressure to move postal prices from acceptable to competitive levels. Nor did they did do all of the research necessary to understand what makes its prices and services levels competitive for specific market segments (retailers, banks, insurance companies, local real estate agents, etc.) and so even if they felt the desire to offer a more competitive product as such information was considered unnecessary for designing and pricing products within the existing regulatory structure.

An alternative more-efficient, more-flexible employment compact was well known to policymakers and both postal management and union leaders. That compact, first employed by United Parcel Service (UPS) in the late 1960's as it expanded its parcel delivery network nationwide involved using mostly part-time workers to sort and load parcels and full-time workers to deliver them. While all of UPS's drivers and sortation center employees were unionized Teamsters, UPS retained great flexibility in its union agreements to adjust its workforce to both optimize employee time and adjust the total workforce as demand changed.

The compact was designed around the idea that the fastest way to move parcels by ground minimized the amount of time that parcels spent in any facility. The flexibility imbedded in its union contracts that allowed UPS to continually optimize employee time and adjust workforce size reflected the fact that the parcel delivery market was highly sensitive to economic cycles. Using lots of part time employees, and later fully automated facilities, UPS limited the number of sortation centers while continuing to provide better service at lower prices than either Railway Package Express or the Postal Office Department could at that time.

UPS has maintained its employment compact until today. The expansion of FedEx Ground nationwide stressed the compact by adding the complication of price and service competition. Competition required that UPS redouble its employee optimization, plant modernization, information system modernization efforts in order to reduce the labor component of delivering parcels. However, competition did not break the flexible framework that UPS created in the 1960's. UPS has had to bend somewhat in its mix of full and part-time jobs but still over 50% of UPS employees are part-time. UPS has changed its pension benefits for one-third of its full-time employees by withdrawing from the Central States Pension Plan but in doing so, it agreed to retain an equivalent benefit in a new UPS-Teamster managed corporate plan.

Today, national postal operators still tied to the old employment compact can no longer hide behind growing volumes and attrition of an older workforce to avoid tough operating decisions that require changes in the employment compact. As the proportion of transaction and correspondence mail, both single-piece and bulk, declines, mail becomes increasingly sensitive to economic cycles and competition from other advertising modes. The impact of this switch is greatest in the United States, where the use of paper checks to pay bills still remains the primary payment method among those over 40. Even these customers may soon desert the mailstream as their preferred method to receive and pay bills as incentives from banks and other creditors become too enticing to pass up.

Clearly the new framework must accommodate the following:

Lower total volume levels;
Much lower volumes of single-piece mail requiring sortation at origin;
Total volume and revenue that is sensitive to business cycles.
Volume and revenue that is sensitive to price such that the sender must generate a positive return for spending to design, print, and deliver a hard copy document or ship a parcel.
Optimized processing and delivery operations that reflect the new characteristics of demand with costs at levels that permit product prices that allow mailers to earn a positive return on their mail spending Increased levels of customer service and sales efforts to identify and accommodate specific customer needs

The UPS employment compact could handle all of these factors. The challenge that national postal operators have is installing a similar compact. Without the ability to install a compact similar to UPS, efforts to optimize sortation and delivery networks through expanded use of information technology, and automation equipment installed in fewer, larger plants cannot be made financially viable. To the extent that a national postal operator needs to make significant capital investments to optimize the network, the lack of a new employment compact makes it nearly impossible for the investments to make returns to justify the spending. (To the extent that legislative actions prevent changes, national postal operators may put off optimization efforts that could provide a positive return even under the current compact and optimization efforts that require a change in the compact are not even considered.)

Royal Mail has developed an operating framework that exists in a leaked "Next Steps" document. In this document, Royal Mail outlines a vision for duty cycles based on 4 and 8 hour increments, increments that are nearly identical to those that UPS uses in the United States. While the public focus and rhetoric from both sides focus on issues of privatization or maintaining Royal Mail as a “public service,” in truth, the real conflict is over delaying the end of the old employment compact that postal jobs were full-time jobs with security for an employee’s lifetime.

The United States Postal Service faces similar issues for its delivery carriers (rural and city), clerks, mailhandlers, supervisors, and postmasters.The changes in the market have smashed the basis for the old employment compact and employees have real concerned about what comes next.

Clerks, mailhandlers and supervisors can see workloads declining; employees placed in standby rooms, and not help but wonder how much longer their plant or job will exist. Postmasters and retail clerks can see declines in retail traffic and the growth in postal franchise operations of non-US postal operators and wonder how much longer will the Postal Service use corporate post offices as the primary means of providing retail services.

What employees see is pain and they fear that postal management has nothing but pain to offer them. The economic downturn intensifies this fear as the thought of transfer, demotion, reduction in hours, or job loss raise anxiety about how bills will be paid, college education will be funded, and loss of connections to long-established relationships in one’s community. What employees don’t see at either Royal Mail or the Postal Service is something that they will gain in return for the pain to come. In many ways, what they perceive is not much different from what a young child sees when getting their first vaccination. They fear the pain of the shot and know of nothing else. How do doctors deal with this problem? They give the child a lollypop or small toy as a reward for dealing with the pain. By the time the child leaves the office, he/she may still have memory of the pain but have in their hands the reality of candy or a toy. The next time the child is vaccinated; they then know of the pain but know they will leave with something that is sufficient to deal with the shot.

What policymakers in the Great Britain and the United States have to fine is the reward for employees for dealing with the pain coming in the transition to new market realities. Employee unions and associations should also be looking for potential rewards that would enhance the new employment compact, including rewards that the current business model may not be able to offer, as policymakers and postal management have not publicly offered anything to ease the fear of changes to come.In the past, this blog has written about the experience of Conrail. Conrail had to significantly downsize its network, reduce its workforce, eliminate a number of railroad crafts and find a way to negotiate out of contracts that guaranteed jobs. Employees from top to bottom suffered greatly during the transition to a leaner and profitable railroad. At one point, employees even had to take a substantial pay cut to turn the company around. Employees did receive rewards for their pain.

The pay cuts were restored as soon as Conrail returned to profitability. Conrail employees received 15% share of Conrail stock in return for concessions in work rules and wages. The shares that employees received at the public offering price of $28.00 in 1987 were worth $214.67 when Norfolk Southern bought the company a decade later. Right now neither Royal Mail nor the Postal Service could offer employees any rewards that approximate what Conrail employees received for the change in their employment compact. As both postal operators face the possibility of new business models employees need to think hard about which models could include rewards sufficient for them to accept the pain that they are likely to endure in the transition to new market realities.

Labor Problems at FedEx Ground

2009-10-21T09:05:00.004-04:00

FedEx Ground has now received a new challenge to its practice of using contractors to delivery parcels at FedEx Ground. The challenge comes from a threat by the the attorney generals of New York, New Jersey and Montana to sue FedEx Ground for violation of state employment laws by classifying its delivery drivers as contractors and not employees. FedEx Ground has until October 27th to respond and explain why no suit should be filed. A similar letter was sent to FedEx Ground by eight attorney generals in June including New Jersey and Montana which are part of this effort. (New York's attorney general was not a signatory to the earlier letter.)

