A recent Office of Inspector General report cited unofficial “Hot 2C” (or “Hot Periodicals”) programs as a major reason for the extensive – and expensive – manual processing of magazines and newspapers that supposedly help make Periodicals a money-loser for the USPS.
“Periodicals publishers have repeatedly made clear that they do not desire and are not willing to pay for 'hot' processing," Jim O’Brien, Vice President, Distribution & Postal Affairs for Time Incorporated, responded yesterday in a letter (full text is below) to the OIG. “Every publisher that we at Time Inc. have spoken with is quite willing to live within the USPS’ published service standards and neither requests nor supports manual processing of Hot 2C.”
Claiming that Periodicals mail only covers 75% of its costs, the Postal Service wants to change the rules so that publishers’ postage rates can be increased faster than inflation. (See Postal Service Preparing Double Whammy for Publishers.) But publishers have repeatedly pointed out the Postal Service’s insistence on bypassing automated sorting equipment and its use of questionable cost-accounting methods.
Dead Tree Edition also questioned this past summer whether postal executives are pursuing a “Washington Monument strategy” of purposely making the Periodicals class look like a money loser.
The OIG report listed three other reasons cited by postal managers for high Periodicals processing costs. O’Brien pointed out why all three are lame excuses:
- Missed CETs: “When a Periodical mailing misses a CET [Critical Entry Time, which is the deadline for next-day delivery], the facility may be unable to process the mailing” with automated equipment and therefore does it manually or sends it to delivery units for manual sortation, the OIG reports says. O’Brien’s response: “The practice of manual processing of mail that arrives beyond the CET is neither requested nor supported by Periodicals mailers. There must be other reasons for local managers to choose manual processing of products that arrive after CET.”
- Bundle breakage: Some of the processing and distribution centers the OIG studied routinely process certain periodicals manually because the bundles are so prone to breakage. O’Brien’s response: The Postal Service could cut down on the problem by ending what amounts to a subsidy for putting Periodicals mail into sacks, which increases bundle breakage. He also pointed out a problem, first identified in 1998, with the way the Postal Service often unloads pallets that causes many bundles to break.
- Mailpiece characteristics: “Management identified certain publications that, from prior experience, they are unable to process on automated equipment,” the OIG report said. “These mailpieces, frequently newspaper-shaped publications, are processed in manual flats operations.” O’Brien’s response: “If mail is non-machinable, it should be paying the non-machinable rate. If the non-machinable rate covers 100% of the related costs, then the USPS should be indifferent whether mail is non-machinable or machinable.”
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I’m writing regarding the recent OIG Audit Report on Periodicals Mail Costs (Report Number CRR-AR-11-001). Let me begin by thanking you and your staff for undertaking this project. The unexplained rise in Periodicals costs has been a significant problem for a number of years. The conclusion of the OIG report cites several reasons for the increases in manual processing costs, including:
• The “Hot 2C” program.
• Missed Critical Entry Times.
• Bundle breakage and preparation problems.
• Characteristics that make mailpieces non-machinable.
While identifying these possible causes for the problem, however, the report failed to take account of some information that has substantial relevance to the questions it was addressing. For example, the Hot 2C program was NEVER requested by the customers of the Postal Service. While the report does indicate that the Hot 2C program is unofficial, it does not reflect the fact that it is not customer driven and that Periodicals publishers have repeatedly made clear that they do not desire and are not willing to pay for “hot” processing. Every publisher that we at Time Inc. have spoken with is quite willing to live within the USPS’ published service standards and neither requests nor supports manual processing of Hot 2C.
The report also refers to missed Critical Entry Times (CETs) as a cause of manual processing. As in the case of Hot 2C, Periodicals mailers have not requested that they receive any special processing as a consequence of arriving after the CET. In fact, the opposite is true. For example, if one of the our magazines arrives later than the CET, we at Time Inc. automatically assume that in-home delivery will occur one day later than scheduled and adjust our Deltrak system to reflect the late arrival. As a result, a late-arriving Time Inc. truck will have no impact upon the USPS’ delivery service scores. The practice of manual processing of mail that arrives beyond the CET is neither requested nor supported by Periodicals mailers. There must be other reasons for local managers to choose manual processing of products that arrive after CET.
The issue of bundle breakage is not new. It was identified as one of the factors contributing to Periodicals costs in a 1998 Periodicals Mail Processing Task Force. During the R90-1 rate case, when Periodicals mailers first complained about anomalously large increases in the mail processing costs attributed to Periodicals, several postal officials suggested it might be due to bundle breakage, even though there was no evidence at that time that there had been any increase in such breakage which might explain the higher costs.
Bundle breakage is much more likely when flats bundles are entered in sacks. A 1999-2000 USPS survey, with industry participation, found that about 0.5% of the Periodicals flats bundles entered on pallets break , and that 1.26% of Standard flats bundles entered on pallets break. But for bundles entered in sacks, the percentage of bundle breakage was in the double digits, both for Periodicals and Standard flats. Because the percentage of Periodicals entered in sacks has been declining for many years, one would expect the extent of bundle breakage to also have declined.
