For Periodicals, The Postal Service’s Math Doesn’t Add Up

Jim O’Brien and David Straus have been arguing about Periodicals postage rates for years, but they definitely agree on one point: The Postal Service has goofed when it comes to measuring the costs of handling periodicals.

“No one to date has been able to explain the incomprehensible rise in Periodicals costs during a period of substantial increases in mailer worksharing,” O’Brien wrote recently at the “Pushing the Envelope” blog run by the Postal Service’s Office of Inspector General.

“Periodicals mailers have, in unprecedented numbers, migrated to co-mailing, co-binding, co-palletization, drop shipping, sack reductions, and increases in carrier route copies. How could this significantly more efficient mail lead to greater mail processing costs?” asked O'Brien, who is Time Inc.’s Vice President of Distribution & Postal Affairs.

Straus, a lawyer who represents the Association of Business Mailers on postal issues, agrees that USPS’s costing methodologies for Periodicals are “highly suspect” and questions the Postal Service’s claim that it loses money on the Periodicals class (mostly magazines and newspapers). Joining the same Web discussion, he noted that USPS’s calculations of Periodicals costs “continue to escalate even as volume declines, or in some cases fall far more slowly than volume.”

“The fact is that there is still a good deal of costly manual handling of machinable Periodicals, for a variety of reasons, none of which have to do with the makeup of the mail itself,” Straus wrote.

Publishers have complained for years that much of that unnecessary manual handling is the result of “automation refugees” – postal employees who are not laid off even though automation has made them unnecessary. Postal insiders say such employees are often assigned to sort periodicals manually even when they are automatable, thereby inflating the costs attributed to the Periodicals class.

O’Brien has been the chief advocate of cost-based Periodicals rates, pushing somewhat successfully for rates that encourage publishers to mail in ways that reduce the Postal Service’s costs. Straus has been O’Brien’s most frequent nemesis, arguing that Time Inc.’s proposals were biased against small publishers – though he has also encouraged his clients to get involved in such efficiency moves as co-mailing and dropshipping.

O’Brien and Straus agree that the Postal Service attributes costs to Periodicals that should actually be considered institutional or as belonging to other classes. USPS says Periodicals customers pay for only 82% of the class’s costs, even though by law each class must operate at least at breakeven. Time Inc. and ABM are among those trying to ensure that the Postal Service’s goofy cost accounting doesn’t lead to a huge spike in postage rates for publishers.

Time Inc. has enlisted the services of postal consultant Halstein Stralberg, whose recent report “The High Costs of Manual Flats Sorting” takes the Postal Service’s methodology to task. Declining volume and increasing automation have caused a sharp drop in manual sorting of flat mail, yet the costs attributed to the Periodicals class for manual sortation have not decreased, notes Stralberg, who seems to understand the Postal Service’s costs of mail handling better than anyone at USPS HQ.

The Postal Service has had difficulty over the years with accounting for the Periodicals class. Its proposed restructuring of Periodicals rates in 2006 was intended to encourage more co-mailing and dropshipping but would have had exactly the opposite effect. It established incentives for creating 5-digit pallets, which supposedly reduce its handling costs, then inexplicably torpedoed those incentives this year.

Regardless of the accounting methodology, it’s clear that many of the costs attributed to the Periodicals class would exist even without Periodicals. When so many postal workers are underemployed and so many machines underused, there is little savings from reducing volume and little cost for increased volume.

As I’ve stated before, with its current structure, the Postal Service’s main problem is not that it doesn’t charge enough for mail pieces but that it doesn’t have enough mail pieces to charge for.

For more on why USPS is more profitable with Periodicals than without, please see Can the Postal Service Still Afford Periodicals?