Network Consolidation: New plan, same old story


May 20, 2012

On Monday the Postal Service will make the changes in service standards official by publishing the Final Rule in the Federal Register.  As we’ve been told since September, delivery of First-Class mail and periodicals will be slowing down — but not as soon as initially planned.  [UPDATE: The Final Rule was not published until later in the week.  An Advance Copy is here.]

Rather than implementing the changes all at once, the Postal Service will give customers an opportunity to prepare and adapt by implementing an “interim version” of the plan for the next eighteen months.  Here’s a quick look at the two phases of the plan:

Phase 1: Interim version
Phase 2: Final version
Implementation in July/Aug. 2012; resumes Jan. 2013
Implementation in Feb. 2014
Consolidates 140 facilities
Consolidates 89 additional facilities
Saves $1.2 billion
Saves nearly $1 billion more
Reduces workforce by 13,000
Reduces workforce by additional 15,000
Preserves overnight delivery for “turnaround” mail (80% of First-Class)
Discontinues overnight delivery for all First-Class mail, except for some business mail

This modification of the plan is apparently a response to concerns expressed by mailers and some members of Congress, and it may also anticipate what the Postal Regulatory Commission will have to say in its Advisory Opinion.  In fact, one of the experts brought in by the Commission provided testimony that described how the Postal Service could realize significant savings by consolidating a large number of plants — though not as many as proposed — while still maintaining overnight delivery for a large portion of the mail.  That’s basically what the Postal Service’s new “interim" phase 1 will do.

 

The evolution of the plan

When it first announced its plan and published an Advance Notice in the Federal Register last September, the Postal Service explained that while 40% of First-Class mail is currently delivered overnight, under the new system, virtually all of that mail would go to two-day delivery.  In addition, about half the mail being delivered in two days would shift to three days.  The Postal Service said that relaxing the service standards in this way would allow it to reduce its processing network from 500 locations to fewer than 200, and thereby save a considerable amount of money.

After receiving comments on the Advance Notice, the Postal Service made some revisions in the plan, and in December it published a Proposal in the Federal Register.  The Proposal stated that the plan would “drastically” reduce the amount of First-Class Mail that qualifies for an overnight service standard.  The only mail that would be accorded overnight delivery was “intra-SCF Presort First-Class Mail that is entered at the SCF prior to the CET.” 

That refers to mail that is brought to a Sectional Center Facility (SCF) by a pre-sort company and that’s to be delivered within the area served by that facility. Sometimes referred to as “turnaround mail,” this is mail that originates from and destinates to the 3-digit ZIPs served by the plant.  It’s essentially local mail that doesn’t need to be transported to another facility before it heads out to your local post office.  In addition, to qualify for overnight delivery, the mail would need to arrive at the facility by a particular time, 8 a.m. — further limiting the opportunities for qualifying for overnight delivery.

Obviously, most retail customers would not be able to meet these criteria, so any of their mail previously delivered overnight would be delivered in two days.  That’s why the plan is sure to drive away business.  How much, though, is an open question.

In December’s Proposal, the Postal Service acknowledged that some people replied to the Advance Notice with concerns that the changes would “exacerbate volume declines.”  The Postal Service said it responded by conducting market research to determine how retail and commercial customers would react to the proposal.  The research showed that changing service standards would cause a 1.9% decline in First-Class mail volumes, which the Postal Service described as “unfortunate” but “acceptable.” 

Actually, by the time it published its Advance Notice in September, the Postal Service had already commissioned market research on potential revenue losses.  But when the results came in, the Postal Service didn’t like what it saw.  The research showed that degrading service standards could cause First-Class mail volumes to decline by 9.1%, and the revenue losses would just about wipe out the savings in operating costs.  (The numbers on the two rounds of market research are here.)

The Proposal stated that the overall cost savings from the plan would be $2.6 billion.  Ignoring the first round of market research, the Postal Service said the research showed that the proposal would lead to an annual loss of $1.3 billion in revenue, which translates to $0.5 billion in lost contribution, for a net savings of $2.1 billion.  Using the first round of research would have shown a net savings of only $600 million.

 

The Final Rule

The Final Rule that will be published in the Federal Register on Monday will make some significant changes to the Proposal.  The Postal Service will establish an “interim version” of the new rules that will be in effect from July 1, 2012, through January 31, 2014.  Then, on February 1, 2014, the “final version” of the plan would go into effect — though it’s possible, says a USPS Industry Alert, that the Postal Service will “revisit” that decision “should subsequent events or changed circumstances so warrant.”

The final version of the plan that will begin in 2014 will be essentially what was proposed in December.  The only mail that will qualify for overnight delivery is intra-SCF (turnaround) mail that’s presented to the processing facility by 8 a.m., pre-sorted and containerized. 

