Thursday, May 27, 2010

Dead Tree Makes the AP!

Dead Tree Edition had a bit of a breakthrough this week when the Milwaukee Journal Sentinel, and subsequently the Associated Press, cited my article Quad/Graphics Has Quarterly Loss, Eyes Plant Shutdowns.

Scores of magazines, newsletters, and Web sites have referenced Dead Tree Edition during its 19 months of existence. I depend upon such referrals for most of my readers because I’m a klutz when it comes to search-engine optimization or social media (though I did my first retweet last week. I couldn't resist Margie Dana's comment: “B&N launches ebook self-publishing service called ‘Pubit’. God forbid you hit ‘c’ instead of ‘t.’ What a name!”).

But, as far as I know, John Schmid’s article in the Journal Sentinel is the first citation of Dead Tree Edition in a major daily newspaper, and the AP pickup of the story was also a first. (Gordon Hamilton of the Vancouver Sun has called Dead Tree Edition "one of my favourite sources for updates on the scandalous American black liquor subsidy," but his references to my work have only been in his blog, not the actual newspaper.)

I've tried to give newspapers tips about news in their area based on my articles about nearby paper mills or postal facilities. But the typical American newspaper has put up a firewall between its reporters and the public.

Have a hot tip to pass along to a reporter about something on his beat? Be prepared to fill out a generic “Contact us” form on the newspaper's Web site – and then to hear nothing.

But I do think that, faced with shrinking news-coverage resources, savvy professional journalists will follow Schmid's and Hamilton's example by looking to knowledgeable amateur writers as a source of leads and insight. The strategy is already fairly common at some business-to-business magazines.

An irony of this week's breakthrough is that the article Schmid cited took a slap at reporters for only reading news releases and not actual source documents. Schmid proved me wrong by digging into Quad's 300+-page "S4" report for the reporting in his article.

Monday, May 24, 2010

Quad/Graphics Has Quarterly Loss, Eyes Plant Shutdowns

Quad/Graphics’ 1st Quarter 2010 was slightly worse than last year’s, and it expects to close some high-cost U.S. printing plants when it merges with Worldcolor this summer.

Those are among the revelations in a document the big Wisconsin-based printing company filed with the Securities and Exchange Commission Friday.

The document is being sent to Worldcolor shareholders in advance of their special meeting on June 25 to vote on a merger with Quad that would create the continent’s second largest printing company. A June 28 court hearing in Montreal could be the final step in consummating the deal now that all anti-trust hurdles have been cleared.

Quad/Graphics’ sales in the quarter ended March 31 were down 3% from the previous year, while its losses doubled to $8.5 million. The loss equaled about 2% of total sales, which is not bad considering the recession and the usual post-Christmas slowdown in printing. Worldcolor’s $59 million quarterly loss, after all, was more than 8% of its total revenue.

The “continued but somewhat lessened decline in demand for commercial printing due to the global economic recession” was the main reason for the sales decrease, Quad said. “Product sales also declined due to continued pricing pressures related to increased competition and industry overcapacity. These decreases were partially offset by an increase in recycling sales due to increased prices received on recycled paper.”

Some of the estimated $225 million in annual cost savings that Quad expects the merger to produce will come “from commercial printing capacity consolidation into lower cost, more modern and efficient printing facilities from certain high cost facilities (primarily in the United States).”

Other sources of savings it cites are increased purchasing volume, “elimination of redundant administrative costs (including the consolidation of the corporate headquarters),” and “better utilization of shipping, distribution and warehousing logistics" as a result of the plant consolidations.

Worldcolor projects the savings will be even higher -- $285 million – apparently because it “estimated greater procurement synergies than Quad/Graphics” did.

Privately held Quad has historically been tight-lipped about its financial status and results, but the process of acquiring Worldcolor and going public is forcing it to reveal more. Still, the First Quarter data are less detailed than what a public company usually releases and were not accompanied by a press release, which is why Quad’s quarterly results have not appeared in newspapers or the trade press.

(“No news release, no news coverage,” a journalist friend told me in explaining the impact of the news media’s budget cuts on business-news coverage. But because Dead Tree Edition is published by a somewhat obsessive hobbyist rather than a real journalist, we continue to read and report on actual source documents. How quaint!)

For related articles, please see:

Saturday, May 22, 2010

FSS Throughputs 9% Below Plan, USPS Official Says

Flat Sequencing System machines are handling about 9% fewer pieces of mail than originally planned but are still proving to be worth the investment, a postal official said this week.

“Additional savings opportunity exists for expanding beyond Phase 1,” according to a presentation from Rosa Fulton, Executive Director of Flats Sequencing, to the Mailers Technical Advisory Committee this week. The 100 machines in Phase I will only handle one-fourth to one-third of the Postal Service’s flat mail when they are all operational a little more than a year from now, she noted.

Low mail volumes, not mechanical problems, are causing the 12 machines that are up and running to handle about 255,000 pieces per day rather than the 280,500 target in the original plan, Ms. Fulton said.

That target was set a few years ago when the amount of catalogs, magazines and other flat mail was growing slightly. But flats volume declined 26% from fiscal year 2005 to FY 2009 and is still decreasing.

As a result, each FSS machine is handling more delivery points than planned. That means more daily runs for each machine because there’s a limit to the number of delivery points in a single run.

“Increasing the number of runs decreases [the] number of pieces that can be processed daily” because of the changeover times between runs, Ms. Fulton’s presentation said. “Technology solutions to gain back efficiencies are in review.”

The Postal Service’s vision for flats mail includes the goals to “optimize savings potential for Phase 1” and “extend flats sequencing beyond Phase 1,” she said.