The attorney generals contend that "the level of control FedEx Ground exercises over its drivers merits, under New York, Montana and New Jersey state law, employee status and the protections inherent in that status. FedEx Ground strictly controls all aspects of the work of drivers doing pick-up and delivery. Hours are prescribed by FedEx Ground with drivers having almost no discretion as to the hours they work. Workers’ performance of their tasks - from the loading of their trucks to their hand-off to customers - is directed and supervised by FedEx Ground. Drivers’ uniforms are mandated by FedEx Ground, even down to the colors of drivers’ socks, and drivers’ opportunities to engage in non-FedEx Ground related work are also almost entirely constrained by FedEx Ground rules. Drivers are only allowed to use their own trucks for non-FedEx Ground purposes if the trucks are used outside of FedEx Ground working hours. Additionally, the work of FedEx Ground drivers is at the very core of FedEx Ground’s business activities; drivers are completely integrated into the overall business functions of the company."

The above quote comes from the letter that the appropriate state offices for enforcing labor law violations sent to FedEx Ground.

Not surprising, the Teamsters applauded the actions of the three state law enforcement officials. The Teamsters have long been active in efforts to force FedEx Ground to end its use of contractors for delivery. They have a website promoting changes in the legal framework within which FedEx works at its Express and Ground divisions with a goal of making it easier to organize everyone that works for FedEx or its contractors.

The actions of the the attorney generals are likely to be opposed by the Express Carrier Association and the Messenger Courier Association of America. Both of these organizations represent local and regional parcel firms that heavily use the contractor model in their delivery services. Members of these associations could become collateral damage in the conflict between the attorney generals, the Teamsters and FedEx Ground.

FedEx Ground has had mixed success in defending its contractor model. It settled a suit in California that required it to switch from single-driver contractors to multiple driver contractors. It has received a number of unfavorable employment law rulings at the state level. NLRB has issued unfavorable rulings that were overturned in court. FedEx Ground successfully defended IRS suits.

Given the politics of the issue, FedEx Ground will likely face some legal action in New York, New Jersey, and Montana even with a vigorous defense in the next week. Given the pace at which these and similar cases proceed, industry stakeholders can expect that the issue will continue to garner headlines for many years to come.

The labor issues will not affect FedEx Ground service as the delivery personnel themselves are rarely parties to the disputes between labor law officials and FedEx Ground. Shippers will want to stay informed about the process of the latest challenge to FedEx Ground's contracting model as it could affect long run competitive structure of the parcel delivery industry.

Rethinking the Parcel Market

2009-10-21T06:25:00.002-04:00

The parcel market is at the cusp of change. Long established distribution patterns are changing as e-comerce competes more aggressively against brick-and-mortar retailers. The latest example is provided by Amazon which just introduced same-day delivery in in seven cities - New York, Philadelphia, Boston, Washington, Baltimore, Las Vegas and Seattle. This will soon expand to Chicago, Indianapolis and Phoenix.

Amazon's new "Local Express Delivery Option" allows order placed in the morning to be delivered that afternoon. In Seattle, orders as late as 1 pm can be delivered same day. The service is not cheap costing Amazon Prime members $3.99 for delivery and $6.99 for everyone else. As the service grows, stock analysts expect that Amazon's same-day delivery charges to drop as the delivery service gains density.

This same day delivery follows Amazon's entry into local delivery with its "Amazon Fresh" service in Seattle that offers delivery of everything from ice cream to digital cameras with same-day or next day delivery. This service is delivered in trucks painted with an Amazon logo. The late delivery offered in Seattle for Amazon's local express delivery option most likely reflects the capability of the already established delivery operation for Amazon Fresh.

Amazon is not alone in offering same day delivery. Barnes and Noble has offered same day in Manhattan for a number of years. That service is free for orders over $25.

The same-day service that Amazon and Barnes and Noble offer does not use the usual parcel delivery suspects, FedEx, UPS, and the Postal Service. Instead, They use national companies that offer local delivery and dedicated fleet services in numerous cities. For the launch of the Local Express Delivery Option, Amazon is using Dynamex and A-1 Express Delivery Service.

These two local delivery carriers are just two of the largest of set of local and regional parcel carriers that are shrinking the time between when an on-line order is made and the parcel is delivered. Amazon's service succeeds only because Amazon can cut the time from order to placement on a delivery truck to less than 4 hours and it has multiple warehouses close to major population centers.

Other on-line retailers offer service that is nearly as speedy. Staples offers next day delivery on most on-line orders and it recently purchased an office supply firm that specialized in next-day delivery to offices using a private fleet of delivery trucks. (In fact the firm that Staples bought had a private delivery fleet because it bought its primary supplier of delivery services.)

On-line retailers are looking for ways to cut the time from order to delivery and find that the FedEx, UPS, and the Postal Service all are too inflexible to allow for later pick-ups and early-morning deliveries that on-line customers want. They are turning to not only same day couriers but to regional parcel carriers that operate out of one or more distribution hubs to cover most of the United States. The rise of these regional carriers was note at the recent Document Forum, where their presence as exhibitors was given a special place in the exhibit hall. The largest of the regional carriers are:

Capital Express - covers the Midwest with a focus on delivery of medical and other time sensitive and high-security delivery customers
Dunham Express - covers all of Wisconsin and parts of surrounding states
Eastern Connection - covers Maine to Virginia with next day service
Edge Logistics - provides regional parcel delivery with nationwide coverage
Lone Star Overnight - covering Texas, Oklahoma and Louisiana
OnTrac - covers the West Coast plus Nevada and Arizona with next day and 2- day service and same day service throughout the plains and mountain west
Skyline Messenger Service - covers Georgia and the Carolinas
Spee-Dee Delivery Service - covers 7 states in the Midwest from Illinois through the Dakotas
Transtek - covers Colorado, western Nebraska and parts of Wyoming
US Cargo - covers 11 states from terminals in Ohio and Pennsylvania

Combined the regional and local delivery carriers are still small. At best their total revenue does not exceed $2 billion. However they are growing faster than any of the three largest carriers and their lower costs, focus on specific markets and willingness to accommodate special needs of specific customers, allow them to accommodate the new faster delivery services that Amazon and other shippers now demand.

Can the big three compete? Probably, but they have to add new services and become more flexible in how they operate. For example, the Postal Service could offer a new competitive next-day service if they offered a combined pick-up to delivery service under the "Postal Service brand" with the pick-up operations operated by contractors. The key is focusing on local delivery and a well run pick-up operation could handle a late pick-up with a-drop-off to a delivery office in the early morning of the day of delivery. Worksharing does not allow for as seamless a process as one provided under a single corporate identity.

Will they compete? Making the changes necessary to handle the new distribution needs requires flexibility from both management and labor at the three largest carriers. Standard operating procedures, sometimes contained in operating manuals, and sometimes in union agreements reflect the old paradigms of parcel distribution. Top management learned the delivery business in a world with different distribution patterns than what Amazon is now looking for. Justifying changes in what appears to have worked for many years is not easy. All three have shown that they will make the effort and the delivery products available today are far superior to what was available two-decades ago.

