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entitled 'U.S. Postal Service: The Service's Strategy for Realigning
Its Mail Processing Infrastructure Lacks Clarity, Criteria, and
Accountability' which was released on May 9, 2005.
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Report to Congressional Requesters:
April 2005:
U.S. Postal Service:
The Service's Strategy for Realigning Its Mail Processing
Infrastructure Lacks Clarity, Criteria, and Accountability:
GAO-05-261:
GAO Highlights:
Highlights of GAO-05-261, a report to congressional requesters:
Why GAO Did This Study:
With declining mail volumes, increasing compensation costs, and a more
competitive marketplace, the need for the U.S. Postal Service (Service)
to increase efficiency and reduce expenses is a matter of increasing
importance and concern. According to the Service, one area where it can
become more efficient is in its mail processing and distribution
infrastructure. The objectives of this report are to (1) describe major
business and demographic changes and their effect on the Service's mail
processing and distribution infrastructure; (2) describe what actions
the Service is taking in response to these changes, and what challenges
exist; and (3) discuss the Service's strategy for realigning its
infrastructure.
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.
Total Pieces Handled per Person per Hour in Processing Plants for
Fiscal Year 2004:
[See PDF for image]
[End of figure]
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.
What GAO Recommends:
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, as well as the actual costs and
savings resulting from the decisions.
www.gao.gov/cgi-bin/getrpt?GAO-05-261.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine Siggerud, (202)
512-6570, siggerudk@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Major Changes Have Impacted the Service's Mail Processing and
Distribution Infrastructure:
The Service Is Pursuing Several Initiatives in Response to Changes but
Challenges Remain:
The Service's Strategy for Realigning Its Mail Processing
Infrastructure Lacks Clarity, Criteria, and Accountability:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Descriptions of Various Mail Flows with Diagrams:
Appendix III: Glossary of Postal Terms Used in this Report:
Appendix IV: Comments from the U.S. Postal Service:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Staff Acknowledgments:
Tables:
Table 1: Common Types of Mail Preparation Service:
Table 2: Common Types of Mailers:
Table 3: 2004 Major Processing and Distribution Plant Types:
Table 4: Change in Average Rate and Volume for Priority Mail:
Table 5: Factors Contributing to Productivity (Total Pieces Processed
per Hour) in FY 2004:
Table 6: Average Productivity (Total Pieces of Mail Processed per Hour)
of Plants By Number of Employees for Fiscal Year 2004:
Table 7: Average Productivity (Total Pieces of Mail Processed per Hour)
for Selected Operations by Area for Fiscal Year 2004:
Table 8: Number of Plants and Annexes Owned and Leased by the Service
as of September 30, 2004:
Table 9: Comparison of FY 2004 Productivity for Flat Sorting
Operations:
Figures:
Figure 1: Mail Flow through National Infrastructure:
Figure 2: Location of Service Processing and Distribution Plants:
Figure 3: First-Class Mail and Standard Mail Volume, Fiscal Years 1971-
2004:
Figure 4: Annual Percentage Change in Priority Mail and Express Mail
Volumes, Fiscal Years 1994 to 2004:
Figure 5: Growth in Mail Volume for Workshared and Nonworkshared Mail,
Fiscal Years 1972-2002:
Figure 6: Evolution of Mail Processing:
Figure 7: Number of Service Processing and Distribution Plants by Age:
Figure 8: Bedloaded Truck and Cardboard Containers:
Figure 9: U.S. Household Growth by State from 2000 to 2003 and Service
Processing and Distribution Plants:
Figure 10: Productivity (Total Pieces of Mail Processed per Hour) at
Small, Medium, and Large P&DCs for FY 2004:
Figure 11: Processing of a Letter at a Multistory and a Single Floor
Processing and Distribution Plant:
Figure 12: Productivity (Total Pieces of Mail Processed per Hour) at
Multistory Plants in Fiscal Years 2001 through 2004:
Figure 13: Photographs of Empty and Full Flat Mail Cart:
Figure 14: Automated Package Processing Machine:
Figure 15: Low Cost Tray Sorter:
Figure 16: Service Bulk Mail Center and Hub and Spoke Program
Locations:
Figure 17: Correlation Between BPI Productivity (Total Pieces Processed
per Hour) and Activity Based Costing Unit Letter Processing Costs for
Fiscal Year 2004:
Figure 18: Letter Mail Processing:
Figure 19: Flat Mail Processing:
Figure 20: Parcel Processing:
Letter April 8, 2004:
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.[Footnote 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 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.[Footnote 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.
Table 1: Common Types of Mail Preparation Service:
Mail preparation services: Lettershop;
Description: Prepares mailings for other organizations and provides
services such as personalizing, labeling, sorting, stuffing, and
addressing envelopes;
Where mail enters network: Generally take mail to local processing
plant.
Mail preparation services: Presorter/Consolidator;
Description: Accepts mailings from multiple sources, consolidates them,
and presorts to the finest level that can be achieved. Often
consolidates mail from multiple sources to achieve quantity-based
discounts;
Where mail enters network: Generally take mail to local processing
plant.
Mail preparation services: Fulfillment House;
Description: Receives, packages, and ships customer orders, generally
for retail sales companies;
Where mail enters network: Generally take mail to processing plant
close to final destination.
Source: GAO.
[End of table]
Table 2: Common Types of Mailers:
Mailers: Financial Institutions;
Description: Primarily banks that use the mail to send financial
statements or advertisements. Depending on mailer's size, it may use
lettershops, presorters, or consolidators to prepare mailings;
Type of mail: Primarily First-Class Mail.
Mailers: Government;
Description: Federal, state, and local governments. Depending on
mailer's size, it may use lettershops, presorters, or consolidators to
prepare mailings;
Type of mail: Primarily First-Class Mail.
Mailers: Catalog Companies;
Description: Companies that sell merchandise through catalogs;
Type of mail: Primarily Package Services.
Mailers: Newspapers/Magazines;
Description: Organizations that produce publications issued at frequent
intervals containing news, editorials, advertisements, and other
articles of current interest;
Type of mail: Primarily Periodicals or Standard Mail.
Mailers: Commercial Industries;
Description: Industries that provide services or products. Depending on
mailer's size, it may use lettershops, presorters, or consolidators to
prepare mailings;
Type of mail: Primarily Standard Mail.
Mailers: Nonprofit Organizations;
Description: Organizations that conduct not-for-profit business.
Depending on mailer's size, it may use lettershops, presorters or
consolidators to prepare mailings;
Type of mail: Primarily Standard Mail (Nonprofit rate).
Source: GAO.
[End of table]
The Service processes mail through its nationwide infrastructure
according to shape and class of mail. There are three basic mail shapes
(1) letters, which are small rectangular pieces no thicker than 1/4
inch; (2) flats, which are rectangular pieces no thicker than 3/4 inch;
and (3) parcels, which are three-dimensional pieces weighing up to 70
pounds.
The Service established national service standards over 30 years ago
that direct how many days it should take mail to reach its destination,
depending on its origin and mail class. For example, First-Class Mail
has service standards of overnight, 2 and 3 days depending on the
distance it has to travel. In addition, the Service developed class-
specific processing networks to process specific types of mail
including:
* a Processing and Distribution Center (P&DC) network that primarily
processes First-Class Mail, Periodicals, and some parcels, as well as
some Standard Mail;
* a Priority Mail Processing Center (PMPC) network that processes
Priority Mail; and:
* a Bulk Mail Center (BMC) network that processes bulk Standard Mail
and parcels.
Each of these networks uses separate processing and distribution plants
as described in table 3.
Table 3: 2004 Major Processing and Distribution Plant Types:
Plant type: Processing and Distribution Centers (P&DC);
Description: Processes and dispatches incoming and outgoing mail for a
designated service area;
Number: 318.
Plant type: Air Mail Centers (AMC);
Description: Mail plant at an airport that processes mail transported
by air;
Number: 78.
Plant type: Bulk Mail Centers (BMC);
Description: Processes and distributes bulk Standard Mail and parcels;
Number: 21.
Plant type: Priority Mail Processing Centers (PMPC);
Description: Processes Priority Mail;
Number: 12.
Plant type: Hub and Spoke Program (HASP);
Description: Central point where mail from a group of plants is
unloaded, combined, and sent on to destination;
Number: 13.
Plant type: Destination Delivery Units (DDU);
Description: Facility where carriers pick up mail for final delivery
and some limited processing for destination may occur;
Number: 37,159.
Source: U.S. Postal Service.
Note: DDUs are generally post offices and are not considered processing
plants for the purposes of this report.
[End of table]
First-Class Mail is collected from mailboxes, houses, or post offices
and transported to a P&DC or deposited directly at the P&DC by the
mailer. Depending on where the mail originates from (origination) and
where it is being delivered to (destination), this mail can be
processed in multiple plants. It may be transported (1) directly
between P&DCs, (2) through a hub and spoke plant, (3) through an air
mail center, or (4) through a combination of these. Once the mail has
reached the destination P&DC, the mail is transported to a delivery
unit for carrier delivery. For example, a birthday card mailed from
Washington, D.C., to Sacramento, CA, would be mailed as First-Class
Mail and might follow these steps:
1. picked up from mailbox by carrier and brought to local post office;
2. transported to Suburban Maryland P&DC where the postage stamp is
cancelled and a barcode reflecting the proper destination is applied to
the mailpiece so it can be sorted according to destination;
3. transported to airport;
4. flown to San Francisco, CA;
5. transported to San Francisco Air Mail Center where it is sorted to
the proper destination plant;
6. transported to West Sacramento P&DC where it is sorted into delivery
order; and:
7. transported to local post office to be picked up by carrier and
delivered to addressee.
Priority Mail can either be processed in the Priority Mail network or
in the P&DC network similar to First-Class Mail. For example, legal
documents sent Priority Mail from Rochester, NY, to Sacramento, CA,
might follow these steps:
1. transported from local post office to Rochester Priority Mail
Processing Center where it is separated from local Priority Mail and
sorted according to destination;
2. transported to Rochester Air Mail Center where it is assigned to a
specific flight;
3. flown to San Francisco, CA;
4. transported to San Francisco Air Mail Center where it is sorted to
proper destination plant; and:
5. transported to West Sacramento P&DC where it is sorted into delivery
order; and:
6. transported to local post office to be picked up by carrier and
delivered to addressee.
Discount mailings (Standard Mail, bulk parcels, etc.) can enter the
bulk mail network by being weighed and paid for at the mailer's plant
through a detached mail unit, or at a postal plant through a Business
Mail Entry Unit. A mailing is initially processed at the bulk mail
center where it was entered, and then pieces are transported to the
bulk mail center in the area where it will be delivered. To receive
additional discounts or achieve faster delivery time, the mailer can
enter mail closer to its destination. This is called dropshipping. For
example, a Standard Mail advertisement dropshipped from Washington,
D.C., to Sacramento, CA, might follow this path:
1. accepted into mailstream through detached mail unit at a mailer's
plant in Washington, D.C;
2. transported by mailer to the West Sacramento P&DC and sorted into
delivery order; and:
3. transported to local post office to be picked up by carrier and
delivered to addressee.
Figure 1 depicts how mail flows through these networks, while figure 2
maps the location of the Service's processing and distribution plants.
Figure 1: Mail Flow through National Infrastructure:
[See PDF for image]
Note: Originating mail refers to where the mail enters the system,
while destinating mail refers to where the mail leaves the system. This
figure depicts mail that originates and destinates in different
locations.
[End of figure]
Figure 2: Location of Service Processing and Distribution Plants:
[See PDF for image]
[End of figure]
Major Changes Have Impacted the Service's Mail Processing and
Distribution Infrastructure:
Since the U.S. Post Office Department was reorganized into the U.S.
Postal Service by the Postal Reorganization Act of 1970, there have
been several major changes, the effects of which include excess
capacity in the mail processing and distribution infrastructure, as
well as productivity differences among plants. These changes include:
* changes in the marketplace and the role of industry that have
resulted in declines in mail volume and changes in mail mix;
* the evolution of the Service's processing and distribution
infrastructure, and the advent of processing automation, that has led
to an infrastructure consisting of processing and distribution plants
that differ markedly from one another; and:
* changes in demographics and modes of transportation that affect the
optimal location of the Service's plants.
Changing Marketplace Has Led to Changes in Mail Volume and Mail Mix:
Changes in the marketplace, including the substitution of electronic
communication for First-Class Mail, shifts in how customers use the
mail, increased competition in overnight mail and package services, and
the changing role of mailers, have led to changes in mail volume and
mix. These changes have intensified the Service's future financial
challenges. Historically, the Service's business model depended on
revenues from increasing mail volumes to cover its expanding
infrastructure. This model has proven more difficult to sustain because
of the decreasing mail volumes, particularly in First-Class Mail. As
the Service's Chief Financial Officer stated, "this shift in mail mix
to lower revenue-per-piece mail classes will result in shrinking
margins, which are used to maintain universal service."[Footnote 3]
Electronic Diversion Has Led to Decreases in First-Class Mail Volume:
First-Class Mail volume, the class that contributes the majority of
revenue to institutional costs, declined 5 percent from fiscal year
2000 to 2004 and this downward trend is expected to continue. The
Service has attributed the declining First-Class Mail volume to the
impact of electronic diversion as businesses, nonprofit organizations,
governments, and households increasingly automate their financial
transactions and divert correspondence to the Internet. For example,
electronic bill payment allows users to pay bills using the Internet
rather than sending checks through the mail. In 2003, the majority of
noncash payments were made electronically; just 3 years earlier the
majority had been made by check. Recent Federal Reserve studies found
that the number of checks paid in the United States has continued to
decline since it peaked in the mid-1990s. There were nearly 50 billion
checks paid in 1995. By 2000, that number had declined to 41.9 billion
and by 2003 that number had dropped to 36.7 billion. Between 2000 and
2003, electronic payments increased from 30.6 billion to 44.5 billion,
an increase of over 45 percent.[Footnote 4] Further, recent legislation
that became effective October 28, 2004, is intended to improve the
efficiency of check processing and may reduce reliance on the physical
movement of checks through the mail.[Footnote 5] It is likely that this
change will accelerate the decline in First-Class Mail volume.
