The Post Office cost structure is pretty much all fixed. Buildings, labor, trucks with steering wheels on the wrong side, fuel, and maintaining bulletin boards with many of my friends and family members pictures on them costs the same thing whether they bring me 1 piece of mail, or 20. In fact, the cost doesn't change on a day when they bring me nothing at all.
When someone says the cost of a first class letter is X, while the cost of a piece of junk mail is Y, the only way they could have arrived at those numbers is to have made a bunch of allocations. The actual cost of delivering a letter is pretty close to $NADA. The cost of opening up all of those post office doors and firing up all those trucks, however, is astronomical. They get to the cost of each type of item by going through some undoubtedly very clever arithmetic that ends up telling them x.xxx% of funny truck expense is assigned to letters and y.yyy% is assigned to magazines. Just because someone conjured up a slick equation, and has some pretzel logic to justify the math doesn't make it so, however. The cost of the truck does not in any way shape or form depend on what sort of stuff it is being used to deliver on any given day. It is simply the cost of the truck and trying to make it into the cost of anything else leads nowhere other than to bad decision making.
So here we have Senator John McCain introducing the Postal Reform Act of 2011, stating, "Additionally, there are certain types of mail upon which the Postal Service routinely loses money. This bill would require that the vendors responsible for this mail be responsible for covering their costs. In Fiscal Year 2010, the Postal Service lost nearly $1.7 billion on these type of ‘underwater’ postal products that failed to cover their costs. For example, the Periodicals class of mail, which includes newspapers and magazines, has not covered its costs for 14 consecutive years, generating total losses of $4.3 billion over that period."
The reason the post office lost $8.4 billion last year is not because their prices were too low on some products. It is because they have a huge installed capacity (and the associated fixed costs) that was grossly under-utilized. The solution is greater volume. No matter what the price charged for the volume, since the direct cost is zip, any revenue they get for the additional volume will help to cover the fixed costs. That being the case, the key to increasing volumes is not to raise prices – it is to lower them. That is Price Volume/ Price Elasticity / Economics 101 / Basic common sense.
Periodicals did not, with all due respect to the senator, lose money. Their direct cost is nothing. What he is saying is that they were priced at something less than enough to cover the allocation, in light of the actual volume. The Senator should stick to what we pay him for – that is to look damn good for a man of his age, shake hands, kiss babies, and make pointless speeches in the well of the Senate – and leave things like pricing and strategic marketing to people who know what they are doing. If the Senator wants to help, he should start by abolishing PUBLIC LAW 109–435—DEC. 20, 2006, which says the Post Office is "To allocate the total institutional costs of the Postal Service appropriately."
The idea that some products are profitable and others are not is a foible limited not to the Post Office. A whole lot of businesses unhampered by federal law make the same foolish mistake. Allocating costs leads to silly conclusions like believing delivering magazines is unprofitable, which leads to price increases, which leads to lower volumes, which leads to allocating the same fixed costs over smaller volumes, which leads to cost increases, which leads to further price increases … you get the picture.
Cost allocating is sending the Post Office down the drain – and a whole lot of our money with it.
Pricing has nothing to do with cost. It is set by the market as a function of the value created relative to the value proposition of the competition. It is destructive thinking to believe that COST + PROFIT = PRICE. Toyota told us a long time ago that PRICE – PROFIT = COST. There is a huge difference. So long as the government institutionalizes the wrong formula, the Post Office is doomed. Private enterprise, however, has no such excuse.
Jim Fernandez says
I like your thinking here.
You never mentioned DC the big gorilla sitting in the corner of the room. His name is Digital Communications. I guess you really did not need to mention him because we all know he’s there.
He is just sitting there, watching all of this. And every time the price of mailing stuff goes up, he takes another bite out of his banana and smiles.
BobG says
I agree with Jim. Buggy whip is to steering wheel as post office is to internet. The only logical explanation for McCann is that he must owe favors to, or own stock in a wide variety of internet companies. Surely not!…Oops what a coincidence…look what I found: http://seekingalpha.com/article/98421-obama-mccain-stock-comparison
Andy Wagner says
Reducing the cost of periodicals and first class mail isn’t going to convince me to sit down at a desk and write letters, or put stamps on my bills instead of clicking on a secured website.