How soon will they compete? This is the great unanswered question. My hunch is that the regional and local carriers will grow their business and nibble away market share for many years before a serious move is made in this market by FedEx, the Postal Service or UPS. What may force the pace of entry into the quick-delivery market is the challenge of the recession that has made selling delivery services more difficult and finding volumes to fill existing distribution networks more challenging. Maybe by next year's parcel forum we will see what the big three plan to do pick-up the business that they have lost to carriers that can offer the quick-delivery services that they cannot.

Creating a Self Service Footprint

2009-10-14T07:17:00.005-04:00

This blog has noted earlier the efforts of Deutsche Post and Post Denmark to automate their acceptance process and solve the problem of delivering parcels to people who are not at home.

Hellmail has just reported that Post Denmark will install an additional 60 of these Døgnposten bringing the total number to 108. To put this in perspective, this Postal Service would need to install nearly 25,000 to have the same level of customer access as will exist in Denmark.

To see how the Danish version of this parcel locker works, I have attached this video.

The Courier, Express, and Postal Business and the Nobel Prize

2009-10-13T08:56:00.003-04:00

The research that Oliver Williams completed that brought him the Nobel Prize in Economics highlight key issues in the transformation of the courier, express and postal (CEP) business over the past two decades. In its press release, the Nobel Committee stated that "Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets."

So what does that mean in plain English? More importantly, why am I writing about this award in a blog dedicated to the courier, express, and postal industry?

Simply, operators in this business have a choice as they try to provide service across a broad geographic area or across the range of transportation and communications needs of their customers within a firm rather than through contractual arrangements between regional or modal partners. With few exceptions, when faced with the choice of providing service with a partner through a contract or within the constructs of a corporate structure, operators in this business have chosen corporate structures. The expansions of Deutsche Post, FedEx, TNT, and United Parcel Service all followed this path.

These firms succeeded by out-competing national postal operators that had to offer international service through bi-lateral or multi-national contractual arrangements, many of which were negotiated through the Universal Postal Union. The key problem of these contractual arrangements were that the operator selling the international service could not truly tell the buyer how long it would take to get delivery because they could not control the end-to-end service. Nor could the originating operator offer a seamless track-and-trace service until many years after the global corporate operators had made them a requirement of international express and parcel delivery.

The choice of a corporate model reflects a choice on a less global scale as well. Efforts by La Poste (France) and Royal Mail to provide service throughout Europe illustrate attempts to create a corporate structure within the Europe for parcel delivery to replace the contractual service that involved each national postal operators. The Austrian Post has purchased a number of firms focused in Eastern Europe with a goal of creating a stronger regional delivery competitor. The recent decision to merge the post offices in Sweden and Denmark also illustrates the choice of a corporate rather than a contract model to provide service within the CEP markets that the two independent posts now operate. Finally, Purolator Courier, a Canada Post subsidiary, and Canada Post itself, have established a strong corporate presence to handle cross-border traffic. Purolator is using its presence in the cross-border market to begin a domestic United States service.

Now there are limits to the use of a corporate model in the CEP industry. Firms in the industry use both a corporate and contractual or franchise model to provide retail services. The cost of maintaining a stand-alone retail infrastructure that has different business challenges than the rest of the CEP business has driven many firms to switch from the corporate to the contract model for this part of the business.

The last area that may fall under the contract model is the pick-up and delivery services themselves. Here the question is whether it is better to manage the delivery process with employees or contractors. The local courier business has always used a contractor model reflecting the uncertainty of the traditional on-demand unscheduled delivery service that they offered. FedEx Ground has used that model since its founding as Roadway Package Express. The recent court cases, IRS rulings, and NLRB rulings illustrate the challenge of maintaining the delivery function as a contractual arrangement and still maintaining proper control over the delivery portion of the service. However, both FedEx and local couriers believe that the cost advantages of managing delivery with contract drivers rather than employees is worth creating the proper legal structures to both ensure a reasonable level of control while still maintaining the driver's contractor status.

The question of corporate vs. contract models will likely come up as Congress looks at potential business models for the Postal Service. The work of Oliver Williams suggests that use of contract model could work for the retail side of the business where a franchiser that does not live up to its end of the bargain could be replaced. His work also suggests that delivery contractors could work in those areas where control over the appearance and schedule of the deliverer was not an issue. This is precisely what the Postal Service does with box-route contractors that serve many rural areas.

More importantly, his work explains why breaking the Postal Service into regional franchises or separating the delivery from processing and collection processes make little sense. Once the separation occurred the various parts would still have to contract with each other to provide end-to-end service. There is no competitive market for large-scale sortation. The growth of UPS’s and FedEx’s use of Parcel Select suggests that the collection and sortation companies would still have to contract with a company running the existing delivery network. Mr. Williams research suggests that there would be significant coordination issues and contractual gamesmanship between the various parts of what is now a unified Postal Service. The experiences of Citi Mail in Sweden and TNT, DX and others in UK illustrate the preference of operators to offer end to end service and the coordination issues and contractual gamesmanship that exists in developing interline agreements when these firms have to contract with either a national postal operator or another independent operator. [One of the drivers behind mergers and territorial expansion of railroads and less-than-truckload trucking firms in the US was the failure of a regulated interline process to resolve contractual and service issues when one firm passedfreigt to the other]

Finally, his work suggests the mail business will see more consolidation and not less in the future. The current process in which multiple firms handle the process a taking a document from concept to delivery with each handoff handled via a contracted or regulated process, could soon involve fewer firms as the advantage of integrating more of these processes within a single firm becomes clear to firms on either ends of these processes merge.

Interview with Deutsche Post CEO

2009-10-08T07:56:00.003-04:00

Forbes has just published an interview with Frank Appel, the CEO of Deutsche Post. While the entire short interview is worth reading, his response to one question is in line with the research that I have conducted on the future of the mail business.

With the imminent end of the mail monopoly in the EU by 2011, what are the new revenue sources you're looking at?

"The monopoly has already gone thanks to the Internet. There's a movement from physical delivery of mail to electronic delivery. People are writing less letters. As you know, we're currently in tough talks with the unions in our mail business. I'm very conscious of the fact that the success of the past doesn't help in the future."

In this answer CEO Appel makes three key points that reflect my recent research on the postal market.

The monopoly has already gone thanks to the Internet.

In this statement, CEO Appel tries to calm the fears of shareholders regarding the impact of eliminating the monopoly. In doing so, he suggests that Deutsche Post has bigger problems in the mail business than removing the monopoly.

The Internet clearly is a problem for national postal operators. Nearly all documents that could be mailed have electronic alternatives that can deliver the same information. Four barriers are holding back senders from using electronic delivery: 1) recipient preference for mail; 2) not knowing or trusting the recipient's e-mail address; 3) difficulty of targeting display, search, and e-mail advertising without violating privacy concerns of Internet users; and 4) lack of a coherent, return-focused document management strategy which includes a coherent approach to transition to a recipient-friendly, electronic content delivery.

The impact of electronic alternatives is different for the United States Postal Service than it is for most foreign postal operators as the United States Postal Service still handles a significant share of all remittances that are easily diverted to the Internet. Foreign postal operators never had as large a share of payments and therefore new payment technologies have less effect on them.

