USPS-T-I
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
POSTAL RATE AND FEE CHANGES,
D.C. 20268-0001
2000
Docket No. R2000-1
DIRECT TESTIMONY
OF
CARL G. DEGEN
ON BEHALF OF THE
UNITED STATES POSTAL SERVICE
6
.-
TABLE OF CONTENTS
1
.
SKETCH .. . .. . .. . .. . .. . .. . .. . .. . . . . .. . . . . .. . .. .. . . . . . .. . .. ..
AUTOBIOGRAPHICAL
I. PURPOSE AND SCOPE (GUIDE TO TESTIMONY AND DOCUMENTATION)
2
3
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II. VOLUME-VARIABILITY
A. INTRODUCTION . .. . .. . .. . .. . .. . .. . .. . .. .. . . .. . .. . .. . .. . .. . .. . .. . . .. . .. . .. .. . . .. . . .. .. . . .. . .. . .. . .. . .. . .. .. . .. .. . 3
B. THE OBJECTIVES OF COSTING . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. .. . . .. . . .. .. . . .. . . .. .. . .. . . .. .. . .. .. .. . 8
I. The Institutional Framework . .. . . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. .. . . .. . .. . .. . . .. . .. . .. . .. . . .. .. .. . .. .. . 8
8
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. . .. . . .
2. The Theory .. . .. .. . . .. . .. .. . .. . . .
C. THE POSTAL SERVICE MAIL PROCESSING NETWORK .. . .. . . .. . .. .. . .. . . .. . .. .. . .. . 10
. 10
I. ZIP Codes . . .. . .. . .. . .. . . . . .. . .. . . . . .. . .. . . . .. . . . . .. .. . . . . .. .
2. The Current Network . . .. . . .. . .. .. . .. . .. . . .. .. . . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. . . .. .. . .. . . .. . .. . .. .. .. . . 11
3. National Volume Growth Affects Workload in the Entire Network . .. . .. . .. .. .. . . 15
4. Network and Location-Related
Factors Affect Costs, But Do Not Change
. . .. . . . . . . .. . . .. .. . . . . . .. . .. . . . . .. . . 18
With Volume.... .. . .. . . . . .. . .. .. . . ..
5. Graphical Analysis of the Impact of Volume Growth . . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. .. . 24
D. THE COST STRUCTURE . . .. . . .. .. . .. . .. . .. . .. . .. . . .. .. . . .. . .. . .. . .. .. . . .. . .. . .. . . .. . .. . .. . .. . . .. .. . .. .. . 30
1. Plants .. . .. . .. . . .. .. . .. . . .. .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. . .. . .. . .. .. . . .. . . .. .. . . .. . .. . .. . .. . . .. .. .. . .. . 30
a) Acceptance and Collection . . .. .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. . .. . .. . .. . . .. .. . .. .. . 30
31
. . .. . .. . . . . . .. . . . . . . . .
..
. . . .. . . .. .
b) Allied Labor .. . . .
c) Piece Sortation of Letters . . . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. . . .. .. . .. . . .. . .. .. .. . 32
35
d) Piece Sortation of Flats .. . .. . . .. . .. . .. .. . . .. . .. . .. . . . . . . . . .. .. . . . . . . . .
36
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e) Parcel Sortation
2. MODS Cost Pools .. . .. .. . . .. . .. .. . .. . . .. . .. . .. . .. . .. . . .. .. . . .. .. . .. . .. . .. . . .. . .. . . .. . .. .. . . .. . .. . .. .. .. . 36
36
. .. .
a) Cancellation .. . .. . .. .. . . .. . .. . .. .. . . .. . .. . .. . .. . .. . .. . .. . . . . . . . . . ..
b) Barcode Sorters .. . .. . . .. .. . .. . .. . .. . .. . . .. .. . .. . . .. .. . . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . . .. . .. .. .. . .. 38
39
c) Optical Character Readers . . .. . .. . . . . . . . . . . . . . . . . . . . .
40
d) Remote Encoding .. . . .. . . .. . .. . .. .. . . .. . . . . . . . . .. . . . .. . .
41
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e) Letter Sorting Machines .. . .. . .. . .. . .. . . . . . . .. . . . . . . .. . .
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f) Manual Letter Sortation
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42
g) Flat Sorting Machines . .. .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . . . . .. . . .. . .. . . .. . . . .
43
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h) Manual Flat Sortation
i) Manual Parcel and Priority Mail Sortation . .. . . .. .. . .. . .. . . .. . .. . . .. .. . .. . . .. . .. .. . .. .. 44
j) Small Parcel and Bundle Sorter-Priority
and Other .. . .. . . .. .. . .. . . .. . .. .. . .. .. 44
k) Opening Units . .. . .. .. . . .. . .. .. . . .. . .. . .. . .. . .. . .. . . .. .. . .. . . .. .. . . .. . .. . .. . .. . . .. . .. . .. . .. . .. .. . .. .. 46
48
I) Pouching . .. .. . .. .. . . .. . .. . .. . . . . . .. . . . . . . . . . . . . . . . . . .. .
50
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m) Platform.... . .. . .. . . . . .. .. . .. . . . . . . . . .. . .. . .. .. . .. .. . . .
E. REASONABLENESS
OF THE ESTIMATED VOLUME-VARIABILITIES
. .. . .. .. . . 51
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1. Manual Sortation . .. .. . .. . .. . . .. . .. .. . . .. . .. . .
2. Mechanized Sortation . .. . . .. . .. .. . . .. . .. . .. .. . . .. . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. . . .. . .. .. .. . . 53
3. Automated Operations .. . . .. . .. .. . . .. . .. . .. . .. . .. . . .. .. . .. . .. . . .. .. . . .. . .. . .. . . .. . .. . .. .. . . .. . .. .. .. . . 53
4. Cancellation . . .. .. . . .. . .. .. . . .. . .. . .. .. . . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. .. . . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. .. . 54
5. Summary .. . .. . .. . .. . . .. .. . .. . .. . .. . .. .. . . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. . .. . .. . .. . .. . .. . .. .. . 54
Ill. COST POOL AND DISTRIBUTION KEY ISSUES . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . . .. . .. .. . .. .. . 55
A. SO-CALLED “MIGRATED” COSTS ARE PROPERLY CLASSIFIED AS PART
OF MAIL PROCESSING . .. . . .. . .. .. . .. . . .. . .. . .. . .. . .. . . .. .. . .. . .. . .. . .. . . .. . .. . .. . . .. . .. .. . . .. . .. . .. .. . .. 55
ii
B. MODS MAIL PROCESSING SUPPORT COSTS SHOULD BE
DISTRIBUTED TO SUBCLASS USING THE COSTS ASSOCIATED WITH
THE ACTIVITIES BEING SUPPORTED .. . .. . .. . .. . .. .. . . .. . .. . . .. . .. . . .. . . .. . .. . .. . . .. .. . .. .. . .. . 57
C. THE POSTAL SERVICE’S METHOD FROM DOCKET NO. R97-1 PROVIDES
THE MOST ACCURATE ESTIMATES OF THE SUBCLASS DISTRIBUTION
OF MIXED-MAIL OBSERVATIONS . . .. . . .. . .. . .. .. . .. . .. . .. . .. . . . .. . .. . .. . . .. . .. . .. . . .. . .. .. . .. . .. . . 58
D. PENDING FURTHER STUDY OF ALL,lED LABOR COST CAUSATION, THE
“NOT-HANDLING”
PORTIONS OF THE ALLIED LABOR COST POOLS
SHOULD BE DISTRIBUTED BROADLY . . .. .. . .. . . .. .. . .. . . .. . . .. . .. . .. . . .. . .. . .. . . .. . .. .. . .. . .. . 69
E. IOCS-BASED COST POOLS SIGNIFICANTLY
IMPROVE THE NON-MODS
COST METHODOLOGY .. . .. .. . .. . .. .. . .. . .. . . .. . .. . .. . .. . .. .. . .. . . .. . . .. .. . . .. . . .. . .. . . .. . .. . .. . .. .. . .. . . 69
F. NEW “ENCIRCLEMENT”
RULES ARE NEEDED TO ENSURE
APPROPRIATE
DISTRIBUTION OF VOLUME-VARIABLE
COSTS TO
SPECIAL SERVICES .. . . .. .. . .. . .. .. . .. . .. . .. . . .. . .. .. . .. . .. . . .. .. . .. . . .. . .. . . .. . .. . .. . . .. . .. . . .. .. . .. . .. .. . 72
G. SOME STREAMLINING
OF DISTRIBUTION KEY PROCEDURES
HELPS
THE POSTAL SERVICE’S DISTRIBUTION KEY METHODS TO BETTER
MATCH THE THEORY LAID OUT BY WITNESSES PANZAR AND
CHRISTENSEN
IN DOCKET NO. R97-1 .. .. . .. . .. . .. . .. . .. . . .. . . .. . .. . .. . . .. . . .. . .. . .. . .. .. . .. . . 73
I
1
I
AUTOBIOGRAPHICAL
My name is Carl Degen.