Shift in Mail Usage Has Led to Challenges in Revenue Generation:
As a result of declining First-Class Mail volumes and the lower revenue
per piece provided by Standard advertising mail volumes, the Service
will be challenged to generate sufficient revenue to cover
institutional costs. From 1970 to 2000, First-Class Mail accounted for
the majority of mail volume. However, as seen in figure 3, Standard
Mail volume is on the verge of overtaking First-Class Mail volume.
According to postal officials, Standard Mail volume is projected to be
greater than First-Class Mail volume by fiscal year 2005.
Figure 3: First-Class Mail and Standard Mail Volume, Fiscal Years 1971
-2004:
[See PDF for image]
[End of figure]
In fiscal year 2003, combined First-Class Mail and Standard Mail
accounted for almost 94 percent of the Service's total mail volume. It
takes approximately 2.5 pieces of Standard Mail to make up for the lost
contribution from 1 piece of First-Class Mail. During fiscal year 2003,
First-Class Mail declined by 3.3 billion pieces, resulting in a loss in
revenue to be contributed toward institutional costs (contribution) of
$675 million, while Standard Mail increased by 3.1 billion pieces for a
gain in contribution of $256 million. The net loss in contribution from
these two classes in fiscal year 2003 was $419 million.
Increased Competition in Packages and Overnight Mail Have Hurt Mail
Volume:
Competition in the overnight and package business is increasing. In
1971, the Service and United Parcel Service each had roughly a 50
percent share of the national parcel market. FedEx entered the parcel
ground delivery market with the acquisition of Caliber in 1998 and, by
2001, the Service's share of the parcel ground market had slipped to
less than 10 percent. In addition, the Service's market share of
overnight and 2 and 3 day air package services decreased between fiscal
years 2000 and 2003. As seen in figure 4, volume for the Service's
products in this category, Priority Mail and Express Mail has declined
precipitously in recent years.
Figure 4: Annual Percentage Change in Priority Mail and Express Mail
Volumes, Fiscal Years 1994 to 2004:
[See PDF for image]
[End of figure]
Changes in the Role of Mailers:
Over the past 30 years, the role of mailers has changed, leading to
further shifts in the mail mix. This change is due in large part to the
advent of the Service's worksharing discounts. Postal worksharing
activities generally involve mailers preparing, barcoding, sorting, or
transporting mail to qualify for reduced postage rates. Key worksharing
activities include (1) barcoding and preparing mail so the Service can
sort it on automated equipment; (2) presorting mail, such as by ZIP
Code or specific delivery location; and (3) entering mail closer to
destination, commonly referred to as dropshipping. The first of many
presort and automation worksharing discounts was introduced in 1976,
followed by dropship discounts for periodicals in 1985, and Standard
Mail in 1991. Presorting and barcoding by mailers allows the Service to
avoid primary sorting activities, while dropshipping allows it to avoid
transporting mail as well. For example, prior to dropshipping, mail
entered the infrastructure at the point of origin. Dropshipping allows
the mailer a discount for bypassing the origination plant and
transporting the mail closer to its destination point.
Presort discounts spawned the mail consolidation business, whereby
consolidators gather mail from many different mailers, sort it, and
convey it to the Service for final delivery. The dropship discounts
were the catalyst for major growth within the consolidation business.
As seen in figure 5, virtually all of the growth in volume since 1972
is in workshared mail. Worksharing contributes to excess capacity
because mail volume bypasses operations that occur early in the
processing and, in some cases, as with dropshipping, mail volumes
bypass entire plants.
Figure 5: Growth in Mail Volume for Workshared and Nonworkshared Mail,
Fiscal Years 1972-2002:
[See PDF for image]
[End of figure]
Evolution of the Service's Processing and Distribution Infrastructure
Has Resulted in Markedly Different Plants:
The Service's mail processing and distribution infrastructure has
developed over time resulting in an infrastructure comprised of plants
that are markedly different from one another. This evolution has
resulted in some plants' inability to accommodate processing equipment
because the floor space requirements differ for manual and automated
processing; and the plants were not originally designed to house the
advanced technology. Also, some plants exclusively process certain
types of mail, which has driven up the cost per piece for those types
of mail. Today, the Service's mail processing and distribution
infrastructure includes plants that range in age from 2 to 72 years
old, range in square footage from 455 square feet to 1,538,494 square
feet, have different layouts, serve different processing functions, and
do not share the same amount and type of processing equipment.[Footnote
6]
Plants Have Had to Accommodate Equipment in Buildings That Were Not
Designed to House the Technology:
Originally, the Service developed mail processing and distribution
plants to manually sort mail using pigeonhole cases. The Service took
major steps toward mechanizing plants in the mid-1950s with the
introduction of the letter sorting machine. The letter sorting machine
required an operator to read the address on an envelope and key the
information into a console. A conveyor belt system then directed the
piece to the appropriate receptacle for the address. In the early
1980s, the Service began replacing the mechanized letter sorters with
automated systems that used optical character readers rather than
manual keying of addresses. The concept of mechanized sorting was
expanded to include flats in the 1980s. The Service recently deployed
automated flat sorters and has begun deploying automated parcel sorting
equipment. Figure 6 depicts the evolution of mail processing
operations.
Figure 6: Evolution of Mail Processing:
[See PDF for image]
[End of figure]
The floor space required to accommodate automation equipment is
different than that needed to accommodate manual or mechanized sorting
equipment, and not all plants have room for new equipment that could
increase efficiency. As seen in figure 7, many of the Service's plants
were built prior to the advent of automation. Therefore, some plants
may not have enough floor space to accommodate the newer equipment.
Figure 7: Number of Service Processing and Distribution Plants by Age:
[See PDF for image]
Note: Figure includes all processing and distribution plants, including
P&DCs, BMCs, AMCs, PMPCs, Annexes, and miscellaneous plants, but
excludes DDUs.
[End of figure]
Dedicated Mail Processing Networks Have Driven Up Costs:
Some plants are part of dedicated networks that exclusively process
certain types of mail and have resulted in higher costs. The Service
developed dedicated mail processing networks within its infrastructure
to process certain classes of mail, including a bulk mail network and a
Priority Mail network. In general, by law, each postal product must
cover the costs attributable to provision of that product plus a
reasonable amount of institutional costs. Consequently, when a network
is dedicated to only one type of mail, that type of mail must bear the
costs of the dedicated network. In addition, with a dedicated network,
transportation capacity utilization is limited to the amount of mail
that is traveling through the dedicated network and redundancies can
occur. For example, Priority and Standard Mail may be traveling through
the same area and may even use the same roads; however, because they
are processed in separate networks, they do not travel on the same
truck. Therefore, two trucks that are 50 percent full might make the
trip rather than one truck that is 100 percent full.
In the 1970s, the Service developed a bulk mail network to maintain its
share of the parcel market against United Parcel Service, and built 21
plants to process and distribute parcels. These plants also process
sacks of bulk Standard Mail. As operations have evolved over 30 years,
the BMCs have encountered a number of difficulties in trying to process
the mail efficiently. Furthermore, bulk Standard Mail is increasingly
bypassing the BMC network through dropshipping.
Bulk letter mail, which first enters the bulk mail network in sacks or
trays, can be processed more efficiently through automated letter
sorters when it reaches the processing and distribution plants if it is
presented in trays rather than sacks. Consequently, the Service made a
concerted effort to move mail out of sacks and into trays. However,
this move caused problems for the BMCs, which used sack-sorting
machines. During our visits to postal plants, managers told us that
sack-sorting machines were not designed to process rectangular trays.
Sorting trays on the sack sorters often resulted in trays, which carry
an average of 500 pieces of mail, breaking open and spilling mail over
the conveyor belt. Consequently, the sack sorter had to be turned off
while the individual mail pieces were collected and either sent to a
P&DC for processing or processed on equipment that had been brought
into the BMC specifically to deal with this problem. The BMCs were told
by headquarters to remove all trays from automated equipment beginning
in October 2004, and some BMCs are now processing the trays manually,
which results in an increase in workhours.
In addition, changes in the way trucks are loaded and unloaded have
affected dock space at the BMCs. For example, when trucks were loaded
at processing plants by manually stacking packages inside the truck
(bedloaded), it took 8 hours to unload a truck filled to capacity.
Today, the Service uses automated loading machines that fill containers
with packages, which are then loaded by forklift into the trucks.
Trucks are unloaded by forklift, and automated equipment dumps the
containers directly onto the conveyor belts that lead to the sorting
equipment. Using this procedure it only takes 30 minutes to unload the
same amount of mail. Figure 8 depicts the difference between bedloaded
and container-stacked truckloads. While this has been a great
improvement in workhour savings, BMCs now have problems storing all the
mail because of limited dock space. We also observed and were told that
some of the equipment in the BMCs is so old that it cannot run at full
capacity and in some cases was not being used. For example, in one BMC
the tow-line--used for transporting mail throughout the building--was
shut down 18 years ago because it needed constant repairs.
Consequently, mail is moved between operations either manually or using
forklifts and tow trucks.
Figure 8: Bedloaded Truck and Cardboard Containers:
[See PDF for image]
[End of figure]
The Service also has a dedicated network for its expedited product,
Priority Mail, which has driven up the cost of Priority Mail and led to
declines in volume. In 1997, the Service awarded a 5-year contract to
Emery to develop a PMPC network on the east coast to improve Priority
Mail's service performance. The Service also contracted with Emery to
provide a dedicated transportation network for Priority Mail. Because
the network only processed Priority Mail, all of the costs were borne
by Priority Mail users. Large rate increases in 1999, 2001, and 2002
for Priority Mail, coupled with service problems, contributed to a 31
percent decline in Priority Mail volume from fiscal year 2000 to 2004.
Table 4 shows rate increases and mail volumes. Consequently, the
Service cancelled its processing and transportation contract with Emery
in 2001, absorbed the processing back into its infrastructure, and
contracted with FedEx for transportation services. While the Service is
still processing Priority Mail in PMPCs, it is moving Priority Mail
operations into other processing plants. It has also begun converting
some PMPCs to Logistics and Distribution Centers (L&DC), which process
multiple types of mail, and according to Service officials, it is the
Service's intent to eventually convert all PMPCs to L&DCs.
Table 4: Change in Average Rate and Volume for Priority Mail:
Date: January 1999;
Percent rate increase: 7.2%;
Percent volume decline: 6%.
Date: July 2001;
Percent rate increase: 17.2%;
Percent volume decline: 11%.
Date: June 2002;
Percent rate increase: 13.5%;
Percent volume decline: 15%.
Source: GAO analyses from Postal Rate Commission and U.S. Postal
Service Data.
Note: Volume declines are between fiscal years 1999 and 2001, 2001 and
2002, and 2002 and 2004. July 2001 is the implementation date of the
Recommended Decision in the R2000-1 rate case, which was modified by
the Service's Board of Governors.
[End of table]
Postal Service Plants May Not Be Optimally Located Due to Changes in
Demographics and Transportation:
Due to population shifts, household growth, and the changing
transportation landscape in the United States, Service plants may not
be optimally located. The Service stated in September 2003 that,
"population shifts, changes in mail processing technology, and external
events that occurred during the last two years, have required dramatic
shifts in operating conditions resulting in rising costs to maintain
the existing network."
Most Service processing plants are located in eastern states--states
that historically have had the highest populations. During the 1990s,
U.S. household growth trends began moving west and south, with Nevada
and Arizona ranking as the two fastest growing states in the nation. As
seen in figure 9, the majority of the Service's processing plants are
located in states whose household growth is not as rapid as others. The
Service has said that the operational challenge it faces in 2004 and
beyond is to locate processing plants and employees within efficient
reach of most of the population, while at the same time providing
universal service to the rest of the nation at reasonable cost.
Figure 9: U.S. Household Growth by State from 2000 to 2003 and Service
Processing and Distribution Plants:
[See PDF for image]
[End of figure]
Additionally, Service processing plants built in the first half of the
20th century were built near major railroad stations. In 1930, the bulk
of domestic mail was moved by rail on over 10,000 trains nationwide. In
1965, only 190 passenger trains carried mail, and by 1970, virtually no
First-Class Mail was carried by rail. In September 2004, Amtrak
announced that it would discontinue transporting mail for the Service.
Changes have also taken place in the Service's use of air
transportation. As a result of the September 11, 2001, attacks, new
federal aviation security restrictions prohibited the transportation of
mail weighing more than 16 ounces on commercial flights. As a result,
the majority of the mail previously transported by commercial air has
shifted to surface transportation or is flown by FedEx. Ongoing shifts
in transportation have created an environment where most mail is now
moved by highway and air, and some processing plants would be better
located so that major highways and airports are easily accessible.
Changes Have Contributed to Variations in Productivity Among Processing
Plants and Excess Capacity:
The changing marketplace, evolution of mail processing, and shifts in
demographics have contributed to variations in productivity across
plants and excess capacity. The growth in infrastructure over time has
resulted in differences in processing plants and contributed to
variations in productivity and cost among plants. The decline in mail
volume and the evolution of mail processing have contributed to excess
capacity.
Productivity Varies among Plants:
Average productivity--total pieces processed per hour--varies among the
Service's mail processing and distribution plants, which indicates that
some plants are not processing mail as efficiently as others. Service
officials have attributed this variation to several factors, including
size of plant as measured by workload, number of employees, layout of
plants, and the use of nonstandardized processes. An analysis of
productivity data for processing and distribution plants for fiscal
year 2004 indicates that none of these factors, in isolation, can
explain the variations; rather, as seen in table 5, it seems that
plants with low productivity exhibit a number of contributing factors.
For example, according to a Western Area Postal Service official, the
processing plant in Spokane, WA, is one of the most productive plants
because the plant is new, all operations are performed on one floor,
and it has an automated system to transport mail among the different
operations. The processing plant in Des Moines, IA, on the other hand,
has very low productivity. This plant is 50 years old, has multiple
floors where processing occurs, does not have enough dock space, and
does not have adequate floor space for new processing equipment.
Table 5: Factors Contributing to Productivity (Total Pieces Processed
per Hour) in FY 2004:
Least Productive Plants:
Productivity;
A: 519;
B: 727;
C: 819;
D: 852;
E: 873.
Workload;
A: 721,178;
B: 3,525,133;
C: 2,909,649;
D: 660,421;
E: 2,468,013.
Employees;
A: 1,144;
B: 4,336;
C: 2,883;
D: 850;
E: 2,319.
