Permit #1 Mailers

Direct Mail Industry News

U.S. POSTAL SERVICE - The Service’s Strategy for Realigning Its Mail Processing Infrastructure Lacks Clarity, Criteria, and Accountability

What GAO Found
Several major changes have affected mail processing and distribution operations including marketplace changes, such as declines in First-Class Mail and increased competition; increased automation and mail processing by mailers; and shifts in population demographics. Effects of these changes include excess capacity in the mail processing and distribution infrastructure and variations in productivity among plants.

The Service is exploring ways to realign its infrastructure by closing annexes, consolidating operations, and employing tools to model its infrastructure needs, while at the same time attempting to increase efficiencies in its current operations by expanding automation, improving material handling operations, creating a comprehensive transportation network, and introducing standardization programs. Also, as the graph above illustrates, there is a large range in productivity among plants. Reducing this range is difficult due to the complexity of operations and differences in plant layout. In addition, the Service faces challenges in eliminating excess capacity, while maintaining service standards, due to workforce rules and resistance to plant closings.

Questions remain about how the Service intends to realign its processing and distribution infrastructure and workforce. The Service’s strategy for realigning has not been clear because the Service has outlined several seemingly different strategies over the past 3 years. None of these strategies include criteria and processes for eliminating excess capacity, which may prolong inefficiencies. Also, the strategy lacks sufficient transparency and accountability, excludes stakeholder input, and lacks performance measures for results.

April 8, 2004 Letter
The Honorable John M. McHugh
The Honorable Danny K. Davis
House of Representatives

The United States Postal Service (Service) has developed a highly complex infrastructure that includes about 450 plants that process and distribute an average of 660 million pieces of mail per day. To meet its universal service obligation, which requires it to provide mail delivery services to all people residing in the United States, the Service delivered mail to over 142 million addresses in fiscal year 2004. This represented an increase in addresses over fiscal year 2003 of 1.8 million. Mail processing costs amount to about $20 billion annually, while annual transportation costs are about $5 billion. The Service is subject to a mandate to break even that requires that postal rates and fees shall provide sufficient revenues so that the Service’s total estimated income and appropriations will equal as nearly as practicable its total estimated costs. For the first time in its history, the Service experienced declining First-Class Mail volumes for 3 years in a row.

This trend is expected to continue and raises specific concerns, since traditionally First-Class Mail provided high revenue-per-piece, which helps cover the Service’s institutional expenses.1 Another challenge is that compensation costs, which account for over 79 percent of the Service’s total costs, grew 3 percent from fiscal year 2003 to 2004 while the number of full-time employees decreased. This increase in compensation costs is due in part to healthcare benefits that increased 7 percent over the same period. With major changes that affect its mail processing operations, including declining mail volumes, increasing compensation costs, and a more competitive marketplace, the need for the Service to increase efficiency and reduce expenses has become more urgent.

In April 2002, in response to a GAO recommendation, the Service issued a Transformation Plan that outlined the steps it planned to take to address the challenges it faced. One key goal cited in the Transformation Plan was for the Service to become more efficient by standardizing operations and reducing excess capacity in its mail processing and distribution infrastructure. Mailer interest groups and a report by the Presidential Commission on the Postal Service also supported the goal of “rightsizing” the nation’s postal infrastructure; that is, establishing a least-cost network

1Institutional costs are costs that cannot be attributed to any specific class of mail. for the Postal Service and the entire mailing industry while improving overall efficiency and service.

To assist Congress in monitoring the Service’s progress in implementing the realignment of its mail processing and distribution infrastructure, this report addresses three key objectives. First, it describes major business and demographic changes and the effect of these changes on the Service’s mail processing and distribution infrastructure. Second, it describes the actions the Service is taking to achieve a more efficient and flexible network in response to these changes, and the challenges associated with implementing these actions. Finally, it discusses the Service’s strategy for realigning its infrastructure.

To address these objectives, we interviewed mailing industry associations, postal officials at Service headquarters, and employee union representatives about their views of the major changes affecting mail processing and distribution operations and infrastructure, as well as the Service’s plans, strategy, and progress to realign its infrastructure. We also visited several Service mail processing plants to observe operations and interviewed plant managers in the Pacific, Southeastern, Eastern, and Capital Metro areas about their efforts to improve efficiency. We analyzed Service productivity data and documentation related to its productivity and efficiency improvement efforts, including plans and implementation schedules. We also reviewed Service documents related to its infrastructure realignment and discussed the direction and progress of its realignment efforts with the Service’s Chief Operating Officer, the area vice presidents, and other senior management officials involved in this effort.

We assessed the reliability of the Service’s data used in our assessment of productivity and efficiency and found it reasonable for our purposes. We conducted our review at Service headquarters and field locations between April 2004 and January 2005 in accordance with generally accepted government auditing standards. A more detailed discussion of our objectives, scope, and methodology is included in appendix I. We requested comments on a draft of this report from the Service and its comments are discussed later in this report and reproduced in appendix IV.

