September 2003 To the President of the United States, The United States Congress, the Members of the Postal Community, and the American people: The publication of the Five-Year Strategic Plan of the United States Postal Service for the Fiscal Years 2004-2008 marks a significant milestone for the nation’s postal system. The President’s Commission on the U.S. Postal Service has delivered its recommendations and Congress has been working on a number of postal-related issues. We look forward to greater legislative and regulatory flexibility to improve service, manage costs, empower employees, and respond to customer needs. The Postal Service has provided Congress with plans for the use of the funds made available as a result of the recent enactment of the Postal Civil Service Retirement System Funding Reform Act. With this adjustment, the Postal Service has been able to reduce its debt levels and will be able to hold rates steady until 2006. The Postal Service continues to implement its Transformation Plan, and has achieved both record service performance and four years of improved productivity. Postal managers and employees have improved safety and performance and indicators of employee attitudes are also improving. The Postal Service has been recognized by independent surveys as providing very high levels of customer satisfaction. The fundamental mission of the Postal Service remains unchanged: To provide prompt, reliable mail delivery at fair and equitable prices to all customers and all communities. Our challenge continues to be to finance the growing universal service network as revenue from key categories of mail decline. Our response is to motivate all postal employees to achieve the performance goals of a highly trusted, fundamental government service, to transform postal processes by the effective execution of bold businesslike strategies that enhance the value of the mail, and to partner with the mailing industry to create a financially stable organization that meets customer needs and helps to grow the American economy. John E. Potter UNITED STATES POSTAL SERVICE BOARD OF GOVERNORS S. David Fineman, Chairman John F. Walsh, Vice Chairman Albert V. Casey LeGree S. Daniels Alan C. Kessler Ned R. McWherter James C. Miller III Robert F. Rider John E. Potter, Postmaster General, Chief Executive Officer John M. Nolan, Deputy Postmaster General UNITED STATES POSTAL SERVICE OFFICERS EXECUTIVE COMMITTEE: John E. Potter, Postmaster General, Chief Executive Officer John M. Nolan, Deputy Postmaster General Patrick R. Donahoe, Chief Operating Officer and Executive Vice President Richard J. Strasser, Jr., Chief Financial Officer and Executive Vice President Anita J. Bizzotto, Chief Marketing Officer and Senior Vice President Mary Anne Gibbons, Vice President, General Counsel Suzanne Medvidovich, Senior Vice President, Human Resources Ralph J. Moden, Senior Vice President, Government Relations OTHER OFFICERS: Nicholas F. Barranca, Vice President, Product Development Sylvester Black, Vice President, Area Operations — Western Area Charles E. Bravo, Senior Vice President, Intelligent Mail and Address Quality William J. Brown, Vice President, Area Operations — Southeast Area James A. Cohen, Judicial Officer Thomas G. Day, Vice President, Engineering DeWitt O. Harris, Vice President, Employee Resource Management Lee R. Heath, Chief Postal Inspector Al Iniguez, Vice President, Area Operations — Pacific Area Danny Jackson, Vice President, Area Operations — Great Lakes Area Azeezaly S. Jaffer, Vice President, Public Affairs and Communications Stephen M. Kearney, Vice President, Pricing and Classification Linda A. Kingsley, Vice President, Strategic Planning Jerry D. Lane, Manager, Capital Metro Operations Alexander Lazaroff, Vice President, Area Operations — Eastern Area George L. Lopez, Vice President, Area Operations — Southwest Area Robert L. Otto, Vice President, Chief Technology Officer Henry A. Pankey, Vice President, Delivery and Retail Donna Peak, Vice President, Finance, Controller Robert J. Pedersen, Vice President, Treasurer John A. Rapp, Senior Vice President, Operations Francia G. Smith, Vice President and Consumer Advocate David L. Solomon, Vice President, Area Operations — New York Metro Area Jon M. Steele, Vice President, Area Operations — Northeast Area Keith Strange, Vice President, Supply Management Rudolph K. Umscheid, Vice President, Facilities Anthony J. Vegliante, Vice President, Labor Relations Paul Vogel, Vice President, Network Operations Management James P. Wade, Vice President, International Business John R. Wargo, Vice President, Service and Market Development Murry Weatherall, Vice President, Diversity Development Jerry Whalen, Vice President, Sales OFFICE OF THE BOARD OF GOVERNORS William T. Johnstone, Secretary of the Board of Governors John A. Reynolds, Deputy Secretary of the Board of Governors MANAGEMENT ASSOCIATIONS AND UNIONS William Burrus, President, American Postal Workers Union, AFL-CIO William H. Young, President, National Association of Letter Carriers, AFL-CIO John F. Hegarty, President, National Postal Mail Handlers Union, LIUNA Dale A. Holton, President, National Rural Letter Carriers’ Association Steve D. LeNoir, President, National League of Postmasters of the United States Walter M. Olihovik, President, National Association of Postmasters of the United States Vincent Palladino, President, National Association of Postal Supervisors OFFICE OF THE INSPECTOR GENERAL David C. Williams, Inspector General TABLE OF CONTENTS EXECUTIVE SUMMARY v CHAPTER ONE: MISSION, CHALLENGE, AND RESPONSE 1.1 Postal Service Mission, Goals, and Benefits to the Public Business Environment and Mail Volume Scenarios Strategic Vision and Performance Management System CHAPTER TWO: IMPROVE SERVICE 2.1 Goal: Improve Service Service Measurement System Service Improvement Strategies Conclusions CHAPTER THREE: MANAGE COSTS 3.1 Goal: Manage Costs Productivity Measurement System Productivity Improvement and Cost Management Strategies Program Costs Conclusions CHAPTER FOUR: ENHANCE PERFORMANCE-BASED CULTURE 4.1 Goal: Enhance Performance-Based Culture Safety and Employee Attitude Measurement System Performance-Based Culture Strategies Postal Service Workforce Conclusions CHAPTER FIVE: GROW REVENUE 5.1 Goal: Grow Revenue Revenue Measurement System Customer Requirements, Competitor Initiatives, and Market Trends Revenue Generation Strategies Conclusions CHAPTER SIX: PURSUE LEGISLATIVE CHANGE 6.1 Adjust Civil Service Retirement System Contribution President’s Commission on the U.S. Postal Service APPENDIX I: PERFORMANCE MANAGEMENT SYSTEM AI.1 APPENDIX II: PERFORMANCE MEASUREMENT SYSTEM AII.1 APPENDIX III: POSTAL STRATEGIC PLANNING STAKEHOLDER OUTREACH AIII.1 APPENDIX IV: EVOLUTION OF POSTAL STRATEGIC PLANNING, FY2000–2003 AIV.1 EXECUTIVE SUMMARY Introduction and Purpose: Five-Year Strategic Plan The Postal Service’s™ Five-Year Strategic Plan, FY2004–2008, is structured around the mission, vision, and strategic goals of the organization. • Mission The United States Postal Service provides universal mail delivery service and access to postal services for all customers and all communities. • Vision The Postal Service will continue to enable committed employees to provide the fundamental, trusted government service of timely, reliable, and accurate mail delivery with convenient access to all customers and communities at the lowest possible prices. The Postal Service will continue its businesslike transformation by effective execution of bold strategies that improve the value of the mail and mail-related products and services. In partnership with the mailing industry, the Postal Service will create a financially stable enterprise that contributes to growth in the U.S. economy by providing flexible services that meet America’s needs. This plan provides an objective way for postal stakeholders, including Congress and the American people, to evaluate the performance of the Postal Service using valid measures and reliable data.1 The plan provides stakeholders with an assessment of the challenges facing the Postal Service and describes how the Postal Service will continue to respond to the needs of the American people and increase its value to the U.S. economy during the next five years. The Central Challenge of Postal Strategic Planning The Postal Service enters the 21st century challenged by mail volume losses from diversion to technological alternatives and direct competition, changing markets, and a continuing soft economy. The Postal Service’s business model, as outlined in the Postal Reorganization Act of 1970, assumes that expansion of the U.S. economy will stimulate mail volume growth and increase revenue sufficient to finance the expanding infrastructure required to provide service to more than 1.7 million new delivery points annually. Major losses in First-Class Mail® volume, which covers 66 percent of the Postal Service overhead expenses, indicate that the Postal Service will no longer be able to rely on growth of First-Class Mail volume to fund the maintenance and expansion of the delivery network. In fiscal year (FY) 2002 and FY2003, First-Class Mail volume will have declined by some 4.5 billion pieces below its FY2001 peak of 103.7 billion pieces. Through FY2004 the total decline is projected to reach 6 billion pieces. These are the greatest declines in First-Class Mail since the Great Depression. Should this trend continue, in combination with growth in costs for labor, employee health care and retirement, fuel, and facilities, the gap between revenue and expenses carries serious financial implications for the Postal Service. Exhibit ES-1 on the following page provides three different mail volume forecasts for the five years encompassed by this strategic plan: a baseline, a pessimistic, and an optimistic forecast. The baseline forecast presents the most probable scenario, based on the view that recent trends will continue into the future. The pessimistic scenario assumes continued weak economic growth and acceleration of First-Class Mail diversion. The optimistic scenario assumes the economy will grow at a faster rate than anticipated and that First-Class Mail diversion diminishes. This scenario is considered the least likely to occur, given the nature of the current economic recovery. Exhibit ES-1. Mail Volume Forecast Scenario, FY2004-2008 (Billion Pieces) Source: USPS Finance (some totals may not add exactly, due to rounding) In fact, the current recovery has been classified as a “jobless” recovery, with employment now about 4 percent lower than at this stage of previous recoveries. This is particularly important for mail volume, since more than 70 percent of mail originates or destinates in American households. Mail volume growth, closely tied to the health of household finances, is negatively affected when consumer confidence is low, consumer debt is high, and consumer spending is faltering. All three mail volume forecasts project that Standard Mail volume, for the first time in history, will exceed projected First-Class Mail volume, significantly impacting overhead cost coverage. Standard Mail, primarily advertising mail, is subject to intense competition which allows little room to increase Standard Mail prices without adversely impacting volume. In addition, the Postal Service faces strong competition from private sector delivery companies and foreign posts in its package markets. These competitors, like the Postal Service, face an unfavorable revenue trend as cost-conscious customers shift from air transport to lower-cost ground business. Overall, postal services, long considered to be the beneficiaries of relatively inelastic demand, today are increasingly challenged by the growing availability of alternatives to the mail for many customers. In FY2001, management began a progression of cost-cutting measures that were updated in the April 2002 Transformation Plan with a commitment to reduce costs by $5 billion by 2006. With no magic wand to reverse the decline in First-Class Mail volume, the Postal Service focused on the basics. It committed to streamlining operations, attracting new revenue by adding value to its core products, and motivating and empowering employees to meet the coming challenges within a performance-based culture. The Postal Service’s Strategic Performance Goals The Postal Service’s Five-Year Strategic Plan, FY2004–2008, has four broad strategic goals focused on results that are important to its stakeholders: improve service, manage costs, enhance performance-based culture, and generate revenue. Improve Service The Postal Service remains committed to its fundamental mission to provide timely, reliable mail delivery to all households, which remains critical to economic progress in the 21st century. Since 2002, independently measured national service performance has increased and has now reached record high levels. First-Class Mail overnight service on-time performance has improved an unprecedented 10 points since 1995 to the current record levels. Two- and three-day service has shown similar improvement. An independent survey of postal performance conducted for the financial industry2 called 2002 a year of mail delivery improvement unmatched in recent history. The same survey in the spring of 2003 reported no signs of abatement in 2003. A June 2003 survey conducted for the President’s Commission on the U.S. Postal Service reports that 79 percent of the respondents said they feel favorably toward the Postal Service, including 47 percent who report very favorable attitudes.3 The American Society for Quality, which has conducted a multi-industry survey of customer satisfaction since 1994, reports that the Postal Service is the most improved in service of all industries measured.4 Exhibit ES-2 sets forth the Postal Service’s performance objective, measures, and targets for the five years covered in this strategic plan. Exhibit ES-2. Service Performance Objective, Measures, and Targets Service will continue to improve through the application of new technology for tracking the mail, effectively managing transportation performance, and improving operational processes that will reduce handlings and errors. Partnerships with customers, suppliers, and the mailing industry to improve the quality of mail preparation and to enter the mail closer to the point of final delivery also will improve service. In addition, the Postal Service will continue to develop pricing incentives that reinforce efficiency and service improvement. Management will continue to emphasize the importance of customer service at all levels of the organization. Manage Costs The Postal Service must provide its timely, reliable universal delivery service as efficiently and affordably as possible. In each of the last four years the Postal Service has achieved improved productivity. Since September 2000, actual complement has declined by more than 60,000 employees through attrition, while the number of addresses served has increased by about 5.2 million. The Postal Service will continue to reduce its workforce through attrition, limited early retirement offers in selected units and locations, and less need for temporary, part-time workers as career employees become more efficient through the use of new technologies. Productivity improvements have enabled the Postal Service to reduce the rate of growth in costs and to hold postal prices relatively steady. After adjusting for inflation, postage rates today are nearly equivalent to the subsidized rates in 1971 when the Postal Reorganization Act of 1970 was implemented. Increasing productivity will continue to enable American households and businesses to enjoy one of the lowest rates of basic postage among developed nations. Exhibit ES-3 below sets forth the Postal Service productivity objective, measures, and targets for the five years covered in this strategic plan. Exhibit ES-3. Productivity Objective, Measures, and Targets The Postal Service’s productivity program has three major areas of emphasis. • Continue to evolve the automation program for letter mail and extend the program to