Related articles:

Thursday, May 20, 2010

NewPage Reportedly Has Deal For Kruger's Idled Machines

NewPage and Kruger have reached a deal ensuring that Kruger doesn't restart the soon-to-be-idled coated-paper operation at its Trois-Rivieres, Quebec mill, several sources say.

The arrangement would reportedly be similar to the deal NewPage did in March, when it agreed to buy Domtar's coated-groundwood product lines and trademarks after Domtar closed its only coated mill, in Columbus, MS. (See Is Domtar's Exit a Game Changer for Coated Paper?)

In this case, Kruger will continue making lightweight coated groundwood on its world-class machine at the nearby Wayagamack mill. But the sources say its business above 40# is being turned over to NewPage.

One irony of the deals is that NewPage has said it wants to focus its coated-groundwood business more on lightweight papers; both Columbus and Trois-Rivieres focused on medium and heavy weights. But as North America's #1 producer of coated paper, what NewPage gets from the Domtar and Kruger deals is capacity reduction -- that is, less competition -- in the oversupplied coated-paper market.

Kruger announced yesterday that it will lay off 320 employees at Trois-Rivieres in June when it shuts down two paper machines and a coater. It said it would stop making both coated and supercalendered paper at the mill, but it's not clear whether the deal with NewPage includes supercal.

Market observers have said that the age and small size of the Trois-Rivieres machines probably made it a high-cost producer of coated groundwood and supercal. The recent strength of the Canadian dollar versus the U.S. dollar also hurt because most of the mill's output is sold in the U.S. With pulp prices soaring while paper prices are gradually coming out of a trough, it's probably more profitable for Kruger to sell its pulp to others rather than to make paper with it.

D. Eadward Tree Unmasked!

A postal executive stunned the Mailers Technical Advisory Committee (MTAC) today by announcing that D. Eadward Tree, pseudonymous chief arborist of Dead Tree Edition, is actually a high-ranking Postal Service official.

Rosa Fulton, Executive Director of Flats Sequencing, said that the Flats Sequencing Map published on this blog last month had only been shown to a few high-ranking USPS officials. She announced, therefore, that D. Eadward Tree must be none other than Patrick R. Donahoe, the #2 man at the U.S. Postal Service. Donahoe reportedly laughed but issued no denials.

Ms. Fulton's "revelation" also drew chuckles from those who had read this blog's criticisms of several Postal Service programs, such as the rechristening of the Intelligent Mail barcode as the FUBAR code.

Confession: That super-secret FSS map was part of a presentation to a meeting of mailers in March that was then posted on a USPS web site.

I've been called many things before -- DeadTree, Mr. Tree, Tree Dude, His Pseudonym-ness, an executive at several prominent publishing companies, that anonymous blogger with the aggravating name, an irritating #&*%#$ -- but never Pat Donahoe.

Here are a couple of clues: Yes, I have a day job, but my salary is less than Mr. Donahoe's.

Wednesday, May 19, 2010

The Boreal Forest Deal and the Sustainable Forestry Initiative

Some have questioned my contention that the Canadian Boreal Forest Agreement recognizes the legitimacy of the Sustainable Forestry Initiative forestry-certification standards, which some of the agreement's signers have criticized as inferior to the Forest Stewardship Council. (See Environmental Groups Make Surprising Concessions in Canadian Forest Deal.)

There was no mention of SFI in the press releases that were sent out yesterday, but the abridged version of the agreement (the full agreement is not publicly available) contains the following language:

Goal 1. World-leading Boreal “on-the-ground” sustainable forest management practices based on the principles of ecosystem-based management, active adaptive management, and third-party verification.

In achieving this goal, FPAC, FPAC Members, and ENGOs believe it is important to build on existing work (the standards in the existing three major certification programs) rather than build a new (fourth) set of standards from scratch. [A footnote adds: Canadian forest managers can certify their forest management practices to one of three internationally recognized forest certification programs: the Canadian Standards Association (CSA), the Forest Stewardship Council (FSC), and the Sustainable Forestry Initiative (SFI).] These standards of practice will be jointly developed by December 31, 2010, and implemented by December 31, 2012.

The objective is to develop a concise document that outlines the key principles and management approaches (from both a substantive and process perspective) that FPAC, FPAC Members, and ENGOs agree are required to achieve ecosystem-based management (EBM) in Canada’s Boreal Forests. In developing this document, the intent is to:

a) Base these standards of practice on the elements of each of the three existing certification programs (i.e., the practices used to apply the standards of each of the programs on the ground as evidenced by the current certifications) that best embody an ecosystem-based management approach, using as a reference point the on-the-ground application of the existing Forest Stewardship Council (FSC) National Boreal Standards;
b) Provide for verification of compliance with these standards of practice through third-party audits (e.g., as currently provided for as part of FPAC membership’s existing sustainable forest management (SFM) certification commitment);
c) Establish principles and procedures to govern the audits of such standards of practice based on best auditing practices in the Boreal:
i) The topics included in these principles and procedures will include (but not be limited to) the required qualifications of auditors, the selection of auditors, consultation, field sampling protocols, the time frames for addressing corrective action required, transparency of audit results, etc.; and
ii) The intent is that these principles and procedures be efficient and avoid audit duplications;
d) Recognize the role of formal and informal voluntary conservation areas within the managed landscape;
e) Base this work on the best available information;
f) Provide for continuous improvement through active adaptive management; and
g) Undertake this work in a manner that is efficient, cost-effective in both its development and implementation on forest tenures, and respectful of the auditing processes and procedures of the three certification programs, as well as in a manner that does not result in a premature process of standards revision. 

