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Mailing & Fulfillment Special Report — Rate Case Realities

March 2007 By Leo Raymond
FOR THOSE of us who work in the postal world every day, a rate case is an interesting but not overwhelming event. Most of us generally understand where it comes from, how it’s litigated and what it all means in the end. But for many professionals—such as printers—who may be less directly involved in the production of mail, the arcana of postal matters gets even murkier when there’s a rate case. So, as the current case is drawing to a close, it might be useful to step back, consider what it’s all about and draw some general conclusions.

First, don’t get confused by the process. Basically, the U.S. Postal Service (USPS) does the math, projecting mail volume and its financial circumstances over a future period, then breaking the answer down to postage rates. Its regulator, the Postal Rate Commission, renamed the Postal Regulatory Commission (PRC) last month, performs its statutory role and conducts a trial-like proceeding, complete with witnesses and testimony. In the end, after 10 months of litigation, the PRC issues a “recommended decision” that the USPS governors consider, then accept or reject. (In the latter case, things get really interesting, but that’s not likely to occur this time.) Finally, the governors set the date for when the new rates, and any associated rule changes, will take effect. This year, the publicly circulated date is May 6, although that may change.

Second, don’t get too fixated on the numbers. Postage rates are important, of course, but they don’t tell the whole story. It’s more important to know why they are what they are, because they reflect costs that the USPS is experiencing, or cost savings that the mailing industry has enabled by worksharing, i.e., what it does with mail before turning it over to the Postal Service.

Finally, stay focused on the bigger picture—how larger changes in how the Postal Service operates are being reflected in the prices and rules affected by the rate case. By doing this, you can get a better understanding of how mail and mail processing are changing and, as a result, how those who produce mail can adapt and thus improve their own business situations.

IT’S ALL ABOUT EFFICIENCY. The Postal Service has always been a labor-intensive operation; about three-fourths of its costs are for labor (salaries and benefits). And, although it has spent billions on automation in recent years, that proportion has hardly changed. But that may be deceiving: inflation has driven up the cost of labor even as the number of employees has decreased steadily, despite equally steady growth in total mail volume. Nonetheless, aware of the impact of rising postage costs on mail volume, the Postal Service persists in looking for ways to become more efficient, an objective that unavoidably has to mean reducing labor costs.

In this case, the agency has finally taken the step of recognizing that different mail shapes have different processing costs, enable different levels of processing efficiency and so deserve to be charged different postage rates. This is best illustrated in retail First-Class mail—the stamped mail sent by average citizens.

Where 39 cents (at the “old” rates) covered the first ounce of a letter, flat or parcel, there are separate “new rates,” with flats being higher than letters, and parcels being higher than both. These separate pricing schedules are simply reflections of the corresponding differences in processing costs. And this shape-based approach to pricing is ubiquitous in the current postal rate case.

Elsewhere, familiar pricing patterns are changing, as well. Presort, the sequencing of mail by the preparer, is being repriced, as are the discounts for affixing a barcode and for entering mail downstream closer to where it’s addressed. Changes, large and small, are being advanced for these long-standing areas of worksharing, but all are related to the same idea: driving customer behavior to prepare mail in a way that enables greater USPS efficiency.

GETTING IT THERE THE FIRST TIME. Another part of postal efficiency that may escape the view of folks who deal with mail production is postal mail processing and delivery. Today, given the level of automation present in USPS facilities, it’s likely that a letter collected from a mailbox will not be touched by human hands again until it’s delivered to the recipient. In between, people not only don’t handle it, they don’t read the address to sort it, either.

Instead, automated equipment reads the address and applies a barcode (unless the mailer applied a barcode already). Then successive machines distribute the letter mail until, at the final step, it’s sorted in delivery sequence for the carrier to deliver. Comparable systems are being developed for flats and will be deployed over the next few years.