flats, pack-ages, and material handling. • Realign the entire postal operating network to make better use of its facilities and transportation. The implementation of integrated information management systems will provide more relevant, accurate, and timely data that will enable managers to make more efficient use of postal resources. • Identify and implement best internal and external business practices throughout the organization. Effective process management will lead to greater efficiencies through standardization. Enhance Performance-Based Culture The Postal Service employs some of the most dedicated workers in the nation. Day in and day out postal employees respond to the challenge of moving more than 650 million items a day, more than 200 billion items a year, across the country to 141 million addresses. The tragic terrorist and anthrax events in New York, Trenton, and Washington, D.C., in 2001 were unprecedented in their magnitude and the scope of their disruption, but Postal Service employees provided unparalleled service to the American people. After floods, fires, tornados, hurricanes, and earthquakes, the first signs of normality returning to a community are often the sight of Postal Service letter carriers on their routes and Post Offices™ open for business. As it moves into the 21st century, the Postal Service will maintain an accountable, motivated, and diverse workforce empowered to maximize performance in a safe and secure work environment. Such a performance-based culture will work to achieve the critical organizational goals of improving service, productivity, and revenue generation. Since implementation of recommendations of the Commission for a Safe and Secure Workplace in 2000 and a transition to the use of measures required by the U.S. Occupational Safety and Health Administration (OSHA) in FY2001, the Postal Service also has been continually improving its safety performance. In the past year employee accidents and injuries at the Postal Service have been reduced by more than 15 percent. Exhibit ES-4 sets forth the Postal Service safety performance objective, measures, and targets for the five years covered in this strategic plan. Exhibit ES-4. Safety Performance Objective, Measures, and Targets The Postal Service is providing award-winning safety training programs and tools to its employees, and is partnering with the Occupational Safety and Health Administration (OSHA) of the U. S. Department of Labor to implement industry leading safety practices. The Postal Inspection Service is working with local management, using an enhanced safety model to identify facilities with higher external security risks, to minimize those risks. In a difficult environment — one with continued concerns about possible job loss due to competition and reduced mail volume — the Postal Service will provide its employees with the support they need to manage their careers and to achieve the objectives of the organization. To determine how effectively it is communicating with its employees, each year all Postal Service employees may respond anonymously to a survey that tracks their opinions about the workplace. Even in the difficult circumstances faced by employees during the last three years, overall employee survey ratings have improved. In addition, the Postal Service has been rated by Fortune magazine as “one of the best places for minorities to work.”5 Exhibit ES-5 sets forth the Postal Service employee opinion objectives, measures, and targets. Exhibit ES-5. Employee Opinion Objective, Measures, and Targets As the fourth largest employer in the world and second largest in the United States after Wal-Mart, the Postal Service manages a workforce through initiatives that must consider size, diversity, and geographic dispersion. Many of these initiatives are among the best in government and many parallel best practices in the private sector. Nationwide programs are now being implemented to address employee retention, recruitment, and development, and by the end of FY2004, a pay-for-performance program will cover all non-bargaining unit employees. Through continuous communication with employees, management associations, and unions, the Postal Service will continue to improve the workplace environment and provide support to its employees. Grow Revenue The fundamental revenue generation strategy starts with continued service improvement (Chapter 2), while holding down the rate of increase in costs as much as possible to provide stable rates (Chapter 3). The Postal Service will also increase the value of the mail through product and service enhancements (Chapter 5). Exhibit ES-6 describes the revenue generation objective, measures, and targets. Exhibit ES-6. Revenue Generation Objective, Measures, and Targets Positive growth in the economy alone will not help improve the growth of mail volume. Mail volume has been affected by intense competition both from direct alternatives, such as FedEx and UPS, and from technological substitutes, such as e-mail and electronic bill presentment and payment systems. The Postal Service will work with the mailing industry and its customers to develop innovative pricing approaches, such as the recently approved Negotiated Service Agreement (NSA), which allows the Postal Service for the first time to engage in volume-based pricing with a single customer. Other customers will be offered similar opportunities as the experiment provides the information necessary to implement additional NSAs. Customers also will have more convenient access to postal products and services through a variety of alternative channels, such as the Internet and kiosks, and as postal products become available through commercial retail outlets. The Postal Service will improve the ease of use for both consumer and business customers and will enhance product awareness among customers. The Postal Service’s sales team will be more effective, using industry-standard techniques to target and address the specific needs of different customer segments. The Postal Service will also respond more effectively to customer inquires and problems. The application of new technology to the mail will provide new opportunities for mailing industry entrepreneurs to increase the effectiveness of mail in meeting customers’ needs. Besides new value in products, the Postal Service will continue as the nation’s trusted third party, modernizing long-standing policies of privacy, security, and consumer protection that reaffirm America’s need for mail and the U.S. Postal Service. Another major program will be increased employee participation in revenue generation programs, particularly on the part of retail clerks and letter carriers. These employees, through the service they provide the public, are the Postal Service’s front line salespeople. It is the employees in the field who explain enhancements to new products and educate the public about the advantages of using postal products and services. Each of them contributes to growing revenue and enhancing the bottom line. Within the constraints of the current legislative and regulatory framework, the Postal Service will continue to develop and offer mail and mail-related products and services that meet the needs of America’s businesses and households. Pursue Legislative Change Adjust Civil Service Retirement System Contributions The Postal Civil Service Retirement System Funding Reform Act of 2003 adjusted the computation rates for Postal Service contributions to the Civil Service Retirement System (CSRS) to prevent future overpayments. The recalculation will reduce the level of Postal Service payments to CSRS. This will permit a reduction in Postal Service debt levels and a delay in the next rate increase until FY2006. Congress has required the Postal Service to provide further information on planned use of the funds in the future, and whether and to what extent the Postal Service should be responsible for funding the benefits attributable to military service of current and former Postal Service employees. President’s Commission on the U.S. Postal Service As currently structured and regulated, the Postal Service’s cost-cutting efforts alone will not be sufficient to guarantee continued fulfillment of its universal service obligation to the nation. Changes in the basic business model will be necessary in the near future. In December 2002, President Bush appointed a President’s Commission on the United States Postal Service. The issues discussed by the Commission are outlined in Chapter 6 of this strategic plan. U.S. Postal Service Vision: Trust, Transformation, and Partnership The Postal Service will continue to enable committed employees to provide the fundamental, trusted government service of timely, reliable, and accurate mail delivery with convenient access to all customers and communities at the lowest possible prices. The Postal Service will continue its businesslike transformation by effective execution of bold strategies that improve the value of the mail and mail-related products and services. In partnership with the mailing industry, the Postal Service will create a financially stable enterprise that contributes to growth in the U.S. economy by providing flexible services that meet America’s needs. Exhibit ES-7 illustrates the framework of this strategic plan and shows the linkage among the mission and vision of the Postal Service and its strategic goals: improve service (Chapter 2); manage costs (Chapter 3); enhance a performance-based culture (Chapter 4); grow revenue (Chapter 5); and pursue legislative change (Chapter 6). Exhibit ES-7. Postal Service Strategic Planning Framework (“Business Model”) These initiatives will position the Postal Service as a highly efficient and effective businesslike public service. The improvements in service performance, productivity, safety, and employee opinion that have been achieved over the last several years will continue. These initiatives, however, will not reverse market trends; the decline of First-Class Mail volume is likely to continue. Even small declines in First-Class Mail volume have a significant impact on the ability of the Postal Service to generate sufficient contribution to institutional costs and remain able to cover the fixed costs of a growing postal network. Without significant change in the current legislative and regulatory structure, the Postal Service will have increasing difficulty in the future in fulfilling its universal service mission. 1 This third update of the Five-Year Strategic Plan addresses the requirements of the Government Performance and Results Act (GPRA) of 1993 by describing the mission and strategic vision of the Postal Service; establishing strategic performance goals and annual objectives; establishing quantitative targets based on verifiable data from reliable measurement systems; summarizing external trends and issues that may affect the ability of the Postal Service to achieve its mission, goals, and objectives; describing strategies that the Postal Service will implement to accomplish its mission and achieve its goals, objectives, and targets; and describing the resources necessary to accomplish the mission and achieve objectives. The strategic plan also includes a brief description of the management process used to establish goals and accountabilities, implement programs, review results, and link performance to budgets. 2 Phoenix-Hecht Postal Survey™, Fall 2002. 3 Black & Veatch, Peter D. Hart Research, Summary of Findings Report from a Consumer Survey about the U.S. Postal Service, June 9, 2003, p. 1. 4 American Society for Quality, 2003 Transportation/Communications/Utilities and Services Industry Report. 5 Fortune, July 7, 2003. United States Postal Service Five-Year Strategic Plan September 2003 | xiv CHAPTER ONE: MISSION, CHALLENGE, AND RESPONSE Introduction Article I, Section 8 of the Constitution of the United States of America empowers Congress to establish Post Offices™ and Post Roads. Postal service is one of the oldest functions of the U.S. government, and the postal function has grown with the country and evolved to meet the changing needs of the American people. POSTAL SERVICE MISSION, GOALS, AND BENEFITS TO THE PUBLIC Universal Service Mission Congress assigned the Postal Service™ the mission of “binding the nation together through the personal, educational, literary, and business correspondence of the people…It shall provide prompt, reliable, and efficient service to patrons in all areas and shall render postal services to all communities” at “fair and equitable” rates.6 This universal service obligation has been generally understood to include regular delivery of letters, periodicals, and packages to the expanding number of business and household addresses nationwide,7 and access to postal services through an extensive network of retail facilities.8 The universal service obligation also encompasses the Postal Service mandate to deliver one class of letter mail, sealed against inspection, at a uniform rate nationwide. Despite the availability and growth of direct competitors and technological substitutes for mail services, a strong and vibrant universal mail system is essential to a fully developed economy.9 The mission of the Postal Service remains as relevant as ever, and the Postal Service is committed to be as efficient and effective as possible, within the constraints of its legislative and regulatory framework. Goals of the Postal Reorganization Act of 1970 The Postal Reorganization Act (PRA) of 1970 defined the Postal Service as an independent establishment of the federal government. It is expected to operate in a “businesslike manner” and generate sufficient funds to cover its costs through the sale of services to the public, rather than depend on appropriations from Congress.10 The Postal Service is expected to be a financially stable organization that adds value to the U.S. economy and meets the needs of the American people. Benefits the Postal Service Provides to the U.S. Economy and the American People The timely, reliable delivery of more than 200 billion items annually — bills, statements, payments, business communications, personal correspondence, magazines, newspapers, advertising, and merchandise — at reasonable rates remains essential to the U.S. economy. The Postal Service provides convenient, trusted services that consumers want. Consumers use postal services to manage personal finances, shop more effectively, obtain information and entertainment, and maintain business, organizational, and personal relationships. Mail helps the U.S. economy grow because it increases awareness of products and services, increases store and Internet site traffic, increases trial of products and services, improves sales, and builds customer relationships, loyalty, and repeat sales. A viable Postal Service is essential to the continued growth of the paper, printing, and mailing industries — and is a major purchaser of transportation and other services. The Postal Service is at the heart of a large and growing mailing industry — representing nearly nine million jobs and annual revenues of about $900 billion.11 It is a large, diverse, and stable employer — the second largest in the nation. The Postal Service supports other public services as well, including providing reduced rates for non-profit organizations and periodical publications. The Postal Inspection Service provides valuable support for the security of the mail, postal employees, and customers, helps enforce consumer protection laws, and combats identity theft. The Postal Service also manages and maintains industry standards, including an address management system that is used by delivery market competitors. This system of forwarding and address correction has no parallel in the Internet world. The Postal Service is one of the most familiar and trusted organizations in the country.12 BUSINESS ENVIRONMENT AND MAIL VOLUME SCENARIOS External Trends and Issues The Postal Service’s current statutory model established a dual mission to operate according to sound business principles but always within the constraints of its public service