More disturbing is that the postal service’s arbitrary allocations have made it very inexpensive for companies to send me mail of so little value to the average customer that it’s universally *known* as “junk” mail! I keep a recycling bin on my porch next to my mailbox with the sole purpose of dropping this crap without it every going into my house.
I would pay a small monthly fee for my letter carrier to perform the sort function for me.
That would be strategic pricing.
Kathleen says
I still say the USPS could save money by walling off unused portions of the lobbies and building smaller ones (new construction). That would save upkeep, utilities etc. There is no point to having six or seven stations set up if there are never more than one or two clerks to serve customers.
Jim Fernandez says
Well, if we are going to suggest ways for the post office to stay in business, I know what I’d do if I were in charge.
I would apply Lean throughout the entire system. But it might be too late for that. Actually, I was taught that it is never too late to apply Lean.
Dale says
I was told recently that the USPS does not actually own their post office buildings – they rent them. (Told to me by someone who has made a nice sum of money as the landlord of multiple post office locations.) I wonder what kind of rent rates are applied. Instead of the actions that Kathleen is suggesting, why not close those monsterous buildings and use store front locations. They would have to be cheaper to maintain and there are usually plenty of open spaces in most towns or cities.
Greg says
Good article, but postal rates for magazines are truly irrelevant because there won’t be any dead-tree versions of magazines or newspapers in a few years. The Postal Service’s future is delivering packages and if they lower their fixed costs by eliminating Saturday delivery and closing rural post offices they should be able to turn a profit.
Joseph says
As a memeber of a company that does a significant amount of parcel shipping, greater than $1B annually, I can tell you that the USPS has realized a lot of what you are saying and is going after the smallest sized parcel shipments in an effort to “fill-up” their underutilized trucks. The have started to offer some very attractive pricing. The problem is that their systems are so antiquated they are unable to integrate with other businesses the way Fedex and UPS can and as such we just can’t use them. Their response is that we should adjust to their 1980’s manifesting process which speaks to thier service oriented nature.
web development USA, web development Florida says
There is no point to having six or seven stations set up if there are never more than one or two clerks to serve customers.
rubin danzinger says
This article does not include a few things.
The USPS already handles UPS and FedEx parcels for the LAST MILE and sometimes the LAST COUNTY…it’s called “PARCEL DIRECT”…check it out.
Your reference to HUGE OVERCAPACITY is no longer true. The USPS has been reducing and realigning both it’s plant capacity and it’s personnel for over five years. Check it out.
While you are at it, check their balance sheet out for the last seven years…their “losses” would not be “losses” if you SUBTRACT THE PENSION OVER FUNDING that Congress has required.
Another item that people who lack the ability to see the ENTIRE COUNTRY instead of just their urban, well connected electronic based UNIVERSE is the fact that the majority of Americans are NOT COMPUTER LITERATE, don’t depend on instant messaging and e-mail and actually USE THE US MAIL to communicate with each other.
E-commerce is here and will not disappear…but there are in fact, millions of people that depend on the USPS in their daily lives…just as there are millions of people that do not even OWN a cell phone or have an internet connection.
And I know it sounds crazy, but there are tens of millions of people that actually WANT what is characterized as JUNK MAIL…seems they LIKE OMAHA STEAKS, order paper back books and THE WEEKLY READER for their kids….go figure.
Just because something fits in YOUR WORLD does not make it a perfect answer for the bulk of America.
Bill Waddell says
Rubin,
Not sure where the tone of your comment comes from – you seem to have missed the central point.
Regarding the Post Office capacity question I would refer you to the Federal Register from just a few weeks ago, specifically where the Post Office states:
“In Section 302 of the Postal Accountability and Enhancement Act of 2006, Congress found that the Postal Service’s networks were larger than necessary and directed the Postal Service to consolidate its infrastructure to better align with changing conditions. Since then, the Postal Service has vigorously pursued operational consolidation opportunities to reduce excess capacity in its networks.