Where the impact of the Internet is similar is in the delivery of information contained in a range of documents including bills, statements, shareholder communications, member communications, acquisitions advertisements, and retention advertisements. Figuring out how to keep mail relevant for transmitting information contained in these documents for as long as possible is critical for national postal operators to manage their transition to a world in which mail is not the primary means of document delivery.

Compared to the problem of dealing with the challenge of the Internet, the removal of the monopoly looks less problematic. Competition from physical delivery competitors is easier to understand and deal with. In fact, it may hasten the changes necessary to keep mail relevant in in an Internet-centered communications world.

We're currently in tough talks with the unions in our mail business.

Current contracts with postal unions worldwide reflect the results of negotiations completed within different market environments that now exist. Previous agreements had to deal with the challenge of introducing new information technology, mail sortation and material handling technology that reduced the need for postal labor. Those national posts that successfully handled the technological transition were able to sign agreement with flexible labor rules that allowed them to operate fewer, larger facilities which operated with short operating windows for sorting originating mail and mail delivered within a sortation facility's delivery area.

Today's negotiations have to deal with challenges from outside the corporation, including competition from electronic and physical delivery. As such, nearly all of the agreements will have to deal with the transition to a smaller, and even more-flexible workforce than current agreements now allow. The labor strife in Belgium, France, Great Britain, and the Netherlands all illustrate that negotiations will not be easy. Finding a way for the national operator's management and postal union leadership to prepare employs for change will be key to minimizing labor conflicts as the postal workplace changes.

Success of the past doesn't help in the future.

This is the clearest statement that nothing is sacrosanct for a postal operator. Every idea for streamlining processes to reduce costs and improve service or developing new products have to be considered. For example, as mail becomes increasingly tied to advertising, national postal operators have to find a way to provide day-certain, low-priced delivery as an advertising campaign is most effective if physical mail arrives on the same day as the e-mail. Without day-certain delivery, advertisers send multiple e-mails to match the actual physical delivery, increasing the cost and reducing the effectiveness of the advertising campaign.

The Myth of Independence

2009-10-06T07:47:00.004-04:00

Since its inception, the Postal Service and its supporters have touted its existence as a self supporting entity. In practice, self-supporting has not meant independence.

The lack of independence reflects the Postal Service’s ties to the federal budget. Since the 1980’s Congress and the President have manipulated both the budget process, measurement of Postal Service liabilities for retiree benefits, and payment schedules for retiree benefits as means to reduce the deficit. Currently two issues have the biggest financial impact: 1) requiring the Postal Service to pay for retirement benefits of its employees that were accrued during military service; and 2) requiring the Postal Service to pay fund retiree health benefit at a rate that is faster than is required by private sector GAAP. In addition, Congress has used legislation to direct management regarding the shape of its operating network, its ability to adjust pay and benefits, and the quality of service offered.

All of these actions are well documented in a recent report of the USPS Office of Inspector General entitled, “Federal Budget Treatment of the Postal Service.” The report has a major failing for use in the upcoming postal policy debate. It does not quantify the impact of each of the budgetary and legislative actions on the Postal Service’s finances. The USPS OIG would serve the postal community well if it would provide a second report quantifying the impact of each of the Congressional and Executive actions that it documents.

The budgetary impact is most pernicious because Congress has caused the Postal Service to charge its customers higher rates, and hold investment spending and cash reserves below prudent levels. In essence, the actions of Congress and prior administrations have treated the Postal Service as a cash cow that could provide needed real or accounting contributions to the Federal Budget in order to meet specific deficit targets or as a condition for passing postal reform legislation.

Congress’s actions are nearly the equivalent of a board of directors leveraging a companies assets and raising dividends to drain corporate cash to the point that when more challenging economic times come the corporation is thrown into bankruptcy. In such situations, customers would generally be upset as service quality would drop and prices would rise to deal with the financial strain.

The Postal Service‘s connections to the federal budget is unique among national postal operators. Equally unique is the Postal Service’s dire financial position. Unfortunately, rectifying this problem and making the Postal Service truly “independent” will have an impact on the federal budget in the year that this occurs. Also there is no guarantee that if the Postal Service generates reasonable levels of cash reserves in the future, that Congress or the executive would attempt to raid those reserves to reduce the federal budget deficit.

Not being independent also means that the Postal Service cannot be self sufficient in a way that best serves the interests of its customers and employees. Self-sufficiency requires a specific level of return or operating margin in order for the Postal Service to have sufficient cash for investments, transition costs when restructuring operations, and covering losses during difficult economic times.For most of its existence, the Postal Service focused on a “budget-like” definition of self-supporting that required only that it break-even over-time on an accounting basis. As such it ran its finances within a three-year rate case cycle that on average generated no operating margin so that it had to use its borrowing capacity and limited cash reserves to deal with the losses that occurred within a cycle.

By not having a target return or operating margin, the Postal Service was financially ill prepared for necessary investments in automation, material handling, and backbone computing systems that were necessary to keep mail competitive. As such, these investments were spread out over an extended period of time that made getting the full benefits of modernization more difficult. The lack of investment capital also required the Postal Service to encourage mailers to make investments in automation equipment that the Postal Service could not.

The lack of independence has had two impacts on employees. First, by weakening the Postal Services ability to have necessary cash for investments, the Postal Service encouraged worksharing to sort mail that required equipment that it could not afford to buy. Second, pay may have been held down because slowing down the benefits of automation and material handling equipment resulted in lost “profits” that would likely have been shared by customers and employees.

With the Postal Service's current financial challenges likely to continue at least through fiscal year 2010, stakeholders are now beginning to discuss the possibility of new postal reform legislation. Making the Postal Service truly independent may provide stakeholders the only hope to ensure that the Postal Service has reasonable prospects for a stable future.

Parcel and Document Forums

2009-10-02T13:23:00.002-04:00

Monday through Wednesday of next week I will be attending the Parcel and Document Strategy Forums in Chicago. I will be reporting back on what the various speakers have to say and exhibitors are offering and sharing that with the readers of this blog.

These are the sessions that I plan to attend:

PC200 - Customer Communications Management: Document Output for Customer Communication Investments that Pay Off

E401 - Introduction: Defining Electronic Communications Management (ECM)

E402 - What is Driving ECM; uncovering business Drivers

MC503 - Easy and Results-Driven Web-Based Benchmarking

TP104 - Reducing Expenses by Using a Regional Carrier

OE305 - Today's Trends in Supply Chain Management

TM206 - Tour of UPS's Chicago Facility (This will be a guilty pleasure.)

P307 - Use What You Have: Capitalizing on the Print Network

M108 - State of the Industry: The Transactional Marketplace

E408 - Delivery and Presentation, Trends and Directions

Fortunately, this schedule only puts me in two places at once for 45 minutes. If anyone who reads this is interested in the programs, here they are:Parcel Forum, and Document Strategy Forum. I would be interested in your thoughts about the sessions that I picked and others that interest the readers of this blog.

Postal Retirement and Plant Consolidation

2009-10-02T09:18:00.002-04:00

Today, the Washington Post reported that 23,000 postal clerks and mailhandlers have either already accepted the retirement offer and left the Postal payroll or are likely to leave the Postal Service by the end of the year. This reduced the full time complement of clerks and mailhandlers by 11.5%. The 31,000 Part-time workers have an additional month to accept the incentive.