mission. Functioning as a “businesslike public service” requires the Postal Service to accommodate financial, political, and social obligations while also ensuring that universal mail delivery service is provided to every American at affordable prices. The central public policy issue facing the Postal Service is to continue to provide universal service to all Americans and still make it affordable in the face of potentially declining mail volume. The external environment is characterized by increasing uncertainty, greater risk, and a more demanding market place. Mail and the Economy There is a strong probability that mail volume will grow more slowly than the economy — a significant change from traditional planning assumptions. Key categories of First-Class Mail® volume may actually decline, threatening the financial foundation of the Postal Service.13 Mail volume growth is increasingly dependent upon advertising mail, which fluctuates with the economy. The growth in household and business formation will continue to relentlessly drive increases in postal costs.14 Customer Needs, Competitor Initiatives, and Market Requirements The Postal Service exists in a much more dynamic and competitive environment than foreseen by the PRA. Competition from electronic substitutes such as electronic bill presentment and payment systems, and e-mail, and from direct alternatives such as FedEx and United Parcel Service is expected to grow more intense. Even foreign postal administrations such as Deutsche Post (Germany) and TPG (Netherlands) have entered portions of the U.S. market. Changing demographics will play an important role in determining the demand for mail services. Households are more fragmented, with more single heads of households or unmarried people living together, with fewer residents per household. The generation that is currently beginning to leave home and forming its own households is the first “Internet” generation and is likely to have a different relationship with the Postal Service and its competitors than previous generations. The majority of residential deliveries do not generate enough contribution to cover the cost of delivery. Part of this is due to the increasing sophistication of mailers, who target the most affluent households. This segment is the most lucrative for the Postal Service and its competitors, and these households are more comfortable with the use of both direct alternatives and technological substitutes for mail services. The risk of mail volume diversion is increasing, but the Postal Service is limited in its ability to respond quickly to market changes, to develop innovative new products and services, or to adapt products and services to the needs of different customers.15 Technology and Business Process Improvements There is significant potential for enhancing the mail, generating new revenue, improving service, and increasing productivity through the application of new integrated mail production, processing, and information systems. The PRA did provide important flexibility to the Postal Service to implement complex, multi-year capital investment programs such as mail processing automation, updated information technology systems, and large facility projects. However, the ability to fund these investments out of current cash flows under a break-even requirement is sometimes limited. As a public organization, the Postal Service must be extremely careful in developing joint research and development programs. Such arrangements are typically more open to public scrutiny than private sector initiatives and are more subject to challenge. Furthermore, the Postal Service is more limited in its ability to form strategic alliances and partnerships.16 Labor Force Changes and Emerging Civil Service Reform As one of the largest employers in the nation, the Postal Service faces particular challenges in managing a changing and diverse labor force. Postal Service personnel practices generally have paralleled other government agencies. The legislation that established the Department of Homeland Security has introduced new flexibilities into federal civil service, and other congressional initiatives on civil service reform are likely. The context of comparability with the private sector is also changing as the U.S. economy continues to transform from manufacturing to information-based service industries. The Postal Service has been innovative in the development of worksharing programs with the private sector and in contracting with the private sector for a significant portion of its operating needs.17 In the future, all government agencies — including the Postal Service — are likely to face increasing pressure to document the relative efficiency of their programs compared to the private sector. The changing demographics of the workforce also create several important issues. The generation currently entering retirement eligibility is large and will generate increased health care costs. The Postal Service will be challenged to replace many executive, professional, and technical positions, and the mix of skills the Postal Service needs will change. There may be a geographic imbalance between the areas where the Postal Service needs to reduce staff, the areas where reductions are easily possible through attrition, and areas where staffing may need to increase to serve growing communities. Administration and Congressional Priorities The Report of the President’s Commission on the U.S. Postal Service is expected to energize public policy-making on postal issues. The pressure for improved government performance, documented with reliable data and accountability for results, will continue to increase. The President’s Management Agenda and the Government Accounting Office (GAO) “High Risk List” for government-wide issues will continue to drive administration and congressional examination of government activities. The Postal Service will be expected to provide more data and detailed explanations about its operations and financial situation that are in line with expectations of the Government Performance and Results Act (GPRA) and other legislation related to government performance and accountability. Public safety, information security, and personal privacy will continue to dominate congressional and administration attention. The Postal Service is committed to protecting the privacy of data for its customers and its employees. The threat of bioterrorism and other threats to public safety will require the Postal Service to continue to develop new measures to prevent, detect, and respond to potential hazards. Information security, especially in the area of identity theft, will be an increasing concern. Legislation on personal privacy, which has impacted telephone soliciting and online advertising, may affect mailing lists. Strategic Mail Volume Scenarios The outlook for mail volume and revenue growth for the next five years is less promising than the period covered by the previous strategic plan. Major mail categories have experienced the greatest volume declines since the Great Depression, and are expected to be weak into the future. While it is still not clear how much of the volume loss is due to the current business cycle and how much is due to more lasting factors of technological change and competition, there is ample evidence that both forces are at work. Mail volume growth or decline depends on a number of factors, including the state of the economy, market developments, technological advances, customer adoption rates of technological alternatives and competing services, postal and competitor prices, quality of service, and the marketing strategies of the Postal Service and its competitors. In a long-term mail forecast, such as is central to this strategic plan, it is useful to consider several different volume scenarios, due to the uncertainty associated with each of these factors. Baseline Forecast (Most Likely) The baseline forecast represents the most probable scenario, based on the view that trends that have been emerging over the recent past are likely to continue. The baseline forecast is that total mail volume will increase from about 202 billion pieces in FY2003 to about 215 billion in FY2008. This represents an average annual growth of about 1.3 percent, which approximates the expected rate of growth of the U.S. population. Exhibit 1-1. Baseline Forecast The baseline scenario assumes that the present “jobless” recovery continues at its sluggish pace into FY2004 and accelerates thereafter. Employment is now about 4 percent lower than at this stage of previous recoveries. This is particularly important for mail volume, since more than 70 percent of mail originates and/or destinates in American households. Mail volume growth, closely tied to the health of household finances, is adversely affected when consumer confidence is low, consumer debt is high, and consumer spending is faltering. Credit card delinquencies, for example, rose in the first half of FY2003 to the highest level since they were first tracked in 1976.18 Diversion will continue to reduce First-Class Mail volume growth by about two billion pieces per year, consistent with the average impact in recent years. Economic recovery in the later years should help to counteract the impact of diversion on First-Class Mail, although volume will not recover to the level of FY2003. This will have a serious impact on the financial situation of the Postal Service, since First-Class Mail service is central to the ability to support the growth of the operating network and associated public services, with a unit contribution of 18.4 cents and cost coverage of 161 percent.19 Regular (non-carrier route) Standard Mail service is the only significant source of projected volume growth in the baseline forecast. Without this increase, total mail volume would be projected to decline. Unfortunately, this subclass of mail has a relatively low unit contribution of 5.3 cents and cost coverage of 137 percent.20 The Postal Service will also face intense competition in the package delivery market, and margins in this sector are decreasing as customers move from Express Mail® and Priority Mail® services to lower cost ground services. Without rate increases, projected revenue in the baseline scenario would be about $71.4 billion in FY2008, representing an average annual growth rate of 0.9 percent from 2003 to 2008. Pessimistic Forecast (Next Most Likely) In the pessimistic forecast, total mail volume is projected to be about 202 billion pieces in FY2008, which is about the same as the expected FY2003 volume. This is a no-growth scenario. The pessimistic scenario differs from the baseline by assuming that the recent slow economic growth persists and evolves into a long-term economic slump. The pessimistic scenario also assumes that electronic diversion of First-Class Mail volume will increase from its current rate of about two billion pieces to about three billion pieces per year. This projection is based on the stated plans of many large mailers in the financial industry to grow their electronic bill presentment and payment programs aggressively and on the predictions of many industry analysts. Exhibit 1-2. Pessimistic Forecast As a result, First-Class Mail volume falls to about 91 billion pieces in FY2008. Standard Mail volume is projected to grow at an annual rate of just 2.1 percent in this scenario, based on the assumption of a continued economic slump that affects advertising mail. As with the baseline scenario, regular Standard Mail service is the only significant source of mail volume growth. The growth in this category offsets the decline in First-Class Mail volume, but due to its low revenue contribution fails to compensate for the much higher contribution that is lost as First-Class Mail volume declines. Without rate increases, overall revenue in this scenario would be projected to decline from the $68.7 billion expected in FY2003 to $67.4 billion in FY2008, representing an average annual decline of about 0.4 percent. Optimistic Forecast (Least Likely) In the optimistic scenario, total mail volume is expected to increase from 203 billion pieces in FY2003 to 223 billion in FY2008, an average growth rate of 1.9 percent. The optimistic scenario assumes a more rapid and pronounced economic recovery than projected in the baseline. The optimistic scenario also assumes that electronic diversion will impact First-Class Mail volume more slowly than currently expected or that there will be compensating increases in the growth of statements and bills resulting from new accounts and financial applications. Exhibit 1-3. Optimistic Forecast As a result, First-Class Mail growth does not decline, but remains flat over the next five years. Standard Mail volume is projected to grow by an average of 4.1 percent, driven by the speed and intensity of the economic recovery. Without rate increases, the optimistic scenario projects that revenues will grow by an average of 1.3 percent a year, reaching almost $74 billion by FY2008. Fixed Costs and the Growth of the Universal Service Network The universal service network will continue to grow as the population of the nation increases and new businesses and households are formed. The fixed cost of maintaining such a system will grow, regardless of the direction that mail volume and revenue take. Almost half of total postal costs are fixed — they do not change when volume changes. Letter carriers travel their complete routes every day, trucks transport mail between facilities on regular frequencies in order to meet service requirements, and retail facilities are open each business day no matter what level of activity occurs. STRATEGIC VISION AND PERFORMANCE MANAGEMENT SYSTEM Strategic Vision: Trust, Transformation, and Partnership The Postal Service will continue to enable committed employees to provide the fundamental, trusted government service of timely, reliable, and accurate mail delivery with convenient access to all customers and communities at the lowest possible prices. The Postal Service will continue its businesslike transformation by effective execution of bold strategies that improve the value of the mail and mail-related products and services. In partnership with the mailing industry, the Postal Service will create a financially stable enterprise that contributes to growth in the U.S. economy by providing flexible services that meet America’s needs. Performance Management System Postal transformation strategies will be described in the subsequent chapters. The key to successful implementation of these strategies is the use of an effective management process. The GPRA legislation was expected to encourage agencies to establish more disciplined, results-oriented planning processes. Performance accountability was to be increased through the use of verifiable data from reliable measurement systems. Appendix I describes how the Postal Service meets these requirements through setting goals and objectives, implementing programs and budgets, and reviewing performance. The Five-Year Strategic Plan is not intended as a complete guide to all Postal Service programs and initiatives. The plan is built on and incorporates the April 2002 Transformation Plan. Additional program level detail also is provided in the FY2002 Comprehensive Statement on Postal Operations. Details about the financial situation of the Postal Service are provided in the Annual Report, which includes management discussion and analysis and the audited financial report. Together, these documents provide the basis for evaluating the performance of the Postal Service. 6 Postal Reorganization Act of 1970, [Title 39, U.S. Code, August 12, 1970, 39 U.S.C. 101 (a,d)]. 7 The number of possible deliveries is currently more than 141 million, and the number has been increasing by more than 1.7 million new addresses annually. 8 There are more than 38,000 Post Offices, stations, and branches. 9 Electronic Signatures in Global and National Commerce, Report to Congress, National Telecommunications and Information Administration, U.S. Department of Commerce, June 2001. 