2
.-
SKETCH
I am Senior Vice President of Christensen
3
Associates,
which is an economic research and consulting firm located in
4
Madison, Wisconsin.
5
economics
6
from the University of Wisconsin-Madison.
7
coursework
8
dissertation.
9
year and a research assistant for two years.
My education
includes a B.S. in mathematics
from the University of Wisconsin-Parkside
and qualifying examinations
and
and an M.S. in economics
I earned an M.S. by completing
for a Ph.D., but did not complete a
While a graduate student, I worked as a teaching assistant for one
In 1980 I joined Christensen
IO
Associates
11
and Vice President in 1992. In 1997 I became Senior Vice President.
as an Economist, and was promoted to Senior Economist in 1990
I have testified before the Postal Rate Commission
12
the
In Docket No. R94-I,
on numerous
13
occasions.
I gave testimony before the Postal Rate
14
Commission
15
In-Office Cost System (IOCS).
16
on letter bundle handling productivities
17
Mail. I also gave rebuttal testimony on the savings from letter automation,
18
demand for greeting cards, and an analysis of qualifiers for the proposed
19
Publications
20
regarding
21
standard errors, and possible changes to the sampling system.
22
R97-I,
23
variable costs by subclass.
24
cost methodology
25
3.1. I also gave rebuttal testimony in Docket No. R97-I,
on the reclassification
Service subclass.
corrections
of Second-Class
Within-County
In Docket No. MC95-I,
to Classroom
I gave direct testimony
and the make-up of presorted
In Docket No. MC96-2,
Periodicals
tallies for the
First-Class
the
I gave testimony
unit costs, the associated
In Docket No.
I gave testimony on the design of IOCS and its use to obtain volumeThat testimony introduced
for mail processing
a new volume-variable
Clerk and Mail Handler labor, cost segment
addressing
numerous
2
issues including intervernor
processing
labor costs.
Service-Industry
criticisms of the new methodology
In the fall of 1998 I participated
for mail
in the U.S. Postal
Joint Study Team for Periodicals.
During my tenure at Christensen
research assignments
Associates,
including productivity
industries and the U.S. Postal Service.
I have also worked on
measurement
in transportation
I have provided litigation support and
expert testimony for a number of clients on issues related to intellectual
property,
anti-trust, and contracts.
9
IO
I.
PURPOSE AND SCOPE (GUIDE TO TESTIMONY
DOCUMENTATION)
11
My testimony addresses
AND
Clerk and Mail Handler mail processing
costs,
12
and has two parts. Section II is an analysis of operational
13
the degree of volume-variability
14
that volume-variability
15
methods used to develop Base Year 1998 mail processing
16
by subclass from the In-Office Cost System (IOCS) data. In Section Ill, I discuss
17
Library Reference
18
associated
19
for mail processing
is less than 100 percent.
LR-I-115,
factors that determine
costs, from which I conclude
Section Ill justifies some of the
volume-variable
which is the only Library Reference
with my testimony.
directly
I have no workpapers.
My analysis in Section II builds on the descriptions
20
operations
21
consider whether the structure of mail processing
22
assumption
23
variable.
24
various types of mail processing
25
percent.
of mail processing
in witness Kingsley’s testimony (USPS-T-IO).
that mail processing
costs
In Section II, I
operations
supports the
costs are uniformly 100 percent volume-
I conclude that volume-variability
operations,
factors are likely to differ across the
and are likely to be less than 100
I also discuss some intervenor and Commission
criticisms of
3
..-
1
Dr. Bradley’s analysis from Docket No. R97-1
2
of the estimated volume-variability
3
15) in the current filing.
factors produced by witness Bouo
(USPS-T-
In Section Ill of my testimony I address many of the criticisms that have
4
/-
and evaluate the reasonableness
5
been made by intervenors
regarding the Postal Service’s method of cost pool
6
formation and creation of distribution
7
subclass.
8
associated
9
observations.
keys to obtain volume-variable
These include, but are not limited to, the treatment
with mixed-mail, non-identified
containers,
costs by
of IOCS tallies
and “not-handling”
With respect to each criticism, I conclude the method proposed
in
IO
the current docket by the Postal Service is preferred or that the change called for
11
by the intervenors would be of little consequence.
12
of the mail processing
13
Postal Service in this proceeding.
14
describes the technical details of the Base Year 1998 volume-variable
15
calculations
16
distribution
volume-variable
cost distribution
method proposed by the
Witness Van-Ty-Smith
(USPS-T-17)
cost
for Cost Segment 3. The In-Office Cost System, on which the
keys are based, is described
Library Reference
17
I also address several details
LR-I-115,
1995 Platform Study, reports the
18
methodology
19
focused on the activities of clerks and mail handlers clocked into the MODS
20
platform operations.
21
distribution
22
II.
VOLUME-VARIABILITY
23
A.
INTRODUCTION
24
25
of a survey conducted
by witness Ramage (USPS-T-2).
by Christensen
Associates.
The survey
I compare the results of that study to the subclass
from IOCS.
The volume-variability
factor (or simply “variability”)
change in cost that results from a “small, sustained”
is the percentage
(percentage)
change in
4
1
volume, holding delivery points and other non-volume
2
Docket No. R97-I,
3
volume-variable
4
to partition mail processing
5
data to estimate variabilities
6
findings that differed from traditional assumptions:
7
significantly
8
than 100 percent3
9
clerk and mail handler mail processing
the Postal Service presented
mail processing
a comprehensive
costs by operational
11
assumption
12
Service’s study results.
econometrically.
first, that variabilities
accepted the partitioning
costs into activity-based
but continued
to apply the
15
sponsored
by UPS and OCA challenged
16
variabilities
on several grounds, including the robustness
17
results and the conceptual
18
Commission
19
traditional description
20
its reasons for rejecting the Postal Service’s estimated variabilities.
21
testimony
22
largely unstated,
24
to the Postal
approach to the study of volume-
variable cost for mail processing
operations.
of
cost pools for
to each cost pool-contrary
presents an operational
differed
generally are less
14
23
study of
The study resulted in two major
costs to subclasses,
of 100 percent variabilities
This testimony
In Docket No. R97-I,
witnesses
the Postal Service’s estimated
and operational
of the regression
bases of the models.
The
cited the OCA and UPS criticisms, as well as the Postal Service’s
addresses
of mail processing
as 100 percent volume variable, among
some of the fundamental
operational
This
issues that were
but implicit, in the intervenor criticisms.
Setting the stage for the econometric
mail processing
operations
’ For a discussion,
-.
activity and MODS and PIRS
The Postal Rate Commission
purposes of distributing
In
costs.2 The study used MODS and IOCS data
across activities; and second, that variabilities
IO
13
factors constant.’
models, I show that the structure of
does not support the assumption
see witness Bozzo’s testimony,
USPS-T-l
2 Docket No. R97-1,
USPS-T-12
[Degen], USPS-T-14
3 Docket No. R97-I,
USPS-T-14
[Bradley], at 52-69.
that volume5, in this docket.
[Bradley].
-
5
1
variability factors should uniformly equal 100 percent.
2
structure of mail processing
3
approach
4
favored by UPS witness Neels, in Docket No. R97-I,
5
of the Postal Service network and operations
6
cost effects of volume changes from the effects of non-volume
7
the Postal Service’s econometric
8
models that properly reflect the structure of the Postal Service’s network of mail
9
processing
advocated
operations
My analysis of the
also reveals that the pooled regression
by OCA witness Smith and the cross-sectional
operations.
potentially
ignores features
that are vital to distinguishing
factors.
results are robust when compared
generally
11
operations,
12
needed to more precisely quantify the degree of volume-variability.
13
testimony of Dr. Bozzo describes the data and estimation
14
econometric
15
part of my testimony.
the
In fact,
across all
While my conclusion that volume-variabilities
IO
16
analysis
are
less than 100 percent is derived by analyzing the structure of
econometric
models.
models consistent with the operational
I discuss the reasonableness
structure are
The
methods used for the
of those results in the last
I begin with “first principles” by examining the legislative basis for the use
17
of marginal and incremental
costs for Postal Service ratemaking
18
use these concepts in Section IIC to analyze the Postal network and show how a
19
small, sustained increase in national (RPW) mail volume causes widespread
20
workload
21
characteristics
22
some of the local cost-causing
23
a small, sustained
24
appear to be volume-related
25
particularly
26
confounding
of volume and non-volume
27
controversy
in the Docket No. R97-1 proceeding.
growth affecting most mail processing
plants.
of the plants of the distinct mail processing
characteristics
increase in volume.
in Section LB.
I then analyze the
operations.
I identify
that will not change in response to
Some of these characteristics
but are, in fact, driven by non-volume
may
factors,
those pertaining to the delivery network served by each plant. The
effects was the source of much of the
I
6
1
I continue with Section ILD where I examine the flow of mail within a plant
2
and the component
activities that make up the major mail processing
3
The Postal Service’s traditional
4
mail-processing
5
“fixed” and those that are 100 percent volume-variable
6
information,
7
does not fit the complexities
8
component
9
volume-variable,
mail processing
activities could be partitioned
IO
operational
11
factors differ across mail processing
12
100 percent.