The Postal Service could help reduce Periodicals costs, including costs caused by bundle breakage, by correcting an imbalance in the current rate structure where mailers who use sacks pay a smaller portion of the costs of those sacks than those who use pallets pay for the cost of pallets. This gives mailers a disincentive to switch to the use of pallets. (See the cost passthrough percentages for Periodicals bundles and containers in FY09-3, Docket No. ACR2009. For example, if a 3-digit sack is entered at the originating SCF, the mailer pays a sack charge which is equal to 34.2% of what it costs the Postal Service to handle that sack. The corresponding charge for a pallet is 50% of the costs.)
With regard to bundles that break even though they are entered from pallets, the 1998 study indicated that if employees operate the pallet dumping equipment in a manner where one layer gets dumped at a time, significantly fewer bundles are broken in comparison to a pallet that is dumped in a single motion. In essence when a single motion is employed, the first bundles to hit the conveyor belt are at the bottom of a 2,000 lb avalanche and are not built to withstand such pressure. Bundle breakage is also caused by the “waterfall system” that helps to singulate bundles on the APPS machines. The USPS has known about this problem for a number of years and has attempted to correct the problem but it is my understanding that bundles continue to break in this area. While I am certain that there are mailers who still use string and rubber bands that contribute to broken bundles, I am also convinced that there are a number of actions that the Postal Service can take to significantly reduce the number of broken bundles.
The issue of non-machinable mail also appears to be straightforward. If mail is non-machinable, it should be paying the non-machinable rate. If the non-machinable rate covers 100% of the related costs, then the USPS should be indifferent whether mail is non-machinable or machinable. Any increases in non-machinable mail would reflect higher revenues as well as higher costs.
As in the case of bundle and pallet costs, non-machinable mail is an item that cost based rates would resolve. The rate structure in place today has all of the proper rate cells to correct these problems, but the USPS must begin to take the necessary steps to adjust the rates within those cells. Without such an adjustment, mailers will continue to provide mail that drives up costs. But after the R2006-1 rate case, when non-machinable rates first were introduced for Periodicals flats, the Postal Service, inexplicably, chose to not apply such rates for 5-digit non-machinable flats with barcodes. Not only did the Postal Service thereby deprive itself of the extra revenues that the application of non-machinable rates to such flats would have provided, it also missed the opportunity to give 5-digit mailers a stronger incentive to use a machinable flats format, which could have reduced manual processing.
The report also states that the “Postal Service data collection systems and procedures accurately attribute costs to Periodicals based on the existing cost attribution models.” This may be true, but is the OIG certain that the existing cost attribution models are accurate? These models and the IOCS data collection system have been the subject of numerous debates before the Postal Rate Commission and Postal Regulatory Commission and warrant a much deeper dive than what was reflected in the OIG’s report. For example, during several rate cases, starting in Docket No. R97-1, the Postal Service argued against the Commission's long held view that the costs of most mail processing operations vary one hundred percent with the volume handled at those operations, i.e., that there are no economies of scale in mail processing. The issue was never settled. Each year since the enactment of PAEA, the Postal Service has been reporting costs based on the Commission's traditional assumptions about volume variability (costs are 100% volume variable). One must assume, however, that the Postal Service still believes true volume variability is less than 100 percent, in which case it would follow that the true marginal costs of Periodicals and other products are less than the costs that have been reported in the recent ACR's.
Evidence that volume variability is less than 100% has been seen in recent years. As flats volume dropped precipitously, the costs being attributed to the remaining flats did not drop proportionately, causing large year-to-year declines in the cost coverage being reported both for Periodicals and Standard flats. Clearly, these declining cost coverage figures are not caused by flats being prepared any differently by the mailers, but by the Postal Service's inability to shed the costs of excess capacity.
As the OIG report states on page 15, “Periodicals’ share of manual flats sorting has been increasing, even though Periodicals mail volume declined and a higher percentage of Periodicals were prepared by mailers and at a level that should require a minimum level of manual processing.” Clearly, something is not right and further investigation is warranted. However, the report does not indicate a next step regarding such investigation. Is the OIG recommending that the Lean Six Sigma teams resolve these issues, or is the OIG going to conduct additional investigation? If the OIG is going to do more research, I suggest that you involve Halstein Stralberg, a consultant to Time Inc. Halstein is the industry expert on mail processing costs and was responsible for developing the USPS’ mail flow models. In addition, he has been studying mail processing operations and costs for decades.
The issue of rising manual processing mail costs is extremely important to Periodicals mailers and we are very appreciative of the OIG’s efforts. We are hopeful that the work doesn’t come to a halt now that this report has been issued. There are still many open issues that need to be resolved. In addition, given the fact that Periodicals cost coverage remains below 100%, time is of the essence in addressing this issue. We look forward to working with the OIG and the Postal Service in driving excessive and unexplained costs from the system.