Wednesday, December 30, 2009

Postal Accounting Snafus Might Be Bad News for Publishers

The accounting geniuses at the U.S. Postal Service calculate that the cost of delivering a publication rose 6% in the past year, despite lighter copy weights and various efficiency moves.

As a result, the Periodicals class was even more of a money loser in Fiscal Year 2009 than in FY 2008, according to the annual compliance report the USPS released yesterday. The class covered only 76.1% of its costs during the year that ended Sept. 30, down from 84.0% the previous year, according to Postal Service calculations.

Those results will fuel claims that Periodicals rates should be increased drastically so that publishers bear their fair share of Postal Service costs.

But the numbers will also bolster arguments that the Postal Service’s system of assigning costs to particular classes of mail is fatally flawed, especially in the case of Periodicals. (See For Periodicals, The Postal Service’s Math Doesn’t Add Up for an explanation of "automation refugees" and other flaws in the way the USPS assigns costs to the Periodicals class.)

The alleged 6% increase occurred during a period in which publications got lighter, co-mail adoption increased, and the Flats Sequencing System began taking on significant volumes -- all of which should have decreased the cost per copy. Nevertheless, the USPS reports that its average cost of handling a periodical increased from 31.7 cents to 33.7.

The new report might also prompt another look at the rules and rates that lead to inefficient Periodicals mailings. One area of focus might be the shipping of publications in sacks rather than on pallets because the USPS has recently become more aware of sacked mail’s high costs. A correspondent noted that a mailing of 500,000 catalogs (Standard class) is usually 100% palletized and dropshipped, while even huge 10-million-plus magazine co-mail pools typically create hundreds of sacks that generally are not dropshipped.

Periodicals volume dropped 8% and revenue 10% during the year. Although Periodicals rates rose about 4% in May, Periodicals revenue per piece declined 3% during the year as a result of fewer ad pages and lighter copies.

One bright spot was a 3% increase in the number of “in-county” Periodicals copies delivered by the Postal Service. Those are mostly small, non-daily newspapers, which have held up better during the recession than have big-city dailies. Some have recently switched from using a carrier force to the USPS for delivering their copies.

See also Can the Postal Service Still Afford Periodicals? for an explanation of why the USPS is better off with Periodicals than without, despite what its cost studies say.


Anonymous said...

Their pallet budget went from 12 or 13 million to 30 something million, because they are using plastic pallets and not wooden ones.
Plastic that they have to use 2 for one because of the strength factor?
Plastic pallets cast almost 3 time more.The postal customers are demanding plastic; That is what their warehouses use and a company called Westfallia designed the racks for Quad Graphics using internally postal pallets.

Tom Bozzo said...

Strictly speaking, there is no "Postal Service system of assigning costs to particular classes of mail" in the PAEA era: the Postal Service follows PRC methods in measuring costs, and has to petition the Commission before implementing any changes.

That method almost surely over-assigns costs to classes of mail by applying what amount to fully-distributed cost methods to some key cost components, notably mail processing and city delivery in-office costs. There is, moreover, some reason to believe that more heavily workshared products are disproportionately affected as they tend to bypass higher-variability sorting operations.

However, a byproduct of that feature of costs ('economies of density') is that when volume is declining, costs cannot be shed in proportion, so average and marginal costs will tend to increase. The current environment basically is a natural experiment that suggests that the Postal Service was right about mail processing cost variability all along.

Anonymous said...

Changing from used wood pallets to new plastic pallets is costing the USPS a fortune. The plastic pallet price is 3-4 times higher and a large % of the new plastic pallets never get returned to the USPS despite their name on them. Many end up overseas. Even their own admission is that "losses of plastic pallets continue to be high." In addition I think there is a recycling program in place for their wood pallets that pays USPS a rebate lowering their cost even further. Makes no sense what they're doing. If cost per publication is rising all the more reason to question their motive using plastic at such a cost.