13
on the basis of IOCS
mail processing
not volume-variable
analysis forms the basis for my conclusion
This simplistic model
operations.
Actual computation
of volume-variable
the volume-variability
15
econometric
16
well as data from other sources.
17
important findings from my operational
factors.
Some
others only partially
at all. This detailed
that volume-variability
cost pools and cannot be assumed to be
14
18
into those that are 100 percent
activities are seen to be highly volume-variable,
and others potentially
operations.
variability analysis assumed that
which classified very few activities as “fixed.”
of real-world
costs requires specific estimates of
To obtain them, the Postal Service relies on
models using MODS data, just as it did in Docket No. R97-I,
1. Mail processing
The econometric
operations
methods incorporate
as
two
analysis:
have cost-causing
characteristics
related to
19
their location, service area, and role within the Postal Service’s network
20
that will not change as a result of a small, sustained
21
2. A small, sustained,
and representative
increase in volume.
increase in national (RPW), all
22
other factors remaining the same, volume will increase workload
23
nearly all, plants.
24
These important operational
was present in the Docket No. R97-1 proceeding,
26
analyses confounded
27
significant
non-volume
cost-causing
in all, or
findings should eliminate the confusion that
25
non-volume,
-
where the intervenors’
effects with volume effects.
characteristics,
Since there are
the econometric
models
-.
7
1
must control for them by including specific measures of these characteristics
2
they cannot be measured,
3
“fixed effects.”
4
effects terms in Dr. Bradley’s recommended
5
effects of network variables, such as possible delivery points, and other factors
6
that were not explicitly included in the models.
7
results show, the failure to control for non-volume,
8
characteristics
9
Working from this conclusion,
by using more general controls such as facility-specific
In the Docket No. R97-1 volume-variability
model partially controlled for the
As Dr. Bozzo’s econometric
cost-causing
results in estimates of volume-variability
Dr. Bouo’s
analysis, the fixed-
that are biased upward.4
testimony demonstrates
that all
IO
estimates derived from models that are consistent with the Postal Service’s
11
network and operation-i.e.
12
causing effects-yield
13
or, if
that control for site-specific,
non-volume,
and wst-
consistent estimates of the volume-variability
factors.
Finally, in Section II.E, I review the measured volume-variabilities
14
estimated
by Dr. Bouo
and find them consistent with my operational
15
This study of the volume-variability
16
estimation
17
findings presented
18
squarely address the Commission
19
robustness
raised in that docket, and provide a detailed description
20
operational
basis of the econometric
of mail processing
analysis.
labor costs and the actual
done by Dr. Bozzo have produced results that reinforce Dr. Bradley’s
in the Docket No. R97-1 proceeding.
Dr. Bozzo and I
and intervenor criticisms regarding
of the
models.5
4 The direction and magnitude of the bias is an empirical, rather than a
theoretical, result. As Dr. Bouo explains, nothing in the econometric
methodology forces the variability estimates to be less than 100 percent.
.-
5 The Postal Service is not recommending the use of estimated variabilities for all
cost pools. Measured variabilities are only used for operations for which piece
volumes (total pieces fed, or TPF) is recorded in MODS. For a discussion of the
status of the analysis for the other cost pools, see Dr. Bozzo’s testimony, USPST-15, Section V1II.B.
8
THE OBJECTIVES
OF COSTING
2
1. The Institutional
Framework
3
The Postal Reorganization
1
B.
Act requires the Postal Service to demonstrate
4
that its proposed
rates generate revenue for each subclass sufficient to cover its
5
“attributable”
6
Service addresses
7
with the cost and revenue analysis (CRA) for a historical Base Year, some
8
important results of which are estimates of unit volume-variable
9
subclasses
costs and satisfy other criteria (39 USC § 3622(b)).
this obligation
using a multi-step process.
of mail and special services.
The Postal
The process starts
costs for the
The Postal Service then estimates
IO
changes in mail volumes between the Base Year and a future Test Year resulting
11
from the proposed
12
price inflation, expected savings from cost-reduction
13
anticipated
14
rates with the § 3622(b) criteria is determined
rate changes, and uses these, along with estimates of factor
programs,
and other
changes, to project Test Year costs. The compliance
of the proposed
with the projected Test Year costs.
15
2. The Theory
16
In Docket No. R97-1, the Postal Service presented theoretical
17
describing the methods needed to produce marginal and incremental
18
its Base Year and Test Year volume-variable
19
testified that incremental
20
test for cross-subsidies
21
marginal costs are needed to evaluate the economic efficiency of proposed
22
rates.’
23
subsidy wncerns
The Commission
cost analysis.6
costs are the appropriate
testimony
costs from
Witness Panzar
economic cost measure to
in proposed rates, as required by $j 3622(b)(3),
while
agreed in principle with witness Panzar that cross-
are most appropriately
evaluated using incremental
6 See Docket No. R97-I,
USPS-T-l
1 [Panzar], USPS-RT-7
’ See Docket No. R97-1,
USPS-T-l
1 [Panzar].
costs and
[Christensen].
9
1
economic efficiency is most appropriately
assessed with marginal costs.*
2
Postal Service’s implementation
3
included a comprehensive
4
labor costs.g The obligation to satisfy the requirements
5
estimates of Test Year costs is an important use of product costing.
6
controversy
7
confusion over the purposes of the Base Year and Test Year costs. For
8
example, UPS witness Henderson
9
based on mark-ups over incremental,
of the marginal/incremental
econometric
The
cost framework
study of volume-variable
mail processing
of 5 3622(b)(3)
using
Some of the
over economic cost concepts in Docket No. R97-1 resulted from
argued that Postal Service rates should be
rather than marginal costs, because the
IO
latter could not account for “changes in volumes, usage mixes, overtime rates,
11
input costs, organizational
12
and other factors.“”
13
are more appropriately
14
only the first of two steps in the development
changes, productivity
general inflation,
Such changes, to the extent that they can be forecasted,
handled in the rollforward
In Docket No. R97-I,
15
improvements,
model.
of Test Year marginal costs.
Postal Service witnesses
volume-variability
Base Year costs are
Panzar and Christensen
16
showed that econometric
factors and subclass distribution
17
based on IOCS data can be combined to produce economically
18
product costs (unit volume-variable
19
presentations
20
theoretical
21
estimating Test Year costs. The process can be understood as follows. The
22
Base Year CRA yields subclass marginal costs that prevail in the Base Year,
23
given Base Year operating procedures
and constraints.
24
captures the cost effects of operational
changes and adjustments
or marginal costs).
keys
meaningful
However, these
did not explicitly address the equally important question of the
roles that the Base Year CRA and the roll-forward
‘See
PRC Op., Docket No. R97-I,
‘See
Docket No. R97-I,
USPS-T-14
lo Docket No. R97-I, Tr. 25113559.
Vol. I, at 231.
[Bradley].
model play in
The roll-forward
model
between the
10
1
Base Year and Test Year, as well as the cost effects of volume changes resulting
2
from the proposed
3
isolate the projections
4
Base Year marginal costs.
rates, among other factors.
of the Test Year analysis from the empirical estimation of
The cost reduction possibilities
5
The effect of this division is to
6
some intervener witnesses
7
the Base Year volume-variability
8
model.
9
reductions
over the prospective
and the Commission
factors,”
“rate cycle,” which
argued should be reflected in
are logically part of the roll-forward
While it would not be wrong per-se to combine the planned cost
over the rate cycle with the historical Base Year cost analysis, doing
10
so muddles the process and makes it much more difficult to evaluate the forecast
11
assumptions
12
are well-suited
13
are ill-suited for predicting changes in the underlying
14
c.
and expected changes in the operating
to measuring
THE POSTAL
plan. Econometric
models
expected changes in cost as volume changes,
SERVICE
MAIL PROCESSING
15
1. ZIP Codes
16
The U.S. Postal Service serves every address’*
but
technology.
NETWORK
in the United States.
17
facilitate mail sortation, the Postal Service undertook
18
(ZIP) in 1963. The country was partitioned
19
the service territories of post offices, stations, and branches,
20
5-digit numeric code.13 The Postal Service processing
21
defined in terms of ZIP Codes. Outgoing mail is sorted to the rest of the country
22
using ranges of 3-digit ZIP Codes.
Plan
into areas generally corresponding
to
each identified by a
and delivery networks are
ZIP Codes are hierarchical,
” Docket No. R97-1, PRC Op. At 65-67,72-73.79-81;
15840-l. Tr. 25/l 3559-60.
‘* Some “addresses”
not provided.
the Zone Improvement
To
i.e. all 5-digit ZIP
Tr. 28/l 5591-2
are the free Post Office boxes when to-the-house
and
delivery is
I3 Stations and branches sometimes serve two or more 5-digit ZIP Codes.