That doesn't mean that certification schemes won't be a point of contention among the organizations that signed the agreement. After all, ForestEthics has accused SFI of tax fraud and greenwashing, saying it is a "phony" scheme that benefits from tax-deductible contributions from "environmentally controversial companies" like Weyerhaeuser, which also signed the agreement.

Environmental Groups Make Surprising Concessions in Canadian Forest Deal

The landmark truce announced yesterday by Canadian forestry companies and green groups represents a new direction for the environmental movement.

It’s surprising enough that the former enemies signed a deal involving forestry practices and conservation for an area of the Canadian boreal forest larger than Texas.

Even more stunning is that radical environmental groups like Greenpeace and ForestEthics signed an agreement that calls for “policies and investments that improve the competitiveness of the Canadian forest sector” and “improved prosperity of the Canadian forest sector and the communities that depend on it.” That’s a big switch from contentions that no logging should occur in ecologically sensitive boreal (sub-arctic) forests.

The agreement also recognizes the legitimacy of the industry-backed Sustainable Forestry Initiative in addition to the rival Forest Stewardship Council. (See The Boreal Forest Deal and the Sustainable Forestry Initiative for more on this subject.) Greenpeace has urged its supporters to “look for the FSC label” when buying forest products, and the two groups sponsored a study that concluded only FSC “represents a viable system that delivers positive results on the ground and in the communities where it matters most” and therefore is “the only forest certification system that is broadly supported by conservation groups."

The nine environmental groups also committed to calling off any “do not buy” campaigns targeted at customers of the signatory forest-products companies. ForestEthics is perhaps best known for its successful guerilla-theater-style Victoria’s Dirty Secret campaign. More recent efforts involving the boreal forest have targeted Sears and Kimberly-Clark.

In return, the forest-products companies agreed to “the suspension of logging on nearly 29 million hectares [two-thirds the size of California] of Boreal Forest representing virtually all Boreal caribou habitat within company tenures.” Caribou habitat is often viewed as a rough proxy for boreal forests that are relatively undisturbed by human activity.

The 21 forestry companies (including AbitibiBowater, Kruger, NewPage, and Weyerhaeuser) also committed to working with the green groups and an independent panel of scientists to develop “best practices for biomass harvesting” and then to follow those practices, backed up by third-party audits.

A goal of the agreement is to make Canada “a world leader in conservation and protection of Boreal biodiversity through a mix of conservation measures, the completion of a protected areas network, and the implementation of third-party certification of sustainable forest management practices.”

The agreement offers hope that the environmental movement is growing up and learning to see the big picture. It makes far more environmental sense to work with relatively responsible companies in a well-regulated country like Canada than to cause the demand for paper and other forest products to shift to environmental nightmares like Indonesia.

How the deal will actually work in practice is not entirely clear. Yesterday’s news release, “highlights” document, and abridged description of the agreement left some key questions unanswered:
  • Show me the money: Who will foot the bill for the studies, audits, and other activities called for in the agreement? And will the environmental groups receive any direct compensation in return for dropping the kinds of high-profile campaigns that can be good for fundraising?
  • What will happen to forestry companies that log the Canadian boreal forest but did not sign the agreement? Will they, and their customers, face pressure to sign?
  • Will other environmental groups go along with the agreement? Or will some claim it doesn’t go far enough and start new “do not buy” campaigns against the signatory companies?
  • Will ForestEthics retire Candace the Caribou, the character who often appears at protests of boreal-forest logging? Or will she start appearing at rallies against the destruction of the boreal forest by the extraction of oil from Canadian tar sands?
  • We know from that scholarly movie “Ghost Busters” that one sign of “a disaster of biblical proportions” is dogs and cats living in peace. Does that mean we should be worried when environmentalists and loggers hold hands, sing “Kum Ba Yah” and agree to bury the hatchet?
Related articles:

    Thursday, May 13, 2010

    What, Exactly, Is Black Liquor? Just Ask the Tax Man

    If you want to understand that once-obscure, now infamous pulp byproduct known as black liquor, you can turn to an unlikely source –- the lawyers at the Internal Revenue Service.

    In its recent ruling about the water and inorganic content of black liquor (See IRS Ruling Helps Pulp Makers Keep Black Liquor Billions), the IRS’ Office of Chief Counsel presented a pretty clear explanation of how black liquor is created, what it contains, and how it is used in the kraft-pulping process.

    The ruling's reference to mixing in diesel fuel is not a usual part of the process but was a trick U.S. pulp makers used to qualify for alternative fuel mixture credits last year. (For the record, I’ve seen paper-company executives handle plenty of liquor, and I’ve never known them to add diesel to it. Tonic water, maybe; diesel, never.)

    Anyway, here’s how the IRS describes the process that resulted in at least $8 billion in tax credits for the pulp and paper industry last year and $23.6 billion in alleged “savings” that helped pay for Obamacare (See ObamaCare's Black Liquor Tab: $23.6 Billion.):

    To make black liquor, wood chips from debarked tree logs are pulped by using inorganic pulping chemicals (“white liquor”), process water, heat, and pressure to separate lignin and other components of the wood from the cellulose fibers in the wood chips (“kraft milling process”). The wood chips consist of approximately 50 percent water (“chip water”) and 50 percent wood, by weight. The process water is added at one or more stages during the kraft milling process. White liquor and
    process water are necessary to create black liquor.

    The resulting weak black liquor (including the lignin, spent chemicals, and water) is an aqueous solution. The weak black liquor is concentrated into heavy black liquor by removing much of the water. The removed water (including both chip water and process water) is generally recycled back into the kraft milling process. After being concentrated, the resulting heavy black liquor has a molasses-like consistency and its chemical composition includes organic matter, inorganic solids, and water. At this stage, heavy black liquor is approximately 60 percent dissolved solids and 40 percent water, by volume. The producer then adds a small amount of diesel fuel to the black liquor to produce an alternative fuel mixture, as described in § 6426(e) of the Code.