In all likelihood, the acceptance rate of clerks and mailhandlers met management expectations. In some plants, this will reduce or eliminate the need to place employees in "stand-by rooms." More importantly, it may reduce the workforce sufficiently to allow the current efforts to consolidate facilities to occur and still allow remaining employees to retain a job.

As noted in the Dead Tree Edition, the Postal Service announced the possible closing or downsizing of 15 additional postal facilities in the past two weeks and adding those already announced the Postal Service has 29 consolidation efforts under consideration. The active proposals are concentrated in three areas: Capital Metro (7), Eastern (6), and Western (7). The New York, Northeast, and Southeastern areas account for 11 of the 17 consolidations that the Postal Service announced as approved or implemented. Given that it takes six months from announcement to approval, all areas could announce additional consolidations in the next two months for approval and implementation before fiscal year 2010 starts and take advantage of the reduced head count from early retirements.

Given the current financial challenges, the Postal Service should seriously think about re-opening consolidation proposals in at least Quincy, IL, Hattiesburg, MS, Mansfield, OH, Zanesville, OH and Utica, NY. The studies of Hattiesburg, MS, Mansfield, OH, Zanesville, OH sugeests that by not going throgh with these consolidation efforts, the Postal Service incurs around $2 million extra expenses annually.

Unfortunately, even if the Postal Service doubles the number of active consolidation proposals, the total savings will only put a small dent in the operating deficit. Given the six months that it takes to get a proposal approved, the Postal Service could save half of he $100 million that the Dead Tree Edition estimates in FY 2010. Clearly, additional consolidations will come given the current financial hole.

Finding additional consolidation options will become increasingly difficult as long as 1) political interference colors management decision making; 2) new facilities remain off the table due to lack of investment capital, and 3) postal management will not propose changes that have a net impact of slowing service for 15% or less of the mail originating in a facility.

Designing a new postal network without these constraints is needed now. Mailers have indicated in testimony before the PRC that they would accept changes in service as the cost of a more efficient network. Postal Management should prepare such a plan, and the capital costs associated with it, or find that Congress imposes as conditions for modifying the retiree benefit payment schedule a network operating plan of its own.

Xerox and the Future of Mail

2009-09-28T22:47:00.004-04:00

Today, Xerox announced the purchase of Affiliated Computer Services (ACS) in a move that Xerox investors clearly found troubling causing the price to drop by 14%. This move should trouble postal stakeholders as well as it sends a strong message regarding what "the document company" thinks about the future of printed documents.

Xerox's business currently is focused on three business segments: 1) equipment for producing / scanning documents in an office; 2) equipment for producing documents in production settings; and 3) document management outsourcing. With the merger, Xerox's reliance on the future of paper documents drops from 100% to 67%. (See Xerox's presentation on the merger.) Steve Gerbel, founder and president of Chicago Capital Management called the merger a "transformative fix." Xerox's presentation to analysts, clearly expects that its future growth will come from the merged company's non-document based business and over time "the document company" will not be as dependent on paper documents.

Why does this matter to the Post? Now, the leading firm designing machines, processes, and software to handle paper documents will now help their customers move the document based, mail-delivered processes to electronic, Internet-delivered processes. Xerox's decision to seek a way to continue to serve existing customers as they abandon documents to the Internet suggests that senior management no longer sees growth prospects in print. The thinking behind Xerox's merger decision should provides postal stakeholders worldwide a wake-up call about the long term prospects of hard-copy delivery.

While some of the 14% decline in Xerox stock, reflects the dilution of current shareholder's holdings, I would argue that the size of the decline also reflects a major revaluation of the value of Xerox's document based business. If the financial market now thinks Xerox's document based business is worth less today than it was yesterday, then the financial market could soon realize that it needs to rethink the valuation of the printers, paper manufacturers, mailing equipment suppliers, and the document-delivery portion of the publicly traded Posts as well.

The End of the Monopoly

2009-09-24T08:20:00.003-04:00

The postal monopoly has ceased to exist. This is a bold statement given that no law has changed. However, the economic downturn has forced every sender of mail looks at their alternatives and many have found competitive alternatives from electronic and physical delivery options that are faster and more cost effective than the mail.

The shift in demand means that mail is now primarily a means to distribute advertising. Nearly all advertising has alternative modes of delivery and mail is used only if it provides a higher financial return than other advertising modes. But now two postal competitors, newspapers and United Parcel Service have found ways to chip away at the delivery monopoly that illustrates how little power the legal monopoly actually has.

The delivery of saturation advertising has always faced competition from local newspapers. While newspapers may find that their circulation, display and classified advertising advertising is declining, they have one bright spot in free standing inserts. Spending for free standing inserts grew by 4.6% in the first half of this year. At the same time spending on postage for delivery of saturation mail advertising (Enhanced Carrier Route) declined by 10%. Valassis and its competitors will prepare an advertiser's copy for delivery by mail or free standing insert depending on which mode the advertiser finds most cost effective. The shift in market share from mail to free standing inserts suggests that the Postal Service is losing market share and iits delivery prices are not competitive to newspaper delivery of the same copy. Further losses in this market may come as newspapers expand their delivery of "mini-papers" composed of 4 pages of newsprint surrounding coupons and other free standing inserts, most likely at prices below what it would cost Valassis to pay the Postal Service to deliver.

The competition from newspaper focuses on part of the hard-copy advertising market that has always fallen outside of the monopoly. The newspapers will try to skirt the monopoly slightly by targeting the "mini-paper" to homes that do not receive a newspaper. In this way they deliver two different items to specific addresses without having to put an address on any piece. Subscribers get the newspaper. Non-subscribers get the mini-paper.

Another assault on the monopoly on addressed advertising is coming from United Parcel Service which has just found another way around that restriction. Yesterday, United Parcel Service announced Direct to Door, a new product that delivers small boxes of advertising, at a price below the cost of direct mail. UPS offers the low price because it only delivers to addresses where it also delivers a parcel.

UPS's new product is attracting some of the Postal Service's best customers and more importantly customers that mail to some of the highest income and highest mail volume zip codes in the country. UPS's initial customers include Men's Warehouse, Finish Line, Williams Sonoma' s Pottery Barn and West Elm divisions, Sephora, and Zappos, an on-line shoe company owned by Amazon. As these customers use the higher prices regular standard mail products to reach their potential customers, UPS is competing against regular standard mail rates and not the lower enhanced carrier route rates.

UPS and advertisers are targeting recipients that buy over the Internet and more importantly likely buy higher priced products over the Internet. In this way, UPS goes after the key advantage that the Postal Service had over all other advertising media, the ability to target specific customers. UPS's effort along with targeted e-mail, Internet search and display advertising erode the value of the addressed advertising monopoly to the point where the value may be quite minimal.

So what services are left within an effective monopoly?

Most transaction mail no long is without competition. Few new bank, insurance, credit card, gym club, cell phone, or brokerage accounts have mail as the default option for paying or receiving bills and statements. Only health care bills, statements, and payments remain as nearly exclusive users of the mail and electronic records could eventually allow the health care industry to follow financial services and telecommunications into a paperless environment.