11
--
1
Codes with the same first three digits combine to form a 3-digit ZIP Code area.
2
The hierarchical
3
sortation of mail without having to train mail handlers and clerks in memory
4
intensive schemes.
5
comprise one or more 3-digit ZIP Codes.
6
relationship
between 3-digit and 5digit ZIP Codes facilitates
The service territories of mail processing
plants typically
The Postal Service extended the use of ZIP Codes to facilitate its
7
automation
plan. In 1983, the Postal Service introduced the g-digit “ZIP+4” code
8
to facilitate the sortation of mail to sector/segment
9
sortation of mail to carrier walk sequence was made possible by the creation of
(block face). Automated
IO
the 1 l-digit delivery point barcode, which is obtained by appending
11
digits of the address number to the g-digit ZIP Code.
12
delivery point barcode occurred in 1990.
the last two
The introduction
of the
13
2. The Current
Network
14
The Postal Service connects over 30,000 post offices and other delivery
15
units serving delivery points through a network of mail processing
facilities.
Most
16
mail processing
17
sortation of the mail. Delivery units may be: stations, which are offices within the
18
same city as the plant; branches, which are oftices in adjacent cities but that
19
report under the same finance number as the stations; or associate offices, which
20
are post offices located outside the plant’s city and report under their own
21
individual finance numbers.
22
mail handlers record their workhours
is done in large plants, but nearly all offices perform some
In most stations, branches, and AOs, clerks and
in the National Workhour.
Reporting
12
1
System (NWRS) under Labor Distribution
2
offices distinguish
3
delivery unit sortation by recording the former under MODS codes that map into
4
LDCs 11-19.
5
All offices that record mail processing
6
by the detailed 3-digit operational
7
System (MODS).”
8
through MODS are Bulk Mail Centers (BMCs).”
9
workload
clerk and mailhandler
Hence, mail processing
mail processing
The larger
hours in the plant from
hours are referred to as “Function
1” hours.
hours under Function 1 also report hours
codes of the Management
Operating
Data
The only plants with Function 1 hours that do not report
The BMCs use an hours and
recording system analogous to MODS called the Productivity
10
Information
11
to reflect the specialized
12
describe operations
13
plants (i.e., the operations
14
Codes (LDCs) 41A9.14
Reporting System (PIRS), which uses a set of 3-digit codes defined
nature of BMC operations.
In the discussion
as they would typically be found in non-BMC
below, I
mail processing
in the Function 1 cost pools of cost segment 3.1).
Plants can play several roles in the Postal Service network.
The most
15
basic role for a plant is the sortation of incoming mail for one or more 3-digit ZIP
16
Codes to the 5-digit ZIP Codes representing
17
more than one 3-digit ZIP Code. For example, a plant may serve the 3-digit ZIP
18
Code for the city in which it is located and also one or more 3-digit ZIP Codes
delivery units. Some plants serve
l4 The NWRS LDCs classify Postal Service work hours and compensation into
broad functional categories. LDCs 41,42, and 43 are, respectively, automated,
mechanized, and manual sortation at delivery units; LDC 44 is sortation to P.O.
boxes. LDC 45 is window service, LDC 48 is miscellaneous, and LDC 49 is
CMV/CFS. LDCs 4049, which encompass all activities at customer service
facilities, are collectively known as “Function 4.” See Library Reference LR-I106 for complete details.
l5 Some stations and branches reporting Function 4 hours also report hours by 3digit operational codes through MODS.
l6 Most Air Mail Centers and Facilities (AMC/AMFs) report data as part of the
plant they serve, but some larger ones report as separate facilities. These
“independent” Air Mail Centers report MODS data as part of regional
transportation finance numbers.
13
1
representing
2
incoming letter mail for the stations, branches, and associate offices to delivery
3
point sequence
4
Code, but some plants will sort flats (especially
5
routes for stations, branches, and associate offices.
6
determined
7
availability at stations, among other factors.
8
9
.c
associate offices outside the city. Plants generally further sort
(DPS).”
Flats and parcels are generally
sorted to 5-digit ZIP
machineable
by the district, based on transportation
flats) to the carrier
The sort plans are
dispatch times and clerk
Plants do not have sufficient outgoing volumes to justify sort separations
for every other plant in the country.
10
designated
11
Centers (AADCs), which serve as intermediate
12
points for various sections of the network.
13
ADC/AADCs,
14
larger stations, branches, and AOs. Thus, ADC/AADCs
15
and mailers for 3-digit ZIP Codes for which other plants will perform the incoming
16
sortation.
17
as the ADCIAADC.
18
as Area Distribution
As a result, some plants have been
Centers (ADCs) or Automated
and will add separationsfor
The ADC/AADC
transshipment
Area Distribution
and processing
Plants sort their outgoing mail to
other plants in their vicinity and their
receive mail from plants
will sort this mail among the other plants they serve
The 21 BMCs constitute a separate network of processing
for Standard Mail (A and B), although they sometimes
facilities
19
specialized
20
hubs for Periodicals.
21
digit ZIP Codes for delivery units in their service territories,
22
to other BMCs.
23
varies, but it usually involves sack, tray, and bundle sorting and the cross-
24
docking of pallets-i.e.,
BMCs sort incoming Standard
The role of BMCs in processing
also act as
Mail (A and B) parcels to 5-
non-parcel
and outgoing parcels
Standard
Mail (A)
no piece sortation of letters and flats.
” Letter mail for delivery units with small numbers of routes may be sorted only
to 5-digit ZIP Code or carrier route because the volume for a small number of
routes does not justify the capital expense required for automated DPS.
14
1
The nature and extent of the mail processing
and distribution
network, in
2
particular the size and location of network nodes (plants), is driven substantially
3
by non-volume
4
local, the number and geographic
5
as well as the service standards for mail delivery.
6
of mail prevents the Postal Service from consolidating
mail processing
7
distribution
activities at a small number of large hubs.
For these reasons, the
8
geographic
locations of mail processing
9
(deliveries)
distribution
considerations:
the large proportion of each plants mail that is
dispersion of delivery units and delivery points,
Additionally,
facilities generally
the sheer volume
and
mirror the population
and ZIP Code structure, with plant size determined
both
IO
by the number and types of delivery points being served as well as anticipated
11
mail processing
volumes.‘*
This is not to say that the Postal Service network is static.
12
-.
It has evolved
13
over time as the nation has grown and its population
distribution
14
and as mail processing
It continues to evolve, albeit
15
slowly.
16
Years) the Postal Service added two new 3-digit ZIP Codes, in addition to the
17
912 in use previously.lg
18
processing
technology
has progressed.
For example, between FYI993
and FYI996
has changed,
(the R94-1 and R97-1
Base
During this same period it added five new mail
plants”-averaging
just over one new plant a year-each
built to
‘s Other factors that may influence plant design and location include ease of
access to transportation services, the availability of sufficient land at a
reasonable price, and the presence of one or more large mailers.
I9 ZIP Code 608 (Chicago, IL) was added in 1995, and ZIP Code 341 (Ft. Myers,
FL) was added in 1996. In addition to the 914 3-digit ZIP Codes currently used
to partition service areas, ten are assigned to the IRS for receipt of tax returns
and correspondence,
five are assigned to individual firms, and one is reserved
for processing International mail, for a total of 930. The remaining 70 possible 3digit codes are not currently in use.
2o These include: National Eagle Hub (Indianapolis, IN), Baltimore IMFIP&DC
(Baltimore, MD), and Dulles IMF/P&DC/AMCNMF
(Dulles, VA) in FY93; Chicago
North P&DC (Chicago, IL) in FY94; and the Northwest Boston P&DC (Waltham,
MA) in FY96.
_
15
.-
1
handle a portion of an existing plants service territory.
2
also replaced 20 existing plants with new ones, and expanded
3
another three.
4
capital commitments
5
take anywhere
6
planning, and approval for a new plant can easily take 6-7 years, and actual
7
construction
involved.
or rehabilitated
pace is the enormous
time and
From initial proposal to project completion,
it may
from 6 to 9 years to bring a new plant on line. Site acquisition,
another 1-2 years.
8
3. National
9
The geographic
Volume
workload
Growth
distribution
Affects
Workload
in the Entire Network
of increases in national volume, and hence of
10
volume-related
11
my analysis of the relationship
12
volumes.
13
may be assessed
14
the mail processing
network and observing the response of total clerk and
15
mailhandler
Since the marginal piece is representative
16
pieces, it does not have any particular origin or destination,
17
positive probability
18
destination
19
plants play multiple roles handling originating,
20
within the network, I must conclude that the additional volumes will cause
21
workload
22
imagine that incremental
23
plants, which violates the representativeness
24
/-
One reason for this deliberate
During this same period it
growth, for mail processing
plants, is a key element of
between mail processing
labor costs and mail
Nationally, the marginal impact of an increase in national mail volume
hours.
by introducing
a hypothetical
representative
RPW piece into
of all additional
but rather bears a
of having any of the large number of conceivable
pairs that are possible in the network.
growth throughout
the network.
origin-
Given this, and the fact that
destinating,
and/or transit mail
To argue otherwise,
one would have to
mail volumes would receive handlings in only a very few
of the marginal piece.