    In the recovery boiler, the diesel fuel, organic matter, and water are burned away from the alternative fuel mixture, generating steam to produce electrical energy that powers the paper mill. The inorganic solids, however, are not burned away but remain in the recovery boiler as smelt (sometimes called “green liquor”). The chemical transformation that changes the inorganic solids into smelt/green liquor consumes energy in the recovery boiler. Despite this energy consumption, however, burning black liquor results in a net production of energy. Originally, the recovery boilers were explicitly designed to recapture the inorganic solids. Currently, the industry recaptures and reuses more than 95 percent of the inorganic solids. Through additional processing, the chemical composition of the green liquor is changed into white liquor, which in turn is recycled into the pulping process.

    Wednesday, May 12, 2010

    Periodicals Are Profitable for USPS, Publishing Exec Testifies

    A Congressional panel is slated to get an earful today from a publishing-industry expert about the U.S. Postal Service’s “automation refugees” and inaccurate accounting of Periodicals-class costs.

    “It is likely . . . that Periodicals Mail fully covered its short-run attributable costs—the proper measure of attributable costs during periods of excess capacity—in 2009 and made a positive contribution to Postal Service finances,” Jim O’Brien, Time Inc’s vice president of distribution and postal affairs, says in a prepared statement for the House Subcommittee on the Federal Workforce, Postal Service, and the District of Columbia.

    Periodicals mail has become more efficient and its volumes have dropped, yet the Postal Service claims that its costs of handling Periodicals mail keep rising, notes O’Brien, speaking on behalf of the Magazine Publishers of America. Postal executives want to jack up Periodicals rates because they claim the class only covers 76% of its costs.

    Here in full is O’Brien’s testimony regarding the Periodicals cost issue:

    The magazine industry has been and remains deeply concerned that the attributable costs of Periodicals, as measured by the Commission, have increased more than inflation over the last 25 years. This trend is especially disturbing to us because MPA and its members have devoted a great deal of time and resources during the past two decades in an ongoing effort to identify and implement ways to minimize the work required for the Postal Service to process and deliver our magazines. From FY 2004 to FY 2009 alone:
    • The percentage of Periodicals pieces sorted to the most-efficient and least-cost Carrier Route level increased from 47 to 55 percent;
    • The percentage of Periodicals pounds privately shipped and entered at a destination facility rose from 57 to 65 percent; and
    • The number of sacks – more expensive for the Postal Service to handle than pallets – declined by 65.9 percent. In FY 2000, Periodicals mailers used approximately 110 million sacks. Today, we use 28 million sacks.
    I brought with me today a bundle of copies of Time Magazine prepared to maximize efficiency for the Postal Service. All the pieces in this bundle are destined for the same carrier route. We truck bundles like this from our printing plants to hand off the magazines to the USPS at facilities near our subscribers. The bundles remain intact throughout the process, and no one has to open them or handle individual pieces until the bundles are opened by the letter carriers who make final delivery of the magazines. Other than taking the bundles to the destination ZIP Code and handing them to the letter carrier ourselves, this is the most efficient product that we can give to the Postal Service – and we and other publishers are making up more bundles like this all the time.

    This improvement in preparation – while very beneficial to the Postal Service – is costly to publishers. We must pay printers, consolidators and truck companies for co-mailing, co-palletization and trucking. We have incurred these extra costs in order to stem the increases in Periodicals costs. And it worked. Periodicals costs were relatively flat between 1999 and 2003. However, despite our significant investments to improve efficiency and reduce costs for the Postal Service, Periodicals costs – as measured by the Commission – have once again begun to outpace inflation.

    Excess Capacity Has Prevented Potential Cost Savings from Being Realized
    The Postal Service’s extensive investment in equipment to automate flat-shaped mail should have led to significant reductions in mail processing costs for flats, including Periodicals. Similarly, mailer efforts to make Periodicals cheaper and easier for the Postal Service to handle should have reduced the Postal Service’s costs.

    But that hasn’t happened. Why?

    We have learned from many years of analyzing postal operations and costs that a key problem facing the Postal Service – and a major reason for the continuing increase in Periodicals costs – is excess capacity. This excess capacity has been created by the failure of the Postal Service to reduce its workforce when its workload has declined. There are multiple reasons for workload declines for the Postal Service, including:
    • increasing automation of the mail processing function, which has reduced the number of processing clerks needed for a given processing operation;
    • changes in mail preparation that eliminate some of the processing and transportation that the Postal Service used to do;
    • and in recent years, shrinking mail volumes.
    The Postal Service’s workforce, however, has not shrunk as fast as the Postal Service’s workload. This is not a new problem. In fact, the increases in Periodicals costs can be tracked back to 1986, when the Postal Service started its letter mail automation program. Time Inc. even coined a phrase to explain what happened to Periodicals as a result of letter mail automation. The term is “automation refugees,” and over the years more and more people have come to understand what that concept means. It means that excess capacity in one processing operation can make another processing operation less efficient. Machines are idled while manual processing occurs in order to absorb the available labor capacity, and classes that had nothing to do with the automation see their costs go up.

    The excess capacity problem that we noticed earlier for Periodicals has worsened and broadened in the past few years with significant declines in mail volume.

    The chart below shows the magnitude of the problem in the last few years. Adjusting for differences in amounts paid into the Health Benefit Fund in 2007-2009, the chart shows that in 2008 total mail volumes declined 4.5 percent but expenses actually increased. Similarly, in 2009, total mail volumes declined almost 13 percent but costs decreased by only 2.4 percent.