Workroom Square Feet;
A: 273,600;
B: 984,290;
C: 490,125;
D: 116,888;
E: 626,918.
Age;
A: 19;
B: 72;
C: 9;
D: 70;
E: 44.
Multistory;
A: No;
B: Yes;
C: Yes;
D: Yes;
E: Yes.
Most Productive Plants:
Productivity;
F: 2,641;
G: 2,651;
H: 2,678;
I: 2,763;
J: 2,854.
Workload;
F: 287,661;
G: 855,680;
H: 324,030;
I: 500,396;
J: 197,942.
Employees;
F: 85;
G: 275;
H: 110;
I: 144;
J: 120.
Workroom Square Feet;
F: 35,322;
G: 43,007;
H: 56,775;
I: 37,222;
J: 27,816.
Age;
F: 7;
G: 39;
H: 13;
I: 8;
J: 29.
Multistory;
F: No;
G: No;
H: No;
I: No;
J: No.
Source: GAO analysis of U.S. Postal Service data.
[End of table]
According to Service managers, a plant's annual workload impacts its
productivity. The Service classifies its plants based on the number of
workhours that should be required to process the plant's annual
workload (earned hours).[Footnote 7] The classifications are small--
295,000 or less earned workhours, medium--between 295,001 and 680,000
earned workhours, and large--more than 680,000 earned workhours.
According to the managers, small plants are more efficient then larger
plants because operations at small plants are not as complex as
operations at larger plants and large plants often have additional
responsibilities. For example, one plant manager told us that the plant
he had previously managed had a large contingency of mail carriers that
operated out of it in addition to the plant's processing duties, which
lead to space constraints. Larger plants often consolidate and sort
mail from smaller plants, which makes sorting schemes more complicated
and requires additional workhours to accommodate the increased
complexity. However, as seen in figure 10, there are also large gaps in
productivity among the plants within each size classification.
Therefore, it appears size, as measured by workload, is only one
contributing factor to the variation in productivity among plants.
Figure 10: Productivity (Total Pieces of Mail Processed per Hour) at
Small, Medium, and Large P&DCs for FY 2004:
[See PDF for image]
[End of figure]
Service officials also told us that the size of the workforce employed
at a plant impacts the plant's productivity. According to these
officials, plants with large numbers of employees have lower
productivity than plants with fewer employees because with fewer
employees, management has better visibility and therefore better
control over its operations. Plants with fewer employees also have
fewer layers of management and more direct manager to employee contact.
One manager, who had managed both large and small plants, told us that
productivity increases can be attributed to making sure employees are
doing what they are suppose to be doing and that this is easier to
manage with a smaller number of employees. Table 6 shows the average
productivity for plants broken down by number of employees.
Table 6: Average Productivity (Total Pieces of Mail Processed per Hour)
of Plants By Number of Employees for Fiscal Year 2004:
Number of employees: <500;
Average productivity: 1,960.
Number of employees: 500-999;
Average productivity: 1,614.
Number of employees: 1,000-1,499;
Average productivity: 1,463.
Number of employees: 1,500-1,999;
Average productivity: 1,443.
Number of employees: >2000;
Average productivity: 1,148.
Source: U.S. Postal Service.
[End of table]
Another factor, according to Service officials, is the physical layout
of plants, particularly when plants are multistoried, because more time
is spent moving mail between floors and among operations. For example,
one multi-story plant that we visited has a number of difficulties in
processing mail. Currently, the plant receives mail on the first floor,
transports the mail to the third floor where it is cancelled, then
sends the mail to the second floor for processing, and then back to the
first floor for outgoing trucks. Due to cost constraints, the plant
does not have an automated system to transport mail among the different
floors and all mail must be moved among the floors by elevator.
Unfortunately, many of the elevators are continually out of service.
According to the manager at the plant, there are 13 elevators in the
building and on a good day, 8 elevators are working. Consequently,
according to the manager, more workhours are used to move mail around
and prepare it for operations then would be used in a single-floor
plant. This lowers productivity and increases the plant's processing
costs. Figure 11 depicts the processing of a letter at a multistory
plant versus a single-floor plant.
Figure 11: Processing of a Letter at a Multistory and a Single Floor
Processing and Distribution Plant:
[See PDF for image]
Note: The figure depicts letter mail processing at a multistory and
single floor plant. Other types of mail, such as flats and small
parcels, are also processed at these plants but are not depicted in the
figure.
[End of figure]
The Service has 40 multistory processing plants across the country. The
average productivity at multistory plants in fiscal year 2004 was 1,381
pieces per hour, while in single floor plants it was 1,828 pieces per
hour. However, as seen in figure 12, there was a large gap between the
productivity at the most productive multistory plant and the
productivity at the least productive multistory plant in fiscal years
2001 through 2004. While overall productivity improved for all plants
between fiscal years 2001 and 2004, the gap in productivity also
increased from 1,395 fewer pieces per hour processed at the least
productive plant than the most productive in 2001 to 1,524 fewer pieces
in 2004.
Figure 12: Productivity (Total Pieces of Mail Processed per Hour) at
Multistory Plants in Fiscal Years 2001 through 2004:
[See PDF for image]
[End of figure]
Another factor in the productivity variation between plants is that the
Service does not have standardized processes across plants.
Consequently, one plant may be using a very efficient method to sort
mail while another plant may be using a less efficient method. For
example, table 7 shows the productivity of common automated mail
processing operations varies by area (the Service has divided its
national network into nine geographic areas).
Table 7: Average Productivity (Total Pieces of Mail Processed per Hour)
for Selected Operations by Area for Fiscal Year 2004:
Area: Capital Metro;
Prepare collection mail for sorting (AFCS): 15,768;
Letter sorting (DBCS): 6,667;
Flat sorting (AFSM 100): 1,944;
Small parcel sorting (SPBS): 257.
Area: Eastern;
Prepare collection mail for sorting (AFCS): 15,226;
Letter sorting (DBCS): 7,809;
Flat sorting (AFSM 100): 1,992;
Small parcel sorting (SPBS): 262.
Area: Great Lakes;
Prepare collection mail for sorting (AFCS): 17,547;
Letter sorting (DBCS): 8,003;
Flat sorting (AFSM 100): 1,999;
Small parcel sorting (SPBS): 260.
Area: New York;
Prepare collection mail for sorting (AFCS): 15,251;
Letter sorting (DBCS): 8,202;
Flat sorting (AFSM 100): 2,095;
Small parcel sorting (SPBS): 301.
Area: Northeast;
Prepare collection mail for sorting (AFCS): 16,452;
Letter sorting (DBCS): 7,868;
Flat sorting (AFSM 100): 1,912;
Small parcel sorting (SPBS): 215.
Area: Pacific;
Prepare collection mail for sorting (AFCS): 18,982;
Letter sorting (DBCS): 9,123;
Flat sorting (AFSM 100): 2,039;
Small parcel sorting (SPBS): 308.
Area: Southeast;
Prepare collection mail for sorting (AFCS): 17,007;
Letter sorting (DBCS): 8,231;
Flat sorting (AFSM 100): 2,063;
Small parcel sorting (SPBS): 308.
Area: Southwest;
Prepare collection mail for sorting (AFCS): 15,178;
Letter sorting (DBCS): 8,066;
Flat sorting (AFSM 100): 2,060;
Small parcel sorting (SPBS): 274.
Area: Western;
Prepare collection mail for sorting (AFCS): 16,132;
Letter sorting (DBCS): 8,545;
Flat sorting (AFSM 100): 1,976;
Small parcel sorting (SPBS): 313.
Area: Difference between Most and Least Productive Area;
Prepare collection mail for sorting (AFCS): 3,804;
Letter sorting (DBCS): 2,456;
Flat sorting (AFSM 100): 183;
Small parcel sorting (SPBS): 98.
Source: U.S. Postal Service.
[End of table]
The Service Has Excess Capacity:
According to Service officials, declining mail volume, worksharing, and
the evolution of mail processing operations from manual to automation
equipment have led to excess capacity. There are different types of
excess capacity including:
* excess workhours, which occur when more workhours are used than are
necessary for processing the mail;
* excess physical infrastructure, which occurs when more square footage
is available for processing mail than is necessary (this may include
entire plants);
* excess transportation capacity, which occurs when trucks are run at
less than full capacity; and:
* excess machine hours, which occur when machines sit idle.
Declines in mail volume have led to excess equipment capacity because
less mail is being processed on the same amount of equipment. As stated
earlier, worksharing contributes to all types of excess capacity
because more mail volume is bypassing Service operations that occur
early in the process, such as cancellation and initial sorting. In the
case of dropshipping, volumes of mail bypass entire plants. With
automation, mail can be sorted faster than with manual processing. This
has led to earlier processing completion times and higher
productivities. On average, 525 pieces of letter mail can be sorted in
1 hour using manual processing operations, while 8,171 letters can be
sorted in 1 hour using automated processes. Consequently, mail no
longer needs to be processed on all plant shifts and equipment is being
used fewer hours a day. Advancements in technology have also lessened
the need for certain types of plants, such as air mail centers and
remote encoding centers--which are separate plants established to
perform address barcoding on letters that could not be read by the
automated equipment in the mail processing plants.
The Service Is Pursuing Several Initiatives in Response to Changes but
Challenges Remain:
To achieve a more efficient and flexible infrastructure in response to
changes in the marketplace, the evolution of the mail processing
infrastructure, and shifts in demographics, the Service is exploring
broad infrastructure realignment, while at the same time pursuing
several initiatives to address inefficiencies in its current
infrastructure. In its 2002 Transformation Plan, the Service outlined
its network optimization effort, the goal of which was to create a
flexible logistics network that reduces mailing industry costs,
increases overall operational efficiency, and improves service. The
Service has also taken some concrete steps to realign its
infrastructure by closing some processing annexes, approving
construction on plants in certain locations, and consolidating
operations in various plants. In addition, the Service is pursuing
several initiatives to improve efficiency in its current
infrastructure. It is expanding automation, improving material handling
operations, creating a comprehensive transportation network, and
introducing standardization programs in an effort to reduce workhours
and increase productivity. The Service faces challenges in reducing
variations in productivity across plants in part because
standardization efforts are hindered by the complexity in operations
and the physical differences in plants. The Service also faces
challenges in reducing excess capacity while maintaining service
standards, including workforce rules, and stakeholder resistance to
plant closings.
The Service Is Working Toward Realigning Its Infrastructure to Address
Changes:
To assess its overall infrastructure in relation to changes that have
occurred, in November 2001, the Service began developing a modeling
tool designed to identify the least-cost network, given current service
standards, under several network scenarios. According to the Service,
the model will "help the Service determine which plants remain viable
and necessary within the future infrastructure, and what distribution
and transportation roles [would] be performed by plants that remain as
parts of an optimal, fully integrated network." According to the
Service's Transformation Plan, a plan to implement the results of this
modeling tool was to be completed by December 2002. By November 2003,
the Service had collected detailed operational and volume data and had
developed data-based models. In January 2004, the Service reported that
the models were being tested and validated. Since then, there has been
little public information on the results of these models or the
Service's implementation plans.
The Service has also begun closing annexes--temporary plants used for
mail operations when space is limited--and consolidating mail
processing operations in order to address the issue of excess capacity.
While new construction is also taking place, some of these projects
have been in the planning stages for years. Consequently, it is unclear
whether the Service is incorporating its future infrastructure needs
into its current projects.
Between fiscal year 2002 and 2004, the Service closed 50 annexes.
According to Postal Service officials, decisions to close annexes are
based on volume and do not take future network configuration into
consideration. Because annexes are usually staffed by temporary
employees, for whom the Service does not have the same notification and
reassignment requirements as it does for permanent employees, they are
easier to close than other plants and the closing can be done
relatively quickly and with little controversy. Also, while most
processing plants are owned by the Service, most annexes are leased and
therefore can be closed without having to dispose of the asset. Table 8
shows the number of plants and annexes owned and leased by the Service.
Table 8: Number of Plants and Annexes Owned and Leased by the Service
as of September 30, 2004:
Type: Plants;
Owned: 330;
Leased: 60;
Total: 390.
Type: Annexes;
Owned: 20;
Leased: 45;
Total: 65.
Source: GAO analysis of U.S. Postal Service data.
[End of table]
However, according to Service officials, closing annexes is a short-
term solution. In some cases, the Service is planning on eliminating
certain types of plants altogether. For example, the Service's Chief
Operating Officer told us that there is no longer a need for processing
mail at air mail centers because, due to technological advances, mail
can be assigned to specific flights right at the mail processing and
distribution plants. The leases for air mail centers are typically very
expensive; and in many areas of the country, the Service is considering
closing down the plants as the leases expire. Another example is the
reduction and eventual elimination of the separate address barcoding
centers, remote encoding centers. Enhancements in the ability of
automation equipment to read addresses have now significantly reduced
the need for remote encoding centers. Initially, the Service had 55 of
these centers and is now down to 17.
In several areas, rather than closing entire plants, the Service has
consolidated sorting operations at several plants into one plant. For
example, in the Pacific Area, Saturday mail processing has been
consolidated from 23 plants to 11 plants. An area official told us that
the consolidation effort began a few years ago in response to volume
declines. The official pointed out that consolidation of Saturday mail
processing reduces processing costs, but may increase transportation
costs because the mail has to be rerouted to the plant that is
processing the consolidated volumes. The Service is able to consolidate
Saturday processing because there is no delivery on Sunday. Therefore,
the Service can reroute the mail and still meet its service standards.
Officials in other areas told us that they are also consolidating
Saturday processing. While efforts to close plants and consolidate
operations have taken place, the Service has not provided any public
information on its future closings and consolidations, nor does it have
a standard procedure in place for closing plants, and instead operates
on a case-by-case basis.
The Service has begun constructing, or has approved funding for the
construction of new plants because, as stated earlier, some plants
cannot accommodate necessary equipment, do not have room for current
operations, or are not optimally located. For example, in Philadelphia,
the Service is building a new processing and distribution center to
replace the current one, which was built in 1935 and consists of two
four-story buildings connected by a bridge. Mail at this plant is
processed on separate floors and is moved between operations using
elevators. The new plant will be two stories but will have a tray
management system that will assist in moving the trays between the
floors. It will also be able to accommodate mail-processing equipment
that will not fit in the current plant and will have more dock space.