This point can be abstractly illustrated with a simple, stylized example.
25
Consider a network with only three plants, in which each piece of mail receives
26
exactly three handlings:
an outgoing sort at its originating
plant, an incoming sort
16
1
at its destinating
2
any one of the plants.
3
additional mail piece receives a handling at any given plant is the same for each
4
type of handling.
plant, and an intermediate
platform handling that may occur at
Suppose that the probability that a representative
These assumptions
are summarized
in Table 1.
Table 1
Piece-Handling
Probabilities
by Plant and Handling Type
Plant
1
2
3
5
Originating
sort
II3
113
113
Platform
Handling
113
II3
II3
Destinating
sort
l/3
II3
113
We are interested in finding the probability that a representative
piece of
6
additional
mail will receive at least one handling at any given plant-say,
7
The probability
8
just under three-fourths.21
The point of this exercise is not to convince anyone
9
that either the probabilities
or the set-up itself are at all realistic-they
in question can be shown, with a bit of arithmetic,
10
anything but that. Even though this hypothetical
11
purely illustrative purposes,
12
representative
are
example was concocted
for
It shows us that when a
sort at plant I}, B = {platform handling at plant 1} and
sort at plant I}
Then the probability
of a representative
additional piece receiving at least one handling at plant 1 equals
Pr(AlJBUC)=Pr(A)+Pr(B)+
Pr(C)-Pr(AnB)-Pr(AflC)-Pr(BflC)+
2.pr(AnBnC),
to be 20127, or
piece of mail has a positive probability of receiving each of its
” Let A = {originating
C = {destinating
it is informative.
plant 1.
or 1+1+1-I-1-.I!+?-=?!!
3 3 3 9 9 9
27
27
17
1
2
3
+
handlings at any of the nodes on a network, the expected additional workload
caused by an additional piece is necessarily
dispersed
This point seems to have been overlooked
throughout
the network.**
by some intervenors
in the last
4
rate hearing.
For example, during oral cross-examination
UPS witness Neels
5
characterized
the problem of a firm’s response to volume growth in the following
6
7
8
9
10
11
12
manner:
If you have a need to increase output, you reach a certain point
where you’re operating one production facility at its most efficient
level of activity, and what one should then do would be to
replicate the facility elsewhere. That’s why you see new factories
being built when output increases, and I think that’s a general
response of any economic enterprise to an increase in volume.23
13
“Replicate the facility” in this context would not be a rational response to a
14
volume increase with no changes to delivery points or other non-volume
15
unless the additional mail could be handled in a few geographically
16
facilities.
17
new plants if nearly all the additional volume originated
18
small number of service areas. The decentralized,
19
Postal Service’s mail processing
20
distribution,
21
workload due to volume growth.
factors,
distinct
The Postal Service could only handle additional volume by building
and destinated
networked
in a very
nature of the
function, which is dictated by the population
rules out plant replication as an option for handling the additional
zz This conclusion is not an artifact of setting the probabilities of each type of
handling be equal across plants in the previous hypothetical.
For instance, if
plant 1 originates the most mail, plant 2 is the main transit site, and plant 3 is the
main destinating site, so that Table 1 looks like this:
Plant
1
2
3
Originating
Sort I/2
II3
II6
Platform
Handling
II6
l/2
113
Destinating
sort
II3
116
II2
then the probability of at least one handling at plant 1 is exactly three-fourths.
23 Docket No. R97-1, Tr. 28/l 5791.
18
1
2
Change
4. Network and Location-Related
With Volume
Operations
3
in mail processing
Factors
Affect Costs, But Do Not
plants are grouped primarily by shape,
4
technology,
5
the range of shapes, and service standards
6
used to process any given mail piece depends primarily on the nature of the
7
piece, the available equipment,
8
costs of a mail processing
and the preferential/non-preferential
status of mail classes.
24 of the mail, the sort technology
and the processing
operation
window.25
Therefore,
the
in a given plant depend on:
9
.
Volume (pieces handled) in the operation
IO
.
Characteristics
11
.
Nature of the sort scheme
12
.
Processing
13
.
Configuration
14
l
Available equipment
15
.
Effectiveness
16
.
Variations
17
.
Effectiveness
of the pieces (in some operations)
windows
(in some operations)
of the plant
(in some operations)
of the labor force
in local work rules
of management
18
I will now discuss how each of these characteristics
19
across plants.
20
Given
affects costs and varies
The volume and mix of mail at each plant is determined
largely by the
21
number and characteristics
of the mailers located in the plant’s service territory,
22
the quantity of mail received by addressees
23
the plants network status, such as whether or not it is an ADC or AADC.
in the plant’s service territory, and
24 Pref and nonpref mail are not always segregated,
secondary and tertiary distribution.
especially
in incoming
25 The term processing window refers to the amount of time between
acceptance/arrival
of mail and the dispatch time required to meet delivery service
standards.
19
Similarly, the distribution
of shape, class mix, and other piece characteristics
beyond the control of plant management-it
is determined
is
by mailers and the
location of the recipients.
Some mail pieces can be considered
certain mail processing
operations.
relatively homogeneous
within
For example, all letter mail being processed
on a barcode sorter must have a legible barcode, whether it was applied by the
mailer prior to entry or by the Postal Service in an earlier processing
mail piece characteristics
9
rC-
do affect the costs of some mail processing
operations.
For example, the flimsiness or rigidity of letter mail has a large impact on the
IO
productivity
11
printed, as opposed to handwritten,
12
reject rate, and hence the productivity,
13
step. Still,
of automation
operations.
Similarly, the proportion
addresses
of machine-
has a significant impact on the
of running letter mail through an OCR.26
The sort plan affects costs in many ways.
Where volume warrants,
large
14
firms and box sections may have unique 5-digit ZIP Codes.
15
from 5-digit ZIP Code to carrier route is simpler with fewer routes per ZIP Code.
16
If a plant serves only one 3-digit ZIP Code, then no ADC scheme is required
17
because no sortation among different 3-digit ZIP Codes is required.
18
servicing large numbers of small delivery units (stations, branches,
19
offices) with small volumes must set up equipment
20
separation.
21
The processing
Manual sortation
Plants
and associate
with small volumes per
window influences costs because it affects the mix among
22
operations.
For example, volumes that are automation-compatible
23
be diverted to manual sortation if there isn’t sufficient equipment
may have to
available to
26 While the cost of a rejected piece handling is basically the same as a
successful piece handling in the OCR operation. Productivity measured as the
number of barcodes successfully applied per hour, is lower the higher the reject
rate.
20
1
process the remaining volume in the available time.27 Longer processing
2
windows
3
remote encoding.
4
window may have to be sorted manually if the Remote Encoding
5
turnaround
6
requires that “backstop”
7
independent
8
9
also allow more mail to use time-intensive
Non-barcoded
options, such as
volumes that arrive late in the processing
time is longer than the remaining processing
operations
window.
Center
This, in turn,
(e.g., manual) have some staffing
of volume to ensure that service standards are met.
Plant configuration
operations,
processing
affects costs, either in the plant overall or in specific
in at least two ways:
by affecting the logistics of moving mail through
10
the plant each day, and by imposing limitations on equipment
11
of the most obvious examples of the impact of plant configuration
12
occurs at multi-floor mail processing
13
are needed to move the mail between floors.
14
however, plant layout affects costs by determining
15
to move mail from operation to operation, or by limiting the number of containers
16
that can be moved at one time by a tow motor. The number of dock doors and
17
the dock configuration
18
Too few dock doors means increased congestion
19
staged at a single door. Too few dock doors also increases the need for staff, so
20
trucks can be loaded and unloaded more quickly.
21
incoming or outgoing trucks only; doors receiving both types may be more
22
congested.
23
operations
24
mail that is processed
25
flat mail.
Equipment
deployment.
One
on costs
plants, where elevators and/or conveyors
Even in single floor plants,
4.
the amount of labor required
also can constrain movement of mail within the facility.
as mail for multiple trucks is
Some dock doors may receive
availability and capability determines
used to process the mail and, consequently,
in non-automated
operations.
the mix of
determines
the kind of
This is especially true for
-.
*’ See Docket No. R97-1, USPS-T-4
[Moden], at 21.
21
The skill level and discretionary
are determinants
of productivity
greatest impact in operations
knowledge,
effort of the labor force and supervisors
in all operations,
that are not machine-paced
such as manual secondary
There is substantial
specific operations
although they tend to have the
and/or require scheme
sortation and the allied operations.
variation in local work rules that can affect costs in
as well as the plant as a whole.
These include local rules or
practices with respect to the scope of crafts for work assignments,
wash-up after certain operations,
9
extra time to
and break time. An example of a local scope
rule would be whether or not clerks are contractually
allowed to operate
10
equipment
11
that only mail handlers operate equipment for moving containerized
12
bundle sorting operation would need to be staffed with mail handlers to operate
13
forklifts or pallet jacks to move pallets as needed.
