The law that underpins the U.S. Postal Service was changed with the enactment of the Postal Accountability and Enhancement Act of 2006 (PAEA). This was the first fundamental change to the American postal system since the enactment of the Postal Reorganization Act of 1970 (PRA). Despite Congress' intent to change the way in which postal services are organized and regulated, the views regarding postal costing and pricing developed under the PRA have not changed much at all, to the disadvantage of what was supposed to be a reinvigorated Postal Service.
While PAEA still uses terms such as "attributable costs" and "institutional costs" to describe the basic framework by which postal economics are discussed, a careful reading of the new law plainly indicates that the legacy language Congress brought forward to the 2006 act was not meant to strait-jacket the Postal Service with a way of operating and doing business that had grown increasingly anachronistic.
Today, postal economists still talk about attributable costs, markups and worksharing discounts and pass-throughs as if Congress intended the postal system to be frozen in time rather than liberating it to better accommodate the nation's changing postal needs and the postal service that provides them. In fact, I am very much of the mind that Congress provided the Postal Regulatory Commission (PRC) and the U.S. Postal Service (USPS) with more than sufficient flexibility to allow both to create tools that better comport with a more business-like way of viewing and meeting the nation's postal needs.
The goal is to set forth a more rational approach to costing and pricing mail products and services that retains the hallmarks of attributable and institutional costing calculations, but leads to a more appropriate and creative framework for determining the pricing of mail in today's more competitive market.
Bottom-up Activity-Based Costing
There are several alternatives to the current (top-down) determination of direct and indirect attributable costs that has been used since the Postal Reorganization Act. One such alternative is an "activity-based costing" (ABC) method that starts from the bottom-up with points that are closest to delivery working up to points that are more distal. In other words, this ABC approach determines product costs from points that are least-costly to those associated with greater postal processing and distribution-related inputs and costs. I believe that a bottom-up ABC-based approach would provide the Postal Service with a more refined and more accurate estimate of actual costs associated with any postal product.
Under such a bottom-up method of costing, the Postal Service would assign costs to products based on a number of attributable activities associated with resources (labor, equipment, materials, etc.) consumed in the processing, transportation and delivery of mail. Resources for each activity in handling the mail would be identified and measured. Whatever resources are consumed would be assigned to cost pools by product. The Postal Service would piece together the cost pools, and their sum would be used as a determination of each product's cost. The costs of any additional processing, transportation, or distribution then would be added to reflect any next levels of upstream operations. The total costs associated with each incremental work-related inputs then would constitute the unit cost of the next (any subsequent) defined product. This sort of bottom-up approach would negate the need to determine avoided costs (as is done under the current regime) since the product-related mail processing and distribution costs would be fully reflected.
For instance, the Postal Service has identified the product known as "Destination Delivery Unit (DDU)-entered Saturation Enhanced Carrier Route (ECR) Standard Mail" as that which requires the least postal inputs to ready mail for delivery. The cost associated with such mail then would constitute the "base cost" of all Standard Mail products. The Postal Service then would add whatever costs as associated with handling mail that is less finely prepared to these base costs to determine each subsequent Standard Mail product's attributable costs. Worksharing, as it is known today, would be accounted through a much simpler determination of all actual product-associated processing and distribution costs. Product costs no longer would be based on cost-avoidance estimates and measurements, but would be inclusive of all relevant processing and distribution inputs.
Market-Based Pricing
Since PAEA, the Postal Service has been allowed to earn and retain revenues that exceed costs. This enables the Postal Service to become a more profit-maximizing enterprise, subject to the control imposed by a CPI-related price cap. While PAEA clearly intended the USPS to be profitable and self-sufficient, its current product mix and pricing are notably hindered by pre-PAEA ideas of cost coverage and mark-ups.
There should be a greater emphasis on market-based pricing set largely by conditions of supply and demand. With this kind of approach, the Postal Service would be better able to tailor offerings to individual customer circumstances. This could lead to situations where mailer postage costs are reduced where the advantage of additional mailer preparation is extremely high or where there is excess capacity. Operationally, the Postal Service would be better able to balance workload and establish a more efficient management of resources under a market-based pricing regime. Essentially, the Postal Service could send price signals to encourage the most efficient operations for each shape of mail.
Expanding Information-Based Services
One of the key purposes behind the use of the Intelligent Mail barcode (IMb) was to provide the postal community a "track and trace" capability that would provide the Postal Service with a means for measuring and reporting service performance, while providing tools for better managing its own operations. With the introduction of the IMb, the Postal Service opened the door to the creation of new products and services that can add even greater value to mail, provide more precise information to mailers and offer other customizable services. Expanding the use of information-based services beyond service measurement and reporting will help provide the Postal Service with new pricing flexibility and opportunities.