10 The Postal Service became self-sufficient in 1982. Cumulative postal deficits since 1971 are less than 0.5 percent of total revenues — essentially “break-even” as required. 11 Report of the Mailing Industry Task Force, 2001. 12 Forrester Research, Winning the Changing Financial Customer, July 2003. 13 Even limited diversion of First-Class Mail volume has a significant financial impact on the Postal Service. First-Class Mail service currently provides 54 percent of postal revenue, and 66 percent of contribution to the “fixed” costs of the universal service infrastructure. No other postal mail category can easily replace this loss. 14 Without management action, at an average of 500 deliveries per route, recent annual increases of 1.7 million new deliveries would require 3,400 new carrier routes, with 4,800 new carriers and associated vehicle, delivery, supervision, and administrative costs. Recent postal productivity improvements in delivery services have been the result of management programs that may be approaching the limits of their contribution (Source: USPS presentation to President’s Commission on the U.S. Postal Service). 15 It takes about 18 months to change rates or introduce new services, and competitors can obtain detailed advance information about Postal Service initiatives. Customer segmentation and customization of services is an important part of effective marketing, but the Postal Service has been restricted from implementing programs some claim would “unduly discriminate among customers.” 16 The Postal Service is also limited from making changes in service standards, operating networks, and facilities that most private sector organizations would implement to improve productivity and reduce costs. 17 See “Hiding in Plain Sight: The Quiet Liberalization of the U.S. Postal System,” Mary S. Elcano, Andrew German, and John T. Pickett, Seventh Annual Conference on Postal and Delivery Economics, Sintra, Portugal, June 23–26, 1999. 18 Postal Service financial analysis of American Bankers Association data. 19 USPS Finance, FY2002 Cost and Revenue Analysis Report. 20 Ibid. United States Postal Service Five-Year Strategic Plan September 2003 | 1.1 CHAPTER TWO: IMPROVE SERVICE Introduction The Postal Reorganization Act requires the Postal Service to provide “prompt, reliable, and efficient services” to all customers. Service is one of the most fundamental indicators of postal performance, and the Postal Service has established relevant service performance standards, developed reliable measurement systems, and is implementing programs to continue to improve service performance. The Postal Service remains committed to its basic mission of providing timely, reliable, and accurate mail delivery to all businesses and households in every community in the nation. The prompt delivery of bills and payments, reliable delivery of magazines, newsletters, and newspapers, the timely delivery of information that makes shoppers aware of products, services, and issues, and the convenient, accurate delivery of packages are all critical to economic progress in the 21st century. Commitment to Service Nothing demonstrates the commitment to service better than the efforts of Postal Service employees to restore service after a disaster. Following the September 11, 2001 attacks on the World Trade Center and the Pentagon, all commercial air transportation was grounded through September 15. When commercial air transportation resumed, mail on commercial flights was restricted to letters and flats and the movement of mail was hampered by erratic flight schedules and conflicting security directives. Postal logistics managers overcame enormous challenges in rerouting mail and rebuilding mail trans-portation networks. Mail movement schedules had to be adjusted as often as three times a day. Existing contracts had to be adjusted and new arrangements made during a time of industry turmoil and uncertainty, including moving significant mail volumes from air to surface transportation, and adding additional mail volumes to the Postal Service’s dedicated air freight contract. Postal Service employees met these challenges and there was little disruption in national mail service performance. After fire, floods, tornados, hurricanes, and earthquakes, the first signs of normality returning to a community are often the opening of the Post Office™ for business and the reassuring sight of Postal Service employees delivering the mail. A Record of Service Performance Improvement Improved operational processes, investments in transportation and in capital equipment, and employee commitment have combined to create continuous improvement in categories of First-Class Mail® service, as indicated by the External First-Class Measurement System (EXFC). The progress over the last eight years is shown in Exhibit 2-1. Exhibit 2-1. First-Class Mail Service Performance History Source: External First-Class Measurement System (EXFC) Timely, reliable delivery is important for most customers, but timely delivery truly means money for mailers and receivers of payments. Improvement in First-Class Mail service means faster access to cash and improved financial management for the remittance industry. The Phoenix-Hecht Postal Survey is an independent study, conducted by the financial industry, of hourly delivery of remittance mail from 170 cities to about 130 sites in 36 destination cities. It is a category of mail that is not measured by the independent EXFC performance sampling system used by the Postal Service. Referring to First-Class Mail service performance, the fall 2002 Phoenix-Hecht Postal Survey says, “Fall Survey Punctuates Year of Significantly Improved Delivery…Against the backdrop of the spring survey (Quarter 1, 2002), in which eight of ten participants posted national improvements, the results are really quite remarkable. The fall survey completed a year of mail delivery improvement unmatched in recent history.” The spring 2003 Phoenix-Hecht Postal Survey headline reads “Excellent Postal Performance Continues,” and the report states, “The remarkably strong postal performance of 2002 showed no abatement in the 2003 Spring Postal Survey … Phoenix-Hecht sees nothing on the near-term horizon to derail continued strong performance.” More Rigorous Service Standards Have Been Established The Postal Service has increased its performance standards for First-Class Mail service, making the achievement of record performance even more remarkable. The number of city pairs with overnight and two-day service standards has increased, as shown in Exhibit 2-2. Thirty-six city pairs have been shifted from two-day to overnight service, and a substantial number of city pairs have been shifted from three-day service to two-day. The overall number of city pairs included has also increased. Exhibit 2-2. First-Class Mail Service Standard Improvement The overall result is a network that is designed to deliver mail sooner to more people. The Postal Service is virtually alone among the nations in the world where so much mail is designated for overnight and two-day service across such a large geographic area. For example, Canada has two-, three-, and four-day service standards, and Australia limits overnight service to the urban areas. GOAL: IMPROVE SERVICE The objective is to provide timely, reliable delivery service to the growing universal network and convenient access to Postal services for all customers. The Postal Service continues to focus on the performance of Priority Mail®, Express Mail®, and First-Class Mail services, as outlined in Exhibit 2-3. Wherever possible, the Postal Service has developed reliable independent measurement systems for these categories of mail. The Postal Service has been developing and testing performance measurement systems for other service categories. Exhibit 2-3. Service Improvement Targets, FY2004–2008 Note: Starting in FY2004, the Postal Service will switch from 13 postal accounting periods to monthly reporting. The quarterly scores for FY2004 and subsequent years may not be strictly comparable to quarterly scores for previous years. SERVICE MEASUREMENT SYSTEM Service performance measurement for major categories of mail is provided by the postal Transit Time Measurement System (TTMS), which includes the following: • Priority Mail service performance. Measured by the Priority End-to-End (PETE) system, providing an independent assessment of Priority Mail service performance. PETE is based on a series of carefully designed tests conducted by a contractor, and is designed to provide a reliable indicator of the consumer and small business experience with Priority Mail service. • First-Class Mail service performance. Measured by the External First-Class (EXFC) Measurement System. EXFC externally measures collection box to mailbox delivery performance, continuously testing a panel of 463 ZIP Code areas selected on the basis of geographic and volume density from which 90 percent of First-Class Mail volume originates and 80 percent destinates. EXFC is not a system-wide measurement of all First-Class Mail performance. The performance of Express Mail service is measured by the Product Tracking System (PTS), an internal measurement of retail acceptance to mailbox delivery performance. All domestic ZIP Codes and international postal codes are included. All pieces in the mailstream which have proper scan information are included. Performance measurement systems for other service categories are being tracked although they are not independent measures. For example, many major mailers or mailing services use CONFIRM™ service to track the performance of some categories of Standard Mail pieces and Delivery Confirmation™ service to track Parcel Select® performance. While these indicators are useful for the Postal Service and for participating customers in identifying potential areas for service improvement, the data is not statistically representative for all mailers and for the mail category. Recent Performance Trends Exhibit 2-4 describes the recent performance trends for First-Class Mail pieces delivered to overnight service standards. The Postal Service has consistently improved performance in the overnight areas, and is currently providing record service performance levels. Exhibit 2-4. Percent Overnight First-Class Mail on Time Source: USPS Annual Performance Reports Exhibit 2-5 describes the performance to standards in the two- and three-day areas. Achieving service performance targets in two and three-day areas is more difficult, largely due to the unreliability of scheduled commercial airline service over the past several years. The Postal Service made significant changes in its operations in 2000 and 2001, and as a result had to establish a new baseline for service performance targets. Exhibit 2-5. Percent Two- and Three-Day First-Class Mail on Time Source: USPS Annual Performance Reports Two- and three-day service performance will be measured separately, with separate targets. The Postal Service is also tracking service performance by transportation mode — air and surface — to ensure consistent and reliable service. Change from Previous Five-Year Strategic Plan and Annual Performance Plan The FY2004 service targets for First-Class Mail, overnight, and two- and three-day services were each increased over the preliminary targets established in the FY2002 Comprehensive Statement on Postal Operations. The target for overnight service was increased from 93 percent on-time delivery to 94 percent, the two-day target was increased from 88 percent to 90 percent, and the target for three-day service was increased from 87 to 88 percent. All the goals have been adapted to reflect the Postal Service’s Transformation Plan (published April 2002), and are structured around five strategic areas of emphasis rather than the three “voices” used in the previous strategic plan. The goal in the previous strategic plan was described as “earn customers’ business in a marketplace where they have choices by providing them with world-class quality at competitive prices.” This goal is still valid. However, the clearest and most important expression of value and quality to customers is timely, reliable, and accurate delivery at reasonable prices.21 The previous strategic plan included separate objectives and targets for consistent and accurate delivery. The Postal Service continues to track consistency and accuracy of delivery as internal diagnostic tools for service improvement, but has removed them as separate performance indicators. Timely, reliable delivery requires and includes both consistency and accuracy of delivery, so only one high-level measurement is necessary. The previous strategic plan used “Customer Satisfaction” as an overall measure of postal performance. While Customer Satisfaction is still measured extensively by the Postal Service, and reported on in the current strategic plan, it is not used as a goal. Similarly, the Ease-of-Use Index, based on selected questions from the consumer satisfaction survey, was found to be more relevant to tactical and program issues and was therefore removed as an overall performance goal. The Postal Service has a long-term goal of measuring service performance for all major categories of mail, and has been developing reliable, cost-effective systems that can provide accurate and timely information to postal managers and customers. Currently, 498 publishers have registered 2,169 publications in the ePUBWATCH system, which tracks problems with Periodicals mail. Registration of new publishers and use of the program by customers is accelerating. Over 154 subscribers are now using the tracking services provided by the CONFIRM system for First-Class Mail, Standard Mail, and Periodicals automation-compatible mail. Included in these subscribers are major mailers and mailing services, which use the data to provide information on mailings for their customers. Delivery Confirmation service for Parcel Select provides customers using this service with robust service performance and quality metrics. While the information provided by these systems is very useful for internal service improvement and is relevant for the participating customers, they are not yet representative for all mailers or the entire mail category. The systems cannot yet be used as general performance indicators for all mail or all customers. However, they do meet the needs of an increasing number of customers, and will be developed further. The Postal Service has separated categories of mail performance by transportation mode (air and surface) for analysis in order to provide more detail and permit more focused improvements. Two- and three-day First-Class Mail performance will now be measured separately. Performance accountability for most measured categories has been extended to cover more of the year. Due to extreme weather challenges, the period November 22, 2003 to January 30, 2004 will be excluded in FY2004. Service reporting will convert to a monthly basis from the 13 postal accounting periods used previously. Priority Mail service improvement is critical both to the Postal Service and the customers who use it. The Postal Service has performance measures and service improvement targets, but the results are proprietary since they exist in a highly competitive marketplace where service performance data are not provided publicly by competing firms. SERVICE IMPROVEMENT STRATEGIES Strategies that support the overarching goal of improving service are closely tied with those that support productivity improvements. Focusing on improved distribution, delivery, and transportation as well as enhanced tracking technology has resulted in significantly improved service. Through its automation program, the Postal Service has and will continue to invest capital in technology that improves the consistency and quality of service as well as the efficiency of operational processes. The automation program includes Letter Mail Recognition Enhancement, Readability Improvement Program, Delivery Bar Code Sorters, Automated Flats Feeder, Automated Flat Sorting Machine, and the Automated Tray Sleever. Postal