Does the USPS Really Need an Overhaul?

| By Francisco Perez | Consultant, Transportation | Chainalytics |

The United States Postal Service has experienced ongoing revenue challenges for quite some time, so it is not surprising to see that the USPS once again faces diminishing revenues due to declining mail volume. Utility companies and other service providers have encouraged customers to move to paperless billing for the past several years, preference towards electronic communication over traditional, hand-written correspondence, and generational shifts, to name a few, have all impacted the USPS’ revenue stream over the past three decades.

As expected, a lot of concern has been raised over the ongoing budget issues that have impacted the USPS. And a recent report from the U.S. Government Accountability Office (GAO) has some information that appears to justify those concerns with the following remarks: “According to USPS, in fiscal year 2017, USPS delivered 149-billion pieces of mail, generating about $70 billion in revenues…total mail volume fell 3.1 percent in fiscal year 2017, resulting in an operating loss of $2.6 billion. Fiscal year 2017 marked USPS’s 11th straight year of operating at a loss.” At first reading, these numbers raise eyebrows, particularly the continuation of these significant losses (which are greatly impacted by known pension liabilities).

Pointing out the ongoing revenue shortages, President Trump recently signed an executive order requesting an audit of the USPS to evaluate areas where changes can be made to increase the agency’s profitability and avoid a “taxpayer-funded bailout.” The executive order commissions the organization of a task force responsible for the audit, including a thorough examination of parcel handling fees applying to companies such as Amazon to determine if rates are competitive within industry standards.

However, as e-commerce total sales percentages continue to climb, parcel business has become a key component in USPS operations, actually one of the few money making areas of the agency. In fact, Mark Harmon, CEO of the Berkshire Company, mentioned in a July interview that the USPS revenue for the first two quarters of the current fiscal year was $36B, $12B of which can be attributed to parcel services and partnerships. Additionally, as of 2017 the USPS’ had a faster expansion rate of approximately 10% within the parcel industry than its competitors.

But continued parcel growth brings new challenges as well. Increases in parcel shipments through collaborative partnerships like Amazon, UPS, FedEx, and various others means the USPS must now funnel additional investments into expanding facilities, fleet equipment, and more to keep up with the growing trend. The expansion of the parcel industry will require continuous investments in technology, particularly as track and trace transparency becomes fully-embedded into consumer expectations. Advancements to SurePost, SmartPost, etc. will be a necessary component on network expansion in the years to come.

USPS projects a huge increase in capital spending ($2.5B), the details of which are outlined in the chart above. The question here is if the right amount is assigned to the “real” needs the USPS has to turn profitable again, and if this amount will be enough to increase and improve the service capacity, not just an update to maintain the current service levels.

The fleet upgrades make up the largest portion of the projected spending, but the aforementioned GAO report points out that many of the 200,000+ delivery vehicles still used by the USPS date back as far as the late 1980’s and have become costly to maintain ($4500 avg. per year). And given the fact that the Private Express Statutes and Universal Service Obligation require and ensure the USPS to provide mail services to every business and residential location in the U.S., the argument for a fleet upgrade is a valid one.

Now skeptics may point out that Amazon’s new Delivery Service Partner Program will mostly likely decrease the parcel business the USPS has come to rely upon. However, as mentioned previously, the Universal Service Obligation provides the USPS with the network infrastructure and logistical capabilities no other delivery service can claim. In the end, the USPS still has the largest “last mile” advantage of any parcel carrier in the country.

To ensure the future and profitability of USPS, a change in products offered and investment is required, and the key here is if that investment will be done with taxpayer or private funds. However, though considered a component of the United States federal government, the USPS acts as an independent agency and does not receive tax dollars toward operating costs (tax revenue only applies to employment management) and is already considered a semi-privatized organization. The projected capital investment into operations will continue to be generated through postage charges and various service offerings (like parcel) conducted by the USPS.

The USPS, like any large organization, certainly has room for improvement, but the existing partnerships, service offerings, and delivery mandates already in existence suggest the USPS will always remain a crucial component of delivery networks and consumer satisfaction. With e-commerce encompassing larger portions of global retail sales percentage with each passing year, organizations should evaluate the options available through the USPS, and other parcel agencies, to ensure they are taking full advantage of available saving opportunities.

Francisco Perez, a consultant in the Transportation practice at Chainalytics, specializes in parcel spend optimization, transportation procurement, and managed analytics. He also possesses expertise in warehousing and fulfillment center optimization.

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Does the USPS Really Need an Overhaul?

| By Francisco Perez | Consultant, Transportation | Chainalytics |

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