Expanding information based services by tracking mail costs through the various stages of operations would provide a better method for capturing product-specific costs than the current costing mechanisms. A bottom-up activity-based approach to costing would create a more precise look at the true cost of handling products, teamed with information based services that could provide the Postal Service with real-time operational data that could enable the Postal Service (and industry) to work to keep costs down. The tracking of mail could be expanded to the piece level, and give the Postal Service the ability to create customer-specific costing associated with the plants at which mail is accepted, the machines on which it is processed and the manner in which it is distributed.
Another benefit would be to enable the Postal Service to better segment its customers and offer more finely tuned market-based pricing for the various segments with a clearer appreciation of actual costs. It would afford the Postal Service an understanding of market test costs and profitability beyond that of today.
Reclassification of Product Offering
The current mail classification scheme is out-of-touch with the Postal Service's long-term operational needs. Stemming largely from the practice of lumping together mail that has vastly different cost and operational characteristics into classes, the Postal Service has imposed a pricing structure that uses a concept of infrastructure cost-sharing, and imposes proportionally large costs on relatively less costly mail, potentially impacting both overall demand and operational efficiency.
Today, the Postal Service offers an array of products that ultimately deliver a piece of mail from point A to point B. Mailers pick that which best fits their mailing needs, i.e., letter, flat, or package. Mailers also choose a class of mail (First-Class, Standard, Periodicals, or Package Services/Parcels) based on rules and regulations established by the Postal Service and service performance commitments. Additional services also are available to mailers that occur pre- or post-delivery.
Eliminating the framework for defining services is a natural step in modernizing the mail system. Prodcuts would comport closely with how the USPS processes mail. Shape influences how a piece gets processed. This, then, affects how much it costs the USPS to produce and ultimately to price the service.
The major differences within operations are how the mail is processed, when and where the piece is accepted, and the service standards associated with the specific category of mail. For example, if a mail piece contained a bank statement and the mailer wanted one-to-three day service, it would be entered at a facility that met those service standards and prepared in a manner that would meet all associated presort and destination entry requirements. An Intelligent Mail barcode (IMb) could indicate that it was sealed against inspection and should be automatically forwarded if the recipient's address had changed. If the mailer wanted or needed return services, it could indicate which services were desired. An "a la carte" price offering would provide the mailing community with the choice of reaching finer presort levels and entering closer to its ultimate destination. Over time this would reduce upstream mail-related operations and postal costs.
Conclusion
I have not introduced new ideas but have developed themes that have recurred throughout the industry. I believe an activity-based costing approach can afford the Postal Service with considerable regulatory flexibility in the terms of how mail services are defined, categorized, cost and priced. In addition, all of these things could be accomplished without the need of any additional legislative action.
While PAEA still uses terms such as "attributable costs" and "institutional costs" to describe the basic framework by which postal economics are discussed, a careful reading of the new law plainly indicates that the legacy language Congress brought forward to the 2006 act was not meant to strait-jacket the Postal Service with a way of operating and doing business that had grown increasingly anachronistic.
Today, postal economists still talk about attributable costs, markups and worksharing discounts and pass-throughs as if Congress intended the postal system to be frozen in time rather than liberating it to better accommodate the nation's changing postal needs and the postal service that provides them. In fact, I am very much of the mind that Congress provided the Postal Regulatory Commission (PRC) and the U.S. Postal Service (USPS) with more than sufficient flexibility to allow both to create tools that better comport with a more business-like way of viewing and meeting the nation's postal needs.
The goal is to set forth a more rational approach to costing and pricing mail products and services that retains the hallmarks of attributable and institutional costing calculations, but leads to a more appropriate and creative framework for determining the pricing of mail in today's more competitive market.
Bottom-up Activity-Based Costing
There are several alternatives to the current (top-down) determination of direct and indirect attributable costs that has been used since the Postal Reorganization Act. One such alternative is an "activity-based costing" (ABC) method that starts from the bottom-up with points that are closest to delivery working up to points that are more distal. In other words, this ABC approach determines product costs from points that are least-costly to those associated with greater postal processing and distribution-related inputs and costs. I believe that a bottom-up ABC-based approach would provide the Postal Service with a more refined and more accurate estimate of actual costs associated with any postal product.
Under such a bottom-up method of costing, the Postal Service would assign costs to products based on a number of attributable activities associated with resources (labor, equipment, materials, etc.) consumed in the processing, transportation and delivery of mail. Resources for each activity in handling the mail would be identified and measured. Whatever resources are consumed would be assigned to cost pools by product. The Postal Service would piece together the cost pools, and their sum would be used as a determination of each product's cost. The costs of any additional processing, transportation, or distribution then would be added to reflect any next levels of upstream operations. The total costs associated with each incremental work-related inputs then would constitute the unit cost of the next (any subsequent) defined product. This sort of bottom-up approach would negate the need to determine avoided costs (as is done under the current regime) since the product-related mail processing and distribution costs would be fully reflected.