Results in Brief Several major changes, such as changes in the marketplace, the evolution of the Service’s processing infrastructure, increased automation and mail processing by mailers, and changes in demographics have affected the Service’s mail processing and distribution operations. The effects of these changes include productivity variations among plants and excess capacity in the mail processing and distribution infrastructure. For example:

• Changes in the marketplace, such as electronic substitution for First-Class Mail and increased competition, led to declines in mail volume and changes in mail mix. From fiscal year 2000 to 2004 total mail volume declined by about 1.8 billion pieces.

• The Service’s processing and distribution infrastructure has developed over time resulting in plants that differ markedly from one another and exhibit wide variations in productivity. Also, some plants have evolved to exclusively process certain types of mail, which has driven up the cost per piece for those types of mail.

• Mail processing operations transitioned from manual to automated, enabling plants to process mail in less time. At the same time, mailers have performed more mail sorting in exchange for discounts, requiring less processing once the mail reaches the plant.

• Shifts in demographics and transportation may mean that the Service’s processing plants are not ideally located. For example, U.S. household growth is greatest in the Western and Southern parts of the country, while the majority of mail processing plants are located in the East.

To achieve a more efficient and flexible infrastructure, the Service is exploring ways to realign its infrastructure by closing annexes, consolidating operations, and employing tools to model its infrastructure needs. At the same time, the Service is attempting to increase efficiencies in its current operations by expanding automation, improving material handling operations, creating a comprehensive transportation network, and introducing standardization programs. The Service has recently reported notable improvements in productivity and efficiency. For example, over the past 4 years, the Service has reduced workhours by more than 170 million, and reduced career staffing by over 80,000 employees.

Nevertheless, the Service faces challenges in reducing productivity variances among plants and eliminating excess capacity. For example, efforts to reduce productivity variances among plants are challenged by the complexity of operations and differences in plant layout. In addition, workforce rules related to moving employees among plants and resistance to plant closings make it difficult for the Service to reduce excess capacity.

Consequently, it is not clear that reducing variations among plants, removing excess capacity, or improving efficiency, can be achieved consistently throughout the current mail processing and distribution infrastructure.

The Service’s strategy for realigning its mail processing and distribution infrastructure has not been clear because the Service has outlined several seemingly different strategies over the past 3 years. While the Service has announced various plans and strategies, including a modeling effort and an attempt to get more uniformity in its infrastructure, it recently announced that it is pursuing an evolutionary strategy—that will respond to opportunities as they arise—and has provided little information about any of these efforts. This evolutionary strategy and the lack of detailed information about it raise many issues, including what the strategy is and whether it will enable the Service to meet the challenge of removing excess capacity in its infrastructure by closing unnecessary facilities. Specific issues related to the Service’s infrastructure realignment strategy include:

(1) the Service’s strategy does not include specific criteria and processes for eliminating excess capacity, including the removal of unnecessary facilities and (2) the Service’s strategy is not sufficiently transparent and accountable, excludes stakeholder input, and lacks performance measures for results of decisions. The Service’s limited communication makes it difficult for customers to work with the Service to achieve a least-cost network for the entire mailing industry, for Service employees to understand how they may be affected, for communities to understand how they will be affected, and for Members of Congress to explain to their constituents what the Service is planning to do.

To enhance the Service’s transparency of its decisions related to realigning its infrastructure, the Postmaster General should establish a set of criteria for evaluating realignment decisions and a mechanism for informing stakeholders as decisions are made. To enhance accountability for these decisions, the Postmaster General should develop a process for implementing these decisions that includes evaluating and measuring the results.

In commenting on a draft of this report the Service concurred with our description of its mail processing and distribution infrastructure and the major business and demographic changes that have affected the Service’s operations, but did not respond directly to our conclusions or
recommendations.

Background
The Service’s mail processing and distribution infrastructure, whereby mail is prepared for sorting on automation equipment by applying a barcode, sorted through various processing equipment, and transported between plants, consists of interdependent networks where operations in one part affect operations throughout. For example, if mail processing is delayed in one plant and misses the cut-off time for being loaded onto trucks for distribution, transportation will not be fully used because the trucks will leave without that mail. Subsequent processing will also be affected at plants that will receive this mail. In addition, the Service’s infrastructure is part of a larger economic sector commonly referred to as the mailing industry.

According to research conducted by the Mailing Industry Task Force, the Service, and the Direct Marketing Association, the core mailing industry is a $976 billion industry comprised of the Service, its competitors, direct and indirect mailers, and mail intensive business segments such as mail order, publishing, and printing houses.2 This industry accounts for 9 million domestic jobs in all 50 states and the District of Columbia. Mailers generally use one of the four major classes of mail:

• First-Class Mail consists mainly of bills, bill payments, correspondence, and advertising and also includes the expedited product, Priority Mail;

• Periodicals Mail encompasses mainly magazines and local newspapers;

• Standard Mail is primarily bulk advertising and direct mail solicitations; and

• Package Services Mail includes parcels, merchandise, catalogs, media, and books.

Tables 1 and 2 describe the major types of businesses that make up the mailing industry and how they generally interact with the Postal Service.

http://www.gao.gov/new.items/d05261.pdf

Blog

Electronics