Service engineering, research, and development efforts ensure a continuing stream of future improvements. In conjunction with the automation program, improvements to the collection and acceptance process, as well as to distribution and delivery operations, ensure that operating plans can support the continued provision of excellent service by reducing handlings and moving the mail more promptly through the operating system with fewer errors. Pricing strategies that encourage worksharing with mailers and intermediaries also may have the additional benefit of reducing handlings by entering properly presorted and addressed mail closer to the point of final delivery. Finally, the leadership of the organization, from the postmaster general to operations supervisors, continues to communicate consistently and regularly on the importance of service to our customers. Specific service improvement initiatives are described on the following pages. Priority Mail Service Improvement Over the next five years, major initiatives will focus on improving Priority Mail handling and transportation. The primary objective is to obtain nationwide improvement of overnight and two-day Priority Mail service and to establish a standard process for the end-to-end actions required to provide customers with a time-sensitive Priority Mail product. The distribution processes are being standardized to increase productivity, improve distribution accuracy, and control costs. To help with operational objectives, procedures and instructions have been developed based on proven practices used in the field that have been shown to provide the level of performance necessary to meet aggressive targets for Priority Mail service. As the Postal Service implements these best practices nationwide, there will be a positive effect on Priority Mail service. The Postal Service’s contract with FedEx adds an expanded dedicated air network which complements ongoing reviews and redesigns of the surface transportation network. Both areas of focus have been critical for improving service despite the impacts of commercial airline restrictions after September 11, 2001. The Postal Service anticipates continuation of this relationship, and may seek additional partners to help improve Priority Mail service. Transportation Management Information Systems Much of the improvement in service will depend upon the development and implementation of information systems that will enable Postal Service managers to better control the work flow, evaluate where problems or bottlenecks occur, and allocate resources. This information will be essential to improving service performance, although cost savings may also result from the elimination or control of such service breakdowns. Information collected from these systems will allow managers to measure the performance of each plane or truck and carrier as well as the performance of origin and destination terminals. This data will be used to optimize network design, improve transportation efficiencies, and enhance service. For example, certain systems will handle mail assignment to air carriers, while others will focus on ensuring service performance accountability and billing/payment accuracy. The Postal Service is also moving toward a more dynamic and industry-standard route optimization model for all transportation needs. Service Performance Measurement Systems Development The Postal Service recognizes the need for reliable service performance tracking for all categories of mail, and has been working on several programs to develop effective and efficient systems that will add value. Many customers are currently obtaining relevant data from these systems, but none have yet been accepted as measurement systems for GPRA service performance evaluations because they are currently only relevant to the participants and the data is not yet statistically valid for the entire class or for non-participating customers. The Postal Service works closely with business customers to regularly evaluate and improve overall service performance for these mail categories, and uses the data from these systems as a diagnostic tool for improving service. CONFIRM Service CONFIRM is a tracking system for letters and flats through the use of a second barcode. It allows mailers to make better business decisions based on knowing where mail is in the postal operating system and when it is scheduled for delivery. The CONFIRM system allows near real-time access to data through a convenient, easy-to-use Web site with dedicated customer support. It serves as a performance measurement system and diagnostic tool for postal service operations management, permitting managers to quickly identify and correct deficiencies. Standard Mail customers are expanding their participation in the program, and a database is being created that will permit participating customers and Postal Service management to use the system for performance tracking for key categories of Standard Mail service. Electronic Publication Watch System The Electronic Publication Watch System (ePUBWATCH) is a Web-based periodicals complaint tracking system which allows a registered publisher to enter a subscriber’s postal related complaint, request an electronic publication watch, or request the assistance of a Periodical Service Improvement team member. The number of regular users and the number of publications using the system has been increasing. A bi-weekly and a bi-monthly reporting frequency feature has been added. Delivery Confirmation and Signature Confirmation Package service can be tracked through two delivery confirmation services. Currently, the Postal Service is working with a workgroup of the Mailers Technical Advisory Committee (MTAC) to develop a performance measurement tool for Parcel Select service. The service currently is used by a limited number of customers on a test basis involving almost a million parcels per week. Participants are able to measure Parcel Select service performance by service commitment or by percent delivered each day on a weekly, monthly, or quarterly basis by national, area, district, bulk mail center, 3-digit, or 5-digit ZIP Code areas. The Postal Service receives aggregate reports to identify and correct service problems, while customers get reports on their own mailings (by individual company or consolidator). International The United States, Canada, and Europe are cooperating on the development of a valid and reliable external measure of international letter service between major cities. Called UNEX, the system is managed by the International Post Corporation and is conducted by an independent private contractor. Intelligent Mail These performance measurement and tracking services were developed for particular categories of mail and typically use different identifiers, codes, and systems. The Postal Service is taking advantage of recent advances in item identification and coding technology to develop an integrated system. A new organizational group has been established to study alternative approaches and to implement a program that significantly improves the ability of the Postal Service and its customers to manage the mail. The initial plan envisions a system based on the use of a single code per type of mail that provides significant enhancements to the information on a mailpiece and creates the opportunities for improved service and new applications using timelier, accurate, and relevant information.22 The vision of this important initiative is that “the Postal Service and its customers will code all mail, aggregates of mail, and business forms, each with a standardized, information-rich code that enables maximum internal and customer utilization of the embedded and derived information.” Codes will be read passively (by automated equipment) as part of existing processes. The development of this system is expected to provide information that will enable mailers, the mailing industry, and the Postal Service to better manage the mail and to develop new strategies to improve service. Address Management Mail is the “raw material” for the postal operating system. Service performance depends on the quality of addresses on the mail, proper preparation, and where the mail is entered into the postal system. The Postal Service works closely with the mailing industry and major customers to establish relevant standards and effective systems to provide both the lowest total mailing cost and improved service.23 The Postal Service is pursuing an aggressive policy of ongoing quality reviews and implementing technological and procedural improvements to ensure better communication between delivery units and the address management program. This policy is improving the address database and providing more timely and accurate delivery point addressing information to customers through a variety of address quality improvement services (Address Element Correction, Barcode Certification, Coding Accuracy Support System, Correct Address Notification, Delivery Sequence File, and Presort Accuracy Validation Evaluation). Mailing Industry Task Force members working on address quality improvement are at the forefront of integrating new technologies with practices whose efficiencies needed improvement, setting the stage for better cost management capabilities for both the Postal Service and the industry. Worksharing The Postal Service has automated the labor-intensive process of evaluating bulk mailing eligibility for worksharing discounts. The Mailing Evaluation, Readability Lookup Instrument (MERLIN) system verifies nearly all mail preparation requirements for both letters and flats, and produces all reports necessary for mailing acceptance. The Postal Service and industry are working together to improve verification and acceptance processes to ensure accuracy and reliability. The Postal Service has encouraged the mailing industry to perform certain functions if it can do them less expensively through the development and implementation of worksharing programs. Mailers may receive discounts if they make the extra effort of providing properly addressed mail that can be handled by automated postal equipment or can skip postal operations through presorting or using their own transportation to enter the mail into the postal system closer to the destination point (drop shipping). The process provides and verifies that all address elements are included to ensure timely delivery. CONCLUSIONS Overall consumer satisfaction ratings, shown in Exhibit 2-6, result from a wide variety of attributes important to customers. One of the most important issues for all customers is timely, reliable service performance. The time it takes for mail to be delivered — consistently and accurately — is a system-wide issue that involves virtually the entire organization, while many other attributes of service are more often relevant to conditions that must be managed at the local level. Exhibit 2-6. Percent Consumers Rating Overall Postal Performance (Good, Very Good, or Excellent) Source: Customer Satisfaction Measurement System, USPS Consumer Advocate While the Postal Service does not use customer satisfaction as a performance measure, overall ratings tend to parallel delivery service performance. A different approach is taken by the American Customer Satisfaction Index, which has been publishing reports on customer satisfaction with different industries in the U.S. since 1994. The Postal Service is included in this comparative approach, shown in Exhibit 2-7. Exhibit 2-7. Overall Customer Satisfaction Index Ratings Source: 2003 Transportation/Communication/Utilities and Services Industry Report, American Society for Quality A recent study conducted for the President’s Commission on the U.S. Postal Service found that Americans have an overwhelmingly favorable view of the Postal Service.24 Seventy-nine percent say they feel positive about it, including 47 percent who rate the Postal Service very favorably. More Americans think the quality and reliability of the Postal Service generally is getting better (36 percent) than think it is getting worse (19 percent), results substantially more positive than results from the same question in 2001 (28 percent responding positively) and in 1994 (24 percent). These results, from a variety of independent measures, indicate that the Postal Service is meeting its commitments to provide timely, reliable, and accurate services to the American people. The strategies described in this plan will help to continuously improve that service. The Postal Service will continue to work closely with customers, suppliers, and the mailing industry to identify and address other service needs. In particular, the Postal Service will increase its focus on providing more convenient access to postal products and services for consumers, small businesses, and large mailers through a wide variety of channels. The Postal Service will also provide more accurate, relevant and timely information to customers, respond more effectively to problems, and develop new solutions to meet customer needs. While such service improvements will help to retain current customers and may help attract new customers, service improvement alone will be insufficient to generate enough revenue to offset losses from declining mail volumes and support the cost of providing service to an expanding network and infrastructure. 21 This has been determined through repeated customer surveys, focus groups, and meetings with key customers. 22 For more information, see the “Intelligent Mail” initiative in the Mailing Industry Task Force Report, 2002 Update. 23 For 25 years, the Mailers Technical Advisory Committee has shared technical information between industry and the Postal Service. Workgroups meet regularly to work with the Postal Service on the development of programs, policies, standards, and regulations. 