According to the manager at the Philadelphia plant, moving to the new
building should increase productivity and decrease the workhours
currently needed to move mail between operations. The Postal Service
Board of Governors has also approved funding for new plants in Maine
and Michigan.
The Service Is Increasing Its Automated Operations to Improve
Productivity and Efficiency:
The Service is completing the automation of letter mail processing and
focusing efforts on automating flats and parcels to increase
productivity and reduce costs in response to changes that have occurred
in the mailing industry. The Service is automating the processing of
undeliverable-as-addressed mail, deploying automated flat sorting
equipment and deploying a promising new parcel-sorting machine.
However, increased automation contributes to excess capacity and it is
not clear how the Service intends to reduce this excess capacity as its
operations become more automated.
Letter Processing Automation:
The Service is continuing its automation of letter mail by focusing on
controlling the cost of undeliverable-as-addressed mail, which includes
mail that is improperly addressed and change of address mail. Annually,
an average 4.3 billion letters are undeliverable-as-addressed and
require additional processing steps to verify and sort the mail to the
correct address. This mail costs the Service approximately $1.8 billion
a year. Currently, undeliverable-as-addressed mail is processed to the
delivery unit where the carrier identifies the piece as undeliverable.
The mail is then transported to a Computerized Forwarding System site,
where the undeliverable-as-addressed mail is manually keyed and
redirected for processing to the correct location. This means that each
piece is essentially processed twice, resulting in increased costs. To
address this expenditure, the Service is deploying software technology
called the Postal Automated Redirection System. By scanning each piece
of mail and comparing it with a computerized database of change of
address forms, the software identifies undeliverable-as-addressed
letter mail at the first automation handling and redirects the mail to
the current address, thus, reducing the handling and transportation of
undeliverable-as-addressed mail. The Service expects to save
approximately 5 million workhours annually upon completion of the
program. However, upon completion, the Postal Automated Redirection
System will only redirect undeliverable-as-addressed letter mail. Flat
undeliverable-as-addressed mail will continue to be processed through
the Computerized Forwarding System.
Flat Processing Automation:
The Service has recently deployed automation equipment for flat mail
that is intended to improve productivity and reduce handling costs of
over 50 billion flat pieces processed each year. In 1982, the Service
began moving flats out of manual processing by introducing mechanized
sorting machines. However, the Service experienced problems with the
mechanized machines, including frequent jams and high maintenance
costs. Many of these problems were due to mail pieces that were wrapped
in plastic, or too flimsy to be processed on the equipment, and
resulted in an increase in the unit mail processing cost for flat mail,
particularly periodicals. In fiscal year 1996, the Service began
replacing the older machines with a flat sorting machine (FSM 1000)
that, although still not automated, was designed to handle pieces
wrapped in plastic and less rigid pieces. In 2000, the Service also
introduced an automated flat sorting machine (AFSM 100) that contains
an automated flat feeder and optical recognition technology to read
addresses. In plants that do not have enough flat volume to justify
deployment of the AFSM 100, the Service is modifying the existing FSM
1000 to include scanning capabilities that replace the need for manual
keying. The AFSM 100 has a throughput rate of 17,000 or more flat
pieces of mail per hour, which is more then twice as fast as the FSM
1000. As seen in table 9, the higher throughput results in higher
productivity than manual or mechanized operations.
Table 9: Comparison of FY 2004 Productivity for Flat Sorting
Operations:
Flat sorting operation: Manual Flats;
Productivity Pieces Handled per Hour: 427.
Flat sorting operation: FSM 1000;
Productivity Pieces Handled per Hour: 433.
Flat sorting operation: AFSM 100;
Productivity Pieces Handled per Hour: 2,011.
Source: U.S. Postal Service.
[End of table]
While the AFSM 100 has a faster throughput for processing flat mail
than its predecessor, when it was first deployed, mailers experienced
problems with the feeder system ripping the covers, which generally
contain addresses, off of magazines. Consequently, subscribers were not
receiving their magazines or were receiving just the cover. The Service
is currently working to enhance the feeders with upgrades designed to
significantly decrease the amount of damage. In addition, the equipment
requires many workhours to prepare the mail to be fed through the
machine. Therefore, some of the benefit of the increased productivity
may be lost. For example, most mail that will be processed on the AFSM
100, must first be stacked into a flat mail cart, which takes 40
minutes for one employee to fill. Due to the speed at which the AFSM
100 can process flats, six carts have to be manually prepared for each
hour the AFSM 100 is run, resulting in a significant amount of
workhours needed to prepare the flat mail and square footage needed to
store the prepared mail waiting to be processed on the equipment. The
Service has said that it is exploring ways to automate and standardize
the mail preparation process to reduce workhours. Figure 13 shows empty
flat mail carts and the space needed to store them and the volume of
flat mail in a flat mail cart when it is full.
Figure 13: Photographs of Empty and Full Flat Mail Cart:
[See PDF for image]
[End of figure]
Unlike letter mail that is sorted on automated sorting machines into
the order the mail will be delivered on the carrier route (delivery
point sequence), flat mail must be sorted manually by the carrier into
delivery order. The Service is exploring automation that would sort
flat mail into delivery sequence order to reduce the need for the
carrier to sort flats in the office and technology that would package
flat and letter mail together for delivery operations to eliminate
carrier sorting. While this technology is still in the research and
development stage, it could eventually have a significant effect on the
Service's infrastructure and on operations and mail processing across
the entire postal network including how mailers prepare and present
their mail to the Service. This has raised concerns among mailers.
Parcel Processing Automation:
To increase efficiencies in parcel processing, the Service has
developed automation to reduce manual handling and increase processing
capacity. The Service has deployed the Singulator Scan Induction Unit
(SSIU), which has improved productivity and sort accuracy for
processing packages at the BMC by reducing the need to manually key in
parcel addresses. The SSIU is capable of scanning over 5,000 parcels
per hour, and eliminates 80 percent of all clerk keying operations at
19 of the 21 BMCs. The equipment cannot be installed in the remaining 2
BMCs due to the unique design of the equipment and the layout of the
plants.
The Service is also in the process of deploying the next generation of
parcel sorting equipment at the processing and distribution plants
called Automated Package Processing Systems (APPS), which will process
small parcels and bundles of mail. The APPS machine is expected to
replace the small parcel and bundle sorters in larger plants and does
not require manual keying of each piece, reducing workhours
significantly for the Service. The automated package processing machine
is expected to increase processing capacity, productivity, and sorting
accuracy of parcels and bundles of mail. However, as seen in figure 14,
the APPS machine is very large and many plants do not have the floor
space to accommodate it. There are several standard configurations for
the APPS machine that require between 12,100 sq. ft. and 32,100 sq. ft.
Some Service officials expressed concern because they do not have
enough room for the new machine in processing plants, and there are
only a few plants that will be able to accommodate the equipment.
Figure 14: Automated Package Processing Machine:
[See PDF for image]
[End of figure]
The Service Is Improving Its Material Handling Operations:
The Service is working to expand mechanization and improve productivity
in order to reduce workhours in the methods employed to move mail
between operations, prepare mail for processing, and load and unload
mail from trucks, known as material handling. However, cost concerns
limit the effectiveness of these initiatives. The Service has deployed
various systems to move trays of mail throughout its processing plants,
including the low cost tray sorter, the tray management system, and a
prototype of the universal transport system. Between fiscal year 2000
and 2003, the Service reduced its material handling workhours in 244
processing plants by 11 million or 11 percent. However, the Service
recently announced that it was curtailing the deployment of the
universal transport system because of low return on investment.
To reduce material handling workhours and limit the amount of manual
labor needed to move mail between operations, the Service has deployed
Low Cost Tray Sorters (LCTS), which are essentially conveyor belts used
to move trays of mail between various operations. LCTS will replace the
current method of loading mail into handcarts, manually moving the
handcarts between operations, and unloading the handcarts. According to
the Service, LCTSs are configured to the unique needs of each
particular processing plant and are only justified and deployed on a
site-specific basis. To date, the Service has deployed the LCTS in 160
plants; however, the Service has stated that additional site-by-site
justifications are possible resulting in additional LCTS deployments.
Figure 15 shows one version of the LCTS.
Figure 15: Low Cost Tray Sorter:
[See PDF for image]
[End of figure]
The Service has also installed the Tray Management Systems in a number
of postal plants. The Tray Management Systems is an automated system
that manages and controls mail transport, staging, and retrieval of
letter and flat mail trays throughout a plant on a conveyor belt system
by scanning barcodes and directing the trays to mail processing
equipment. The Service initially planned on deploying 42 systems but
temporarily suspended deployment because of capacity and reliability
problems. In 1998, the number of systems to be deployed was reduced to
23 sites costing $497.3 million. Only three multistory plants have the
Tray Management System.
The Service recently abandoned an effort to automate material handling
due to low return on investment of its experimental Universal Transport
System. This system was designed to expand the processing of product
lines beyond that of traditional Tray Management Systems, which only
process letter and flat trays. Instead, the Universal Transport System
is a system that transports trays, bundles, packages, and sacks
throughout a plant to enhance work processes and improve information
flow. The Service spent $27.3 million developing this system in a
processing plant in Fort Myers, FL, over the past 5 years. However, the
Service stated that it has no plans for deploying the system to other
processing plants.
The Service Has Made Changes to Its Transportation and Distribution
Network to Address Demographic and Transportation Changes:
To improve efficiency in its transportation and distribution network,
the Service is implementing programs designed to increase utilization
of truckload capacity, increase flexibility in transportation
contracting, and reduce redundancies.
The Service Has Developed a Tool to Improve Information Used to
Optimize Truckload Capacity:
The Service has developed a Transportation Visibility Strategy designed
to help management increase utilization of truckload capacity.
According to Service officials, currently, 35 to 40 percent of
truckload capacity is not being used, and without accurate and complete
data on mail volume per truck, the Service has been unable to optimize
load capacity. One way in which the Transportation Visibility Strategy
is intended to increase efficiency is by using actual volume data in
network planning and optimization. Instead of relying on estimates to
determine truckload volume, the new strategy will incorporate scanning
technology and data management software to determine the origin and
destination of mail, and to assign it to a specific route. Having more
accurate data on how much mail is coming from or going to any given
destination will enable the Service to analyze mail density on travel
routes, and consolidate mail traveling to the same location, resulting
in fuller trucks. The Service has stated that this strategy will be
employed at about 130 plants by fall 2005, which will afford it the
ability to capture data on 78 percent of the Service's originating
highway volume and automate 70 percent of the data collection
activities that are currently performed manually.
The Service Is Working to Increase Flexibility in Its Transportation
Planning:
The Service has implemented a new contract management system to support
the solicitation, award, and administration of its highway contract
routes and improve flexibility in the transportation network.
Traditionally, the Service has entered into 4-year contracts with its
transportation suppliers. According to Service officials, at times,
these contracts do not support efforts to create a flexible
transportation network. This is because 4-year contracts commit the
Service to agreements that may not reflect changing needs such as mail
volume fluctuations and changes in processing operations. Also, the
Service may not be able to easily add or remove needed trips. Service
officials have stated that the use of the new contract management
system, in addition to the mail volume data provided through the
Transportation Visibility Strategy, will allow the Service to enter
into 1 or 2 year transportation contracts that allow it to more
accurately plan transportation and routing of mail. The Service is also
planning to implement a Transportation Optimization Planning and
Scheduling tool that is intended to allow it to conduct long-term
planning and dynamic scheduling of its mail transportation. The Service
manages over 17,000 highway contract routes and as contracts are
renewed, these new systems will allow the Service to assess costs and
service performance associated with these contracts.
The Service Intends to Reduce Redundancies in Transportation and
Distribution Systems by Expanding Its Hub and Spoke Program:
The Service plans on expanding its hub and spoke program (HASP), and
modifying its Bulk Mail Center (BMC) networks to address redundancies
in its transportation and distribution network. Currently, the Service
transports First-Class Mail through its HASP network and Standard Mail
through its BMC network, which may create redundancies on routes
serviced by both networks. Figure 16 shows the current locations of
HASPs and BMCs. By eliminating redundancies across these networks, the
Service believes that it will be able to cut its transportation costs
and improve its efficiency. HASP creates a consolidation hub within an
area, thus eliminating some inter-plant truck trips between different
processing centers, and their associated costs. Currently, the Service
has 13 HASPs located in 8 of its 9 regional areas. The Western Area,
which is the largest of the Service's 9 geographic areas, covering 1.7
million square miles, does not have HASP. The Service is considering
developing two HASPs in this area, attaching them to the Kansas City,
MO, and Denver, CO, processing and distribution centers. Another method
the Service is considering to reduce redundancies in its transportation
network is to modify its BMC network for use as regional distribution
centers included in the hub and spoke program.
Figure 16: Service Bulk Mail Center and Hub and Spoke Program
Locations:
[See PDF for image]
Note: There are no Bulk Mail Centers or Hubs in Alaska or Hawaii.
[End of figure]
The Service Has Designed Several Programs to Increase Productivity and
Reduce Workhours:
The Service has designed several programs to increase processing
productivity and decrease variances in productivity between plants,
including its Breakthrough Productivity Initiative (BPI) and
Standardization Programs, Activity Based Costing (ABC), and Labor
Scheduler.
Breakthrough Productivity Initiative and Standardization:
The Service has developed a Breakthrough Productivity Initiative that
measures each plant's processing performance against nationally
established targets to increase processing productivity and decrease
variations in productivity between plants. This initiative includes a
recognition program that provides plant managers with financial
incentives to perform at their target productivity. The Service
establishes target groups and productivity targets for each of these
groups. Plants are placed in a group and are compared with the other
plants in the same group. Postal officials explained that incentives to
increase productivity are given in the form of bonuses for managers and
reduced budget allocations for plants.[Footnote 8] As part of this
initiative, the Service has established a Standardization Program. This
program identifies "proven practices" in mail processing that have
resulted in high productivity for processing plants and communicates
these practices, and the subsequent increases in productivity that
result from them, to other processing plants.
The goal of standardization is eventually for all plants to certify
that they are reaching set performance targets. Because there may be
more than one way to reach a productivity target, a plant does not have
to use the proven practice; it only has to meet its productivity target
and is provided with a proven way to meet the goal. In addition,
targets are reviewed to determine if they need to be adjusted based on
demonstrated performance. The first operation to be certified under
this program is the Automated Flat Sorting Machine (AFSM 100). The AFSM
100 operations have been standardized, and all plants that use this
machine must be certified in them, that is, the operations must all be
as productive as their given target. Certification of this operation
has resulted in the Service achieving a 6.8 percent increase in
performance in fiscal year 2003 with 44 percent of its sites certified.