Mail delivered periodicals compete every day with in-store and Internet delivery of content. A subscriber has to actively want the hard copy now to receive the periodical. Many business and industry publications have illuminated hard-copy editions completely. For a periodical to continue using the mail, the mail must compete with alternative modes and increasingly have a customer willing to pay more to receive hard copy.

Non-profit mailers showed these past two years that even if their low-priced mail may not be price sensitive, it is highly sensitive to the economy. With tight budgets driven by lower levels of contributions, non-profits are looking at mail as a cost center and newsletters, solicitations, and other documents that used to be sent by mail are now sent electronically. For these organizations, mail at even non-profit rates do not provide sufficient value to justify the production and postage expense especially when e-mail, search engine advertising, social media can deliver the same newsletter or generate the same net-revenue. The mail that they still send must compete with the value that alternative media provide.

This leaves two parts of the mail stream where the Postal Service provides service with minimal concerns about competition: 1) correspondence, and in particular announcements, greeting cards, invitations, and holiday cards; and 2) transactions for those not connected to the web. This is a very small part of the Postal Service's $60 billion in revenue. Having a monopoly to protect these customers seems hardly worthwhile.

A Light at the end of the Tunnel

2009-09-17T09:23:00.002-04:00

There is now growing evidence that we have passed the bottom in two of the Postal Service's key businesses, delivering advertising and parcels.

Advertising

The evidence on advertising comes from recent forecasts on advertising spending and management comments of Postal Service Competitors. Here are some highlights. TNS Media Intelligence Reports released its measure of advertising spending for through the first six months of 2009. In that report it shows that all media spending was down by 14.3% not much better than the 15.9% decline in Standard Mail revenue. Mail appears to be doing substantially better than radio, local television, newspapers, magazines, and about even with outdoor advertising. The problem that mail and many its hardest hit competitors faced in the last year was that its best customers were those that cut advertising the most, automotive, financial, retailers, other than department, appliance and home furnishing stores, and builders, building materials, home furnishing stores, and real estate. Real estate advertising spending was down 50% or more than 3.5 times the rate of decline of advertising in general.

Now that GM and Chrysler are out of bankruptcy, there advertising is rebounding and the Postal Service may see additional business from these and other auto makers as they try to serve some of the pent-up demand. Real growth depends on improved business in the housing and financial markets that really depend on both improved credit markets and how fast customers can save. However, these industries are no longer seeing declines in business so their advertising by mail and other modes have most likely hit bottom as well. So it is reasonable to expect that postal revenue handling advertising will no longer decline at double-digit levels.

Real growth in advertising will really depend on the consumer and specifically the consumer's return to the housing market. Few expect that will occur until late next year.

Parcels

Two of three publicly traded parcel carriers, FedEx and Dynamex, reported quarterly earnings today. Both companies indicated that they believe that their business has seen the end of the recession driven decline in business. However, neither sees significant growth in the near term.

Both companies survived the decline in business by significant efforts to control costs. For example, Dynamex cut 1/3 of its regional management and eliminated one of its two administrative centers. These significant cuts allows both companies to minimize losses and are now starting show the impact with greater than expected profits and higher stock prices.

The FedEx conference call also provides some hope for the Postal Service's business of delivering parcels that FedEx collects from package shippers. FedEx ships drops at least 2.5 million parcels every Monday with the Postal Service and this business was FedEx's fastest growing domestic business.

FedEx targets the business to parcels under 7 pounds destined to households. Heavier parcels are handled by its own FedEx Home service. The growth has come from three sources, 1) DHL business that FedEx captured, 2) moving customer's light weight parcels into this service and away from FedEx Home, and 3) taking volume away from the Postal Service, with the biggest customer mentioned by FedEx as shifting their business from the Postal Service being Amazon.com.com.

FedEx's expected increase in rates of 3.9% in January (5.9% increase in rates and a 2% decline in fuel surcharge) also suggests that the Postal Service will be able to raise its parcel rates by more than inflation and still offer a strong value proposition. In order to keep its un-regulated rates competitive and profitable, mailers should expect that the Postal Service could raise its under 7 pound parcels by at least 4% and still keep rates in line with competitors. The price cap requirement that parcel rates remain nearly flat on average and FedEx price increases will likely result in higher rate increases on lighter weight parcels and lower rate increases on heavier parcels. This will likely put Postal rates more in line with a weight related curve that the private sector uses. The FedEx increases may also force the Postal Service to raise short-distance rates and lower long-distance rates to put its rate schedule more in line with the schedules used by its competitors,

Moving to Cleveland

2009-09-08T08:44:00.004-04:00

Recent news stories have highlighted some of the absurd results that current labor contract provisions and civil service rules create as the Postal Service deals with workforce management today.

The East Hampton Star reported the experience of two postal employees that were transferred from Manhattan to the far reaches of Long Island. The story was picked up by the New York Times and New York Post, which made it a national story. The commute that these employees face is not uncommon for businesses that have union agreements that guarantee jobs during a period of declining demand. Employees with guaranteed jobs at the Penn Central could be transferred from Delaware to Ohio if the jobs close to home disappeared. Similarly airline employees regularly are transferred from base to base when shrinking demand bumps an employee from a base closer to home.
The Federal Times provided a detailed account of the practice placing employees in "standby rooms" until they can be assigned. The story notes that 11,000 can be placed in this position at any time or about 4.5% of the clerks and mailhandlers the Postal Service employees. The article illustrates the absurdity of union rules that prevent the Postal Service from using this standby time to train employees to be more productive at what they now do, or for other jobs that may become available in the future.
The Akron Beacon Journal illustrated the challenge that the early retirement incentives will have for workforce planning in northern Ohio. Cleveland has 1,100 employees eligible for retirement incentives out of 1,700 working in the Cleveland processing plant. That's right. Sixty-five percent of the workers in Cleveland are eligible to retire. Another 550 are eligible in Akron and Canton. Similar figures likely exist throughout the Northeast and Midwest creating the possibility that the Postal Service could find itself in October needing employees in this region to fill vacancies created by early retirements.

The three stories combined raise the possibility of significant movement of employees once eligible employees take advantage of early retirement incentives. While some employees will see long commutes, like what happened in New York, others may be offered paid transfers to locations further away. As it is unlikely that Florida postal facilities will have retirement rates anywhere near what will be experienced in northern Ohio, the Postal Service may find it cheaper to pay to move an employee from Key West to Cleveland than to pay for an excess employee in Key West and a new employee in Cleveland. (Can you imagine making that move between November and January?)

Combined the articles raise two important issues as it relates to workforce planning.

Why aren't lay-offs used to reduce the workforce?
Why doesn't the Postal Service have more part-time jobs?

Why aren't lay-offs used to reduce the workforce? All of the articles note the roadblocks that the union agreements place on layoffs. Employees with six-years of employment have protections against layoffs outside of a more rigorous process. What these articles miss is the roadblocks that the civil-service RIF process place on rightsizing staff and the up-front costs that any workforce reduction causes.

