Modern Times at the Postal Service: Network Rationalization gives more work to idle machines

March 27, 2012

Last Tuesday, David Williams, USPS VP of Network Operations and the man running the Network Rationalization plan, was cross-examined before the Postal Regulatory Commission, which is working on its Advisory Opinion about the mail-processing consolidations and the change in service standards they depend on.  Williams explained “the whole concept” behind the plan like this:

“If you go into anyone of our plants today at this hour, we’ve got about 6,000 delivery bar code sorters.  The vast majority of those machines are sitting on the workroom floor and they’re not doing anything.  They’re just sitting there.  And those machines were purchased to process delivery point sequencing volume, and that operation typically starts at say 11:30 at night and goes to 6 or 7 o’clock in the morning, and it’s that idle time in terms of mail processing equipment for delivery point sequencing that we need to address. 

“Those machines take up a lot of square feet, those machines are sitting idle, and the concept of this network change is to get a full operating use of that equipment so instead of a five-to-six-hour operating window on about 6,000 machines we want to get to a 20-to-16 hour operating window….  It’s that lengthening of the operating window of that equipment which drives a significant reduction in the number of pieces of equipment that we need and therefore the number of square feet that we need, which allows us to reduce the fixed overhead that we have in our network.” (PRC webcast at 1:18:00; written transcript, p. 246)

From Williams’ point of view, then, the Postal Service has invested heavily in machines that are not operating enough hours per day.   Relaxing service standards will enable the Postal Service to make better use of the machines and the facilities that house them, and thereby reduce fixed operating costs.  It’s all about machines and square footage and fixed overhead.

In a few weeks, the Postal Service will begin implementing a plan that will cost 35,000 postal jobs and probably just as many non-postal jobs, displace tens of thousands of workers, cause long commutes, break up families, hurt the economies of over 200 communities, slow down the mail, and drive business away — all so that the Postal Service can give more work to idle machines.

The leaders of the Postal Service call this a “rationalization” plan.  They value the efficient use of machines over things like jobs, families, and community.  They think feeding a machine is more important than feeding a family.  


The incredible shrinking cost-saving numbers

Let's say that the Postal Service has a point.  Let’s say that the postal deficit is real (and not a manufactured crisis being caused by payments to the retiree health care fund), and let’s say mail volumes will continue to drop significantly over the coming years (even while the rest of the economy recovers from the recession and resumes growth).  Let’s say that automation in the long run is a good thing (even though tens of thousands of mail-processing jobs may be lost in the short run).   Let’s say that the Postal Service, if it’s to act like a business, should make the most efficient use of its operations (even if that means more work for machines and less work for people).

To justify this line of thinking, the Postal Service should be required to demonstrate that its Network Rationalization plan will in fact save money, and not just a little, but enough to make all the pain worthwhile.  

It's becoming increasingly clear, however, that the Postal Service cannot prove the consolidation plan will realize any significant amount of savings. 

When the Network Rationalization plan was first announced in September, the Postal Service said it would save $3 billion.  When the Postal Service presented its case to the Postal Regulatory Commission in December, they said it would save $2.1 billion ($2.6 billion in lower operating costs, minus $500 million in lost revenue).

Now that the AMP (Area Mail Processing) studies have been completed, we see that 223 of the original 252 facilities have been approved for consolidation.  Nine studies are still underway, but even if most of them are approved, about 10% of the plants will have been removed from the plan.  That presumably means the savings should also be reduced by 10%, so the $2.6 billion becomes $2.34 billion, minus the $500 million in lost revenue, for a net savings of $1.84 billion.

As we learned last week from the secret marketing survey, however, that calculation may seriously underestimate the revenue losses that Network Rationalization will cause.  In order to estimate how much business changing service standards and slowing down the mail would drive away, the Postal Service commissioned a market research study.   When the results came in, the Postal Service didn’t like the numbers, and it commissioned a second round of research to produce more "reliable" data.  (That research, by the way, cost nearly one million dollars.  The rest of the story is here.)

The USPS press release on the secret survey: They still can’t get their story straight

March 24, 2012

Yesterday, the Postal Service issued a press release responding to revelations about a market research survey it commissioned last summer but chose not to tell anyone about.  The press release contains several misleading statements that only serve to compound the Postal Service’s bad faith in keeping the survey secret. 

One wonders why they even bothered issuing a press release, rather than ignoring the story and hoping it went away.  But the Postal Service was probably getting inquiries from the media, and someone decided it would be best to refer reporters to a press release. 

The press release will probably raise more questions than it answers, as you can already see in the way Government Executive handled it.  In an article entitled "Postal Service steers attention away from 'flawed' revenue study," GE rehashes the press release but then quotes a staffer for Congressman Gerald Connolly saying that the real reason they abandoned the study was that "they didn't like the results because they would be very inconvenient for them."  