Further, as of August 2004, with 100 percent of its sites certified,
the Service achieved record productivity performance of 2,015 pieces
per hour being processed, for a 17.7 percent increase in productivity
over fiscal year 2003.
Activity Based Costing:
The Service has begun using an Activity Based Costing program to
determine differences in unit operating costs among plants and to
identify opportunities for savings in plants. For example, a plant's
mail volume, maintenance needs, or workforce size may affect the
plant's operating costs. The Activity Based Costing program assigns
costs to plants for specific activities and products and provides
managers with the ability to identify potential areas where high costs
can be reduced. To date, the program is not used in BMCs, but will be
piloted in three BMCs in fiscal year 2005.
Using Activity Based Costing in conjunction with BPI would allow plant
managers to view the costs associated with different levels of
productivity. Managers have an incentive to increase BPI productivity
but the costs associated with this productivity may be high. As seen in
figure 17, there is a strong correlation between BPI productivity and
the cost of processing letter mail. However, not all plants with high
productivity have low processing costs. For example, two plants with
very similar productivities in fiscal year 2004--2,251 and 2,250 total
pieces per hour--had average letter processing unit costs that were
about 2 cents apart, with one being about 4.8 cents, and the other
about 2.8 cents. Service officials have said that there are plans to
expand the Activity Based Costing program. Activity Based Costing was
made available to managers in 2003, and officials stated that they are
continuously receiving requests from interested employees for training.
Figure 17: Correlation Between BPI Productivity (Total Pieces Processed
per Hour) and Activity Based Costing Unit Letter Processing Costs for
Fiscal Year 2004:
[See PDF for image]
[End of figure]
The Service Developed a Labor Scheduler to Optimize Employee
Scheduling, but Problems with Data Have Limited Its Use:
The Service has implemented the Labor Scheduler, a model that will
allow managers to optimize the number and type of employees required
for each mail processing shift and operation. The Labor Scheduler is
designed to allow plant managers to avoid overstaffing or understaffing
that can lead to higher mail processing costs or poor service. Several
problems have arisen with the use of the Labor Scheduler, including
poor data quality and insufficient communication used when implementing
it.
In February 2004, the Service's Office of Inspector General (OIG) found
several problems with the Labor Scheduler. The managers we interviewed
corroborated these problems. For example, the OIG determined that the
model's input data could not be validated because it was either
incomplete or unavailable. Therefore, the model's output data were not
reliable. In one instance, the model identified 112 positions in a
plant to be changed or reduced. However, after a significant number of
the positions were reduced, the plant's workhours and overtime
increased. A Service official responsible for implementation of the
Labor Scheduler program said that the same type of data are used for
each plant but acknowledged that some sites might need to improve their
data. This official also said that the output of the model is only as
good as the data collected and how it is used. For example, a
headquarters' official told us that data can be manipulated to show a
desired outcome. During our plant visits, some managers told us that
they were unable to use the Labor Scheduler because its outputs were
unrealistic and could not be implemented.
The OIG also found that there was ineffective communication between the
Labor Scheduler program office and plant management. Management was
unclear on how to use the model and how to use and communicate the
model's results. For example, the OIG found that managers were unsure
how to manage multiple employee shift start times. This concern was
also raised during our site visits, when a plant manager told us that
the model's output recommended the plant shifts should start at 12-14
different times. The plant manager said that it would have been hard
for managers and employees to keep track of the schedules.
The Service Faces Challenges in Addressing Productivity Variations
among Plants and Excess Capacity:
Despite the recent progress the Service has made in improving
efficiency and cutting costs, it faces challenges in reducing
productivity variances among plants and eliminating excess capacity.
Difficulties in Reducing Variations in Productivity among Plants:
The Service has had difficulty reducing variations in productivity
across plants, in part, because standardization efforts are hindered by
the complexity in operations and the physical differences in plants. In
fiscal year 2001, the average productivity at small plants was 446
pieces per hour higher than the average productivity in large plants.
This difference shrunk to 405 pieces in fiscal year 2002, then rose
again in fiscal year 2003 to 436 pieces per hour, and 474 pieces in
fiscal year 2004. According to postal officials, a key effort directed
toward reducing this variation in productivity is its standardization
program. These officials said that it is difficult to standardize some
operations, such as material handling and collection, because these
operations are affected by so many variables, such as how many trucks
need unloading on any given day and how the mail is prepared on the
truck. Thus, it has been difficult to establish a measurement on which
to evaluate them. Standardization is also hampered because there are so
many different buildings in the Service's infrastructure that it cannot
develop one uniform layout. For example, the automated parcel-sorting
machine has standard operating procedures to maximize its output, but
it comes in different physical designs to complement different plant
layouts. Service officials told us that engineers have been studying
processing plant layouts for years, and have ideas as to what the most
efficient layouts are, but have not been able to generalize plant
layouts because not all plants have the same equipment in them. Another
difficulty in achieving standardization, according to these officials,
is that because the workforce is primarily decreased through attrition,
standardization processes occur incrementally, in tandem with changes
in the workforce.
Reducing or Eliminating Excess Capacity Is Difficult:
The Service faces challenges in eliminating excess capacity while
maintaining service standards, which drive dispatch times at processing
plants. For example, one way to reduce excess capacity in the form of
workhours and transportation capacity is to consolidate mail-processing
operations from many plants into one plant. If some of the plants are
then closed and equipment disposed of, then excess physical
infrastructure and machine capacity is also reduced. However, according
to a Service official, service standards impede consolidation of mail
processing because consolidation requires re-routing mail from plants
that are closer to collection or delivery points to plants that are
farther away. This official said that relaxing service standards could
greatly increase the amount of consolidation that could be achieved.
The challenge is to reduce excess capacity while maintaining service
standards.
The Service and its unions have negotiated workforce rules, which are
important in documenting how work in the plant will be performed and in
protecting workers' rights. According to Service managers, contractual
workforce rules reduce management's flexibility to reduce excess
capacity because these rules govern reassignments and terminating
positions that are no longer needed. For example, several Service
managers told us that it is difficult for them to move excess employees
to positions where they are needed because of these workforce rules.
These workforce rules include steps to be followed when eliminating
positions, and rules regarding transferring employees between
positions, such as clerks, mailhandlers, and carriers.[Footnote 9] When
transferring between positions, employees will often lose their
seniority so they elect not to transfer. Therefore, if a plant has too
many clerks and not enough mailhandlers, it cannot simply move some
clerks to mailhandler positions. In addition, moving employees between
plants requires the Service to follow specific steps that often limit
managers' flexibility. One area vice president told us that it is very
challenging to move employees from one plant to another. For example,
this vice president had worked out an agreement between the regional
unions to allow employees to move from a plant that had too many
employees to a plant with too few. However, local union representatives
wanted part-time employees in their district to be converted to full-
time employees and given positions in the plant with openings rather
than have current full-time employees from the over-staffed plant move.
Therefore, they halted the agreement at the last minute. The workforce
contracts also include "no layoff" clauses and procedures that must be
followed when plants are closed or tours consolidated, including a
formal agreement that requires 60-days notice whenever the Service is
going to close a plant.
Another obstacle to eliminating excess capacity is the resistance the
Service has historically encountered when it tries to close plants. In
each of the three cases we reviewed, the Service encountered resistance
to its plans to close plants. For example:
* When the Service wanted to move operations from the Pendleton, OR,
plant to nearby Pasco, WA, because of equipment limitations in
Pendleton, many people protested. Local congressional representatives
made a formal request to the Service not to close the plant. In
response, the Service modified the equipment to fit into the existing
plant.
* When the Service considered moving the business mail entry unit from
St. Paul, MN, to Minneapolis, MN, because of security concerns and
cramped plant space, local union members and representatives got
involved and urged the Service to reconsider. Although none of the 30
employees at the St. Paul plant would have lost their jobs, their
schedules and commutes would have changed. The Service agreed to delay
the closing pending further review.
* At the Marina Del Rey, CA, processing and distribution plant, local
managers began moving some operations out of the plant and
consolidating them with operations at the Los Angeles, CA, plant.
Before any decisions were announced at the headquarters level, word got
out that the plant was being considered for closing. Local unions
contacted local government representatives, and union members picketed
the plant. Some of this resistance was due to the Service's failure to
communicate with its employees and unions regarding the Marina Del Rey
plant. National union representatives told us that the Service never
contacted them about the possible closing, and they only heard about it
after the possible closing was discussed in a newspaper article.
The Service's Strategy for Realigning Its Mail Processing
Infrastructure Lacks Clarity, Criteria, and Accountability:
We developed criteria for evaluating the Service's strategy, including
how effective it would be in eliminating excess capacity and whether
the strategy was transparent and accountable. The Service's strategy
raises several issues. First, the Service's strategy for realigning its
mail processing and distribution infrastructure is unclear. Second, it
does not include specific criteria and processes for eliminating excess
capacity, including the removal of unnecessary facilities. Third, the
Service's strategy excludes stakeholder input, is not sufficiently
transparent and accountable, and lacks performance measures for results
of decisions.
The Service's Strategy for Realigning Its Mail Processing and
Distribution Infrastructure Is Not Clear:
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.
In 2002, the Service announced a strategy for realigning its
infrastructure that outlined an ambitious effort to "initiate sweeping
logistics changes." According to the Service, a modeling tool referred
to as Network Integration and Alignment (NIA) was to be used to
determine what specific changes would be made. These changes were to
include consolidation of plants, redefined roles for plants, reduced
transportation costs, and a streamlined network. An implementation plan
for this strategy was to be developed by December 2002. However, to
date the Service has not developed an implementation plan. Following a
recommendation we made, in November 2003, the chairman of the Senate
Committee on Governmental Affairs and a senator asked the Service to
provide a plan on how it intended to optimize its infrastructure and
workforce that described the criteria, process, and data the Service
was using to make decisions, as well as the strategies, timing, and
funding necessary.[Footnote 10] In December 2003, the chairmen, and
ranking minority members, of the House Committee on Government Reform
and the Special Panel on Postal Reform and Oversight also asked the
Postal Service to submit a plan on how it intended to fund capital
investments needed to ensure the long-term viability of the Postal
Service, including how the Service intended to rationalize its
infrastructure and workforce. In response, in January 2004, the Service
submitted to the House Committee on Government Reform, a report
entitled, Infrastructure and Workforce Rationalization: Funding Key
Capital Investments. This report, which was not made public by the
Postal Service, described a "promising alternative" being considered
that the Service called a consolidation hub concept. Under this concept
there would be two basic types of facilities, origination and
destination facilities, which would be the initial recipients of
collection mail and the final plant before delivery, and consolidation
hubs where the mail would be consolidated and distributed. According to
the report, "the major difference between this concept and the current
mail processing environment is that it envisions a single uniform
network."
Since issuance of this report, Postal Service officials told us that
nothing is planned across the entire network but rather opportunities
will be reviewed as they arise. In a speech before the 2004 National
Postal Forum[Footnote 11] the Postmaster General called this strategy
the Evolutionary Network Development (END) and explained it in the
following manner:
"A couple of years ago there was a lot of fanfare and misunderstanding
about a concept known as "NIA"-Network Integration and Alignment. Many
saw it as the ultimate plan to consolidate and close facilities. Well,
it's not.
"Why? Because nobody can predict 5, 10, or 15 years from now what mail
volume will be, or what type of mail processing equipment we will be
using to sort the mail. So we have decided, instead, to do what we've
done for decades. That is, take the next step in evolving our networks,
and that's our E-N-D game--short for Evolutionary Network Development.
"It's an END game that never ends, because rationalizing and optimizing
security, plants, processing systems, transportation, and staffing is
something we have to continue to do to keep our networks efficient and
our systems affordable."
Neither the Service's report, the strategy outlined in meetings with
Postal Service officials, or the Postmaster General's speech sets
criteria for making realignment decisions, nor do they include a
process for making these decisions. In addition, no details about the
Service's vision of how its planned changes will remove excess capacity
in the network, minimize productivity variances, maximize overall
efficiency, or how much the Service will save in costs has been
provided. The Service has procedures that it uses when making decisions
to consolidate operations in its mail processing plants, which are
outlined in appendix N of the Transformation Plan. These procedures
include a feasibility study, preparation of proposal documentation, an
approval process, and implementation steps. However, in discussions
with Service officials, we were given vague and confusing information
on the Service's procedures for closing plants. Consequently, it is not
clear how these procedures relate to the Service's realignment
strategy, whether these procedures are used when closing plants, are
applicable to all plants, or if these procedures are used consistently.
In addition, the procedures outlined in appendix N lack specificity
regarding:
* who is responsible for initiating proposals,
* who conducts feasibility studies and how,
* what criteria are used to evaluate proposals,
* who is responsible for approving these proposals,
* how these proposals are implemented, and:
* who is held accountable for these decisions.
It is also unclear how stakeholders are notified, when they are
notified, and by whom.
In Attempting to Evaluate the Service's Strategy We Developed Criteria:
In evaluating the Postal Service's strategy, we established criteria
based on the Service's stated goals for realignment, our previous work,
the Committee on Government Reform report that accompanied House postal
reform legislation (House Report), the Committee on Governmental
Affairs report that accompanied Senate postal reform legislation
(Senate Report), and the President's Commission on the United States
Postal Service (Commission) report.[Footnote 12] In its Transformation
Plan the Service stated, "the mail processing network infrastructure
will be redesigned to meet volume forecasts, customer requirements, and
competitive pressures. Streamlining and simplifying the distribution
network will permit consolidation of sorting facilities and elimination
of excess resources." In our previous work, we emphasized the
importance of transparency and accountability:
for government institutions such as the Postal Service.[Footnote 13]
Both the House and the Senate Reports also state the importance of
transparency to the Service achieving its realignment goals. In
previous testimony, we stated that in order to be successful in its
realignment the Service will need the input and support of its major
stakeholders, such as mailers, employees, communities, and government
representatives.[Footnote 14] The Commission has stated that it is
important for the Service to ensure that an appropriate process for
soliciting and dealing with stakeholder concerns is implemented. The
Service identified one of the benefits of realignment as reduced total
costs for the Service and mailers. Accordingly, in evaluating the
Service's strategy for realigning its infrastructure, we used the
following criteria:
1. Will the Service's strategy result in a network that is efficient
and flexible, and will it lead to the elimination of excess capacity?