Layoffs within the Postal Service must occur with the guidelines of civil service. This allows employees to bump employees with lower seniority, including seniority related to preferred classes of employees. The employees that are laid off are eligible for severance pay and unemployment benefits that could total far more than the early retirement incentives that the Postal Service is now offering. Finally, the civil service layoff of RIF process is time consuming and fraught with procedural land mines that can delay the reduction in staff or add costs to the process.

The early-retirement incentives that the Postal Service is now offering is a lower cost and more quickly implemented solution but not without its own challenges. The Cleveland example illustrates that the Postal Service will have challenges in some locations where potential retirements could create staffing challenges. The Postal Service has already noted the $450 million in cost for employee incentives. Additional costs will come from training new and existing employees and possible paid transfers to facilities that will be short staff after the retirements.

The Postal Service is not alone in using early retirement incentives as a preferred option for reducing the workforce, especially when the reduction has to be substantial. Similar incentives were offered to employees of GM, Chrysler and FedEx.

Why doesn't the Postal Service have more part-time jobs? One of the key highlights of the Federal Times article is a description of what is happening in Key West, FL. "Standby time, for now, is largely confined to mail processing facilities — though it is beginning to spread to retail post offices. The three post offices in Key West, Fla., employ 27 people. But under a schedule recently drafted by postal supervisors, 15 of them would spend at least part of their week on standby time." Here the issue is the labor agreement that limits the number of part-time clerk jobs. As noted in a previous post, the APWU contract limits part-time employees in a district to 2.5% of employees. While Key West may conduct some mail processing, most of the activity will involve window service with significant peak periods of customer demand. Most retail employers would use part-timers with regular schedules to deal with peak demand issues but the APWU contract does not allow for hiring a significant number of part-time retail clerks. Even the provisions for part-time/flexible did not work as the mail business needs part-time employees on regular schedules.

Layoff procedures and part-time jobs will likely be key issues negotiated in the next agreement with the APWU. Pressure from current employees give APWU leadership little incentive to back away from provisions in existing agreements on these subjects. Acceptance of changes by union leadership only if they are either imposed as part of an arbitrated contract agreement or if Congress demands that the parties negotiate changes as one of the conditions for relaxing retirement payment schedules and raising loan limits. The first possibility leaves leadership with clean hands. The second one will give them the opportunity of negotiating a seat at the table in deciding the future of the Postal Service and postal service jobs.

The Problem with Congress

2009-09-04T06:45:00.004-04:00

The primary debate that over the future of the Postal Service will be whether it is time to seriously consider privatization. Independent of the value of a mail delivery as a governmental or private sector service, the private sector option will not be viable as long as members of Congress from both parties see personal political value in interfering with Postal Service operations, prices, or service.

The value of interfering with postal management decisions come from the positive news stories in local newspapers and on TV. No member of Congress can pass up good press. Any interview or press statement supporting a local plant and its workers or retention of a local post office is good press. Good press relating to constituent service raises the Congressperson's visibility and positive ratings and may even endear him or her to voters of opposing political viewpoints.

The headlines relating to one postal plant illustrate the point.

Upton says postal facilities are here to stay

Congressman Fred Upton, R-St. Joseph, says a U.S. Postal Service processing plant in Oshtemo Township and downtown Kalamazoo's Arcadia post office will not be closed.

U.S. Rep. Fred Upton will tour the U.S. Postal Service processing plant in Oshtemo Township today in an effort to stop officials from studying the consolidation of the plant to Grand Rapids.

Congressman Fred Upton fights to keep Kalamazoo postal plant open

"Local postal facilities serve as a cornerstone to communities large and small, and provide hundreds of good-paying, stable jobs," said Upton, R-St. Joseph, in press release. "We owe it to our postmen and women who have faithfully served our community, many for their entire careers, to keep them employed within their own community."

Upton joins fight for postal jobs

Congressman Fred Upton has joined the fight to save postal jobs in Kalamazoo County.

Upton Sends Angry Snail Mail to Postamaster

OSHTEMO -- Congressman Fred Upton has sent an angry letter to the Postmaster General complaining about an unauthorized study that suggested that the Kalamazoo Postal Distribution center in Oshtemo should be moved to Grand Rapids.

Upton tries to stop postal-plant closing

KALAMAZOO -- U.S. Rep. Fred Upton will tour the U.S. Postal Service processing plant in Oshtemo Township today in an effort to stop officials from studying the consolidation of the plant to Grand Rapids.

``Local postal facilities serve as a cornerstone to communities large and small, and provide hundreds of good-paying, stable jobs,'' said Upton, R-St. Joseph, in press release. ``We owe it to our postmen and women who have faithfully served our community, many for their entire careers, to keep them employed within their own community.''

Rep. Upton discusses mail handling

Upon learning of an unauthorized study recommending the consolidation of the Kalamazoo Automated Mail Processing facility into Grand Rapids, Congressman Fred Upton (R-St. Joseph) immediately voiced his concerns directly to the Postmaster General, John Potter. Upton is concerned with the intent of the non-sanctioned study and its recommendations that will have widespread implications upon postal efficiency in Kalamazoo as well as impact many postal families within the community. Upton has heard from dozens of local postal workers who may be faced with the decision to either move their families or commute over a hundred miles a day just to keep their current job. Upton is also concerned with rumors swirling over the closings of regional post offices including the Arcadia Creek Station post office in downtown Kalamazoo.

Congressman Upton vows to fight to keep postal jobs in Oshtemo

OSHTEMO, Mich. (NEWSCHANNEL 3) – The prospect of hundreds of jobs being lost in his district didn't sit well with Congressman Fred Upton.

That was the prospect facing Upton and many others when they learned that a postal processing center in Oshtemo could be shut down and then consolidated to another facility in Grand Rapids.

Rep. Upton said he'd fight for the jobs, but his fight has led him to make some pretty dramatic declarations.

Managing the Workforce

2009-09-03T06:56:00.004-04:00

This blog's previous post, "Management Approaches to Restructuring,' generated substantial number of comments regarding my use of the word "layoff" to describe Canada Post's planned 15% reduction in positions in Winnipeg. The original memo used the word "cut" to describe Canada Post's planned reduction in full time position and that word follows CUPW's labor agreement that guarantees jobs to full time employees.

A subsequent investigation into the labor agreements and data available from CUPW and the Postal Service provide some insight as to how Canada Post will achieve the reduction without layoffs.

Unionization and Labor Negotiation

Employees that work in processing plants and retail post office are unionized in Canada and the United States. All of these employees at Canada Post are represented by the Canadian Union of Postal Workers (CUPW). At the United States Postal Service, two unions represent workers performing similar jobs, the American Postal Workers Union (APWU) and the National Mailhandlers Union (NMHU).

Labor law in Canada allows postal employees to strike and CUPW employees have struck on numerous occasions prior to reaching contract agreements with Canada Post. Postal labor law in the U.S. does not have the right to strike and agreements are signed either following negotiation or the decision of an arbitrator.