24 Peter D. Hart Research/American Viewpoint, June 9, 2003. United States Postal Service Five-Year Strategic Plan September 2003 | 2.1 CHAPTER THREE: MANAGE COSTS Introduction The Postal Service must provide timely, reliable, and accurate universal delivery service as efficiently and affordably as possible. The core of the strategic plan builds on an ongoing, multi-year operational plan that has the objective of managing the existing enterprise more effectively and efficiently. The Five-Year Strategic Plan, FY2001–2005, described this project as the “Breakthrough Productivity Initiative,” an overarching strategy that also served as the foundation for the April 2002 Transformation Plan. The Transformation Plan also included other initiatives for managing costs, for enhancing a performance-based culture, and for generating revenue. The Postal Service is on track to achieve the Transformation Plan’s objective of $5 billion in cost reductions and avoidances over five years. The Postal Service is working to identify and implement programs that will result in additional savings beyond FY2006. GOAL: MANAGE COSTS The objective is to manage costs and improve productivity to provide service at the lowest possible price. The Postal Reorganization Act (PRA) expected that the Postal Service would be managed reasonably efficiently and that prices could be adjusted to cover the costs of providing service to a growing nation. The current postage rate, after adjustment for inflation, is about the same as it was following the implementation of the PRA, as shown in Exhibit 3-1. Exhibit 3-1. Real Postage Rates (in $), 1972–2003 Source: USPS Finance The relative stability of inflation-adjusted postage rates over time indicates that the Postal Service has been reasonably successful in keeping prices affordable, especially since the workload has increased — mail volume has increased from about 87 billion pieces in FY1971 to over 202 billion in FY2002, and the number of possible deliveries has increased by about 50 million since FY1971. Another indicator of affordability is that the Postal Service has maintained one of the lowest postage rates in the developed world, as shown in Exhibit 3-2. Exhibit 3-2. First-Class Postage in Selected Countries Source: USPS International Services, postage and exchanges rates as of June 11, 2003 * Approximately 0.7 ounces. Although the Postal Service has been able to keep postage rate increases at about the same level as the overall increase in prices in the economy, major mailers are more resistant to even modest price increases. The emergence of competition in postal markets — especially technological substitutes in what had previously been categories of mail protected by the Private Express Statutes — has increased the resistance of many mailers to continued postal rate increases. The Postal Service has been increasing its focus on productivity improvement as an appropriate strategic measure of success in managing costs and providing affordable service. Performance Indicator: Total Factor Productivity Total Factor Productivity (TFP) is a widely accepted measure of efficiency based on measuring changes in the relationship between resources used (input) compared to changes in workload (output). Workload is adjusted by the work content and the volume of different mail categories and changes in the number of possible deliveries. Input is also adjusted to account for the different categories and costs of labor. This productivity calculation is not directly affected by changes in postal rates and resource prices (external factors not directly under the control of management). Productivity measurement does not directly include service performance, but the output of the operating system measured by productivity is a set of services provided to customers. In the case of the Postal Service, overall customer satisfaction with the Postal Service has increased as service improved. Simultaneously improving productivity, service, and customer satisfaction is a significant accomplishment. By comparison, since 1994 overall customer satisfaction with many private sector services has been declining, at least in part due to service reductions.25 The Postal Service continues to make a conscious effort not to improve productivity at the expense of service. PRODUCTIVITY MEASUREMENT SYSTEM The TFP analysis is conducted by a well-respected private firm under contract to the Postal Service and results are reported publicly. The methodology is well known, and the underlying data is available from postal financial systems. Recent Performance Trends In each of the last four years, the Postal Service has improved productivity. Actual complement has been reduced by more than 60,000 employees. Postal Service productivity, as measured by TFP, has improved and achieved its target as shown below in Exhibit 3-3. Year-to-year changes are based in part on the level of capital investment, which reduces measured productivity in the year the investments are made but is expected to increase productivity in subsequent years. Exhibit 3-3. Comparative Productivity Performance, 1998–2002 Percentage change from prior year Source: USPS Finance Note: TFP figures for FY2000 and 2001 have been adjusted and differ slightly from data published previously (see Appendix I for explanation). Final TFP figures for FY2003 will be available after the close of the fiscal year. Analysts often attempt to compare postal TFP with the multifactor productivity measures developed by the Bureau of Labor Statistics, U.S. Labor Department. The comparisons are generally made to the private non-farm businesses and to manufacturing businesses. While the Postal Service’s mail processing operations might be compared to a manufacturing establishment, Postal Service productivity is not strictly comparable to the manufacturing industry. Productivity figures for the manufacturing industry are dominated by the high-tech sector. If the electronic and computer manufacturing sector is excluded, postal productivity has actually exceeded the productivity of the remaining manufacturing sectors. Exhibit 3-4 describes the productivity target for FY2004 and for the five-year planning period. It is important to note that annual productivity results may be volatile, and results should be assessed over a longer period. Exhibit 3-4. Productivity Performance Improvement Target Breakthrough Productivity Initiative Although TFP improvement is the overall summary objective for Government Performance and Results Act (GPRA) reporting, the Postal Service continues its emphasis on breakthrough productivity reported in the previous strategic plan. For the last two years, the Postal Service has recognized the field operating units with the best and most improved mail processing and delivery performance on an annual basis. This recognition is based on measured performance of specific elements of operational productivity that drive TFP results, and is part of the Postal Service effort to link strategic objectives with specific postal programs. Six performance categories are measured as part of this “cascade” of linked performance measures. The categories are as follows: • Best Overall Mail Processing Performance • Best Overall Rural Delivery Performance • Best Overall City Delivery Performance • Most Improved Mail Processing Performance • Most Improved Rural Delivery Performance • Most Improved City Delivery Performance Labor productivity, a component that contributes to TFP, has increased as a result of the achievements of these leading performers. Best practices for productivity improvement have been shared throughout the organization. To achieve recognition, a field unit has to reach the performance level equal to the average of the top 25 percent performing organizations. Service scores are also factored into the equation to prevent service from deteriorating as a result of productivity initiatives. Change From Previous Five-Year Strategic Plan and Annual Performance Plan There are no changes from the FY2004 preliminary productivity target in the FY2002 Comprehensive Statement on Postal Operations. All the strategic goals have been adapted to reflect the development of the Postal Service Transformation Plan in FY2002. They are structured around the strategic areas of emphasis identified in the Transformation Plan rather than the three “voices” used in the previous strategic plan. The Voice of the Business goal in the Five-Year Strategic Plan, FY2001–2005, was expressed as “Generate financial performance that assures the commercial viability of the Postal Service as a provider in a changing, competitive marketplace and generate cash flow to finance high-yield investments in the future while providing competitively priced products and services.” Sustained productivity improvement is the most effective way to achieve that goal. The goal, objective, and target have been restructured to focus primarily on productivity. Overall productivity (TFP) is the GPRA corporate measure, while functional and unit productivity measures may be used for individual accountability under the National Performance Assessment (NPA) Program. In the previous five-year strategic plan, “Net Income” was an objective (sub-goal). However, under the best of circumstances net income is limited by the break-even requirements of the PRA. Even in stable times, net income on an annual basis is difficult to achieve when the rate determination process takes eighteen months. While inappropriate for GPRA purposes, net income is an important metric and relevant data on performance is provided on a regular basis, with a detailed explanation available in the Annual Report. PRODUCTIVITY IMPROVEMENT AND COST MANAGEMENT STRATEGIES The Postal Service’s cost management strategy has three major areas of emphasis: • Continue to evolve the automation program for letter mail and extend it to flats, packages, and material handling; • Realign the postal operating network to make better use of its facilities and transportation. The implementation of integrated management information systems will provide more relevant, accurate and timely data that will enable managers to make more efficient use of postal resources; • Identify and implement best internal and external business practices throughout the organization. Effective process management will lead to greater efficiencies through standardization. The Postal Service must also implement programs that reduce the cost of labor, make more effective use of available employees, and improve management of fixed costs. Replace Labor With Capital Letter Mail Automation Letter mail accounts for more than 71 percent of all mail volume, and by the close of FY2002, 89.5 percent of letters were distributed in automated operations. Letter mail processing is already highly automated and very efficient. Letter mail productivity in processing plants improved nearly 50 percent from 1993 to 2001. Between 1998 and 2002, the Postal Service reduced the number of clerk and mail handler positions by more than 40,000. The Postal Service will continue to make incremental increases in letter mail processing productivity through equipment and software enhancements, and through improved operations processes based on more accurate, timely, and relevant information from new management information systems. Postal Automated Redirection System Forwarded and returned mail increases the cost to both the Postal Service and the mailer and delays service. In 2001, this amounted to more than 3 billion pieces of mail. The Postal Automated Redirecting System (PARS) will intercept relevant mail earlier in the sorting process, resulting in a reduction in the number of handlings and improving the service. The system will enable notification of mailers of address changes electronically or by mail, and will support the automated processing of change-of-address forms. Flats Processing Automation The Postal Service receives approximately 52 billion pieces of mail annually that are “flats” — neither letters nor packages. This volume, about 26 percent of all mail, includes documents in large envelopes, magazines, newspapers, catalogs, and advertising circulars. These pieces are more expensive for the Postal Service to process, since there is more variety than in letter mail. Although the Postal Service has introduced equipment to improve productivity, automating the processing of these pieces is more difficult than letter mail because of the variety of items. The Postal Service is still developing its flats automation strategies, based on emerging technology. In addition, the Postal Service will continue to explore new worksharing discounts with customers and the mailing industry that will create a mailing system with lower total cost. Next Generation Package Sorting Equipment The Postal Service delivered more than 1 billion packages in FY2002. In addition, many pieces of mail in other categories — First-Class Mail, Express Mail, and Priority Mail — are package shaped. Furthermore, some mail in other categories may be bundled or put into tubs, trays, and other containers and handled as a package at some point during processing. The Automated Package Processing System (APPS) is the Postal Service’s next generation of sorting machines for parcels and bundles of mail. It is designed to replace older, more labor-intensive machines. The system has an enhanced processing capacity and will introduce optical character reading and other advanced technologies to improve sorting accuracy and productivity. Mechanization of Material Handling Operations Tray sorting machines will reduce the manual handling of letters and flats trays as they enter and exit processing and dispatch operations. The Postal Service will also develop an integrated process for handling trays, bundles, sacks, and packages to replace the separate processes now in place. The Postal Service will also work with customers to explore new initiatives that reduce the number of postal handlings of containers and bundles (see Develop Innovative Pricing in the Revenue Generation Strategies section of Chapter 5). Intelligent Mail The Intelligent Mail program will reduce operating costs through better network management using information about mail, and will further increase mail processing automation using standardized coding. The program will reduce investment costs through standardization and integration of coding structure, data acquisition, communications and storage infrastructure. It will enhance mail security by providing forensic evidence for investigation, emergency response, and emergency preparedness, and deter criminal activities involving mail, while ensuring the traditional privacy customers have come to expect from the Postal Service. Shared Services Most large organizations face challenges in balancing the need for specialized functional systems and services with the need for larger, more cost-effective integrated systems. The concept of shared services has been proven to be effective for both government and private sector applications, particularly in the information technology and the administrative services areas. Much of the savings in shared services programs comes from centralization of common functions and the reduction of overhead, enabled by technology. • Information Technology The Postal Service is upgrading its information technology infrastructure and providing integrated systems which are more readily accessible, easier to service and maintain, and capable of being upgraded or improved in a timely fashion. The objective is to create and maintain a more robust and reliable system while reducing operating costs. To efficiently support both networks and applications, the Postal Service is implementing a shared services model for technical and corporate functions across the organization. Technical shared services involve building on infrastructure improvements to improve technology offerings such as data warehouse services, disaster recovery services, customer support, application hosting, and hardware and software deployment and support. • Administrative Services Corporate shared services focus on those initiatives that utilize the upgraded infrastructure to reinvent the Postal Service’s back office. Examples include the Standard Accounting for Retail (SAFR) system, the Accounting Shared Services system, and a number of self-service activities. These initiatives improve convenience and accessibility for managers and employees, reduce the time required to complete standard administrative services, improve accuracy and timeliness of information, and reduce costs. As one of the largest employers in the nation, the Postal Service’s human resource function faces an enormous task of responding to employee inquiries and requests for assistance. In response, the Postal Service has created a variety of automated processes and self-service systems that allow employees to telephone an interactive voice response system or visit a Web site on the Postal Service Intranet to conduct their business. Processes such as training, job bidding, award nomination, ideas and suggestions, travel, fleet card management, and purchasing have all been moved to such self-service applications. The Postal Service plans to move virtually all human resource functions to self-service applications. In doing so, the Postal Service can reduce the support complement and capture significant cost savings while improving the response times for employee services. Network Optimization and Facility Utilization Optimize Distribution Networks The Postal Service has initiated a Network Integration and Alignment (NIA) effort with a charter to create a flexible processing and distribution system that reduces the Postal Service’s and customers’ costs, increases overall operational effectiveness, and improves consistency of service. The network optimization may offer the mailing industry an opportunity to identify impacts of alternative work sharing concepts through the use of sophisticated modeling. The Mailing Industry Task Force workgroup has noted, “The Postal Service’s investment in computer-based network modeling has been an important step forward in developing an understanding of system capacity and capabilities. The knowledge gained will serve as a critical tool in the decision-making process that will determine the shape, scope, and operational vision of