Achieving Discounts -- New Numbers, Same Advice

IN THE wake of postal reform, the U.S. Postal Service (USPS) started a new practice last year: annual rate increases. Last May, this May, and potentially every May in the foreseeable future, prices will change for most forms of mail and USPS services—usually upward. Each such “price adjustment” (as a rate case is now known) is linked to a calculated increase in the Consumer Price Index (CPI) for the previous 12 months compared to the CPI for a similar period a year earlier. This figure caps the average rate increase for a class of mail (e.g., First-Class Mail), but changes within a class—such as the rate cells in a rate category—can be greater.

Most mail volume nowadays is “workshared” mail, i.e., mail that has been prepared by the sender to obviate the need for some degree of USPS processing. In exchange for taking specific preparation steps, mailers earn a reduction in the postage they pay; that reduction is generally, but not perfectly, aligned with the postal processing costs that are avoided.

Commercial mailers and their clients pay very close attention to how workshare rates—including the prices in particular rate cells—are changed in a “price adjustment,” and they devote considerable energy to strategizing how to continue earning the lowest possible rates. But, even though worksharing has been around in some form since the late 1970s, its basic principles, and the fundamental strategies for mailers who want to optimize their discounts, have changed very little.

Worksharing comes in three forms: presort, automation and destination entry. Each has a set of rates—or discounts, if you’re the glass-is-half-full type—with associated requirements. By design, each obligates the mail preparer to perform additional work that avoids USPS work and thus, in principle, justifies the discount.

Tried and True

Presort dates back to 1976. Simply put, presort discounts are based on the postal processing costs avoided when the mailer arranges mail in groups, for example by ZIP Code or carrier route. Originally, presorted mail was bundled and sacked, but this has been largely phased out in favor of loose mail in sleeved trays. But, though the details may change, the basic idea of grouping mail remains the same.

In this year’s rate changes, mail owners and preparers again can see that, over the years, presort has become a fundamental part of commercial mail production and really no longer is an option. In fact, all commercial rate mail (including all Periodical and Standard Mail) must be presorted, even to qualify for those rates.

However, the strategies for optimizing presort discounts in May 2009 will be essentially the same as they were in 1976: Sort as much mail as possible to the finest extent possible. But that’s the easy part, especially with presort software that guides mail preparation and generates any necessary postal reports. The hard part is accumulating the volume; volume enables density, and density is key to optimizing presort. It’s much more difficult to develop density (and optimize presort) with 10,000 pieces distributed nationwide, than with 10,000 pieces going to a single city.

Therefore, to the extent feasible, mail owners should avoid segmenting lists into individually submitted mailings, and should consider timing their mailings to allow aggregation of volume. Even if a mailing consists of a series of short-run batches, commercial mailers have the ability to combine these to generate greater density and, as a result, earn better discounts.

Sortation remains focused on the primary nodes of the postal network—the processing and distribution centers—which are identified as 3-digit, ADC, or AADC facilities on postal sortation instructions. Whether mail is moving from, through, or to these facilities, finer presort (by 3-digit or 5-digit ZIP Code) remains of value, as it often allows a plant to move the mail directly to the processing equipment “schemed” to work it.

Carrier route sortation, and finer preparation forms like walk-sequence, usually earn the deepest discounts, but those are gradually losing their function and value as the USPS grows its equipment’s capacity to ingest huge quantities of mail, sorted only to five or even three digits, and output walk-sequenced mail for carrier routes throughout a plant’s service area.

As material handling changes in both mailer and postal facilities, and pallet use becomes more common as a mode of mail transport, the pallet also has become a sortation unit, just as the tray and sack have been. However, in recent years, sophisticated mailers and their sophisticated software have learned that the finest presort may not be the best presort, especially when it results in a lot of finely sorted, but small, quantities to destinations and a significant quantity of leftover “working” mail.

By analyzing a variety of scenarios and presort options, those mailers and their brainy software have found that holding back some groups of mail enables presort improvement and a reduction in the amount of working mail, especially in palletized mailings. As a result, for little or no loss of postage discounts, less of the mail is left to be “worked,” i.e., the average presort of the entire mailing is improved.

Regardless, the bottom line for presort remains: volume drives density; density enables optimization of presort and presort discounts.

Automation Takes Hold

Until the 1960s, mail processing was largely a manual function. Rooms full of clerks sorted mail into cases using “scheme” knowledge of what was sent by what routing to which destinations.

Mechanization became more widespread in the 1970s, with behemoths like the letter-sorting, sack-sorting and parcel-sorting machines being installed in postal facilities nationwide. These machines had operators who entered information from the address, such as the ZIP Code, into a keypad; the machine then moved the mailpiece mechanically to a bin for the appropriate destination.

In the 1980s, the Postal Service took advantage of optical character recognition (OCR) technology to begin sorting mail automatically. The address on letter mail was “read” to generate a barcode representation of the destination ZIP Code that, in turn, allowed a barcode-reading sorter to distribute the mail with little human involvement. Despite Congressional measures to delay expanding the 5-digit ZIP Code, a longer form, with nine and later 11 digits, was introduced to allow finer sortation on postal equipment.