The two phases of the market research

The market research was conducted by Opinion Research Corporation (ORC) to determine how mailers would respond to the change in service standards on which the Network Rationalization plan is premised.   The survey showed that slowing down First-Class and periodical mail would cause First-Class to drop by over 10%, periodical mail by nearly 20%, total mail volumes by nearly 8%, and revenues by over $5 billion a year.  

When the folks in postal headquarters saw those results, they decided the survey instrument was “seriously flawed” and ordered a second phase of research, this time making sure the questionnaire and concept statement (the prompt used to initiate the questioning) were constructed in a way to get better, more “reliable” results. 

The results for the phase-2 survey were much more palatable, and this is the research that became part of the Postal Service’s testimony to the Postal Regulatory Commission (PRC) in December as part of the Request for an Advisory Opinion.  Below are the results of the two phases of the market research.

Net contribution
Total Single Piece FCM
Total Presort FCM
Total First-Class Mail
Total Standard Mail
Total Periodicals
Total Single Piece FCM
Total Presort FCM
Total First-Class Mail
Total Standard Mail
Total Periodicals
Source: Phase-1, released by PRC 3/22/12; Phase-2, Whiteman’s testimony before the PRC, p. 22.

The Postal Service presented two witnesses to provide testimony about the market research — Rebecca Elmore-Yalch, a VP at ORC, and Gregory Whiteman, Manager of Market Research at the Postal Service.  Their initial testimony was extensive, but neither mentioned the existence of an earlier phase of research that had been abandoned.   During the “discovery” part of the PRC’s Advisory Opinion process, several interrogatories were posed that could have provided an opportunity to mention the phase-1 research, but no one did. 

Eventually, the questions became so direct, it was impossible to avoid acknowledging the existence of the phase-1 research, and the Postal Service turned over some data to the PRC, but classified it as “non-public.”  It took some pressure from members of Congress, the postal worker unions, and perhaps others, but finally, on Thursday, the results of the research were made public.  The rest of the materials submitted to the PRC remains “non-public,” and one wonders if the other shoe is yet to drop.


The Postal Service issues a press release

Needless to say, yesterday’s press release doesn’t provide any of this background.  Instead, the press release begins as follows: “The Postal Service conducted market survey research related to potential service standard changes.  A questionnaire used in the fall of 2011 asked business customer respondents about a scenario that would never be implemented at the same time.”

The survey was actually conducted in late summer, during August, but that’s a minor error.  It simply reveals that the person who wrote the press release had very little knowledge about what actually happened.

Contrary to what the press release says, the phase-1 survey does not describe “a scenario that would never be implemented at the same time.”  Instead, the concept statement used to initiate the interviews notes that the Postal Service is experiencing an “unsustainable” budget deficit, and it then simply enumerates the changes being considered to address the problem: seeking legislative reform to change government requirements to pre-pay health and pension benefits, eliminating Saturday delivery, and closing small post offices.  The statement then outlines the revisions in service standards being proposed.  (The phase-1 survey is here; the concept statement is on page 11.)

The phase-1 concept statement says nothing about implementing these changes all at once, as part of some overall “scenario.”  It simply says the Postal Service is “exploring several changes.” 

The press release then says, “Specifically, the survey asked whether business customer respondents would lessen their use of the mail if the Postal Service immediately imposed price increases, service standard changes, altered delivery frequency, realigned its network of mail processing facilities and other actions.  Any such contemplated actions, if implemented, would be done so over a phased, five-year time horizon, providing adequate time for planning.”

The truth of the matter is that the survey questionnaire never once mentions anything about a rate increase — not in the concept statement or in the questions themselves.  The words “price” and “rate” and “increase” do not appear anywhere in the survey.

The survey questionnaire also says nothing about doing everything — or anything — “immediately.”  There’s nothing alarming like that in the concept statement. 

Secret market survey reveals USPS plans would cost over $5 billion in lost revenue

March 21, 2012

While hearings before the Postal Regulatory Commission (PRC) are usually pretty mundane events, something totally unexpected happened today.  The Postal Service revealed something it’s been hiding for months — the projected revenue losses its consolidation plan could cause. The numbers are something to behold.

The PRC was holding hearings for its Advisory Opinion about the Network Rationalization plan to consolidate over 200 mail processing plants and to reduce service standards in the process.  Gregory Whiteman, Manager of Market Research at the Postal Service, was answering questions about market research commissioned last summer to determine how much revenue might be lost if the Postal Service reduced service standards and slowed down First-Class mail.  Up until this moment, the Postal Service had been reluctant to say much about this research.  Instead, it has stuck to the testimony it presented to the PRC in December, which was based on a second round of research conducted in October.

