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:

• The De-Automation of Periodicals Mail
• Postal Service Preparing Double Whammy for Publishers
• Postal Service Inefficiency Drives Up Periodicals Costs
• For Periodicals, The Postal Service’s Math Doesn’t Add Up