Jul 232011

I just read this NYTimes article on overhauling the US Postal Service, which lost $8.5 billion in 2010 (-12.5% margin), with that rate poised to increase annually. The recommendations seemed to address several parts of what the Postal Service calls its Ten-Year Plan, especially in eliminating Saturday deliveries, and tapping into its retirement fund to plug the budget gap. However, in the Form 10K from the most recent year, it’s clear that the decrease in revenue is a structural problem, and taking stopgap measure that reduce delivery costs by a mere 10% or so will not scale with the decrease in mail traffic.

I took a deeper look, especially at the USPS’s Cost Segments and Components Report, their Form 10K, and their Annual Report, and came up with some of my own recommendations. Looking at the total costs broken down by segments, the largest segments are C/S 3 Clerks and Mailhandlers, with $15.4B, C/S 18 Administration and Area Operations with $13.3B, and C/S 5 City Delivery Carriers — Street Activity with $11.4B. However, all direct costs of delivery segments, city and rural, including transportation, vehicle maintenance, and office costs, are around $29.9B. No other cost segment exceeds $4B.

So, first, let’s look at some low-hanging fruit by comparing to the 2010 Annual Report of UPS. UPS’s operating expenses for 2010 had $26B for compensation and benefits. Total. Total administrative (non-COGS) costs are around $939M. Contrast that with the USPS, where the Administrative Support and Miscellaneous component–a single component within the C/S 5 segment, costs the USPS $887M. Something seriously inefficient is going on here. I have not worked at or done any real look inside the workings of the USPS, but I notice three things.

(1) The USPS is way behind in modernization as compared to the private shipping/freight services. The only time I observed mail being processed at the postal service, I witnessed an extremely inefficient system of manual sorting. I once had the pleasure of talking with the local post office’s manager about how various processes works, and was stunned to discover that mail forwarding is implemented by taping a printed note on the appropriate PO Box or sorting bin. Really? And each time I go to the post office, it amazes me that it always seems to take about 5 minutes and hundreds of keystrokes, and rifling through lots of random bins and cabinets to even do the simplest transaction. And in the end, nor bar codes are printed and nothing is digitized to speed up the next step, besides perhaps a receipt of the transaction. Seemingly mocking how inefficient the system is, the cost of Mail Processing is only $753M, and R&D is exactly $0. Seems like an overinvestment in human capital over better solutions. How about investing in a modern infrastructure, thinking about more efficient processes, and instilling a culture of efficiency and continual improvement?

(2) And speaking of culture, what’s with clerks always standing around while the line is 15 people long? I understand that the USPS is generous with their breaks and benefits, but besides the ever assiduous mail carriers, USPS staff in general do not seem to be invested in improving their organization. I have yet to meet an unfriendly employee, but I also have yet to meet one who seems genuinely concerned when the line goes out the door. Even though the USPS is now technically private as a legal monopoly, it is still very tightly controlled by the government, and suffers from a culture of job security over accomplishment, and rotting from unnecessary top-down mandates.

(3) Administrative costs are sky-high. Looking at C/S 2 Supervisor and Technicians, the largest costs are Supervision of Collection and Delivery, Supervision of City Delivery Carriers, and Supervision of Mail Processing. Supervision? What does that mean? Making sure the correct letters go to the right places? Shouldn’t that be automated? Even if can’t be completely automated, isn’t a few billion dollars a bit steep? That’s something like $50-60M per state. Give me $50 and I’ll require all addresses by typed. Everyone has printers, so just make a super easy web site, with widgets to link with LDAP, Google Contacts, LinkedIn, and whatever else, and have it print addresses on envelopes. For those without computers, just market and sell cheap miniature $10 dot matrix printers that just prints envelopes.

So, instead of cutting out whole segments of your market (i.e. Saturday delivery), how reducing unnecessary costs first? Cutting Saturday delivery might still be a good option, but while the Ten-Year Plan calls for an improvement of processes, none of the appeals to congress even makes mention of it.

In addition to increasing efficiency, the USPS has struggled as of late to truly innovate. They are legally assured to be the only service to have a mailbox for every single household living in the United States, something I’m sure many delivery services would kill to have. The private delivery services have all standardized shipping labels and shipping procedures as they attempted to reduce cost and increase reliability, but for some reason, that didn’t catch on with USPS. You can use printed shipping labels, but because written addresses are still permitted, most of the human energy goes into sorting those badly written ones. Require people to print addresses. Then the post office would be the perfect player to move into the address management space. Not one company even remotely has the address data that the USPS does. So use it. Allow people to opt into releasing some of their high-level non-PII mail data, and use that for collaborative filtering, especially for local networks. Again, no company even remotely has that kind of data. Privacy advocates might freak out a little, but of all things I trust the USPS to get right, it’s privacy, so having an opt-in system for a system where I can see which cable service or charities are most popular in my neighborhood is worth it as a consumer, and, for the USPS selling licenses to the data, should be worth it as well.

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