The results of this first round of research will officially be released tomorrow morning, but at the hearing, Mr. Whiteman revealed that the research showed that First-Class mail volumes would drop a whopping 10.3%, and total mail volumes would drop by 7.7%.  That translates into $5.2 billion in gross revenue losses, and $1.9 billion in net contribution losses (the contribution loss figures in lower costs for lower volumes).  The breadkown for the market research numbers can be seen here.  (They also show a volume drop for periodicals of nearly 20%.)

Losses like that would wipe out nearly all of the $2.6 billion in cost savings the Network Rationalization plan hopes to achieve.  Given that the AMP studies suggest cost savings might be far less than $2.6 billion, the consolidation plan could easily end up losing more money than it saves.

These volume and revenue losses are significantly greater than the numbers provided in initial testimony for the PRC’s Advisory Opinion.  That testimony was based on the second round of research conducted by Opinion Research Corporation (ORC).  That research, which is a central part of the Postal Service's case for consolidation, said the service standard changes would cause a volume loss of 1.7%, a revenue loss of $1.3 billion, and a contribution loss of $500 million.

These new numbers provide circumstantial evidence that when the Postal Service saw the results of what we now know as the Phase-1 research back in late September or early October, it realized the numbers were devastating to their case for the consolidation plan.  It ordered the market research firm to stop the research before finalizing the numbers, and it began work on a new research survey, apparently designed to elicit better, less damaging results. 

"Because we said so": The unassailable logic of postal managers and their salaries

March 19, 2012


Last week Kathy Hochul, Representative of New York’s 24th district, where Buffalo stands to lose a mail processing plant employing 700 workers, made a modest proposal — legislation to limit the salaries of the Postmaster General and his executive officers to the level of Cabinet Secretaries.  Her goal was to make a statement: “The Postal Service cannot make the argument that they need to cuts costs and let go hard-working postal workers when their own management team continues to rake in bonuses and make more than the President’s Cabinet.”

The proposal drew an interesting response from Thurgood Marshall, Jr., Chairman of the USPS Board of Governors.  Mr. Marshall argued that the Postal Service needs to pay salaries higher than elsewhere in government in order to attract and retain talented individuals to operate the Service.  It’s the same argument used to justify the astronomically high compensation paid to corporate executives in the private sector.

There are many arguments to be made for and against the huge salaries that have become prevalent in corporate America.  When those arguments are applied to the Postal Service, however, they raise two essential questions: Is the Postal Service more a corporate entity than a government entity?  And is the rationale expressed by Mr. Marshall valid?

The second question seems the easier to answer.  Thirty-eight senior executives of the Postal Service make salaries in excess of those paid to Cabinet Secretaries.  Now Chief Operating Officer Megan Brennan may have an important position, but is it more important than that of Secretary of Defense Leon Panetta, who makes $26,000 less than Ms. Brennan?  (And that doesn’t even take into account the additional $135,000 in bonuses she received in 2011.)

Mr. Marshall says that the Postal Service must pay these salaries to attract and retain competent people.  The problem with that argument is that nearly all of the senior postal executives are postal lifers, people who have spent virtually their entire careers in the Postal Service.

Former Postmaster General Jack Potter rose from carrier to the highest office in the organization.  Our current PMG rose from the position of clerk.  Now I’ll grant that it takes talent and perseverance to progress to the heights of an organization like the Postal Service, and many of these people worked hard to acquire advanced degrees along the way.  But the simple fact is that most of the executives in the Postal Service progressed up through the ranks — and that is the limit of their experience.

When you go down to the next level of the managerial pyramid — district managers, senior plant managers, and so on — the insular nature of management becomes even more apparent.  Those who earn more than $150,000 a year are almost exclusively employees who have risen through the ranks of the organization.  Their experience is almost entirely self-referential, and their professional universe is actually a pretty small place.  

When the Postal Service has sought to bring in outside “talent,” it has often been a disaster.  One only need mention the name Robert Bernstock.  He’s the fellow they brought in from Campbell Soup in 2008 with the hope that he would use his private-sector experience to re-invigorate slumping mail volumes.   During his two years as the President of USPS Mailing and Shipping Services, volumes continued to slump, and Bernstock resigned — under investigation for awarding nearly $5.9 million in controversial no-bid contracts to his former business associates.  When Bernstock left the Postal Service to return to the private sector, Postmaster General Potter commented, “Bob's work will have long-lasting, positive impact on the Postal Service and its customers."

One of the reasons General Motors got into such financial trouble is that senior managers became too insular and incestuous, too thoroughly committed to the GM corporate vision.  They lost the capacity to understand the world around them, thus dooming the organization to failure.

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