Through the next decades, the need for OCR equipment changed as mail producers began applying barcodes on mail before it was presented to the post office. This “pre-barcoded” mail earned the first form of true automation discount.

However, like presort has done, barcoded mail—now with a delivery point barcode and soon with an Intelligent Mail Barcode (IMB)—has become the norm. Very few pieces of letter- or flat-size mail are in the mailstream of 2009 that do not bear a barcode.

As a result, the normal way to distribute letter-size mail, and most flat-size mail, is on automated mail processing equipment. The typical commercial letter isn’t touched by a human until it’s delivered to the addressee; flats processing is close behind, and even parcel processing is growing more automated.

In the 2009 rate change, automation rates remain preferable to those for non-automation-compatible pieces, a difference that may get larger as the proportion of mail processed automatically continues to grow and the relative cost of manual processing increases.

The moral of the discount optimization story is the same as it’s been for years: To the maximum extent practicable, design mail for automation compatibility, and produce that mail with an accurate address and quality delivery point barcode.

If you really want to be ahead of the curve, consider adopting the IMB. That format is larger, more complex, and holds more information than the current POSTNET format (which will be eliminated in 2011). But moving to the IMB may require some investment in hardware and technology upgrades. These costs have caused some mailers to balk at making the move before they have to, and they were not impressed at the discounts being offered by the Postal Service.

Simply applying the IMB earns no added discount, but becoming a “full-service” mailer could earn $0.003 per piece for First-Class letters and flats, and $0.001 per piece for Standard Mail, Periodicals or Bound Printer Matter letters and flats, starting November 29. Full-service mailers will also have to use IMB-related container labels and present postage statements and payments electronically, but will get mail entry and address change information back from the Postal Service at no additional charge.

Difference in Distance

Destination entry as a form of worksharing dates back only to the 1990s, but the underlying concept—rates which reflect that mail costs less to transport when it enters the postal system close to its destination—has been around just about since the postal system started.

Zoned rates, such as those for Periodicals and most expedited mail and package services, are based on distance; mail that is addressed to a place closer to where it’s mailed is charged a lower price than mail that the Postal Service has to transport a greater distance.

Destination entry moves the mailer closer to where the mail is going and, because that reduces postal transportation costs, earns the mailer a discount. The trick for the mailer is calculating the tipping point at which it makes financial sense to be a destination entry participant.

Perhaps the most important element is volume and density; preparing a truckload of mail for a single destination postal facility is, after all, much like a super-presort. Software can do the calculations and drive mail production accordingly. Like other forms of worksharing, destination entry is evolving. The Postal Service wants the mail entered at the same places where it’s concentrating its processing firepower, so as that matrix changes, so do the terms of the discount.

But, regardless, even if a truckload of mail can be accumulated, does the cost of moving it to a destination outweigh the value of any destination entry discount? Can intermediaries or less-than-truckload shippers be engaged to merge several mailers’ volume and make a discount possible? Perhaps more than with the other forms of worksharing, the basic equation is cost vs. discount. Nonetheless, the Postal Service continues to encourage mailers to consider destination entry and to offer rates adequate to make the proposition worthwhile, under the right circumstances.

What’s New, or Not

For the 2009 “price adjustment,” aside from the prices themselves, there are few rate structure changes or alterations of mail preparation routines. The Postal Service is continuing to make it less desirable for mailers to generate “inefficient” mail—pieces that aren’t compatible with automated processing—and to adjust its preparation rules to align with its evolving processing methods and networks.

Perhaps the most noteworthy aspect of the entire rate case is a one-year test under which mailers of Standard Mail saturation rate letters or flats can earn an additional per-piece discount if they can demonstrate volume growth in total or within a defined market area.

In the new rules implemented with the May 11 rate change, the Postal Service has included the criteria and process for participation in the test but, for those mailers who can, a decent discount is available: $0.037 per letter-size piece ($0.022 for Nonprofit), or $0.04 per flat-size piece ($0.024 for Nonprofit).

Looking ahead, mail owners and their service providers should monitor the state of USPS finances to assess how that will drive changes within postal operations that, in turn, could affect service options and mail preparation rules.

Concurrently, changes in the CPI should be used as indicators of the rate change in 2010; prices for “competitive products,” e.g., Express Mail, Priority Mail and commercial package services, will be adjusted next January, while the other prices will be announced in February 2010 to take effect the following May.

With postal affairs as with much else, the old axiom remains true: The more things change, the more they stay the same. PI

About the Author
Leo Raymond is director of postal affairs for the Mailing & Fulfillment Service Association (MFSA). He joined MFSA in 2003, upon retiring from a 35-year career with the U.S. Postal Service. This article is based on material from MFSA’s Postal Points newsletter. Raymond can be contacted at lraymond@mfsanet.org.