FLATS STRATEGY This document outlines the Postal Service’s Flats operational and pricing strategies. In its FY 2009 Annual Compliance Determination, the Postal Regulatory Commission (PRC) expressed concern over cost coverage for a number of flat-shaped products, and directed the Postal Service to address those issues. In particular, the PRC directed the following: • [t]he Postal Service [to] develop and present a plan explaining how it intends to increase Periodicals cost coverage to a reasonable level in its next notice of general price adjustments for market dominant products, or its next annual compliance report. • the Postal Service to devise a plan to improve the cost coverage of the Standard Mail Flats product. This plan should include any operational or mail preparation changes that the Postal Service deems necessary, as well as a specific timeline for achieving a positive contribution for the Standard Mail Flats product. The plan shall be included in the next ACR or the next general market dominant price adjustment, if it precedes the ACR. • the Postal Service file a plan at the time of the next ACR or the next general market dominant price adjustment if it precedes the ACR that outlines how it anticipates addressing the revenue shortfalls of the Package Services class and each of the products that did not produce sufficient revenues to exceed attributable costs.…The plan should also address, if necessary, any impact the ongoing network distribution center activation process will have, and any other information the Postal Service deems necessary to ensure adequate revenues in the future. FY 2009 ACD at pages 75, 87, 95. This document responds to the PRC’s directives by providing a description of the strategies the Postal Service has implemented and intends to implement in the future to address these issues. The discussion is in two sections; the first covers operational changes and enhancements, and the second covers pricing strategies. OPERATIONS This section is divided into three parts covering transportation, mail processing, and Post Office operations and delivery. Within each section, strategies for improvement are presented, along with a qualitative estimate of each program’s overall impact on cost, a brief discussion of the initiative, its actual or expected implementation status, and, where applicable, an indication of the products it will primarily affect. There are a mix of strategies and approaches included here. Some, such as the implementation of the Network Distribution Center (NDC) network and the roll-out of Flats Sequencing System (FSS), are transformative, with immediate and easy-to-see impacts. Others are evolutionary, including efforts to maximize efficiency in current operations and improve existing processes. But even though their affects are not as immediately dramatic, these evolutionary changes are equally important, as they reinforce, support, enable, and enhance the systemic changes necessary for Postal Operations to adapt to the changing landscape. Process improvement, equipment and space optimization, and other ongoing reviews allow the Postal Service to take full advantage of the potential of new technologies and systems in order to improve efficiency and lower cost. June 30, 2010 Page 1 FLATS STRATEGY Transportation The primary focus of the transportation strategies is to maximize the utilization of space. This effort begins by filling handling units (trays, tubs, sacks, etc), then containers (rolling stock, pallets, air containers, etc), and finally trucks, planes and rail cars. These strategies not only reduce the amount of transportation necessary, but also the handling costs associated with moving handling units and containers throughout the network. These efforts, along with the NDC transition, will also allow the Postal Service to optimize the shape of the overall network, all of which will help to reduce overall transportation cost. • Improving Handling Unit/Container Density (2010-2011) – LARGE Opportunity o Facility Optimization – The consolidation of outgoing operations either through Area Mail Processing (AMPs) or other initiatives, for example the NDC implementation, allows for the aggregation of mail, increasing the weight of handling units and providing the opportunity to create denser containers. This reduces the amount (and therefore the cost) of transportation required to move this volume to destination. o Equipment Consolidation – Tour compression and maximizing utilization of sortation equipment (see Mail Processing section) support aggregation of mail, which leads to fewer, fuller containers, increasing the weight of handling units and expanding the opportunity to create denser containers. • Eliminate Periodical and Standard Mail Flown (2010-2011) – SMALL Opportunity o “Do Not Fly” effort — Eliminate Periodicals and Standard Mail on air transportation. The goal is reduce the transportation cost as volume can be absorbed on existing surface transportation. In order to capture savings, the Postal Service is currently monitoring plant sort program runs to ensure sites that are supposed to be consolidating volume at another facility are in compliance. Also monitoring sort programs not run to identify plants consolidating mail classes on sortation equipment resulting in upgraded transportation for mail classes that are supposed to use surface transportation. Alerts are distributed daily. Utilization of Intelligent Mail Barcdoe (IMb) data is planned in future to identify these opportunities. • Transportation Utilization (2010-2011) – LARGE Opportunity o Redesign NDC Mail Transportation Equipment (MTE) – Goal is to maximize the cube utilization of the trailer by utilizing containers that can be double stacked. Current MTE design is focused on easy trailer loading and unloading (more use of rolling stock vs. palletized loads) rather than on maximizing load. Stackable cardboard containers utilized in outgoing operations will increase floor to ceiling trailer utilization opportunities. o Consolidation/Deconsolidation Concept – Increase trailer utilization by consolidating volume in the most efficient manner (including bed loading trailers) to reduce the number of required loads within a lane. Focus will be on the NDC network initially. o Quarterly Reviews – Provide a sustained focus on increasing trailer utilization through review of opportunities to reduce weekend trips, eliminate redundant June 30, 2010 Page 2 FLATS STRATEGY trips, and consolidate trips, as well as adjust scheduled departure and arrival times to improve NDC network efficiency. • Network Optimization (2010-2012) – MEDIUM Opportunity o NDC/Surface Transportation Center (STC) Integration – the floor space gained by consolidating distribution within the NDC network has created adequate space to co-locate some STCs with NDCs. This enables previously underutilized transportation to be maximized with other classes of mail (thus reducing the number of trips in the system), and eliminates redundant networks. Mail Processing Opportunities in mail processing operations include several activities with concentration in two main areas. The first is facility optimization, where consolidation of operations can yield significant benefits, primarily in terms of improving efficiency of operations by achieving economies of scale and increasing mailflow densities. The second main focus is on improving equipment utilization and minimizing the amount of non-automated processing. This should particularly benefit flat-shaped mail, as the roll-out of FSS and the minimization of manual handling will significantly improve the efficiency of flats processing. • Facility Optimization (Ongoing) – LARGE Opportunity o Area Mail Processing (AMP) – The Postal Service continually reviews the feasibility of consolidating all originating and/or destinating mail processing operations from two or more offices. An AMP study presents the business case for centralization of mail processing resources and takes advantage of state-of-the art technologies available at the gaining facility. o Eliminate annexes – This initiative will reduce handlings, overhead, and transportation by consolidating processing operations, thereby capitalizing on underutilized facilities, which can result in the disposal of real estate through either lease termination or the sale of property. o Other facility optimization initiatives – The Postal Service is evaluating the consolidation of other operations and functions at network facilities, including Airport Mail Centers, Logistics & Distribution Centers (LDCs), and NDCs that allow for co-locating operations to maximize efficiencies and promote other concurrent initiatives. • Equipment optimization (2011 and beyond) – MEDIUM Opportunity o Automated Package Processing System (APPS) utilization – By focusing on maximizing the amount of mail processed on the most efficient equipment, the Postal Service is implementing strategies to ensure the APPS is fully utilized. This may require shifting volume form less productive older equipment or even manual operations, for example by taking mail from the Small Parcel and Bundle Sorter (SPBS) or other non-automation operations. Weekly telecons stress optimal APPS performance. In addition, weekly machine performance indicators are disseminated and appear in the Mail and Image Reporting System (MIRS). o Automated Flats Sorting Machine (AFSM) 100/Upgraded Flats Sorting Machine (UFSM) 1000 utilization – MEDIUM Opportunity – To focus on maximizing the June 30, 2010 Page 3 FLATS STRATEGY