14
readily available, clerks working the bundle sorting operation would be idle while
15
waiting for the next pallet. Local labor agreements
16
national contracts by allowing additional clean-up time for employees
17
specific operations,
18
conveniently
19
to move pallets into a bundle sorting operation.
If local rules require
mail, the
If mail handlers were not
sometimes
supplement
working in
or additional time to walk to break areas when they are not
located relative to work areas.
Finally, managements
effectiveness
at motivating workers and staffing to
20
workload affects costs in all operations.
21
employees
22
manual operations,
23
not machine paced.
24
compatible
25
Operators
26
leaves the entire machine crew idle. Management
27
staffing for expected workload.
affect productivity
Good supervision
and motivation of craft
in both manual and automated
operations.
In
it is important to motivate workers since the operations
In automated operations,
mail to ensure it is processed
operators
are
must correctly identify
efficiently while minimizing jams.
must also clear jams quickly when they do occur.
Failure to do so
also plays a key role in
Managers perceive a trade-off between cost and
22
1
service.
Leaner staffing means lower costs, but may also mean more service
2
failures.
There is variation across plants in the frequency
3
deviations
4
well managers
5
of actual from expected workload.
and magnitude
There are also differences
of
in how
plan for and adapt to those deviations.
Plants in large urban areas tend to be less efficient than smaller plants, as
6
measured
7
enough of a pattern that it could be incorrectly
8
operations
9
greater than 100 percent).*’
In fact, this phenomenon
10
terms of the network-related
and location-related
11
above, rather than volume perse.
12
in large urban areas with the largest numbers of stops per route and the most
13
routes per ZIP Code.*’
14
mail spread across several 3-digit ZIP Codes.
15
by average pieces handled per hour. While not uniformly true, there is
exhibit diseconomies
Likewise,
inferred that mail processing
of scale or density (i.e., that variabilities
is best understood
cost-causing
are
in
factors listed
For instance, scheme complexity
is greatest
Large urban areas are more likely to have their “local”
narrow processing
windows
can be highly constraining
in large
16
urban areas because of the large number of delivery points being served and the
17
peaking problems associated
18
stations and branches.
19
run in shorter timeframes.
20
required as a backstop.
21
land prices in large urban areas require plants to be in less efficient multi-story
with the near-simultaneous
This means that more equipment
dispatches
to the city
is needed and will be
It may also mean that more manual sortation is
Similarly, the scarcity of large building sites and high
*’ This has been called “diseconomies of scale” (cf. Docket No. R97-I, Tr.
1 l/5521-30),
but since all non-volume factors, including the mail processing and
delivery networks, are properly held constant in the volume-variability analysis,
volume-variability exceeding 100 percent would be more appropriately termed
diseconomies of density.
*’ In Manhattan, many routes require multiple carriers per route-if the routes
were configured for single carriers there would simply be too many routes for the
manual incoming secondary schemes, which must be memorized by clerks.
23
facilities.
In some areas, logistical (and sometimes
political) considerations
require centrally located plants with limited expansion
Finally, the skill mix and discretionary
and configuration
effort of the workforce
often
options.
may vary with
the relative wage level being paid by a plant. Postal Service wages vary by craft,
length of service, and job assignment,
uniform nationally.30
but within those dimensions
they are
This means that Postal Service wages are less competitive,
relative to private sector wages, in high-cost areas, which also tend to be large
urban areas.
9
.-
Similarly, management
but do not include regional cost-of-living
10
compression
11
of large urban facilities.
12
choose not to advance to management
13
additional compensation
14
salaries, vary somewhat
differentials.
is more likely to result in inadequate
by size of plant,
The resulting salary
compensation
for management
Talented managers of small plants could quite rationally
of large urban plants because the
is not a sufficient incentive.
All of the network and location-related
factors discussed
above impact
15
costs. These factors explain the substantial variation across plants in
16
productivity
by operational
17
productivity
by cost pool in terms of the inter-quartile
18
from the raw MODS data supplied in Section 2 of Library Reference
19
associated
cost pool. Table 2 shows the substantial
ranges.
variation in
It was compiled
LR-I-107,
with the testimony of Dr. Bozzo.
3o Only areas not contiguous to the continental U.S. are given wage premiums.
These are known as Territorial Cost of Living Adjustments (TCOLAs).
24
Table 2
Variation Among Plants, Quarter 4 FY98
(TPHIHour from MODS)
Productivity
cost Pool
4,442
1,114
240
256
485
609
255
220
3,745
7,297
617
OCR
LSM
SPBS Other
SPBS Priority
Manual Flats
Manual Letters
Manual Parcels
Priority
Cancellations
All BCS
All FSM
1
Inter-Quartile
Range
Median
Dr. Bozzo’s econometric
2,271
448
128
189
306
295
286
166
1,798
2,748
176
labor demand models include variables to
2
capture the effects of non-volume
cost-causing
3
confirmed
4
variables and non-volume
5
5. Graphical
Analysis
6
In questioning
Dr. Bradley on his testimony
by the statistical significance
workload
factors.
of the coefficients
indicators,
Their importance
for site-specific
is
control
as reported in his testimony.
of the Impact of Volume
Growth
in Docket No. R97-1, the
7
Commission
used a plot of TPH and hours from the manual letter cost pool to
8
imply that visual inspection of the plot indicated
100 percent volume-variability
9
that cost pool. Dr. Bozzo thoroughly
the issue of graphical
addresses
and analysis of the MODS data in his testimony,
for
10
representation
11
like to discuss it here because the pictures succinctly illustrate how ignoring non-
12
volume characteristics
13
of the hours-volume
of plants can lead to a biased, misleading
relationship.
but I would also
understanding
25
1
Na’ive visual inspection of plotted hours against volume can result in the
erroneous
conclusion
that hours will vary in direct proportion to volume when
network and plant characteristics
are ignored.
I include Dr. Bozzo’s plots that
demonstrate
this point using synthetic data generated
hypothetical
plants, each with different non-volume
from a cost structure of ten
cost-causing
Figure 1 shows the “true” cost structure of a mail processing
these hypothetical
plants.31 The volume-variability
operation at this hypothetical
operation
10
characteristics.
operation for one of
of the labor required in this
plant is less than 100 percent:3’
as volume in this
increases at the plant, other factors held constant, hours increase less
than proportionately.
Figure 1
The Underlying Cost Structure for a Plant
Total Piece Handlings
31 By “true” or “underlying” cost structure I mean the systematic,
component of the hours/pieces relationship.
32 A 45degree
line is superimposed
on Figure 1 for comparison.
non-stochastic
26
1
2
Figure 2 shows simulated sample data generated
to the underlying
hours/pieces
relationship
by adding random noise
plotted in Figure 1.
Figure 2
Observable Data from the Underlying Cost Structure
with Random Noise for-One Plant
Total Piece Handlings
-
27
rc-
1
Figure 3 represents
ten plants with similar cost structures,
2
efficiency.
3
where the relative efficiency of plants is largely driven by non-volume
This situation is analogous
but different levels of
to the Postal Service’s network of plants,
Figure 3
Data for Ten Plants with Similar Cost
but Different Levels of Efkiency
Illustrating True Cost Structure
.-
Total Piece Handlings
factors.
28
In Figure 4, the lines representing
de-emphasized
the true hours/pieces
and an overall trend line is added.
cues in the plot to indicate the correct relationship,
sites permit an erroneous
conclusion
Our eyes mis-identify the relationship
data separate;
relationships
Without appropriate
are
visual
the pooled data for all ten
that there is 100 percent volume-variability,
because they cannot keep each plant’s
instead, we are deceived by the overall shape and orientation
the composite cluster of points.
have higher costs independent
Since, in this example, larger-volume
of volume, the visually-fitted
line is overly steep, and leads to an overestimate
pooled regression
of the true variability.
Figure 4
Data for Ten Plants with ,Similar Cost Structures
but Different Levels of Efficiency
Illustrating Misinterpretation
of Cost Structure
Total Piece Handlings
plants
of
29
1
Figure 5 illustrates the fallacy implicit in the visually fitted line (Figure 4) by
2
showing how the labor required in an operation at a specific plant responds to a
3
volume increase, and contrasting
4
As volume in the hypothetical
5
labor rises from Ho to H,-represented
6
expansion
7
predicts that as volume grows from TPH, to TfH, the labor required rises from
8
Ho to H;-represented
9
visually fitted line presumes that plants change their non-volume
that with the prediction of the visually fitted line.
operation grows from TPH, to TPH, the required
by the movement along the plants
path from point A to point B. The visually fitted line, by contrast,
by the movement from point A to point C. In effect, the
characteristics
IO
since the line with the correct volume-variability,
through point C has a higher
11
interception
12
the pooled variability from the visually fitted line would mean that a mail
13
processing
14
Chicago plant with sufficient volume growth.