2. Does the Service's strategy include stakeholder input, and is it
transparent and accountable under the following guiding principles;
* It is based on a clear, transparent, and consistently applied
process.
* It ensures that when decisions are made they are conducted as fairly,
effectively, and efficiently as possible.
* It provides for accountability in connection with decisions.
The Service's Strategy May Not Reduce Excess Capacity and Is Not
Transparent and Accountable:
It is unclear how the Service's strategy will result in elimination of
excess capacity because it does not include criteria for making
realignment decisions that include considering the effect on excess
capacity, nor does it include performance measures related to
eliminating excess capacity. In addition, the Service's strategy
excludes stakeholder input and is not sufficiently transparent or
accountable. The strategy does not include criteria for making
decisions or processes for implementing decisions, which would help
ensure fairness and effectiveness, nor does it include performance
measures for evaluating decisions.
The Service's Strategy May Not Result in Elimination of Excess
Capacity:
In discussions with Service officials, we were told that the closing of
the Marina Del Rey processing plant was a good example of the Service's
strategy. The Service will close the Marina Del Rey plant and move
operations into its South Los Angeles plant. The Marina Del Rey plant
had productivity in fiscal year 2004 of 1,598 pieces per hour, while
the Los Angeles plant had productivity of 1,139 pieces per hour.
According to Service officials, none of the 900 employees at the Marina
Del Rey plant will lose their jobs. Instead they will be relocated. The
Service has also stated that it has no immediate plans for the building
once the operations are moved out of it. It is not clear how closing
this plant will increase efficiency or reduce excess capacity. Criteria
for making realignment decisions would help clarify the Service's
decisions.
As stated earlier, the Service has also been consolidating shifts
across its infrastructure. These consolidations have contributed to the
Service's impressive reduction in workhours over the past 3 years.
However, consolidating shifts may lead to excess capacity in other
areas. For example, if mail is no longer processed on certain shifts
this means that the processing equipment sits idle during that shift.
In addition, if several plants in a particular area have eliminated
processing shifts it may be feasible to consolidate these plants and
dispose of excess physical infrastructure. Due to the Service's lack of
transparency about the results of its network modeling activities,
however, it is difficult to assess the extent of opportunities for
eliminating unnecessary plants. The Service's strategy of taking
advantage of opportunities as they arise may not result in
consolidations or closings in the areas with the most excess capacity.
Having realignment criteria that outlines at what point an area should
begin closing plants may result in better alignment of resources with
mail volumes.
In addition, the Service's approach of taking advantage of
opportunities as they arise may prolong inefficiencies and may not
address the most pressing needs. For example, the Service has been
deploying automation equipment throughout its network although some of
the plants that are receiving equipment may ultimately be closed, which
would necessitate moving or disposing of the equipment. Similarly,
equipment and transportation costs will be higher than necessary if the
network is not as streamlined and simplified as it could be.
Furthermore, maintaining an infrastructure that is larger than
necessary requires the Service to spend resources that it could employ
elsewhere. In addition, the Service may be forgoing revenue from the
sale of excess properties.
The Service's Strategy Excludes Stakeholder Input and Is Not
Sufficiently Transparent or Accountable:
The Service strategy excludes stakeholder input and is not sufficiently
transparent or accountable because it is not based on a clear,
transparent and consistently applied process; it is not clear that when
realignment decisions are made they are conducted as fairly,
effectively, and efficiently as possible; and it does not have
performance measures for results to provide accountability in
connection with realignment decisions. To achieve its realignment goals
of an efficient and flexible network, the Postal Service will have to
have a strategy that is both transparent and accountable. According to
the Committee on Governmental Affairs report that accompanied the
Senate postal reform legislation in 2004, "it is vitally important that
the Postal Service go about its facilities realignment in the most
transparent manner possible. Transparency will [sic] make it possible
for those affected by the Postal Service's actions to see the
connection between those actions and the need to preserve the vital
services the Postal Service provides."[Footnote 15]
The Service's lack of external communication excludes stakeholder input
that could prove valuable in developing a least-cost network for the
entire mailing industry. Some stakeholders have complained that the
Service does not consult with them during planning, but only
communicates when it has already made its decisions. Mailers explained
that this approach often leads to uncertainty and lower investment in
the mailing industry. For example, one representative of a large
mailing company told us that uncertainty about what the Service is
planning to do about new discounts, and new processing operations,
stifles this mailer's investment in its own infrastructure. Union
representatives also expressed concerns about limited information
related to the Service's realignment plans and how these plans might
affect postal employees.
The Service has stated that it is reluctant to publicly disclose
information on its realignment strategy because it believes that it
will meet with resistance from employees, communities, and government
representatives if it tells them what it is planning on doing too far
in advance. While employees and communities may resist changes that
affect them, congressional staff members have told us that Members of
Congress would be better prepared to respond to constituent concerns
that arise when the Service considers making changes to its
infrastructure if the Service provided better information, such as the
Service's criteria for its decisions.
To better inform stakeholders on its infrastructure realignment
decisions, the Service needs to make public its decisions and the
criteria used to make these decisions. There are various avenues the
Service could use to inform the public of changes and limit the burden
of disclosure. For example, the Service could include a list of the
changes that were made to the Service's infrastructure during that year
and changes that are planned for the coming year in one of its existing
reports, such as the Service's annual Comprehensive Statement.
Conclusion:
The Service faces future financial challenges due to its declining
First-Class Mail volume and has excess capacity in its current
infrastructure that impedes efficiency gains. The Service has stated
that one way to increase efficiency is to realign its processing and
distribution infrastructure. However, important questions remain about
how the Service intends to realign its infrastructure to meet its
future needs because the Service has not provided clear public
information about its planned direction for realigning its
infrastructure and workforce. The Service's currently stated strategy
is an evolutionary approach that prolongs inefficiencies related to
excess capacity and productivity differences among plants, resulting in
higher costs. The Service's lack of communication often leads to
confusion among stakeholders and communities about what the Service is
doing and why and excludes input that could prove valuable to
developing a least-cost network across the entire mailing industry.
Because the Service does not have criteria to be considered, or a
process to be followed, when making realignment decisions, it is not
clear that these decisions will be made in a manner that is fair to all
stakeholders or that is efficient and effective. It is also not clear
that the Service's strategy provides accountability for realignment
decisions, because there is no process for evaluating results, no
criteria for measuring results, and no stated policy for making
managers accountable for decisions.
Recommendations for Executive Action:
To enhance the Service's transparency of its decisions related to
realigning its infrastructure and ensure that these decisions advance
the Service's realignment goals, we recommend that the Postmaster
General take the following three actions:
* establish a set of criteria for evaluating realignment decisions;
* develop a mechanism for informing stakeholders as decisions are made;
and:
* develop a process for implementing these decisions that includes
evaluating and measuring the results, as well as the actual costs and
savings resulting from the decisions.
In taking these actions, the Service should reconcile any planned
infrastructure realignment changes with the criteria used to make the
decisions.
Agency Comments and Our Evaluation:
The U.S. Postal Service provided comments on a draft of this report in
a letter from the Chief Operating Officer and Executive Vice President
dated March 18, 2005. These comments are summarized below and included
as appendix IV. The Service concurred with our description of its mail
processing and distribution infrastructure and the major business and
demographic changes that have effected the Service's operations. The
Service did not comment on our conclusions or recommendations.
With respect to the Service's statement that one of the key strategies
of its Transformation Plan is an initiative called Evolutionary Network
Development (END), this initiative was not discussed in the Service's
Transformation Plan. Instead, the Transformation Plan discussed an
initiative referred to as Network Integration and Alignment (NIA),
which called for analyzing and redesigning the existing network with
the goal of creating a flexible logistics network and reducing overall
costs for both the Service and the mailing industry as a whole. In
addition, NIA was to determine which facilities would be necessary
within the future infrastructure. In its January 2004 report to
Congress on its infrastructure and workforce rationalization, the
Service further discussed the status of NIA and said that it planned to
pilot network alternatives in 2005 and if the results of the pilots
were favorable, it could have a completely optimized network in place
by the end of 2009. The NIA initiative appears to be more comprehensive
and integrated in scope than the evolutionary approach referred to as
END, which was described to us as a strategy that takes advantage of
opportunities as they arise. As stated in the body of this report, the
Service's strategy remains unclear because the Service has outlined
seemingly different approaches to realigning its processing and
distribution infrastructure.
Regarding the Service's statement that Area Mail Processing (AMP) is
one of the tools it uses to implement the goals of END, we remain
concerned that these goals may not be realized because it is not clear
whether AMP includes criteria for making realignment decisions, and if
so, what these criteria are, and that therefore the processes
associated with AMP are not responsive to the recommendations we made.
Furthermore, the AMP guidelines do not include determining the disposal
of facilities or the reduction of excess capacity. Consequently, it is
not clear how AMP directly relates to reducing excess capacity,
furthers the overall redesign of the mail processing and distribution
infrastructure, or relates to the Service's vision of its future
infrastructure.
The Service also stated that the decisions it makes will be made with
stakeholder input. However, it is not clear how stakeholder input will
be incorporated into realignment decisions. As previously mentioned,
congressional staff told us that Members of Congress would be better
prepared to respond to constituent concerns if the Service were more
transparent regarding its infrastructure decisions. Hence, we continue
to believe that a formal mechanism for notifying stakeholders of
realignment decisions, as we recommended, is vital.
The Service stated that because it cannot accurately predict future
changes in the hard copy communications and package delivery industry,
the changes it seeks to make must be incremental. However, the
President's Commission pointed out in its report that regardless of the
economic climate, the nation is due the most cost-effective, efficient,
high-quality Postal Service that can be provided. To this end the
Commission recommended that the Service accelerate its efforts to
redesign the postal network. Furthermore, the Service itself stated in
its Transformation Plan that this is "the ideal time to initiate
sweeping logistics changes."[Footnote 16] We believe that without
clarity, criteria, and accountability in its realignment strategy, the
Service risks falling short of achieving the major productivity gains
that will be needed to offset rising costs and maintain high-quality,
universal postal service at affordable rates.
As agreed, unless you announce the contents of this report earlier, we
plan no further distribution until 30 days after the issue date. At
that time, we will send copies of this report to the Chairman and
Ranking Minority Member of the House Committee on Government Reform;
the Chairman and Ranking Minority Member of the Senate Committee on
Homeland Security and Governmental Affairs, Senator Thomas R. Carper,
the Postmaster General, and other interested parties. We will also
provide copies to others on request. This report will also be available
on our Web site at no charge at [Hyperlink, http://www.gao.gov].
If you have any questions regarding this report, please contact me at
[Hyperlink, siggerudk@gao.gov] or by telephone at (202) 512-2834. GAO
contacts and acknowledgments are listed in appendix V.
Signed by:
Katherine Siggerud:
Director, Physical Infrastructure Issues:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
To describe the impact of major changes on the Service's mail
processing and distribution infrastructure, we discussed with Postal
Service officials, mailing associations, mailers, and union
representatives their views on changes that have occurred in the
mailing industry and the impacts these changes have had on the Postal
Service. Through our initial discussions we narrowed the focus of our
objective to three major changes, (1) changes in the marketplace, (2)
the evolution of mail processing and its related infrastructure, and
(3) shifts in demographics and transportation modes. To gain more
insight into the first change, we analyzed mail volume trends over the
past 30 years and reviewed literature related to these trends,
including special reports prepared for the President's Commission on
the United States Postal Service, a special report prepared by Pitney
Bowes for the 12th Conference on Postal Delivery and Economics, Postal
Service presentations, and articles and studies prepared by mailers and
mailing groups. In addition, we discussed the cause and effect of mail
volume declines with Service officials. We also reviewed, analyzed, and
discussed with Service officials, mailers, mailer associations, and
union representatives, articles related to competition in the mailing
industry and changes in the role of mailers. To further our
understanding of the evolution of mail processing, we reviewed,
analyzed, and discussed with Service officials, data related to the
age, location, size, ownership, and equipment complement of the
Service's processing and distribution infrastructure. We also reviewed
literature on the history of mail processing and changes that have
occurred in mail processing operations over the past century. In
addition, we conducted site visits to mail processing plants in the
Capital Metro, the Eastern, the Southeastern, and the Pacific areas,
and discussed mail processing changes with management at these plants.
We also discussed related changes with eight area vice presidents and
the Manager of Capital Metro Area Operations, as well as Service
officials, mailers, mailer associations, and union representatives. To
assess the impact of demographic shifts, we reviewed, analyzed, and
mapped geo-spatial data from the Postal Service and Census Bureau. We
also reviewed related articles and Service documents. To analyze the
impact of these changes, we reviewed, analyzed, and discussed with
Service officials, data related to productivity and cost variances, as
well as excess capacity in the Service's processing and distribution
infrastructure.
To describe 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, we reviewed,
analyzed, and discussed with Service officials the Service's
Transformation Plan and related updates. We also reviewed Postal
Service documents related to operations, including Annual Reports,
Comprehensive Statements, Capital Investment Plans, Investment
Highlights, Five-Year Strategic Plans, Corporate Automation Plans,
Integrated Plan for Operations, and documentation related to specific
programs. We conducted site visits to plants in the Capital Metro, the
Eastern, the Southeastern, and the Pacific areas, and discussed
initiatives and programs with management at these plants. We also
discussed these initiatives and programs and the challenges associated
with them with eight area vice presidents and the Manager of Capital
Metro Area Operations, as well as Service officials, mailers, mailer
associations, and union representatives.
To discuss the issues related to the Service's strategy for realigning
its infrastructure, we discussed with Service officials, including the
Service's Chief Operating Officer, how the Service intended to approach
realignment. We also reviewed Postal Service documents, including the
Transformation Plan, Infrastructure and Workforce Realignment: Funding
Key Capital Investments, and documents related to realignment. In
addition, we reviewed postal reform documents, including the Committee
on Government Reform report that accompanied House postal reform
legislation (House Report), the Committee on Governmental Affairs
report that accompanied Senate postal reform legislation (Senate
Report), and the President's Commission on the United States Postal
Service (Commission) report. In addition, we discussed the Service's
realignment efforts with mailers, mailing organizations, and union
representatives.