For instance, the Postal Service has identified the product known as "Destination Delivery Unit (DDU)-entered Saturation Enhanced Carrier Route (ECR) Standard Mail" as that which requires the least postal inputs to ready mail for delivery. The cost associated with such mail then would constitute the "base cost" of all Standard Mail products. The Postal Service then would add whatever costs as associated with handling mail that is less finely prepared to these base costs to determine each subsequent Standard Mail product's attributable costs. Worksharing, as it is known today, would be accounted through a much simpler determination of all actual product-associated processing and distribution costs. Product costs no longer would be based on cost-avoidance estimates and measurements, but would be inclusive of all relevant processing and distribution inputs.
Market-Based Pricing
Since PAEA, the Postal Service has been allowed to earn and retain revenues that exceed costs. This enables the Postal Service to become a more profit-maximizing enterprise, subject to the control imposed by a CPI-related price cap. While PAEA clearly intended the USPS to be profitable and self-sufficient, its current product mix and pricing are notably hindered by pre-PAEA ideas of cost coverage and mark-ups.
There should be a greater emphasis on market-based pricing set largely by conditions of supply and demand. With this kind of approach, the Postal Service would be better able to tailor offerings to individual customer circumstances. This could lead to situations where mailer postage costs are reduced where the advantage of additional mailer preparation is extremely high or where there is excess capacity. Operationally, the Postal Service would be better able to balance workload and establish a more efficient management of resources under a market-based pricing regime. Essentially, the Postal Service could send price signals to encourage the most efficient operations for each shape of mail.
Expanding Information-Based Services
One of the key purposes behind the use of the Intelligent Mail barcode (IMb) was to provide the postal community a "track and trace" capability that would provide the Postal Service with a means for measuring and reporting service performance, while providing tools for better managing its own operations. With the introduction of the IMb, the Postal Service opened the door to the creation of new products and services that can add even greater value to mail, provide more precise information to mailers and offer other customizable services. Expanding the use of information-based services beyond service measurement and reporting will help provide the Postal Service with new pricing flexibility and opportunities.
Expanding information based services by tracking mail costs through the various stages of operations would provide a better method for capturing product-specific costs than the current costing mechanisms. A bottom-up activity-based approach to costing would create a more precise look at the true cost of handling products, teamed with information based services that could provide the Postal Service with real-time operational data that could enable the Postal Service (and industry) to work to keep costs down. The tracking of mail could be expanded to the piece level, and give the Postal Service the ability to create customer-specific costing associated with the plants at which mail is accepted, the machines on which it is processed and the manner in which it is distributed.
Another benefit would be to enable the Postal Service to better segment its customers and offer more finely tuned market-based pricing for the various segments with a clearer appreciation of actual costs. It would afford the Postal Service an understanding of market test costs and profitability beyond that of today.
Reclassification of Product Offering
The current mail classification scheme is out-of-touch with the Postal Service's long-term operational needs. Stemming largely from the practice of lumping together mail that has vastly different cost and operational characteristics into classes, the Postal Service has imposed a pricing structure that uses a concept of infrastructure cost-sharing, and imposes proportionally large costs on relatively less costly mail, potentially impacting both overall demand and operational efficiency.
Today, the Postal Service offers an array of products that ultimately deliver a piece of mail from point A to point B. Mailers pick that which best fits their mailing needs, i.e., letter, flat, or package. Mailers also choose a class of mail (First-Class, Standard, Periodicals, or Package Services/Parcels) based on rules and regulations established by the Postal Service and service performance commitments. Additional services also are available to mailers that occur pre- or post-delivery.
Eliminating the framework for defining services is a natural step in modernizing the mail system. Prodcuts would comport closely with how the USPS processes mail. Shape influences how a piece gets processed. This, then, affects how much it costs the USPS to produce and ultimately to price the service.
The major differences within operations are how the mail is processed, when and where the piece is accepted, and the service standards associated with the specific category of mail. For example, if a mail piece contained a bank statement and the mailer wanted one-to-three day service, it would be entered at a facility that met those service standards and prepared in a manner that would meet all associated presort and destination entry requirements. An Intelligent Mail barcode (IMb) could indicate that it was sealed against inspection and should be automatically forwarded if the recipient's address had changed. If the mailer wanted or needed return services, it could indicate which services were desired. An "a la carte" price offering would provide the mailing community with the choice of reaching finer presort levels and entering closer to its ultimate destination. Over time this would reduce upstream mail-related operations and postal costs.
Conclusion
I have not introduced new ideas but have developed themes that have recurred throughout the industry. I believe an activity-based costing approach can afford the Postal Service with considerable regulatory flexibility in the terms of how mail services are defined, categorized, cost and priced. In addition, all of these things could be accomplished without the need of any additional legislative action.