(aB) than the correct line through point B (with intercept an). Using
plant in Madison, Wisconsin would come to resemble the main
Analysis
Figure 5
of Response to Volume
TPHo
TPHj
Total Piece Handlings
Growth
30
1
D.
THE COST STRUCTURE
2
1. Plants
3
Operations
4
shape.
within each mail processing
Within each shape, operations
plant are organized
are further organized
by activity and
by technology.
5
a) Acceptance
6
Mail enters each plant through the collection operation, the Business Mail
and Collection
7
Entry Unit (BMEU), and the platform (dock) operations.
8
presorted
9
dropped off at Postal Service facilities.
mail picked up by carriers, deposited
Collection mail is non-
in collection boxes, or simply
The BMEU accepts presorted and permit-
10
imprint non-presorted
11
originating
12
destinations
13
BMEU, and platform activities handle all shapes of mail. The platform also
14
handles all subclasses
15
Mail, and the BMEU is primarily presort from all classes.
16
through a culling operations
17
sometimes
18
volumes.
mail. Collection mail and BMEU volumes are considered
Mail that originated elsewhere,
and is addressed
in a plant’s service territory, enters through the platform.
of mail, but collection is primarily single-piece
where mail is separated
Collection
to
Collection,
First-Class
mail goes
by shape, class, and
physical characteristics.
Permit-imprint,
presort, and automation
rate mailers are required to
19
prepare their mail in packages,
trays, sacks, and/or pallets, as specified in the
20
Domestic Mail Manual (DMM).
For each rate category, the DMM defines the
21
package,
22
volumes by ZIP Code, SCF, AADC, or ADC. The DMM also specifies maximum
23
package and item weight.
sack, and/or pallet make-up requirements
in terms of minimum
31
--
1
When a mailing is deposited with a BMEU or detached
mail unit, or
2
accepted at the platform as a drop shipment, only the portion of it destinating
3
the plants service territory will actually be processed
4
volumes that destinate elsewhere
5
containers for outbound transportation.
6
handled by workers clocked into the platform operation.
in
in that plant.33 Presort
will be cross-docked,
or sorted in items to
The cross-docking
of mail will be
7
b) Allied
8
Mail from the “rest of the world” for a plant’s service territory arrives on in-
9
Labor
bound transportation.
Any incoming items or containers
10
require further processing
11
branches.
12
called the “opening”
13
preferential
14
includes First-Class
Mail and Periodicals.
15
opening operations
for trays, sacks, and pallets.
16
Containers
with contents that do not
are staged for dispatch to the AOs, stations, and
that require processing
are worked in a set of operations
unit. Most plants maintain separate opening units for
and non-preferential
mail. The preferential
mailstream
There are sometimes
generally
separate
From the opening units, some volumes flow directly to piece sortation and
17
other volumes flow to bundle sort operations
18
sometimes occurs as part of the opening unit. Bundles of letters were
19
substantially
reduced with the implementation
20
classification
reform.34 Pieces flow directly to piece sortation operations.
21
sortation is done on the barcode readers, the optical character
22
manual cases.
called “pouching.”
Bundle sortation
of the Docket No. MC95-1
Piece
readers, and at
33 Each plant will also process residual mail that did not have sufficient volumes
by ZIP Code to require presortation.
34 Bundles of letters are found in collection mail, but such bundles are not the
result of presortation. These bundles are created by the mailers for their own
convenience and are opened as part of cancellation operations.
32
1
A large proportion of flats are presorted in mailer-prepared
may be mechanized
bundles.
The
2
bundle sorting operations
3
SPBS) or manual.
4
route and some 5-digit) may be kept intact, and others (ADD
3-digit and other 5-
5
digit) will be opened and the pieces will be sorted individually.
Piece sortation of
6
flats is done on Flat Sorting Machines
7
manually in the delivery unit (secondary
(Small Parcel and Bundle Sorter,
Under Postal Service operating
8
Operations
9
called allied operations.
-
plans, some bundles (carrier
(FSM) or manually in the plant, or
sortation only).
that do not involve individual piece sortation are collectively
Allied operations
include the platform, opening, and
10
pouching units. Allied operations
11
pieces.
12
and pallets) and containers
13
contain loose pieces, from broken or spilled items.
do not generally involve handling individual
Rather, mail is generally handled in items (trays, tubs, bundles, sacks,
(rolling stock), though containers
14
c) Piece Sortation
15
The standard operating
may sometimes
--
of Letters
plan for letter sortation starts in cancellation.
16
culling activity identifies automation
incompatible
17
(including too thick or lumpy) that are separately
18
letter sorting operations.
19
letters into three streams:
20
facing identification
21
script) letters.35 Pre-barcoded
22
sortation.
23
letters, the AFCS, functioning
letters such as oversized
letters
cancelled and sent to manual
The AFCS then separates automation
pre-barcoded
The
letters (identified
compatible
by the presence of a
mark, FIM), enriched (typed) letters, and all other (usually
letters are sent directly to BCS operations
Typed letters are usually sent to the OCR to be barcoded.
for
For script
as a Remote Barcode System Input Subsystem
35 At some sites the AFCS does not distinguish
enriched letters from all others.
33
,-
1
(lSS),36 creates an image of the address area on the envelope’s
2
it to the Remote Computer
3
also send images of pieces it cannot resolve to the RCR.
4
-~
Reader (RCR).
face, and sends
The OCR functioning
as the ISS will
The ISS puts an ID tag on the back of each piece, which is used to match
5
the piece with its barcode data. When the image is sent to the RCR, the RCR
6
attempts to assign the barcode automatically.37
7
address, then the image is transmitted
8
the REC, a clerk will view the image on a computer screen and manually key the
9
address information.
If the RCR cannot resolve the
to a remote encoding center (REC). At
For pieces that are resolved by the RCR or at a REC, the
10
barcode is applied by a BCS operating as an output subsystem
11
BCS-OSS reads the ID tag on the back of the piece, sprays the barcode on the
12
front of the piece, obtains the corresponding
13
barcode and sorts the piece.
14
(OSS).
The
barcode data, and then verifies the
If the OSS cannot verify the barcode, it usually means that there was
in the barcode clear zone on the front of the piece.
In those cases,
15
interference
16
the mail pieces are run through the letter mail labeling machine (LMLM), where a
17
blank white sticker is applied over the barcode clear zone. The pieces are then
18
fed into the OSS again and a readable barcode is applied.
19
barcodes to the level needed to sort the piece for delivery (which may only be 5-
20
digit or g-digit ZIP Code), or the system does the best it can given the address.
21
Letters for addresses
22
neighboring
The system applies
outside the plant’s service territory are sorted to
plants and AADCs or ADCs, then dispatched
in trays.
Subsequent
36 Until recently the script letters would have been processed on the OCR-ISS for
the image lift. Prior to the creation of the remote encoding centers, the script
letters would have been processed on the LSM.
37 The RCR is allowed more time relative to the OCR to process the image. The
RCR employs algorithms designed to read mail with handwritten addresses.
34
1
sortation of barcoded
2
in BCS operations;
3
letter mail destinating
in the plants service territory is done
some in plants and some in delivery units.
There are very few Letter Sorting Machines
4
they are used, some automation
5
from cancellation.
6
LSM from cancellation
7
incompatible
Before remote encoding,
(LSMs) still operating.
When
mail goes to the LSMs directly
most script mail went directly to the
operations.
The above description
of letter mail processing
8
Letter mail from the BMEU, which is mostly presorted,
9
prepared trays.
BMEU letters that do not destinate
was for collection letters.
is presented
in the accepting
Otherwise
service territory will be sorted by tray if possible.
11
the OCR and BCS operations.
12
service territory) will also be sorted in OCR and BCS operations,
13
collection letters.
14
among the non-barcoded
15
the OCR reader cannot interpret.
16
in a plant’s service territory will arrive in trays and be designated
17
manual.
18
letters to be barcoded
19
barcoded
20
Predominantly,
21
delivery point sequencing
22
carrier sequence
Local BMEU letters (that destinate
There generally won’t be many handwritten
The operating
in mailerplants
the mail is sent to
10
23
-
in its plant’s
just like
addresses
mail
BMEU letters, but there may be some addresses
that
Letters from the rest of the world that destinate
plan calls for automation-compatible,
as barcoded or
non-presorted
at the origin plant, so only incoming presorted
letters need OCR-ISS processing
at the destinating
plants sort to delivery sequence
of automation
on DBCSs.
non-
plant.
Sometimes
the
mail is done in larger delivery units using
barcode sorters (CSBCSs).
The manual sortation of letters to delivery unit (incoming primary) is done
24
at the plants.
Local practices vary with respect to manual sortation to carrier
25
routes (incoming secondary).
26
incoming secondary
Sometimes
sortation-sometimes
the plants will perform the manual
it will be done in the delivery units.
1
35
P
1
d)
Piece Sortation
of Flats
2
Flats are sorted in manual operations
and using machines.
The model
3
881 was the first multi-position
flat sorting machine (FSM) deployed.