We used productivity and cost data provided by the Postal Service to
assess the impact of changes on the mailing industry. We did some
testing of the data by performing basic logic tests, reviewing all
related documentation, and discussing with agency officials any
apparent inconsistencies or inaccuracies we found with the data. On the
basis of those discussions, we adjusted the data to ensure that the
inconsistencies or inaccuracies we found were corrected or clearly
explained. Based on our testing, we determined that the required data
elements are sufficiently reliable for the purposes of this engagement.
We received written comments on a draft of this report from the United
States Postal Service. The comments we received are discussed near the
end of the letter and the written comments are included in appendix IV.
We conducted our review at Service headquarters and field locations
between April 2004 and January 2005 in accordance with generally
accepted government auditing standards.
[End of section]
Appendix II: Descriptions of Various Mail Flows with Diagrams:
Letter Mail Processing:
There are a number of different processing operations that letter mail
must undergo before arriving at its final destination. Containers of
loose mail are collected from collection boxes and transported to
plants that handle collection mail through a dual pass rough cull
machine that separates machinable letter mail from other mail. The
other mail consists of flat mail, bundles, and nonmachinable pieces
that go to different mail streams for processing. Once the mail is
separated, machinable letter mail is transported to an advanced facer
canceller system (AFCS). The AFCS prepares letter mail for down stream
automated processing by facing the mail in the proper position,
canceling the postage, and separating letters into three categories.
Currently, these categories include (1) handwritten address letters,
(2) machine printed address letters with no barcode, and (3) machine
printed address letters with a barcode. AFCS enhancements in 2005 will
provide greater readability that will enable a more defined separation
of the mail.
Machine printed address letters without a barcode are transported to
the multiline optical character reader (MLOCR) machine where a barcode
is applied to the letter piece. If the address is not readable by the
MLOCR, the mailpiece is scanned and an image sent to an off-site remote
encoding center (REC). There, human operators view a scanned image of
the envelope, key-in the correct address information, and transmit the
results back to the mail processing plant where a correct barcode is
applied to the physical mailpiece on a delivery barcode sorter-output
subsystem (DBCS-OSS) for continued automated processing. Handwritten
mail from the AFCS is sent directly to a DBCS-OSS and images of these
pieces are electronically transferred to the REC. Results from keyed
information are returned to the DBCS-OSS where a barcode is applied to
the letter piece and sorted to its appropriate destination. Machine
printed address letters with a barcode are also sent directly to a DBCS-
OSS for processing.
Once the letters have barcodes, the mail is then sorted by ZIP Code on
a DBCS-OSS or a delivery barcode sorter (DBCS). Letter pieces
destinating in a different location are sorted to the first 3 digits of
the ZIP Code. These pieces are then ready for transport to other postal
plants for further processing. Letter pieces that are destinating in
the same area are sorted multiple times--this includes mail already
presorted from other processing plants. These letter pieces are sorted
to 5, 9, or 11 digit ZIP Code levels.
During letter processing, pieces that are nonmachinable or have
nonreadable addresses will be rejected from the automated equipment and
must be manually processed. Depending on where in the process the piece
is rejected, employees will try to reintroduce the mail back into
automation. If the mail cannot be reintroduced into the automation
process, employees will sort the mail by hand to the 3, 5, 9, or 11
digit ZIP Code level.
Besides collection mail, the mailing industry also delivers discount
mail or "bulk mail" to plants for processing. To claim the lower
postage rates, the mailer must have a minimum quantity and do some
additional work that makes it easier for the Postal Service to handle
the mail. Based on how efficiently they can be processed, mailings are
classified by the way they are prepared, including machinable,
nonmachinable, and automation. A single mailing usually includes
multiple levels of ZIP Code sortation. Discounted letter mail will be
inducted into the mail stream at the appropriate level of distribution
based on mail class, preparation, and sort level. Figure 18 shows how
letter mail is processed.
Figure 18: Letter Mail Processing:
[See PDF for image]
[End of figure]
Flat Mail Processing:
There are a number of different operations that flat mail undergoes
before arriving at its final destination. Collection mail is loaded
into a dual pass rough cull machine that separates flat mail from other
mail. The other mail consists of letter mail, bundles, and
nonmachinable pieces that go to different mail streams for processing.
Once the mail is separated, employees will manually ensure that correct
postage is applied and render the postage unusable--cancel--on each
flat piece of mail.
Once canceled, the flat pieces are prepped to be placed on a machine
for sorting. Currently, there are three different types of flat sorting
machines: automated flat sorting machine (AFSM 100), upgraded flat
sorting machine (UFSM 1000), and flat sorting machine (FSM 1000). Flat
pieces destinating in a different location from where it originates are
sorted on one of the three flat sorting machines to the first 3 digits
of the ZIP Code. These pieces are then ready for transport to other
postal plants for further processing. Flat pieces that are destinating
in the same area will be sorted again to the 5 digit ZIP Code on one of
the three flat sorting machines--this includes mail already presorted
from other processing plants. The AFSM 100 and the UFSM 1000 are also
used to sort flat mail to the carrier route level--9 digit ZIP Code. If
the address is not readable by the AFSM 100 or the UFSM 1000, then the
flat piece is scanned and an image is sent to an off-site remote
encoding center (REC). There, human operators view a scanned image of
the flat, key-in the correct address information, and transmit the
results back to the mail processing plant where a correct barcode is
applied to the flat.
Throughout flat processing, there will be mail that is rejected by the
flat sorting machines or due to physical characteristics is unable to
be processed on flat sorting equipment. Employees will try to
reintroduce the flats that were rejected back into the machine for
reprocessing. If the mail cannot be processed on the machines,
employees will manually sort the mail by hand to 3, 5, or 9 digit ZIP
Code levels.
Besides collection mail, the mailing industry also delivers discount
mail or "bulk mail" to plants for processing. In order to claim the
lower postage rates, the mailer must have a minimum quantity and do
some additional work that makes it easier for the Postal Service to
handle the mail. Based on how efficiently they can be processed,
mailings are classified by the way they are prepared, including
machinable, nonmachinable, and automation. A single mailing usually
includes multiple levels of ZIP Code sortation. Discounted flat mail
will be inducted into the mail stream at the appropriate level of
distribution based on mail class, preparation, and sort level. Figure
19 shows how flat mail is processed.
Figure 19: Flat Mail Processing:
[See PDF for image]
[End of figure]
Parcel Processing:
Parcels can be processed a number of different ways depending on the
mail class and size. The equipment used and the type of sortation will
depend on the origin and destination of the parcel. Automation and
mechanization are only available at selected postal plants.
Parcels:
Any class of parcels can be sorted on a small parcel and bundle sorter
(SPBS) machine. If a parcel is destinating in a different location,
then a human operator at the SPBS machine manually keys in the first 3
digits of the ZIP Code, which directs the piece to the correct
destinating bin. At dispatch time, the parcels are ready for transport
to the destinating postal plant for further processing. If the parcel
is destinating in the same area, then the human operator at the SPBS
machine manually keys in the last 3 digits of the ZIP Code, which
directs the piece to the correct destinating bin. At dispatch time, the
parcels are ready for transport to a local office for manual sortation
to the delivery address.
The Service is also in the process of deploying the next generation of
parcel sorting equipment at postal plants called the Automated Package
Processing System (APPS), which will replace the SPBS machine in some
larger plants. The APPS machine will not require human operators to
manually key ZIP Code information for each parcel. APPS automates
package processing by providing high-speed throughput, automated
package induction, singulation, and optical character reader
(OCR)/barcode reader (BCR) address recognition. If the OCR/BCR
technology is unsuccessful, an image of the parcel will be transmitted
to an off-site remote encoding center (REC), where address information
will be keyed in the same matter as letter mail. APPS deployment will
continue through FY 2006.
Package Services:
Package Services and presorted Standard Mail parcels from mailers are
processed on a primary and secondary parcel sorter machine (PSM). A
human operator will look at each parcel to locate a barcode indicating
the piece's ZIP Code destination. If a parcel has a barcode, the piece
will be sent on a conveyor belt through the package bar code scanner
(PBCS), which will scan the barcode and directs the piece to the
correct destinating location. If the parcel is destinating outside the
area, then the mail will be sorted to the first 3 digits of the ZIP
Code. If the parcel does not have a barcode, ZIP Code information is
read by a human operator who will manually key in the destination ZIP
Code location. The PBCS will then affix a barcode to the parcel and
directs it to the correct destinating location.
All parcels that are barcoded and destinating in the area can be sent
through a singulate scan induction unit (SSIU) for sorting. Parcels are
sent one at a time through a weigh-in-motion scale and then through a
scanning tunnel that will read the 5 digit ZIP Code and direct the
piece to the correct destinating bin. At dispatch time, the parcels are
ready to be transported to a local office for manual sortation to the
delivery address.
Nonmachinable Parcels:
A nonmachinable outside (NMO) parcel cannot be sorted by postal
equipment because its size or weight exceeds machine capacity or some
other aspect requires the piece to be handled manually. Examples of
NMOs include tubes, tires, golf clubs, and plants. If a parcel is
destinating in a different location, then the piece will be sorted to
the first 3 digits of the ZIP Code. The piece is then ready for
transport to other postal plants for further processing. If the piece
is destinating in the same area, then it will be sorted to the 3 or 5
digit ZIP Code and transported to a local office for manual sortation
to the delivery address.
Throughout parcel processing, some pieces will be rejected--barcodes
are unreadable, no barcode is applied, and packages break open. These
parcels will be reintroduced into the PSM for processing. If the mail
cannot be reintroduced into the PSM for processing, then employees will
process the mail manually to the appropriate delivery address. Figure
20 shows how parcels are processed.
Figure 20: Parcel Processing:
[See PDF for image]
[End of figure]
[End of section]
Appendix III: Glossary of Postal Terms Used in this Report:
Advanced Facer Canceller System (AFCS):
A machine that separates letter mail by address type--script, barcode,
and machine imprinted--in support of the automation effort. AFCS has
image lifting capability needed to support the Remote Bar Coding
System.
Automated Flat Sorting Machine 100 (AFSM 100):
A fully automated flats sorting machine designed to streamline flats
mail processing operations and at the same time significantly reduce
manual processing. The AFSM 100 receives mail via automatic feeders,
acquires images of script and typed mail for video encoding, and
processes mail using optical character recognition technology.
Air Mail Center (AMC):
A postal plant at an airport that receives, distributes, and dispatches
mail transported by air.
Automated Package Processing System (APPS):
The Service's next generation for sorting parcels and bundles of mail.
The APPS will automate package processing by providing greater
processing capacity through automatic package induction, singulation,
and address recognition. It uses a carousel-type cross belt sorter
subsystem that provides high-speed throughput.
Breakthrough Productivity Initiative (BPI):
A program that identifies best processing, retail, and delivery
practices and uses this information to standardize operational
processes.
Bulk Mail:
Mail that is rated for postage partly by weight and partly by the
number of pieces in the mailing. The term is generally used to refer to
Standard Mail (A).
Bulk Mail Center (BMC):
A highly mechanized mail processing plant that distributes Standard
Mail in piece and bulk form.
Business Mail Entry Unit (BMEU):
The area of a postal plant where mailers present bulk, presorted, and
permit mail for acceptance. The BMEU includes dedicated platform space,
office space, and a staging area on the workroom floor.
Collection Mail:
Mail deposited into a collection box or lobby drop, as well as mail
collected by letter carriers on their delivery rounds.
Computerized Forwarding System:
A centralized, computerized address label-generating operation that
performs address correction and forwards or returns undeliverable-as-
addressed mail to customers.
Delivery:
The act of taking mail from the post office to the customer. The mail
is taken to the customer's business or residential delivery address or
picked up at a post office-whether post office box, window, or dock.
Delivery Bar Code Sorter (DBCS):
This machine is used for processing letters that are already barcoded.
DBCSs come in multiple configurations; most machines have between 190
and 220 sortation bins. The DBCS is used for outgoing processing,
incoming primary sortation, and Delivery Point Sequencing (DPS).
Delivery Point Sequencing:
The process of arranging mail in delivery order for a particular
carrier route.
Delivery Unit:
A post office, post office station, or post office branch that has mail
delivery functions.
Destinating Mail:
Incoming mail arriving for its point of final delivery.
Destination Delivery Unit (DDU):
A customer service unit that processes mail for one or multiple ZIP
codes within its own associate office. The DDU may contain a limited
amount of automation equipment. The DDU generally provides mail
delivery, bulk mail acceptance, and performs actions related to all
products and services offered.
Detached Mail Unit:
An area in a mailer's plant where postal employees perform mail
verification, acceptance, dispatch, and other postal functions.
Dropshipping:
Typically the movement of a mailer's product on private (nonpostal)
transportation from the point of production to a postal plant located
closer to the destination of that product.
Dull Pass Rough Cull:
This machine separates machinable mail into different mail streams.
Express Mail:
A mail class that provides expedited delivery service for mailable
matter subject to certain standards. It is available in five basic
domestic service offerings (Same Day Airport Service, Custom Designed
Service, Next Day Service, Second Day Service, and Military Service).
Express Mail International Service is available between the United
States and most foreign countries. Express Mail is a Service trademark.
First-Class Mail:
A class of mail that includes all matter wholly or partly in writing or
typewriting, all actual and personal correspondence, all bills and
statements of account, and all matter sealed or otherwise closed
against inspection. First-Class Mail comprises three subclasses:
postcards, letters and sealed parcels, and Priority Mail. Any mailable
matter may be sent as First-Class Mail. First-Class Mail is a Postal
Service trademark.
Flat:
A mailpiece that exceeds one of the dimensions for letter-size mail (11-
1/2 inches long, 6-1/8 inches high, 1/4 inch thick) but that does not
exceed the maximum dimension for the mail processing category (15
inches long, 12 inches high, 3/4 inch thick). Dimensions are different
for automation rate flat-size mail eligibility. Flat-size mail may be
unwrapped, sleeved, wrapped, or enveloped.
Flat Sorting Machine (FSM):
A machine that mechanically sorts flats by ZIP Code.