The interim version, however, is significantly different.  For the next eighteen months, the Postal Service will continue overnight delivery of all intra-SCF turnaround mail.  That means about 80% of First-Class mail will continue to be delivered overnight, and the big change won’t take place until 2014.

The Postal Service’s Fact Sheet on the plan says that the first phase can achieve $1.2 billion dollars in annual savings by February 2013, and the second phase will achieve nearly another billion dollars in savings savings by early 2014, for a total savings of $2.1 billion. 

According to the new plan, 48 facilities will be consolidated during July and August of this year.  Consolidations will be suspended from September through the election and holidays, and then resume again in 2013, when another 92 facilities will be consolidated.  Phase 2, with 89 more consolidations, would begin in 2014.

 

Questions about the new plan

The PRC is past halfway in its process for an Advisory Opinion on the Network Rationalization plan, and it just finished having the Postal Service witnesses provide revised testimony reflecting the fact that fewer plants were approved for consolidation than originally proposed.  Now that the Postal Service has revised the plan yet again, new questions will need to be asked and more revised testimony may be necessary.  Here are some areas that may be explored.  [UPDATE: On May 24, the PRC requested additional information about the plan and posed a number of questions, many of which are anticipated in the following discussion; the PRC request is here.]

 

How much will the plan save now?

When the plan was first announced in September, the Postal Service said it would save $3 billion; the USPS website still uses that number.  (The Five-Year business plan, by the way, says operational initiatives in “Network: Sortation & Transportation” will save $4.1 billion, without providing any details.) 

In December, the Postal Service published the Proposal to change service standards in the Federal Register and submitted the Request for an Advisory Opinion on Network Rationalization.  The total savings at that point were down to $2.1 billion. 

After 35 of the AMP studies were disapproved and the total number going forward was reduced to 223, the savings estimate needed to be adjusted, and just a couple of weeks ago, the Postal Service submitted revised testimony to the PRC.  The new estimate: $1.6 billion.  That represents $2.1 billion in cost savings, minus $0.5 billion in lost revenue.

This week the Postal Service issued a press release about the newest version of the plan.  It says, “When fully implemented in late 2014, the Postal Service expects its network consolidations to generate approximately $2.1 billion in annual cost reductions.”

That figure of $2.1 billion is a problem.  Is the Postal Service ignoring its own revised testimony to the PRC and reverting to its earlier estimate of $2.1 billion for all 260 facilities?  Or has the Postal Service neglected to subtract the half billion in lost revenue?    Perhaps that’s why the press release says “annual cost reductions” rather than net savings. 

In any case, the Postal Service should provide a revised cost-savings analysis that shows how each phase of the plan will produce the savings it claims, along with how the savings would be impacted by lost revenue.

 

Where are the savings coming from?

One of the issues that keeps coming up as the PRC works on its Advisory Opinion is how the Postal Service can expect to save a couple of billion dollars when the AMP (Area Mail Processing) studies done on individual facilities suggest the savings would be about half that (as discussed in this blog post).

Here’s a table that shows the total cost savings from 184 AMP studies, separated according to the two phases of the revised plan.  Since about fifty of the facilities didn’t require an AMP studies before consolidation, the table figures the average per facility and then extrapolates to get a total for the entire group.  (For the source of these summaries, see this spreadsheet in Google docs.)

Revised Network Rationalization: Savings Based on AMP Studies
Savings Category
Phase 1
Phase 2
Total
Number of facilities
140
89
229
Number of AMPs available
95
86
181
Mail Processing Craft Workhour Savings
$201,882,985
$243,846,886
$445,729,871
Non-MP Craft/EAS + Shared LDCs      Workhour Savings (less Maint/Trans)
$13,390,383
$20,546,674
$33,937,057
PCES/EAS Supervisory Workhour Savings
$46,402,734
$72,155,656
$118,558,390
Transportation Savings
$30,349,428
$24,207,932
$54,557,360
Maintenance Savings
$115,279,073
$169,741,855
$285,020,928
Space Savings
-$65,800
-$1,485,518
-$1,551,318
Total Annual Savings
$406,023,250
$539,231,948
$945,255,198
Total One-Time Costs
$72,026,469
$107,081,642
$179,108,111
Total First Year Savings
$334,996,780
$432,150,306
$767,147,086
Average First-Year
Savings per facility
$7,216,153
$5,025,004
$4,238,382
First-Year savings
for all facilities
$494,101,631
$447,225,317
$970,589,407

The table shows where about one billion in savings will come from.  Where’s the other billion coming from?  The Postal Service claims that the AMP studies don’t capture all the savings, but it’s hard to imagine that they are off by half.  The Postal Service has yet to provide an adequate explanation for the huge discrepancy.