    In my experience, excess capacity often leads to manual processing despite the availability of automation. And manual processing leads to increased costs. In the Strategic Improvement Guide issued by the Postal Service after our 1998 joint task force, the Postal Service quantified the problem, circa 1997: “In FY97, we failed to automate over 6 billion barcoded flats – and had we processed them through automation, we would have saved over $54 million.”

    When I have visited postal facilities over the past 13 years, I have often observed flat sorting machines standing idle while Postal Service personnel sorted Periodicals manually rather than running them on the machines. This doesn’t happen in the case of letter mail, because the Postal Service removed manual letter cases from its facilities. But manual processing areas for Periodicals remain.

    In a postal facility in the New York area, just three weeks ago, I saw an operation that the Postal Service informally refers to as a “bullpen.” A sign at the top of the bullpen said “Hot Publications Staging Area.” Inside the bullpen, were hampers for mail handlers to manually sort bundles of Periodicals. Why do manual processing areas continue to exist in so many processing facilities? Facility personnel, when asked about manual processing, sometimes claim it is done for “service reasons.” But I have never asked for manual processing, and I don’t think other publishers have either. In fact, the reverse is true. Our industry has literally begged postal personnel for years to put Periodicals on flat sorting equipment. We have made every change the Postal Service has asked for – including turning our mailing labels upside down – to ensure that Periodicals could be automated.

    We believe that extensive manual processing survives because the Postal Service has not succeeded in reducing its workforce enough to match reduced processing needs. The costs of this excess capacity should not be charged to Periodicals and other similarly situated classes – either directly because of unnecessary manual handling or indirectly because of increased overhead costs.

    Periodicals Costs Are Overstated
    The Postal Service’s existing cost systems overstate the costs attributed to Periodicals. First, they assume that all costs are incurred efficiently, and that all worker time and other resources spent on processing a particular class of mail are needed by, and of benefit to, that mail. Charging periodicals for the extra costs of manual processing that periodical publishers did not request and do not need, is unjust and unreasonable. And it is inconsistent with the policy of the law that postal rates should reflect the costs of honest, economical and efficient operations.

    Second, existing methods also overstate attributable costs by making unrealistic assumptions about the extent to which costs vary with changes in mail volume. For mail carrier costs, there is a general consensus that some of the costs are fixed (or institutional in postal parlance) in the short or medium run. For mail processing costs, however, the Postal Regulatory Commission has assumed for many years that virtually all costs are variable, and therefore should be attributed to individual mail classes. This assumption has led to protracted debate. For a decade in six different rate cases, the Postal Service tried to convince the Postal Rate Commission that mail processing costs were not fully variable and thus should not be fully attributed to classes. Several respected PhD economists demonstrated on behalf of the Postal Service that mail processing costs did not increase or decrease fully with volume, but had volume variability only in the range of 70-85 percent. Periodicals costs would look quite different if the Commission agreed that mail processing costs are not fully volume variable.

    In FY 2009, Periodicals Likely Covered Short-Run Attributable Costs
    In June 2009, the Postal Regulatory Commission approved the Postal Service’s “summer sale” discounts for Standard Mail. In seeking the discounts, the Postal Service argued that the relevant measure of attributable costs for evaluating whether the discounted rates would cover costs was short-run attributable costs—the costs that varied with volume in the short-run during a period in which there was excess capacity—rather than long-run attributable costs, i.e., costs which assume a time period over which all excess capacity 6has been shed. The Postal Service estimated that, because of excess capacity, the shortrun attributable costs of the two Standard Mail categories with cost characteristics most similar to Periodicals were only 66% and 51% of their long-run attributable costs.

    The same logic applies to the pricing of Periodicals mail. Although short-run attributable costs were not estimated for Periodicals Mail (because Periodicals Mail wasn’t part of the “summer sale” case), Periodicals’ short-run attributable costs probably were a similar percentage of their long-run attributable costs during the summer sale period. As shown in the chart above, the Postal Service’s limited cost savings in 2009 suggest that excess capacity was present throughout the year. It is likely, therefore, that Periodicals Mail fully covered its short-run attributable costs—the proper measure of attributable costs during periods of excess capacity—in 2009 and made a positive contribution to Postal Service finances.

    The Postal Service and Postal Regulatory Commission Continue to Examine These Issues
    As I mentioned, in 1998, I participated in a joint USPS/Periodicals mailers task force to look at some of the issues I’ve addressed today. Twelve years later, many of the problems we identified are still unaddressed, and many of the questions we asked are still unresolved. The Postal Service and the Postal Regulatory Commission are currently looking at many of the same issues again. Their report is due within the next few months. Hopefully, this study will provide additional insights and recommendations.

    For related articles, please see:

    Tuesday, May 11, 2010

    IRS Ruling Helps Pulp Makers Keep Black Liquor Billions

    A recent IRS ruling means that pulp and paper companies will not have to pay back several billion dollars in black liquor tax credits.

    In fact, as a result of the ruling, at least six companies booked additional credits for First Quarter 2010 even though the controversial eco-credits expired on December 31.

    The Feb. 12 decision from the IRS’ Office of Chief Counsel, which apparently became public in late April, states that all of black liquor, not just the portion that is burned to generate electricity at kraft pulp mills, is eligible for the 50-cent-per-gallon “alternative fuel mixture credit.” Black liquor, a molasses-like pulp byproduct, is 40% water and also contains some inorganic compounds that have negative energy value, the ruling noted.

    Pulp manufacturers exploited a loophole in an alternative fuel program to garner approximately $8 to $9 billion last year in tax credits for burning black liquor as fuel. With nearly half of black liquor consisting of water or inorganic compounds, an unfavorable ruling on the water content could have negated about $4 billion worth of credits.