the 21st century postal system.” Effective implementation of the optimization program depends on the complex interaction of a number of factors. These include the age, size, and location of the facility, the ability to support a standardized operating configuration and upgraded management information systems, the availability of air and ground transportation, current workload and productivity. The historical nature of some postal facilities must also be considered, as well as the availability of alternative locations. Service standards and expected worksharing programs are also part of the optimization equation. The timing of network implementation will depend, in part, on how fast mail volume workload declines, how workload shifts among the facilities as a result of worksharing programs, how workflow shifts within a facility as a result of new equipment and improved processes, and the availability of capital to upgrade or to acquire new facilities. Efficient and Responsive Transportation The primary objective for all transportation programs is to help create a logistics network that reduces both Postal Service and customer costs, increases overall operational effectiveness, and improves the consistency of product service. Initiatives like the surface air management system, the transportation optimization and scheduling tool, and the surface air support system are applications that are leveraging information in order to optimally align transportation resources while tracking service, costs, and payment reconciliation. The Postal Service will continue to seek improved partnerships and flexible contracts to meet changing needs, and will continue to work with the airline industry and the government to resolve the issue of mail screening. Retail Network Optimization The current retail network of about 38,000 Post Offices™, stations, and branches provides access to customers in communities throughout the nation. Changing work and travel patterns, shifting demographics, and growing communities are challenging the ability of the existing network to meet the needs of postal customers. Access to postal products and services is being redesigned in order to both reduce the cost of operating the network and to improve customer convenience. Customers will have more access to postal products and services through the implementation of partnerships with other retailers, through improved self-service facilities and equipment, and through new and alternative channels such as the Internet. The reliance on alternative retail channels to meet many of the needs of growing communities will reduce the capital requirements of the Postal Service. Manage Real Estate Assets The Postal Service is one of the nation’s largest real estate holders. The Postal Service has developed strategies to identify opportunities to reduce costs or maximize the return on postal property. Standard building designs have been developed for the most commonly used sizes of facilities, thus reducing design costs. Space standards and design are reviewed on a regular basis, and post-occupancy evaluations of recently built facilities are conducted to identify future cost savings opportunities. In addition, with nearly 27,000 leased facilities, a proactive leasing program promotes the renewal of leases up to three years prior to expiration, providing maximum time to negotiate more favorable terms or relocate to alternative facilities. A newly developed prioritization system will ensure that the limited funds available for new facilities will be used to address the most critical needs. The Postal Service has an active program to generate revenue from its assets and reduce the total cost of its facility operations. In the past six years, financing and trade of assets have generated gross revenues of over $475 million. Other initiatives include the disposal of excess or underutilized property, including air rights; leasing space to government or private tenants; and developmental real estate programs which maximize the value of high profile assets by obtaining improved zoning and other entitlements. Postal Service management has reexamined the funding mechanisms that support the real estate acquisition program and determined that there is a critical gap in the ability of the Postal Service to generate funds to recover the cost of land associated with real estate purchases. Essentially, for accounting purposes, land is not recognized as an asset that is depreciated. Accordingly, in the postal rate-setting process, no funding is provided to cover the cost of acquiring land. Therefore, land costs are primarily financed through the issuance of debt, meaning that postal ratepayers have not funded land acquisitions. The Postal Service will be exploring the option of including a provision for requesting land acquisition costs in future rate increases. The goal would be to require customers who benefit from the use of the land and the facilities to fund the purchase of that land. Procedural Standardization and Best Practices An effort is underway to further establish organization wide procedures and standards that have been identified and validated as best practices. These efforts will lead to improvements in both management practices and processing efficiencies that will reduce costs and increase service. Standardization of Mail Preparation, Containerization, and Entry Requirements The efficiency of the overall postal delivery system is limited by the array of differing and inconsistent preparation and entry standards that exist among and between classes and subclasses of mail. This differing treatment gives rise to work redundancies and inefficient transportation, translating into additional costs for both the Postal Service and the private sector. Several preparation and entry initiatives have been implemented to help reduce these expenses. The Postal Service will develop and implement additional initiatives. Delivery Efficiency Improvements The annual increase in delivery points puts considerable upward pressure on costs. The Postal Service has achieved remarkable gains in delivery productivity during the past three years through the implementation of delivery point sequencing (DPS) and other management improvements. In the past three years, the Postal Service has achieved remarkable gains in delivery productivity through the implementation of DPS for letter mail. A longer-term initiative is to apply this DPS technology to flats mail in order to automate its process of sequencing. The Postal Service is also examining the concept of delivery point packaging, a technology that will be capable of producing one package of letters and flats for each delivery. The packages would be automatically sorted for the letter carrier in walk sequence. Development of these initiatives is three to four years away, but is crucial to achieving the goal of virtually eliminating carrier in-office time. The Postal Service will continue to work with the mailing industry to refine this strategy and to explore other options. Although the potential for future gains from these programs is diminishing, the foundation for future improvements was laid by the completion of the nationwide deployment of the Delivery Operations Information System (DOIS). This new management information system is designed to provide timely, accurate, and actionable data to delivery unit supervisors. The data will enable delivery unit supervisors to make effective local adjustments that will improve delivery productivity in the office and on delivery routes. Another supporting program (Managed Service Points) was based on the recent national implementation of the Mobile Data Collection Device (MDCD) on city routes. City carriers using this device scan barcodes at the delivery unit and along the carrier’s route, and management can evaluate whether routes are being traveled within the expected time frames. Other initiatives have focused on rural routes, such as the Rural Time Review and improved management training. Some of the major initiatives that will assist in improving delivery productivity include: • Delivery Performance Achievement and Recognition System The Postal Service has been developing the Delivery Performance Achievement and Recognition System (DPARS) database, which groups the performance of similar offices together and creates “benchmarks” for top performing offices against a standardized target. Performance will be recognized for both “best in class” and “most improved” offices. DPARS will be incorporated into the compensation and rewards strategies. • City Carrier Optimal Routing The Postal Service is testing city carrier routing and travel optimization programs similar to those used by private sector delivery firms. If proven effective, this program should improve productivity and reduce costs. • Increase Retail and Customer Service Productivity Detailed transaction data from the Point of Service (POS) ONE equipment is allowing the Postal Service to create a data base that will be used to more effectively staff retail units and customize services to meet the local needs of the community. This data will be used to determine which products and services are the most requested, and to identify those that could be accessed through alternative channels. Continuing to develop these and other services not only provides customers with greater flexibility and convenience in doing business with the Postal Service, they also provide the organization with considerable cost savings as transactions are moved to less expensive alternative channels. Furthermore, the POS ONE system will enable postal retail associates to provide prompt, reliable information to their customers. The Postal Service will also provide more alternatives to customers for conducting business without standing in lines at Post Offices. Moving many standard transactions to less costly alternatives will reduce the pressure on retail staffing. Improve Performance Management The Postal Service will depend on the ability of local managers to take advantage of standardization around best practices, and on the availability of improved management information tools to help local management improve local performance based on more accurate, timely, and relevant data. Supply Chain Management The Postal Service awards thousands of contracts every year that are cumulatively worth billions of dollars. Supply chain management maximizes the effectiveness and efficiency of these expenditures, using standardized practices that have been proven to be successful in the public and private sectors. Web-Based Supply Chain Management Technologies One major focus is to implement Web-based technologies to reduce the administrative cost of managing thousands of contracts and procurement actions, while increasing the ease of use for both customers and vendors. Such systems also enable the Postal Service to track contracts, contractor performance, and payments more effectively. Effective Contract and Transactions Management A second major initiative is more effective administration of commodity purchases, where the dollar value is often low but the transactions costs are high. Consolidation and centralization, supported by convenient and easy-to-use programs, provide ways to reduce the costs of obtaining ordinary items such as office supplies. Strategic Sourcing Another initiative is to more carefully manage the strategic sourcing of critical items by working more effectively with the vendor community. Partnerships, alliances, long-term contracts, and other nontraditional approaches will depend upon improved planning, outreach, and cooperation while maintaining the value of competition to ensure that the Postal Service obtains the best possible value from its purchases, particularly for transportation, fuel, and equipment. The Postal Service has one of the largest and most complex information technology (IT) infrastructures in the world. The software that is built or purchased must be scaleable to accommodate the size and scope of the organization. Information technology components put in place rely on hardware and software developed by vendors being integrated seamlessly into the organization’s existing infrastructure. Because the introduction of one faulty piece of software or one malfunctioning server could negatively impact operations across the nation, the Postal Service must be certain the vendors it does business with offer products and services that are of the highest quality. The Postal Service has been working with leading IT vendors for many years in a typical customer-vendor fashion. The Postal Service is moving toward establishing relationships with vendors that follow the “partnership” model. In these arrangements, the Postal Service works with vendors who are not only able to sell the organization a product or service, but also who take the time and make the investment to learn about our business and offer technology that can support an organization the size of the Postal Service. Strategic partnerships with vendors are allowing the Postal Service to form long-lasting relationships with the companies that provide critical components of the information technology infrastructure. Labor Cost Reduction and Employee Utilization Improvement Reduce Labor The Postal Service has reduced its complement by more than 60,000 since September 2000, and expects to make further reductions throughout the five-year strategic planning period. The Postal Service has received permission from the Office of Personnel Management (OPM) to allow employees in selected locations and functions to retire early. The Postal Service has recently consolidated five of the 85 district offices, affecting 538 nonbargaining and 128 bargaining unit employees. The Postal Service will continue to adjust its structure and its workforce to the changing workload and improvement in business processes. Effective Contract Management The Postal Service has been working to improve communications between management and employees, and to involve employee organizations in the development of programs and policies. Managers and supervisors are receiving training in proper application of the contract and effective employee and labor relations practices. Management has deployed programs that should improve the workplace environment to reduce grievances and other employee complaints, and to handle those issues that arise more effectively and at less cost. The Postal Service and employee organizations have been successful recently in achieving agreements that meet the needs of the organization and those of the employees. The Postal Service expects to build on recent successes to hold increases in wages and benefits at reasonable levels. Explore Outsourcing Opportunities Unlike other government organizations, the Postal Service faces competition on a daily basis. If postal services fail to deliver value to customers, most customers can use direct and indirect substitutes for mail. The Postal Service has contracted for a number of nonpostal functions. Virtually all of the long-haul transportation is provided by the private sector, and the Postal Service will continue to examine opportunities to outsource activities that result in lower costs for Postal Service customers. Managing Labor-Related Costs As a large, labor-intensive organization where most employees are performing manual labor, the Postal Service faces significant potential costs from injury compensation claims. The primary strategy is to avoid accidents and injuries through effective safety programs. There are additional costs associated with the current administrative process for injury compensation, and the Postal Service is implementing a number of programs to reduce these costs. • Extend Preferred Provider Organization Program This program has been recently implemented nationwide and will reach all of the Postal Service’s injured employees. This program should reduce medical fees and duplicate payments, while providing more consistent and effective medical care to employees. • Transfer Federal Employees’ Compensation Act (FECA) Recipients Employees on the FECA