Clearly, the critical element in such processes is accurate information about where the letter (or flat or parcel) is supposed to go. That information starts with an accurate, complete and current address in human-readable form, but must be translated into a barcode if it is to be read by machines. As a result, the increased use of equipment to process mail and the decreased reliance on human knowledge to interpret addresses for sortation and delivery, have combined to make it unwise for mail owners and producers to tolerate less-than-perfect addresses (and thus less-than-perfect barcodes). Once, a person might have intervened to get an incorrectly addressed piece to the intended addressee, but today’s distribution systems rely on the sender’s attention to address accuracy, not the ability of someone downstream to compensate for address shortcomings.

READING THE RATE CASE TEA LEAVES. So, regardless of whether you understand rate setting or not, or whether or not you remember all of the postage rates and discounts, or whether or not you can explain how mail moves, you still can easily understand these overarching themes that pervade the rate case: shape matters, address and barcode quality matter, and the best prices are offered to the most efficient mail.

This begs the question of what to do to position your business—whether it’s focused primarily on printing or includes a mailing operation—to best endure the impact of higher rates.

The first step would be to work with your customers to help them through it. No matter how little you may think you know about postal matters, odds are your customers are even less expert. Help them understand the postage consequences of designing mailpieces whose size and weight, and especially their shape, may be less than ideal to enable efficient postal processing. If clients can reformat and redesign their mail into a flat (or, ideally, letter) shape that can be processed efficiently on USPS equipment, that’s a big step toward lower postage costs.

Beyond that, consider mailing patterns, Can small runs be combined, or mailing lists resegmented, to improve presort density, enable drop shipment or simply improve production? The economics of how and when mailings are prepared have changed when set against the possible discounts that could be earned under different circumstances. Whereas a client might have wanted to send out a variety of individual segments of a list as separate mailings, the cost of doing so may be less attractive now, especially if mailpiece shape is factored in.

Consider address quality and, from your perspective, what you could do to help clients increase the accuracy and currency of their address lists. The Postal Service is serious about reducing the volume of undeliverable-as-addressed mail it handles, and is continually ratcheting up its address quality standards accordingly. Outdated, inaccurate or incomplete addresses are being forced off lists by a combination of rules and rates; for those businesses that support mail owners, this situation represents an opportunity to offer a value-added service while improving the efficiency (and lowering the cost) of mail.

Processing address lists has another benefit: winnowing out those that represent a waste of resources. It makes no sense to produce and mail a message that will never reach a recipient. Combine this with more prudent selection of addresses and mail owners will find that their return-on-investment is higher—more response from a smaller mailing.

Printers and other mail service providers may find it counterintuitive to help customers produce and mail fewer pieces, but those businesses should not be tricked by false economy. Retaining client business is as important as winning new business, and a client that sees benefit from a provider’s advice will return. Selling more printing or mailing services than the customer needs may be good for one time. Over the long term, however, customers will want the most beneficial (cost-effective) service, and that may be from a provider who understands that sometimes “less is more.”

KEEPING UP ON THE NEWS. Clearly there’s a lot to think about when it comes to postal rates, whether because of an ongoing rate case or because of the complex rates and rules that are the norm in the postal environment. Keeping up with all of this is not easy, especially for an executive or manager who’s also trying to run a business.

To help, professionals in all businesses understand the need to find a source for information, and for assistance when questions or problems arise. Typically, such a source is a professional or trade association, a group of like-minded businesses with common needs that support common resources for a common benefit.

Printers and mailers, like dentists and plumbers, need to be part of an association. Without the resources that such an affiliation provides, the professional is operating in the dark, hoping to discern alone what his peers are having explained to them.

Associations charge dues, of course, but that cost can easily be offset by money saved (or not lost) because of a smarter decision based on information or advice supplied by the association. Going forward in postal rate cases, the need to better understand what they’re all about—and what to do—will not decrease.

So, aside from doing some thinking about what to do now, think about how to be ready next time, and how to get the relevant information you’ll need to position your business correctly. PI

About the Author
Leo Raymond is director of postal affairs for the Mailing & Fulfillment Service Association. He joined MFSA in March 2003 upon his retirement from a career with the U.S. Postal Service that spanned more than 35 years.
 

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