    Black liquor is a liquid fuel
    Citing a precedent involving the water content of coal, the Chief Counsel’s office stated that “the volume of black liquor should not be divided into component parts to calculate the alternative fuel mixture credit and the entire volume of the heavy black liquor is a liquid fuel that is ‘derived from’ biomass.”

    Some of the kraft manufacturers were worried enough about the inorganic compounds that they had held off claiming the credits on a portion of the black liquor they burned.

    “Due to a potential risk that a portion of the alternative fuel we used might not qualify for the tax credit, we recorded a book reserve of $10 million," explained Randy Levy, Temple Inland CFO, during the company’s recent earnings conference call. Because of the ruling, “what we did was we reversed the reserve and recognized $10 million in alternative fuel mixture tax credits in the first quarter of 2010. Of course that's related to the actual alternative fuel that we used in 2009.”

    Others that booked similar First-Quarter income because of the ruling include Domtar ($25 million), Smurfit Stone ($11 million), Packaging Corporation of America ($9 million), KapStone Paper and Packaging ($7.9 million), and Buckeye Technologies ($2.9 million). NewPage recognized $13 million and SAPPI $2 million in black liquor credits during the quarter, but it isn’t clear whether those earnings are related to the IRS ruling.

    But most of the 21 publicly traded recipients of the credits, including #1 International Paper, made no reference to the ruling or any reserves for black liquor in their recent earnings statements.

    Companies are still waiting for guidance from the IRS on whether black liquor credits are subject to corporate income taxes. Because some of the companies have booked reserves in case the credits are taxable, a favorable ruling would lead to more income related to the credits.

    For more information on tax credits for burning black liquor, please see:

    Saturday, May 8, 2010

    The Unofficial Guide to Flats Sequencing

    This guide was originally published in January 2009 but has been significantly updated since then. For the latest on the successes and failures of the Flats Sequencing System so far, please see USPS Speeds Up FSS Start-Ups, FSS Throughputs 9% Below Plan, USPS Official Says, and USPS Consolidation Plan Means Moving or Closing Some FSS Machines.

    Is the Flats Sequencing System going to revolutionize the Postal Service’s handling of catalogs and magazines or is it destined for failure? Good question.

    The evidence is mixed, partly because USPS has been forthcoming about some aspects of FSS but secretive about others.

    Mailers report little trouble with the few FSS machines that are operating so far. And some are impressed by postal officials' efforts, after some initial hiccups, to work with industry on creating an efficient, “lowest combined cost” approach to the handling of catalogs, magazine, and other flat mail.

    But postal officials were also caught off guard by the rapid decline in flat mail, which has forced them to rework the locations and schedules for Phase I (the first 100 machines) of the FSS program. And Northrop Grumman, which is building the machines, reportedly reassigned all of the engineers who had been working on FSS after the machines failed two USPS acceptance tests.

    USPS has a split personality when it comes to talking about the Flats Sequencing System. It has provided lots of information about the new technology but not answered some basic questions that have been kicking around for a couple of years.

    It has created an FSS Web site bringing together various documents related to FSS and a neat video (above) showing the FSS in action. But it put the video on YouTube without referencing the video on its own Web sites. And it has had trouble keeping the list of FSS locations up to date.

    To clear up the mysteries and confusion, Dead Tree Edition here offers answers to frequently asked questions about FSS:

    Q: What is the purpose of FSS? A: The most straightforward answer comes from a report issued by USPS' Office of Inspector General (OIG) report, rather than the PR or marketing folks: “The mail processed by the FSS will arrive at the delivery unit in walk-sequence order, ready for delivery by the carrier with no additional mail movement or manual sorting required. Savings should result when delivery units can eliminate the requirement for mail carriers to manually case flat mail. A small reduction in clerks’ work hours at delivery units should also result, since employees would no longer need to move FSS-processed mail to the carrier casing areas.” The best description from the Postal Service itself comes from an obscure cost study: “The Flats Sequencing System (FSS) machine sorts flat mail into Delivery Point Sequence (DPS) for carrier delivery. This program eliminates the last significant manual sortation currently performed by carriers before leaving the office. Since FSS machines will be deployed in processing plants, the FSS program will shift processing activities from delivery units to processing plants.”

    Q: How many people will be laid off? A: Using data from USPS, Dead Tree Edition estimates that the Postal Services envisions the first 100 machines resulting in elimination of about 6,000 delivery-related jobs, mostly letter carriers. But we have no way to verify the accuracy and repeatability of the results from Reston Annex, VA on which the projection is based. And we’ll point out that, because of attrition, not every job elimination results in layoffs. Dead Tree Edition has also shown that FSS will apparently result in, or contribute to, consolidation of the flats dropship network (known as processing and distribution centers in postal-speak), which presumably will result in more job eliminations. has a great FSS page with links to numerous documents, many of them related to the system's impact on postal workers. And check out the "Automation and the Life of the Letter Carrier", including the comments, at the blog published by USPS's Office of Inspector General.

    Q: Where will the machines go, and what ZIP codes will be affected? A: Here are links to the official list of the 47 Phase I, IA, and IB locations for the 100 machines and the list of 2,328 affected ZIP codes. Declining Volumes Lead to FSS Expansion explains the Phase IA expansion of August 2009, which added 10 facilities and about 1000 ZIP codes to the Phase I plan; Phase IB added five more in May 2010.

    Q: Why were these locations chosen? A: The Postal Service chose the locations with the greatest potential for savings. That generally means processing plants serving areas with the highest numbers of relevant flats (generally Periodicals and Standard classes) per delivery point. Another factor was buildings with enough space for at least two of the enormous machines.