During the same time period, however, mail volumes have declined substantially, such that the Postal Service’s processing and transportation networks exhibit more excess capacity in relation to current and projected mail volumes than previously anticipated. As a result of the sharp revenue declines associated with falling volumes, as well as other statutorily mandated costs, the Postal Service has
experienced significant financial losses for the past four years. Unfortunately, further network consolidations (beyond those that have already been performed or are currently under study), which are necessary to align the Postal Service’s infrastructure with current and
projected mail volumes and to bring operating costs in line with revenues, will for the most part be unachievable without a relaxation of certain service standards for First-Class Mail, Periodicals, and Standard Mail. The Postal Service is therefore exploring a proposal (the Proposal) to revise these service standards.”
Seems they believe they have excess capacity, your opinion notwithstanding, and they also acknowledge financial losses beyond those that can be attributed to their pension obligation.
You can read the Post Office entry into the Federal Register Volume 76, Number 183 (Wednesday, September 21, 2011) at: http://www.gpo.gov/fdsys/pkg/FR-2011-09-21/html/2011-24149.htm
As info, my personal “urban, well connected electronic based UNIVERSE” is a town in rural Illinois, population 15,000.
Mark Comerford says
Sirs, here is a simplistic view of some known facts:
1) the PO has been doing a remarkabke job of balancing the loss of first class volume with the introduction of job reducing technology and the use of attrition to avoid layoffs. Some would call this model operations plan.
2) the 2006 PAEA, as passed by Congress, is specifically responsible for bankrupting the PO by NOT allowing them the use of their(the Post Office) own monies during the worst recession in history. Why, one would ask?
3) the Republican Party has been trying to destroy and privatize the Post Office since Reagan was in office. The mis-information coming out of Comgressmen Issa and Ross respective offices have proved that point.
4) Both the GAO and the OIG have performed audits on the Post Office and found that it would be financially solvent even during this recession if not for the politically motivated 2006 PAEA.
This is the straight, yet easy to understand explanation of where the Post Office stands. The political situation of the country is untenable and the Post Office is a case in point.
Bill Waddell says
Mark,
On this blog you assert the problem is 100% the Republican party, and the P.O would otherwise be onsolvent.
A few months back on the Postal Employees Network you were decrying the Postal Service “40+ Vice Presidents” and suggesting that the problem at the Post Office is too much overhead.
In the Postal Service Pushing the Envelope blog you wrote that the Post Office management “is fraudulent from the bottom up as the reporting figures are frequently ‘made to fit’ and there is no accountability system in place for management.” and that the P.O. is ” a backwater in terms of the advances that business has made, not recognizing, or maybe not wanting to, that we have taken a wrong turn down a dead end alley.”
And just a couple weeks ago in the Postal News you wrote, “The Post Office has disregarded mailing standards and the sanctity of the mail for years; instead the ‘slash and burn’ approach of anything goes has been the daily banner. If management was adhering to the regulations they have SWORN to follow when they were promoted the Post Office would have less trouble with their employees and would deliver better, more efficient service.”
Your passion for the Postal Service performance and reputation is admirable. However, your comment – which incidentally missed the point of my blog post entirely – suggesting that the only problem the Post Office has is the Republican Party supporting the PAEA is a rather ridiculous simplification of the situation, as your own observations about the P.O. demonstrate.
ray says
So the solution for customers that don’t pay their own way would be to add even more customers that don’t pay their own way. The old we lose a little on each piece, but we make it up on volume theory.
Bill Waddell says
Ray,
You seem to have missed the point of the post completely. It is only true that some customers “don’t pay their own way” if you believe a lot of nonsensical accounting allocations. The cost per item is virtually nothing. The Post Office cost structure is overwhelmingly fixed costs that have nothing to do with the volume levels. Put another way, the additional cost to the Postal Servive to deliver one more piece of mail – no matter what it is and who is sending it – is zero. Therefore, any revenue they can get for any additional mail is ‘profitable’.