As UPS and the teamsters have finally come to terms on an agreement, large-volume parcel shippers should be asking the following questions: What impact will the settlement have on my company in terms of additional costs, and what alternatives do I have to the inevitable UPS price increase in 2003? The answer may very well be saturation DDU deliveries and the U.S. Postal Service.

History of Postal Service Parcel Deliveries

Through the years, the Postal Service had dedicated its resources to the delivery of billions of mailpieces. In that time, UPS was able to grow its volume. With few competitors to keep UPS in check, annual price increases became the norm. Parcel shippers also were forced to deal with surcharges and other add ons that made transportation budgeting even more difficult.

During the 1990s, the Postal Service began to reposition itself in the parcel delivery market. With its mandate to deliver First-Class Mail, the Postal Service had developed a system that was primarily set up to meet that mandate: to sort and distribute letter mail. Most Bulk Mail Centers (BMC) and Sectional Center Facilities (SCF) had become outdated and did not have the ability to modernize with parcel shipping sortation equipment. Without proper equipment, the costs associated with the manual labor necessary to sort and transport packages within the parcel system had been very high. Even with these higher costs, the Postal Service could foresee the day arriving when mail revenues would quickly diminish as more advanced forms of communi-cation such as e-mail, faxes, the Internet and cellular phones would begin to replace traditional mail volumes. Thus, the Postal Service made a strategic advancement into parcel delivery in order to establish a shipping alternative to UPS as part of an effort to meet the demands of a new technological age. During most of the 1990s, parcel shippers used BMC drops where parcel volumes did not overwhelm the system. By 1998, the Postal Service had identified a more cost-effective and long-term solution to the BMC system. Revenue projections were good for the Postal Service when performing the last delivery mile (from the DDU to the home). The postal response came in July of 1998 when the Postal Service created work-sharing discounts that encouraged com-panies to bypass the traditional BMC system. It costs less to sort and deliver to the SCF than the BMC and even less when delivering into the DDU, the deepest penetration allowed by the Postal Service.

Saturation DDU Delivery

In January of 1999, the work-sharing discounts were officially in place, and PFI became one of the first companies in the United States to saturate an entire DDU market. DDU saturation means that approximately 90% of PFI's parcel volume is distributed daily into the DDUs in a regional area. In an attempt to provide the Postal Service the best opportunity to reduce in-home service times, PFI delivers into the DDU system between 2:00 AM and 10:00 AM. Critical entry time for the Postal Service DDU system is approximately 7:00 AM. Packages received prior to 7:00 AM can be sorted to the carrier route and, in many cases, are actually delivered the same day.

Receiving DDU Benefits

Large- and medium-sized shippers are positioned to receive the greatest benefits from saturation DDU deliveries. For maximum savings, any shipper with regional distribution can utilize PFI as long as the shipper has sortation and transportation capabilities to support regional shipping. Smaller shippers, who have fewer resources, can take advantage of national consolidation with PFI (west to east) or with PFI's partner, Parcel Direct (east to west).

Can shippers save money and improve service? In the newest rate case implemented on June 30, 2002, the Postal Service's BMC rates were increased. SCF rates remained unchanged in some weight cells while increasing in others. However, at the DDU level, rates were unchanged with the exception of the one-pound rate, which had a slight decrease. While the Postal Service increased rates on virtually every postal product, it has made a strong statement about remaining competitive with respect to pricing parcels. By holding the line on DDU work-sharing discounts, the Postal Service is offering customers long-term pricing stability. What large- and medium-sized shippers are looking for is summed up by Mike Martinez, logistics manager at the Home Shopping Network. "The Home Shopping Network is committed to achieving the highest percentage DDU penetration we can realistically obtain," states Martinez, "because the DDU is where the ultimate savings and service can be found."

Regional Saturation

There are currently a total of 29 BMCs and SCFs nationwide within the postal system. When compared with DDUs totaling 35,000 plus, it becomes very clear that saturation DDU deliveries are regional in basis, and no one consolidator can possibly deliver into all of them. PFI currently handles DDU deliveries in all of California, Washington, Oregon, Nevada and Arizona. Parcel Direct effectively blankets the rest of the country, with its highest DDU saturation levels in those cities and states with the highest populations. Residual packages (non-DDU) are entered at the BMC or SCF in order to remain cost effective. In many cases, these residual packages are being delivered to rural addresses. BMC and SCF deliveries to these rural addresses can add time to the final delivery.

Tracking

Most shippers expect to have timely information available for customers looking for in-home delivery. With delivery confir-mation now available with the Postal Service, along with a new program allowing an acceptance scan of all packages being entered at the DDU level, shippers are now able to track their packages from their own distribution centers to PFI and from PFI to the DDUs. From the DDUs, the Postal Service expects to make the delivery within 24 hours of receipt, thus completing the delivery chain.

The Keys to the West

PFI recently tested actual service levels by employing delivery confirmation to over 50,000 packages per week throughout the State of California. Test results showed a 97% scan rate with less than a two-day, in-home delivery average. Packages tendered to PFI are sorted at the rate of 6,000 to 8,000 per hour. The Postal Service has an on-site employee to verify postage, and PFI's trucks deliver directly into over 1,400 DDUs each day within its service area. Up to 40% of those packages receive a carrier route sort and are delivered in-home next day with the majority of the remaining 60% delivered within three days.

Mike Sullivan is CEO of PFI. For additional information, visit www.shippfi.com.