program may receive benefits that are substantially greater than what an employee would receive through one of the OPM retirement programs. The Postal Service will seek relief from the Department of Labor in the form of a FECA-managed retirement program that will result in lower costs. • Revise Office of Workers’ Compensation Program Regulations Prior to January 1999, Postal Service managers had the ability to contact an injured employee’s treating physician directly to explain the options available to accommodate injured employees on the job with limited or light duty assignments. This often resulted in earlier returns to duty. The Postal Service is working to have this program restored, while still respecting the privacy of employee medical records and privileged conversations between physicians and their patients. • Improve Interagency Cooperation As the Postal Service reduces its workforce, especially in mail processing and mail handling operations, the Office of Workers’ Compensation Program (OWCP) and the Postal Service will need to focus more effectively on private sector outplacement for injured employees returning to the workforce. The Postal Service will cooperate with the OWCP in developing new approaches to rehabilitation, retraining, and out-placement. Using Labor More Efficiently The Postal Service has developed and is implementing workforce planning and complement management tools that will enable field managers to match employees and skills to workload with a degree of precision not previously available. Among other benefits, this data will improve scheduling and staffing in order to reduce overtime and other costs that drive up the cost per workhour. Technology Infrastructure In order to support current and future business needs, the Postal Service must optimize its information infrastructure and reengineer its systems. One of the key initiatives supporting the distribution of innovative technologies within the organization is the Advanced Computing Environment (ACE) initiative. ACE involves replacing the entire distributed computing infrastructure, upgrading existing hardware, software, processes, and support while enhancing the stability, reliability, and availability of the infrastructure at 30 percent less cost. The Postal Service’s computing network is playing an increasingly important role in every business area of the organization. The effective and efficient implementation of advanced management information systems will enable Postal Service managers to improve service, reduce costs, manage employee complement, and track sales. The Postal Service is upgrading the network. The next phase will begin in calendar year 2004 and will take about two years to complete. The Postal Service has also begun to integrate wireless technologies into its day-to-day operations. Wireless services — which currently support e-mail, scheduling, pager capabilities, task management, and Internet and intranet access — will enable the organization to offer continuity in critical operations for contingency purposes. By the end of FY2003, the top 2,000 managers in the organization began using wireless devices to assist them in managing their respective functions. PROGRAM COSTS The cost reduction and productivity improvement strategies are directed at all major expense categories of the Postal Service. Postal Expense Trends Overall expense trends have been moderate, averaging about 3.1 percent annually, as shown in Exhibit 3-5. Although costs in some categories are difficult to predict, the cost control and reduction strategies that have shown such success in the last few years should continue to provide overall favorable trends for the five-year planning period. Exhibit 3-5. Postal Service Expenses, by Category (Billion $)26 Source: USPS 2002 Annual Report, USPS Finance Personnel Compensation Almost 90 percent of the Postal Service career workforce is covered by collective bargaining agreements. The Postal Service reached agreement through arbitration with the National Rural Letter Carriers’ Association (NRLCA) and reached agreement through negotiations with the other three major unions. These agreements call for basic pay increases and cost-of-living adjustments (COLAs), but provide predictability and stability to postal labor costs until 2006. Although average hourly labor rates increased in FY2002 by about 2.8 percent, compensation costs declined by 2.8 percent due to reductions in postal workhours. This trend is expected to continue for the next several years. Nonbargaining employees receive pay increases only through annual merit reviews. Unlike most of the federal government, these employees do not receive automatic salary increases, nor do they receive COLAs or locality pay. Retirement The Postal Service is the only agency to provide full funding (principal and interest) for the retirement costs associated with general pay increases to Civil Service Retirement System (CSRS) employees and COLAs for retirees. Reviews by the OPM, Office of Management and Budget, and General Accounting Office (GAO) found that the Postal Service was projected to overfund its contribution, and Congress has passed legislation that will adjust the payment rate. This will produce immediate savings that will allow the Postal Service to decrease its current debt and keep rates stable until 2006. Congress has limited the use of these funds, and has required the Postal Service to present a plan to describe how the funds will be allocated. This plan will be presented separately from the strategic plan. Congress also added military service liabilities to the Postal Service. The Postal Service has no deferred retirement liability for Federal Employees Retirement System (FERS) employees because FERS is funded so that all future costs, including retiree cost-of-living adjustments, are provided from present contributions related to active employees. Health Benefits The increases in health care costs and associated insurance premiums are a major concern to firms throughout the economy, and are a major reason for the rapid growth in Postal Service benefits. Postal Service collective bargaining agreements provide for participation in the Federal Employees Health Benefits (FEHB) program. Until 1987, the cost of postal retirees’ health benefits was paid from funds appropriated (tax dollars) directly to the federal Office of Personnel Management. Beginning in 1987, these costs were transferred to the Postal Service, including retroactive responsibility for all employees on rolls at the time of postal reorganization in 1971. In May 2002, the GAO recommended that the Postal Service review the accounting treatment of post-retirement health benefits. Postal participation in FEHB most closely matches the characteristics of a multi-employer plan and the Postal Service accounts for these costs according to current accounting standards. As a result, funds to make future payments will come from future revenue. If the Postal Service were not considered to be a participant in a multi-employer plan, the obligation for the present value of future costs — estimates of those costs range from $40 to $50 billion — would have to be treated differently. Retirement health benefit costs represent 1.5 percent of total operating expenses and are considered to be part of the postal rate base. In FY2002, the increase in these costs represented 0.2 percent of total costs. Workers’ Compensation Postal Service employees are covered by the Federal Employees’ Compensation Act (FECA), administered by the Department of Labor’s Office of Workers’ Compensation Programs (OWCP), which makes all decisions regarding injured workers’ eligibility for benefits. The Postal Service reimburses all postal workers’ compensation claims as well as an administrative fee to OWCP. The Postal Service’s bottom line is directly affected every time an employee is injured. The Postal Service records as a liability the present value of all future payments it expects to make to those employees receiving workers’ compensation. At the end of FY2002, the total liability for future workers’ compensation costs was estimated at $6.7 billion. Transportation After the terrorist attacks on September 11, 2001, the Federal Aviation Administration placed restrictions on carrying mailpieces on scheduled passenger airlines. The Postal Service was forced to move virtually all Priority Mail volume onto other carriers, including the FedEx network and air taxis. This is costly and the Postal Service is moving more mail onto surface transportation. The Postal Service is currently working with the airlines and appropriate government agencies to develop effective screening methods that would allow some mail to return to scheduled airlines. It is unclear who would bear the costs of the additional monitoring. All transportation modes will be affected by uncertainty about future fuel costs due to potential disruptions in world oil supplies. Supplies and Services Several years ago, the Postal Service began focusing on the use of supply chain management (SCM) best practices to control and reduce costs. SCM is based upon a close interaction among end users, buyers, and suppliers, focusing on long-term contracts and partnerships emphasizing the best suppliers with the most competitive advantages. The vast size of the Postal Service enables it to achieve major savings by leveraging previous local and regional fragmented buys into national contracts. This permits small local offices to order against these contracts and get the advantage of our market leverage as well as cost savings from reduced administrative expense. Interest and Other Expenses The Postal Service Retirement Funding Reform Act of 2003 requires the Postal Service to use any FY2003 savings attributable to the legislation, estimated at $3.5 billion, to be used for debt reduction in FY2003. The legislation also mandates that any savings realized for FY2004, estimated at $2.7 billion, be likewise applied towards debt reduction. Consequently, the Postal Service can have a maximum amount of debt outstanding at the end of FY2004 of $4.9 billion, a reduction of 56 percent from $11.1 billion outstanding at the end of FY2002. The Postal Service plans to exceed this statutory debt reduction requirement for FY2003 and reduce debt outstanding by $3.8 billion. Additionally, during FY2003, the Postal Service repurchased $6 billion of long-term debt and reissued the same amount of debt with maturities of less than one year. The debt portfolio is now structured so that cash flows in excess of current needs can be efficiently applied to debt reduction whenever practical to do so. The reduction in debt combined with the debt restructuring will enable the Postal Service to manage its cash and debt on a daily basis and minimize interest expense going forward. Five-Year Capital Investment Plan In February 2001, the Postal Service instituted tighter controls on capital projects, due to cash flow problems. Priority was given to safety, security, and infrastructure maintenance projects. The Board of Governors approved a one year capital plan for FY2003, and is reviewing the status of future investments based on current conditions and expected resource availability. The current Five-Year Capital Investment Plan is described in Exhibit 3-6. Exhibit 3-6. USPS Five-Year Capital Investment Plan (Millions $) Source: USPS Finance, Strategic Capital Investment Plan Note: Subject to change based on economic conditions and resource availability. Data are preliminary, pending Board of Governors’ review and approval of updated plan. Automation/Mechanization Equipment The Postal Service’s best opportunities for reducing the dependence upon labor is still automating mail processing and mail handling functions. Vehicles Investments in global positioning technology will improve management and control of delivery vehicles for operational efficiency, customer service, and enhanced security. Since much of the increase in delivery points is occurring on rural routes, the Postal Service has a program to provide additional right-hand drive vehicles. Retail Equipment Investments in retail and acceptance automation will make processes more cost-effective, accurate, and responsive while new self-service equipment will assist in moving simple transactions from the window. These changes will provide expanded access up to 24 hours a day in some locations and will allow customers to use their debit or credit cards. Facilities During the next five years, the emphasis will continue towards optimizing the use of existing space through the repair and alteration of existing facilities. The Postal Service’s facility-related requirements are currently being evaluated and prioritized with the particular focus on high growth areas, facility obsolescence, and necessary maintenance on real property assets. In addition, facilities programs will implement security measures that address the threat of terrorist activities. In conjunction with Engineering, the Postal Inspection Service and other security agencies, new building system applications will have to be developed, tested, and installed that will provide safety to the mail, employees, and customers.27 The Emergency Preparedness Plan, developed during late 2001 through February 2002, describes how the Postal Service intends to protect its employees and customers from exposure to biohazards in the mail while maintaining the current level of service and without unduly adding to the cost of operations. The Postal Service provided a confidential update to Congress in April 2003, and will continue to provide information to Congress and relevant agencies. As a result of new information about testing procedures, the Postal Service will develop and implement new procedures for ensuring that postal facilities are safe for employees. At the same time, the Postal Service will build on the close consultation developed with the employee organizations to provide more complete and timely information to Postal Service employees. The Postal Service approach continues to rely on a multi-layered, multi-year set of initiatives that focus on deterrence, detection, containment, and neutralization. A cautious, considered approach is warranted when attempting to integrate emerging technologies and newly designed systems into a complex operating environment. Where initiatives have been validated as effective, implementation will follow. Wherever further testing and analysis is necessary, implementation will be slowed to ensure that the technology and processes truly reduce risk to employees and the public without sacrificing service or imposing significant costs. Postal Support Investments in postal support maintain and improve the communication and systems’ needs of the Postal Service and the daily administrative and operational equipment requirements. Finance and Technology have transitioned the financial systems’ infrastructure from an antiquated environment to a state-of-the-art integrated environment. The ACE ongoing infrastructure replacement initiative reflects the transition to a more centralized and controlled approach to information technology infrastructure that can more easily leverage current and future Postal Service system requirements. CONCLUSIONS The Postal Service is developing a more flexible, integrated network that is aligned with customer and operational needs, with highly efficient, information-based operations and reduced administrative costs. The operations strategies will continue to improve postal productivity and manage costs to keep postal prices affordable for the five-year strategic planning period. The Postal Service could further enhance its productivity performance and its ability to keep rates affordable if restrictions on cost reduction programs were removed and if there were more flexibility in providing universal service. 25 The American Customer Satisfaction Index, based on independent surveys conducted since 1994 for the American Society for Quality, indicates that the Postal Service is the most improved of the services measured since the survey began. 26 As the