    Q: How much will the machines save the Postal Service? A: The Postal Service isn’t saying, but the OIG report says “FSS is expected to generate operational savings of between $593 million and $677 million annually.” That’s consistent with Dead Tree Edition’s conservative estimate that the Postal Service envisioned delivery savings of at least $420 million (at least 5 cents per flat) from Phase I, but the calculations are actually quite different. Dead Tree Edition considered only delivery costs, while the OIG report presumably looked at all factors – impact on sorting costs, equipment maintenance, real estate, and depreciation as well as delivery costs.

    Q: Will the savings be shared with the customers in the form of lower postal rates? A: Don’t count on it. Facing a $2.8 billion loss in the last fiscal year and declining mail volumes, USPS no doubt will use the money to improve its financial situation rather than to decrease average prices. Postal officials have said informally that dropshipped flats handled via FSS will cost mailers less than if they had been dropshipped in traditional carrier-route bundles. But that is likely to mean higher-than-normal rate increases for non-FSS flats, so that the average rate increases for each class will be close to the rate cap, which is determined by changes in the Consumer Price Index. Publishing Executive's article "Pushing the Envelope" has an extensive discussion of FSS from a customer perspective.

    Q: You mean we will have two sets of rates for flats, one for FSS and one for non-FSS areas? A: Probably. Postal officials are still working with the mailing industry to determine the best way to package FSS flats, but it’s clear that at some point mailers will no longer be creating carrier-route bundles for areas served by FSS and that the rules for bundling and containerization will change. Trying to avoid the kind of delays and miscommunication that have plagued the Intelligent Mail Barcode (IMb) program, both postal officials and mailers are reportedly trying to work out all issues before the new rules and rate structure are announced. Some of the work revolves around optimal bundle sizes and how best to strap or band pallets. In the meantime, mailers are packaging mail in the traditional way (for example, carrier-route bundles and SCF pallets), which is not optimal for the FSS machines that are already running.

    Q: How will FSS flats be packaged? A: It looks as if mailers will create larger bundles for FSS facilities than for non-FSS facilities. The bundles may cover an entire FSS scheme (typically, two to four ZIP codes that are processed on the equipment at the same time). Ideally, mailers will create scheme pallets, but that will be extremely rare except for huge mailstreams (those containing more than 3 million pounds) unless the minimum weight for pallets is reduced. Probably the next step down will be machine pallets, which will contain copies for all of the schemes (typically about seven) that will be worked on the same FSS machine. The next step down after that may be FSS pallets, containing copies going to all of the FSS machines in a facility. There may be some mixing of FSS and non-FSS copies on the same pallets. The use of tubs instead of sacks is being investigated for flats that mailers cannot palletize.

    Q: If there are no carrier-route bundles, will it make sense to co-mail FSS copies? A: Yes, according to postal officials – presumably because co-mail will produce more finely sorted bundles and pallets and spread the costs over multiple mailers. But we won’t really know until we see the FSS rate structure.

    Q: Why did mailers have to change the way they address their flat mail? A: For FSS to be optimal, letter carriers will need to be able to determine quickly which flats get delivered to the next address. Because the catalogs and publications will be upright in a tub with all of the spines facing right, the best way to do that is to have all of the addresses right-side up in the upper right portion of the cover that faces the carrier. As a result, most magazines are now placing addresses up-side down in the lower left quadrant of the front cover, while most catalogs are addressing right-side up in the upper right portion of the back cover. The new addressing rules, which apply to flats going to non-FSS areas as well, took effect on March 29, 2009.

    Q: What about newspapers? The official answer is that newspapers going to FSS zones will be processed on the FSS “to the extent possible”. But there is some skepticism in the mailing community about how the machines will handle some newspaper formats. It’s also not clear to what extent in-county Periodicals and other locally focused publications will be encouraged or forced to enter their mail at FSS facilities rather than at their local post offices.

    Q: What about saturation mail? Postal officials say that saturation mail will bypass FSS but that high-density mail will be processed on the machines.

    Q: How much do the machines cost? USPS has a contract to pay Northrop Grumman Corporation $874.6 million for the 100 systems in Phase 1, but the OIG refers to Phase I as a $1.4-billion investment. Most machines will go into existing buildings, but there are a few new buildings, plus some modifications to existing buildings.

    Q: Did the Postal Service make a good investment? A: Investing $1.4 billion to save between $593 million and $677 million annually would certainly be a good investment; the investment would pay for itself in barely two years. See Can the Flats Sequencing System Be Fixed? for more information about a couple of potential problems in achieving those savings. FSS Throughputs 9% Below Plan, USPS Official Says explains how the drop in flats volume has hurt the machines' productivity.

    Q: How much of the country will be included in Phase I/1A? A: It looks as if the latest plan will involve roughly 25% to 30% of the flats the Postal Service handles. The percentage should be higher for mail going mostly to affluent urban and suburban dwellers. By the way, postal officials are already planning Phase II and considering whether to pursue new technology that would sequence letter and flat mail together.

    Q: How will firm bundles be handled? A: Postal officials say there will still be Periodicals-class firm bundles but indicate that firm bundles containing only a few copies in FSS zones may no longer make economic sense for mailers.

    Q: How will FSS affect the timeliness of delivery? A: The critical entry time for next-day delivery will be noon for sacked Standard flats, 4 p.m. for palletized Standard mail, and determined on a facility-by-facility basis for Periodicals and First Class. In theory, FSS will make the day of delivery more predictable. For example, letter carriers sometimes forgo manual casing on days when they have heavy volumes, delaying delivery of flats. But “News” Periodicals (daily and weekly publications) may see some deliveries delayed by a day. They may need to enter mail by mid-afternoon at an FSS facility to get next-day delivery, while entering in the late afternoon or early evening at a non-FSS Sectional Center Facility (SCF) typically gets them next-day delivery.