 

Where are the eliminated positions coming from? 

The Postal Service says the plan will save $2.1 billion and eliminate 28,000 jobs.  As the following table shows, however, the AMP studies only give us an idea of where 15,000 jobs may be cut. 

Revised Network Rationalization: Positions Lost Based on AMP Studies
Positions Lost
Phase 1
Phase 2
Totals
Craft Position Loss
5,041
6,702
11,743
PCES/EAS Position Loss
108
314
422
Total Position Loss
5,149
7,016
12,165
Average Positions per facility
54
82
67
Total Positions lost for all facilities
7,588
7,261
14,849

That leaves 13,000 positions unaccounted for.   Either the description of the plan is seriously overestimating the number of positions that the consolidations will eliminate, or the AMP studies seriously underestimated the cuts.  If the latter is the case, it means the Postal Service misrepresented how many people will be losing their jobs when it gave public presentations and prepared its AMP study reports.

It’s also not clear how the cost savings for the two phases correspond to the number of lost positions.  Phase 1 will save $1.2 billion, with 13,000 jobs cut.  Phase 2 will save nearly $1 billion, with 15,000 jobs cut.  How will phase 1 save more but cut fewer jobs?

 

Why not just stop with phase 1?

One of the main issues with the Network Rationalization plan has been how much business will be driven away by the reduction in service standards.  If the Postal Service simply stopped with the “interim plan” and did not proceed to phase 2, it might be able to significantly reduce those losses, which could make a smaller number of consolidations a more sound financial decision.

The market research relied upon by the Postal Service showed a revenue loss of $1.3 billion, with a contribution loss of $0.5 billion, as a result of the reduction in service standards.  The Postal Service has presumably not done market research on how customers would react if service standards were maintained for turnaround mail and changed only for Inter-SCF mail (i.e., mail that needs to go from one processing facility to another).  Since that would maintain current standards for 80% of First-Class mail, the impact on customers would be significantly mitigated.  Perhaps that $500 million loss would just be $100 million. 

If, as the Postal Service claims, phase 1 will save $1.2 billion in operating costs, the net savings would be $1.1 billion.  That’s not quite as much as the $1.6 billion the entire plan would save, but it would preserve 15,000 jobs, and it would be much safer, considering that permanently reducing service standards could have significantly greater impacts on revenues than the Postal Service wants to acknowledge.

 

Why not stop now, before doing more damage?

While implementing an “interim version” may give mailers more time to adapt, it’s not likely to mitigate the problem of lost revenues once the Postal Service moves to phase 2.  Mailers can see where things are headed, and they are going to take their business elsewhere.

In fact, it’s very likely that by postponing full implementation of the plan and delaying the corresponding cost savings, the Postal Service will find itself suffering the revenue losses before the cost savings can be realized. 

That's probably already happening.  For the past two years, the Postal Service has done nothing but cry about falling revenues and rising deficits, and it’s proposed one plan after another to cut costs — the Stations and Branches initiative to close four thousand retail facilities, the plan to eliminate Saturday delivery, the Retail Access Optimization Initiative to shutter 3,650 post offices, the Network Rationalization plan to consolidate 250 processing facilities, and now the POStPlan to reduce hours at 13,000 small post offices.

Yet what have these plans accomplished?  The Postal Service closed about 140 stations and branches, as well as about 450 post offices not included in the RAOI.  And that’s about it.

The Postal Service has engaged in many other cost-saving efforts, but they have not attracted headlines, and they probably have not had a big impact on the behavior of mailers.   It has significantly reduced the workforce, but mostly by attrition, not with a big plan.  It has consolidated nearly 200 plants, but on a case-by-case basis, without a lot of fanfare and without requiring a national change in service standards.  It has has saved millions by replacing postmasters with Postmaster Reliefs, without disrupting service in a serious way.

The big plans, however, are causing a lot of damage.  Businesses dislike nothing more than uncertainty, and by going from one plan to another, and then revising each plan on the fly, the Postal Service has created plenty of uncertainty.  All the negative statements about how much money it is losing and the calamity that will result if its plans are not approved don’t help matters either.

The big plans have brought in no savings so far, but they have undoubtedly driven away customers.  The Postal Service complains endlessly about the diversion of business to the Internet, and it sometimes acknowledges that the bad economy has been a problem too.  But what about the self-inflicted damage the Postal Service has already done?  How much business has it already lost just with its constant talk of crisis and cost cutting?  Now that would be an interesting question for a market research study.

(Image credits: USPS materials on the new plan: press kit, media webinar)

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