Hub and Spoke Program (HASP):
For surface mail, primarily for 2-day committed mail. HASP includes a
central point ("hub") where mail for a group of offices ("spokes") can
be unloaded from a series of incoming trips, massed according to their
intended destination, and then sent on to that destination on another
trip. Savings are realized because each trip does not have to drive to
each individual office or spoke to drop off just a portion of its total
load capacity.
Letter:
A mail processing category of mailpieces, including cards, that do not
exceed any of the dimensions for letter-size mail (that is, 11-1/2
inches long, 6-1/8 inches high, 1/4 inch thick).
Letter Sorting Machine:
A large mechanized machine that can sort letters into as many as 277
bins. Operators physically read the address and then manually enter an
extraction code, via keyboard, based on their memory of the sort scheme
loaded into the machine's computer software.
Low Cost Tray Sorter:
A tray sorter used for inbound tray sorting operations and outbound
dispatch operations to reduce material handling workhours.
Mailer:
An entity that prepares and/or presents a mailing to the Postal
Service. In some cases, a mailer is the agent for the actual owner of
the mail.
Mailpiece:
A single addressed article of mail, usually a letter, flat, card, or
parcel.
Multiline Optical Character Reader:
An optical character reader that reads and interprets more than one
line of the delivery address on a mailpiece.
Nonmachinable Outside:
A parcel or mailpiece that, because of size, weight, or other
characteristic, cannot be sorted by mechanized mail processing
equipment and must be handled manually. The parcel is called an outside
because it cannot be placed in a sack or other mailing container.
Optical Character Reader (OCR):
An automated mail sorting machine that interprets the address
information on a letter-size mailpiece and sprays the corresponding ZIP
Code information onto the piece as a barcode. The OCR consists of a
mail feed unit, transport unit, stacker modules, computer with a
control system, video monitor, and printer.
Originating Mail:
Outgoing mail and local mail that enter the mailstream--that is, the
point of origin--for mail processing and delivery.
Outgoing Mail:
Mail sorted within a mail processing plant that is dispatched to
another plant for additional processing or delivery.
Package Services:
A class of mail that comprises four subclasses: Bound Printed Matter,
Library Mail, Parcel Post, and Media Mail. There is no minimum weight
limit for Package Services.
Parcel:
Mail that does not meet the mail processing category of letter-size
mail or flat-size mail. It is usually enclosed in a mailing container
such as a carton.
Parcel Sorting Machine (PSM):
A large machine with an input station controlled by a computer that
sorts and discharges parcels from transport trays to primary and
secondary positions.
Periodicals:
A class of mail consisting of magazines, newspapers, or other
publications formed of printed sheets that are issued at least 4 times
a year at regular, specified intervals (frequency) from a known office
of publication. Periodicals mailers must generally have a legitimate
list of subscribers and requesters.
Postal Automated Redirection System:
A system designed to intercept and process undeliverable-as-addressed
mail using automated techniques.
Presorted Mail:
A form of mail preparation, required to bypass certain postal
operations, in which the mailer groups pieces in a mailing by ZIP Code
or by carrier route or carrier walk sequence-or other Postal Service
recommended separation.
Priority Mail:
First-Class Mail that weighs more than 13 ounces and, at the mailer's
option, any other mail matter weighing 13 ounces or less. Priority Mail
provides expedited delivery. Any mailable matter may be sent as
Priority Mail. Priority Mail is a Postal Service trademark.
Priority Mail Processing Center (PMPC):
The core function of a Priority Mail Processing Center is to provide an
operational foundation capable of delivering consistent and reliable
Priority Mail service.
Processing and Distribution Center (P&DC):
A central mail plant that processes and dispatches part or all of both
incoming and outgoing mail for a designated service area. It also
provides instructions on the preparation of collection mail, dispatch
schedules, and sorting plan requirements to mailers. The plant is
usually a sectional center plant or a general mail plant, but it can
also be a dedicated mail processing plant without a station or branch.
Remote Encoding Center:
A Postal Service unit that uses advanced technology to assign barcodes
to hand-addressed mailpieces physically located at a general mail
plant. After the mailpiece image is displayed on a computer terminal,
an operator, who is at the center, keys in the ZIP Code and the street
address in order to match this information with that in a database.
This allows for the imprinting of the barcode and automated mail
processing at the general mail plant.
Sack:
A container generally used to transport flat-size mail, parcels, and
loose pack mail. It is made of sewn fabric (usually nylon, polyester,
canvas, or plastic with an opening at one end) and is closed with a
draw cord and fastener.
Sack Sorting Machine (SSM):
A mechanized, operator-controlled machine similar to a parcel sorting
machine but of heavier construction, that sorts sacks of mail.
Service Standards:
A stated goal for service achievement for each mail class.
Small Parcel and Bundle Sorter:
A modular machine that sorts small parcels and packages or bundles of
letters and flats to 100 specific bins for either delivery or
processing.
Singulator Scan Induction Unit (SSIU):
Equipment that automates the entry of barcoded parcels onto the
secondary parcel sorting machines at bulk mail centers. Packages first
enter a singulator area where they are aligned in single file and
spaced, and then sent through a dimensioning unit, which measures
external dimensions and weight. Next, parcels pass through an omni scan
tunnel where their barcodes are read. Finally, the parcel is inducted
onto the parcel sorting machine.
Standard Mail:
A class of mail consisting of mailable matter that is not required to
be mailed as First-Class Mail or is not mailed as Periodicals.
Tray:
A container used in postal plants to hold letters and First-Class Mail
flats. It is used as a basic unit of mail quantity for purposes of
preparing mail to qualify for discounted postage rates.
Tray Management System (TMS):
TMS uses tray identification, transport, storage, and process control
technologies to automate the movement and staging of trayed letter and
flat mail between most mail sortation operations.
Walk Sequence:
The order in which a carrier delivers mail for a route. This order is
required for most carrier route presort mail.
Undeliverable-As-Addressed (UAA):
Mail that the Postal Service cannot deliver as addressed and must
forward to the addressee, return to the sender, or send to a mail
recovery center.
Universal Transport System:
A system that has the ability to process letter trays, flat tubs,
sacks, parcels, and bundles.
[End of section]
Appendix IV: Comments from the U.S. Postal Service:
UNITED STATES POSTAL SERVICE:
PATRICK R. DONAHOE:
CHIEF OPERATING OFFICER AND EXECUTIVE VICE PRESIDENT:
March 18, 2005:
Ms. Katherine A. Siggerud:
Director, Physical Infrastructure Issues:
United States Government Accountability Office:
Washington, DC 20548-0001:
Dear Ms. Siggerud:
Thank you for providing the U.S. Postal Service with the opportunity to
review and comment on the draft report titled U.S Postal Service: The
Service's Strategy for Realigning its Mail Processing Infrastructure
Lacks Clarity, Criteria, and Accountability.
As your draft report demonstrates, our nationwide mail processing,
transportation and distribution infrastructure is highly complex and
inter-connected, with over 450 facilities that process and transport an
average of 660 million pieces of mail each day to our customers.
Our infrastructure is dynamic, with processing facilities and
transportation links added or removed as needs dictate. Throughout our
nation's history, our mail delivery system has changed as the country's
mail needs have changed. And today we must continue making changes to
the system to accommo-date (1) demographic shifts within and between
sections of the country, and absolute population and household growth
in most sections; (2) a changing mail mix, with an increasing volume of
lower margin mail classes and a decreasing volume of higher margin
First-Class Mail; (3) the replacement of labor-intensive manual mail
processing operations with automation that is less labor-dependent; and
(4) the challenges of replacing aging and no longer optimally located
facilities.
However, the reason underlying all the changes to the system, both
historic and present-day, has remained the same: to ensure that the
Postal Service continues to deliver on the universal service commitment
the American public has come to expect, while providing other essential
mail services and related products at a reasonable price. To do that,
our processing network has to be efficient and affordable. We are
pursuing efficiencies and cost reductions by continuing to rationalize
our networks. This process is a continuation of our strategic efforts
over the past several years to improve service while controlling costs
in our core functional areas-retail and delivery, processing and
distribution, transportation, and administrative support operations.
We are making great strides in both service improvement and cost
control. In fiscal year 2004, on-time delivery of First-Class Mail
reached a record 95 percent, and 93 percent of our residential
customers rated our service as good to excellent. We achieved a record
fifth straight year of increased total factor productivity, with
staffing down to pre-1985 levels. Since 2000 we have achieved $8.8
billion in cost reductions and avoidances-all this while maintaining a
residential and business delivery network that serves 114 million homes
and 9 million businesses and that has been expanding at the rate of
around 1.8 million new delivery points each year.
The single biggest contributor to the achievement of our Transformation
Plan savings targets has been the reduction in workhours. Over the past
two fiscal years, we have eliminated 75 million work-hours, with about
half of that reduction coming from streamlining and standardizing mail
processing operations. These workhour reductions have produced dramatic
results; for example, productivity in the mail processing function has
achieved an average six percent improvement each year for the past four
years.
We are making significant progress in forging better relations with our
labor unions. For the first time since 1987, we have reached negotiated
agreements with our four largest unions, avoiding lengthy and
contentious arbitration. Another sign of the maturing relationship
between management and the unions is the agreement to substitute
mediation for the more adversarial fact-finding process during dispute
resolution. Relations with our employees, as measured directly by
annual surveys of all of our employees, show that while we have been
steadily reducing total complement, employees' job satisfaction has
continuously improved. Scores on employee opinion surveys are at record
high levels, and three dimensions of job satisfaction are showing
significant improvement: communication from supervisors to employees
has improved; we are holding employees more accountable for job
performance; and employees feel they are being appropriately recognized
for doing their jobs well.
One of the key strategies of our Transformation Plan in the area of
mail processing and transportation rationalization is an initiative we
call Evolutionary Network Development (END). Through the continu-ing
application of the END process, we can respond to the challenges of
declining mail volumes, an aging processing infrastructure,
transportation network redundancies and operational inefficiencies to
develop a flexible logistics network that reduces our costs, increases
our operational efficiencies, and improves the consistency of our
service. Area Mail Processing (AMP) is one of the tools we use to
implement the goals of END. AMP is the consolidation of mail processing
functions, typically from several facilities into one centralized
facility, for the purpose of increasing operational efficiency, making
better use of existing space, staffing, processing equipment, and
transportation capacities while maintaining or increasing service
performance to our customers. The decision to consider an AMP
consolidation begins at the local management level, with input from and
concern for the views, needs and wishes of stakeholders in the local
business community, mailers, employees and their union representatives,
and local elected officials. Each AMP proposal is tailored to best meet
the various aspects of each local situation, and to generate operating
efficiencies for the network as a whole. Proposals are then reviewed at
the area and headquarters levels to ensure they conform to the AMP
guidelines and, among other things, that any outstanding stakeholder
concerns are appropriately addressed. This is a process we have been
using, with refinements, for three decades, and one which has been
reviewed and discussed in earlier GAO studies.
No one can accurately and reliably predict how the hard copy
communications and package delivery industry will change in the next
five to ten years. While some broad trends are certainly discernable,
it is not possible, with the degree of specificity we would need, to
say now what the optimal mail processing and delivery infrastructure
should look like a decade from now. Our only recourse is to
continuously examine the network for inefficiencies and redundancies,
standardizing the best operational practices, and where cost-effective
and operationally sensible, consolidating processing functions. The
changes we seek to make, using END as a framework, must be incremental
and will be made with input from stakeholders and in response to our
customers' current and future needs.
If you or your staff wishes to discuss any of these comments further, I
am available at your convenience.
Sincerely,
Signed by:
Patrick R. Donahoe:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine Siggerud (202) 512-6570:
Staff Acknowledgments:
In addition to the person named above, Teresa Anderson, Tida Barakat,
Margaret Cigno, Collin Fallon, Kerry Lipsitz, Kathy Gilhooly, Brandon
Haller, and Jason Kelly made key contributions to this report.
(543077):
FOOTNOTES
[1] Institutional costs are costs that cannot be attributed to any
specific class of mail.
[2] Envelope Manufacturing Association Foundation for Paper-Based
Communications, Postal Reform and Jobs, April 2, 2004, pg. 5.
[3] Richard Strasser's presentation to the Service's Board of Governors
year-end meeting on December 7, 2004. Universal service is not defined
in law, but is understood to include affordable rates, 6-days per week
delivery, and access to postal retail services.
[4] The 2004 Federal Reserve Payment Study: Analysis of Noncash
Payments Trends in the United States 2000-2003, Federal Reserve System,
2004.
[5] The Check Clearing for the 21st Century Act (Check 21) was signed
into law on October 28, 2003, and became effective on October 28, 2004.
[6] Post Offices/DDUs are not included.
[7] The Service determines how many earned workhours a plant should
need by dividing that plant's workload by the average productivity of
the 25 percent most productive plants.
[8] Each area and plant is given a baseline budget, and its budget
allocation is subtracted from this baseline. The budget allocation is
determined by the amount of unused opportunities for efficiency that an
area or plant has. The more unused opportunity it has, the less
operating money it gets.
[9] Mail processing clerks perform a variety of duties related to
processing mail; mail handlers move mail between operations; and
carriers deliver the mail.
[10] U.S. Government Accountability Office, Postal Pension Funding
Reform: Issues Related to the Postal Service's Proposed Use of Pension
Savings, GAO-04-238 (Washington, D.C.: Nov. 26, 2003).
[11] PMG Jack Potter's speech at the 2004 National Postal Forum.
[12] House Report Part 1-Postal Accountability and Enhancement Act 29-
006, Report 108-672, 108TH Congress (Washington, D.C.: September 8,
2004). Report of the Committee on Governmental Affairs, United States
Senate, Postal Accountability and Enhancement Act Report 108-318, 108TH
Congress (Washington, D.C.: August 25, 2004). President's Commission on
the United States Postal Service, Embracing the Future: Making the
Tough Choices to Preserve Universal Mail Service (Washington, D.C.:
July 31, 2003).
[13] U.S. Government Accountability Office, U.S. Postal Service:
Transformation Challenges Present Significant Risks, GAO-01-598T
(Washington, D.C.: April 4, 2001). U.S. Government Accountability
Office, U.S. Postal Service: Bold Action Needed to Continue Progress on
Postal Transformation, GAO-04-108T (Washington, D.C.: November 5,
2003).
[14] GAO-04-108T.
[15] Senate Report 108-318, p. 25.
[16] U.S. Postal Service Transformation Plan, p. 30.
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