Contact Provision and Management Flexibility

The following table provides a brief summary in contract provisions as they relate to the control over workforce size and composition. (Readers with greater knowledge of all three agreements are encouraged to make comments as to how the table ca be improved.) While the description below is limited, management at both Canada Post and the Postal Services both have restrictions on their control over hiring and firing employees. There is one important difference that is not included in the labor agreements. Canada Post employees do not have civil service protections that Postal service employees do.

	Postal Service – APWU & NMHU Agreements	Canada Post – CUPW Agreement
Guaranteed Jobs	Regular full and part time employees guaranteed job after 6 years	Regular full and part time employees guaranteed job after 5 years
Transfers	Involuntary transfers allowed within 100 miles of origin facility; longer transfers possible with compensation	Involuntary transfers allowed within 25 miles of origin facility
Full Time / Part Time / Casual/Transitional Employees ratio	APWU: Part time employees limited to 2.5% of employees within a district; casual employees limited to 6% of employees with a district; different limits apply to drivers NMHU: Full time employees must be 90% or more; casual employees limited to 12.5% of employees within a facility	Full time regular employee workhours must exceed 80% of total workhours after accounting for absences.

Employee Complement

Working within the confines of their labor agreements, the Postal Service and Canada Post use a different mix of full-time, part-time, and casual/temporary/transitional employees . The following table shows the proportion of straight time hours of clerks and mailhandlers in Fiscal year 2008 for both posts. The slight differences in the two contracts result in Canada Post having slightly less of its workhours paid to full time regular employees, more hours paid to part-time employees, and less hours paid to temporary employees.

	Canada Post	USPS
Straight Time Regular	76.9%	80.2%
Part-time Regular	16.5%	12.4%
Casual/Transitional/Temporary Regular	6.7%	7.4%
Total Regular Hours	100.0%	100.0%

The overall difference gives Canada Post slightly more flexibility in staffing its processing plants than the Postal Service. With a higher proportion of part-time employees, Canada Post may be able to deal with the changing nature of work with the decline of single-piece mail.

The difference in the mix of employees is most important in trying to cut staff without layoffs. Canada Post's full time employees tend to be both older and have many years with the corporation. Part-time workers are younger and have a significantly higher normal turnover rate than full time employees. Temporary employees have no employment guarantees.

Canada Post's could reduce its workhours by reducing temporary employees and allowing the turnover in part-time employees to provide work for full-time employees until normal attrition patterns within the Winnipeg plant and postal locations within 25 miles open up enough positions to bring the full time complement down 15%. Clearly this will take a couple of years but it is doable if the full time attrition rate is 4-5%. Canada Post's plans really depend on employees finding better opportunities elsewhere.

The employment guarantee and part-time maximum provisions of labor contracts of Canada Post and the United States Postal Service were both signed before the decline in single-piece mail changed the nature of managing workhours in mail processing plants. In all likelihood, reworking these long-standing provisions will come up in future labor negotiations as Canada Post and the United States Postal Service adjust its labor contracts to new market realities. It will be interesting to see how the differences in the negotiating processes in Canada and the United States result in changes in these provisions.

Management Approaches to Restructuring

2009-08-31T07:50:00.007-04:00

The Postal Service is in the midst of a major restructuring of the smallest of its operating networks, the one that handles sortation and transportation of bulk mail. The implementation of the new National Distribution Center network in the northeast both reduced costs and improved service quality. The positive results has caused the Postal Service to accelerate the program's completion.

The Postal Service could implement the restructuring with minimal if any loss of jobs by transferring employees to the larger network handling single-piece mail and mail drop shipped at processing plants. Clearly a similar restructuring of the entire processing network would give the Postal Service few if any opportunities to transfer employees. Without the ability to transfer employees, the Postal Service faces significant civil-service related procedural challenges, labor negotiation challenges, and substantial costs to reduce workforce levels before the savings can be acheived.

To see what would happen if the Postal Service had both the resources to handle the transition costs of creating a more efficient network and did not have to deal with civil service protection, one need only look to Canada Post which is in the midst of a $1.7 billion transformation plan that will introduce delivery point sequencing to all mail and consolidate letter carrier and parcel delivery routes. While delivery point sequencing is not new to the United States, how Canada Post is handling its implementation is different.

One of the first cities seeing the change is Winnipeg, Manitoba. Canada Post is building a new plant to house the new equipment that started construction last year.

As required by its contract with the Canadian Union of Postal Workers (CUPW), Canada Post informed the union that it plans cut 15% of Winnipeg employees including clerks, mailhandlers and letter carriers. As the Union's memo to employee implies, Canada Post under its labor agreements has the authority to lay off employees when demand for labor decreases. Furthermore, the letter implies that even more layoffs could occur in the more remote areas of Manitoba that the the plant serves.

Canada Post employees have not had civil service protection since at least the 1970's. The CUPW is at least as tough a negotiator as any union in the United States and has not been afraid to use a labor strike as a negotiating tactic. However, even while dealing with a tough-minded union, Canada Post has been able to negotiate an ability to rightsize its workforce as new technology is introduced, as long as proper notification is given to employees.

The approaches that Canada Post used to implement its introduction of delivery point sequencing reflects a labor complement management philosophy significantly different from the Postal Service employees. Canada Post determines its labor needs and then implements a plan to reduce its workforce quickly to the new level required. The Postal Service determines its workforce needs and then must find a way to reduce its workforce without layoffs through attrition and employee transfers. Both the Postal Service's approach of reducing the workforce through attrition and transfers and Canada Post's approach of outright layoffs of employees may eventually get the workforce down to the same optimal level. The Postal Service's approach is much slower to reap the gains from introducing new technology or a network restructuring.

The Canada Post reflects an active management style that a corporate structure, operating under standard Canadian corporate and employment law and union agreements that make sense for the business of Canada Post allow. Canada Post's management approach also reflects an understanding of all political parties that for Canada Post to survive and to serve the national interests of nationwide system of mail delivery it must operate in a manner like all other Canadian businesses without interference from local or national politicians.

The Postal Service approach reflects a more passive management style that has developed due to numerous influences. The first influence is the corporate structure, operating under a quasi-governmental business law and civil service employment law The second are the union agreements that only make sense for a business not experiencing technological or competitive changes. The third is a regulatory process that reviews any change in network infrastructure, introducing administrative costs through a public hearing process and increasing operating costs of restructuring by slowing down the process. The final influence on management style is Congress, who have on regular occasions legislated restrictions on the Postal Service's ability to restructure its business.

As this cursory examination of how Canada Post and the United States Postal Service dealt with a transformation issue illustrates, the business model and regulatory framework employed do make a difference. More detailed examination is warranted to fully explore how each of the differences in corporate law, employment law, labor agreements, regulatory oversight, and political interference between a postal operator and the businesses in the same country affect how well the operator deals with the stress of technological and market induced changes while still meeting universal service obligations. Without such a study, identifying the benefits of changing the business model and regulatory framework in the United States would be difficult.

Packstation vendor

2009-08-28T16:19:00.004-04:00

For those that are interested, the Packstation's vendor is a KEBA AG, a European company (either Austiran or German). From press releases on their website, they have sold at least 2,400 packstations to Deutsche Post and 60 to the Danish Post office. Sales to other postal operators is not indicated on their website.

Their brocure on the product provides a bit of history of its delvelopment and the product's features.