    Q: How will FSS affect dropshipping? A: It has already led to consolidation of dropship facilities and will probably lead to more, which is good for mailers. Unfortunately for mailers, the FSS-related consolidations will tend to affect dropship facilities in densely populated areas, rather than those in such hard-to-reach locations as El Paso, TX and Clarksburg, WV. The good news is that the FSS dropship locations will be identical for Periodicals and Standard classes; that is not always true for dropshipping of non-FSS flats.
    Please submit additional questions, as well as suggestions and other FSS information, to

    FSS Machines Shuffled Again -- But Do They Work?

    The U.S. Postal Service announced yesterday that it is putting the Flats Sequencing System into five new locations but has still not revealed whether the machines work as intended.

    As a result of declining volumes of catalogs, magazines, and other flat mail, the number of facilities getting the first 100 FSS machines is 47, up from 32 that were planned just a year ago.

    San Diego will get two machines, while one each will go to Brooklyn, Cleveland, Dallas, and Pittsburgh. Palatine, IL will get an additional machine. Carol Stream, IL; Denver; Indianapolis; Middlesex-Essex, MA; Providence, RI; and Sacramento, CA will each lose a machine.

    The revised schedule released yesterday shows the last of the 100 machines starting up in May 2011. Eleven machines are already sorting mail, and another 37 are in various phases of installation or start-up.

    Eight months ago, USPS's Office of Inspector General said that "deploying FSS machines to additional sites is premature" until the system "demonstrates operational stability and achieves the minimum performance requirements under field test conditions". But postal officials decided that the results were good enough and providing enough cost savings to press on with more installations.

    A third round of acceptance testing was scheduled for last fall, but USPS has not revealed the results. Various sources, however, report that the machines have still not met the standards specified in the contract with the manufacturer, Northrop Grumman.

    For more information on the system that is intended to revolutionize the handling of flat mail, please see:

    Wednesday, May 5, 2010

    Downsizing Diminishes USPS's Role As A Source of Opportunity for Blacks, New Book Says

    Downsizing of the Postal Service’s workforce is undercutting the service’s historic role as an opportunity provider for African Americans, according to a new book by a postal-worker-turned historian.

    Philip F. Rubio’s There’s Always Work at the Post Office: African American Postal Workers and the Fight for Jobs, Justice, and Equality is “a history of black postal workers, their activism and influence on the post office and its unions, as well as the significance of government employment in the making of the black community.” The book starts in the 19th century but focuses especially on the major role played by African Americans in the crucial wildcat postal strike of 1970.

    Especially telling is this passage from an interview with APWU president William H. Burrus Jr.: “'The post office has been unique . . . . We shaped America,' notes Burrus, who warns that 'our country will lose something' without universal service: 'It will also put an end to the relationship between the people of color and their opportunity to climb up the ladder of success in our country. . . . The postal service has permitted millions of African Americans . . . to better themselves.'”

    Rubio worked 20 years for the Postal Service, first in the Denver Bulk Mail Center and then as a letter carrier in North Carolina, before heading to graduate school and becoming a professor at North Carolina A&T State University.

    The book cites 2008 statistics showing that the USPS’s workforce was 21% African American, 8% Asian American, 8% Hispanic, and more than 37% female.

    ‘That diversity came about primarily as a result of the fight led over the years by African American postal workers for jobs, justice, and equality at the post office,” Rubio concludes.

    Sunday, May 2, 2010

    Postal Service Scores a Win with Walmart

    If FedEx and UPS are so much more efficient than the U.S. Postal Service, how did the USPS manage to beat its private rivals for an exclusive deal with the nation’s toughest customer?

    At last month's National Postal Forum, postal officials were bragging that they had recently negotiated an agreement with Wal-Mart to be its exclusive shipper of prescriptions ordered by telephone. The drugs will be sent via Priority Mail, with Wal-Mart picking up the tab, according to Clint Bolte’s excellent summary of the forum at PrintCeo.

    “Wal-Mart has a reputation throughout its history of driving down each of their suppliers’ prices. Wal-Mart surely put FedEx, UPS, and USPS up against one another to obtain the cheapest distribution price possible,” Bolte wrote. “USPS CFO Joe Corbett remarked that he sits on the seven-person pricing committee and is personally confident that this Wal-Mart contract will be profitable to the Post Office.”

    That might surprise the misguided pundits and politicians who pontificate about how the Postal Service should privatize or outsource delivery. But when it comes to delivering small items inexpensively to homes, it’s pretty clear that FedEx and UPS can’t compete with the Postal Service.

    Often, they don’t even try. Both have outsourced much of their final delivery to the Postal Service. FedEx favors the Postal Service especially for lightweight packages delivered to residences, according to industry analyst Alan Robinson.

    The reason is obvious: The Postal Service is going to deliver to a residence any way, so adding one more small package to the delivery won’t cost much. To make the same delivery itself, FedEx would usually have to add another stop to a driver’s route. And of course FedEx must deliver to the doorstep, not to the mailbox.

    FedEx and UPS thrive by making high-value deliveries (for example, those involving big packages, overnight service, or delivery confirmation) especially to business locations that receive multiple items each day. But for a packet or bottle of pills destined for a residence, where the service level of Priority Mail is good enough, the Postal Service is clearly in the driver’s seat despite its inefficiencies and enormous fixed costs.

    I wonder how many other retailers could lower their inventory costs by using the Postal Service.