4
881 sorts flat-sized envelopes,
catalogs, and magazines
5
polywrap that is not too slippery and does not extend too far beyond the
6
magazine
7
with barcode readers and optical character readers allowing automated
8
The Postal Service has more recently deployed the FSM 1000, which can handle
9
a broader range of physical characteristics
10
11
The FSM
including those with
itself. FSM 881 s have four keying stations that have been retrofitted
deployment
than the FSM 881. The current
of FSM 1000 does not include optical character
The operating
plan for processing
sortation.
readers.38
flats varies widely across plants.
12
generally
run First-Class flats on the FSMs-First-Class
13
FSM 881s.
14
or because the physical characteristics
15
and Standard
16
equipment,
17
jams based on the piece characteristics,
18
service commitments.
19
the FSM 881, FSM 1000, or manually varies across plants.
20
determine
21
offices make that determination
22
operations
23
Local management
24
identifying
25
to carrier route in mail processing
Plants
flats run very well on the
Some First-Class flats are sorted manually to meet service standards
/-,
of the piece require it. For Periodicals
Mail (A) flats, the method of sortation depends on the available
the volume of each class to be processed,
the expected number of
the available processing
The method for determining
window, and
whether flats will be sorted on
Some offices
the piece sortation method as part of the bundle sorting process, other
at the FSMs, while others operate flat “triage”
that separate the mail flows to each type of FSM and to manual.
is responsible
automation
compatibility
for determining
the most effective method of
within individual plants.
operations.
Automated
Flats are only sorted
sortation to walk
38 Deployment of optical character readers for the FSM 1000 is being explored,
but would occur after the test year.
36
1
sequence
2
in the plant or in the delivery unit.
3
e) Parcel Sortation
4
In contrast to letter and flat sorting, which is mostly performed
is still in the planning stage. Manual secondary
sortation may be done
in plants,
5
most primary parcel sortation occurs in BMCs.
6
machine to sort parcels to 5-digit ZIP Code for plants in its service territory, and
7
to BMCs for the rest of the world.
Non-machineable
8
at the BMCs to 3-digit ZIP Codes.
Containers
9
other BMCs are simply cross-docked
The BMC uses its parcel sorting
parcels are sorted manually
for individual 5-digit ZIP Codes or
and BMC-prepared
sacks of parcels for 5-
10
digit ZIP Codes are sorted, and then both are dispatched
11
Plants sort incoming large and odd shaped parcels referred to as non-
12
machineable
to the delivery units.
outsides (NMOs) and sacks to the delivery unit.
13
2. MODS Cost Pools
14
All operations
-,
within each mail processing
plant are assigned standard 3-
15
digit codes in the Management
16
are specific to activity.
17
codes by shape, type of equipment,
18
are too detailed for our analysis.
19
operations
20
flexibility in how individual MODS codes are used. Therefore,
21
consist of groupings
22
and manual versus mechanized/automated
23
aggregation
Operating
Data System (MODS).
For sortation operations,
and scheme.
The individual MODS codes
We are concerned
of related MODS operation
that workers may not reclock
25
The cancellation
Plants have some
the cost pools
numbers that preserve shape
processing.
we have reliable data that can be compared
a) Cancellation
MODS codes
there are individual MODS
as schemes change on particular machines.
24
26
-
At this level of
across plants.
cost pool includes the culling and canceling operations.
The activity begins with unloading
the trucks and moving the mail to the culling
37
P
1
operation feeders.
2
identified in the hampers are removed.
3
and sent directly to the OCRS.~’ After the initial cull of the hamper, the container
4
dumper spills the mail onto the culling belt.
Meter mail is identified where possible,
The culling belt is staffed by clerks who open bundles; separate flats; cull
5
/-
Express Mail, Priority Mail, and other parcels that can be
6
small parcels, odd shapes, Express Mail, and Priority Mail; and identify bundles
7
of meter letters that are trayed and sent directly to the OCR.
8
cancelled by hand or using a simple belt-fed canceling machine.
9
hand cancelled.
Flats are usually
Parcels are
The staffing on the culling belt varies by time of day and by
IO
plant. Most plants plan to have all cancellation
11
outgoing mail can be sorted in time to meet outbound transportation,
12
generally departs between 11 PM and 12 AM.
The culling operation
13
complete by 8 or 9 PM so that
which
is a “gateway” operation that must process collection
14
mail quickly so that it can flow to the outgoing sortation operations.
15
volumes arrive at the plant, the cancellation
16
window.
17
in the operation.
18
mail must accumulate
19
interruption
20
must be staffed to quickly clear any late arriving volumes.
21
collection volume that exhibit the current time distribution
22
cancellation
23
operation will not need to change-some
24
converted to processing
It is critical that the cancellation
Early in the operation,
as collection mail arrives, inventories
mail supply.
hours proportionately
the sortation
operation be fully staffed early and late
quickly at downstream
due to inadequate
operation determines
As collection
operations,
of
to ensure no
Late in the operation,
cancellation
Increases in total
will not increase
because the full staffing early and late in the
of the waiting time will simply be
time.
3g When outgoing mail operations commence, between 4 PM and 6 PM, extra
effort is made to identify metered mail so that the OCRs have mail to begin
processing. This creates a wider processing window.
38
1
The dock/dumping
activity must be staffed to help unload collection mail
2
as it arrives.
The same people who unload the collection vehicles may also be
3
responsible
for culling parcels, flats, and metered letters directly from the
4
containers.
The dock/dumping
5
cancellation
operation and can absorb additional volumes without a proportional
6
increase in hours. The culling belt can be staffed to match expected mail
7
volumes, but it will generally be staffed more heavily early in the window to
8
quickly feed mail to the OCRs. Once sufficient volumes have been cancelled to
9
create backlogs for the OCRs, the staffing can be adjusted to actual volume.
function is staffed as a gateway within the
At
IO
startup and wind down there will be some capacity to absorb additional volumes.
11
The overall volume-variability
12
than 100 percent because of its role as a gateway with varying vehicle arrival
13
times and volumes of collection mail that cannot be forecast with certainty.
of the cancellation
operation
will tend to be less
14
b) Barcode
15
Barcode sorters process letter mail by reading the POSTNET
Sorters
barcode that
16
appears in the address block or on the bottom, right-hand
corner of the front of
17
the envelope.
18
which the barcode sorter is located, or another mail processing
19
staffing of a BCS consists of a feeder and a sweeper.
20
from trays and sets it on the input ledge.
21
side racks that hold trays corresponding
22
responsible
23
operation
24
even partial trays. The sweeper monitors the output bins while the machine is in
25
operation
26
sweeper
The barcode may have been applied by the mailer, the office in
plant. The
The feeder takes mail
Most BCSs are configured
with sweep-
to the output bins. The sweeper is
for filling the racks with trays and labeling each tray when the
is first set up. At dispatch time all trays with mail are taken away-
and removes the mail as the bins get full, placing the mail in trays. The
places full trays in rolling containers
or on a conveyor for movement to
39
.C
1
the next operation or dispatch.
The sweeper then labels an empty tray and
2
replaces it. Some offices use automated take-away
3
barcodes to route the trays.
The pace of the BCS operations
4
is determined
systems that utilize tray
by machine capabilities
5
and the flow of mail to the operation.
6
35,000 to 40,000 pieces fed per hour, depending
7
used.
a
should be stopped during a run. The machines will also be stopped for scheme
9
changes.
10
The BCS has a maximum throughput
Infrequent jams or machine breakdowns
of
on the type of BCS equipment
are the only reason that the BCS
Barcode sorters have minimal setup time. Because the bins on the BCS
11
can hold about 1.5 feet of mail, the sweeper can set up the racks of trays while
12
the machine is running.
13
and begins feeding it mail. Loaders rarely have to stop the machine for lack of
14
mail. The machine’s
15
However, the operation
16
that will not be volume-variable.
17
instance, will depend more on the number of output bins than the volume of mail
ia
in the bins at the end of each run. I would expect a relatively high volume-
19
variability factor for BCS operations,
20
perlods of down time during scheme changes and dispatches.
The loader turns on the machine, selects the scheme,
run time should vary closely with the number of pieces fed.
includes a small amount of setup and takedown
Character
work
The takedown work for the sweeper, for
but not quite 100 percent due to short
21
c) Optical
Readers
22
Like the barcode sorters, the OCRs are staffed with a feeder and sweeper.
23
The machine sets the pace and only infrequent jams and equipment
breakdowns
24
interrupt a run. The feeder and sweeper function in the same roles as they do on
25
the BCS. The feeder has the responsibility
to identify letters that are not
40
1
machineable.
These letters include ones that are too flimsy or that may have
2
been damaged
and will be worked in manual sortation.
3
machineable
4
final screen.
5
letters begins in the culling operation,
OCR operations
The identification
of non-
but the OCR feeder is the
consist of activities generally similar to BCS operations.
6
This would suggest that the OCR cost pool would have similar volume-variability.
7
However, the OCR operations
a
In order to meet outgoing dispatch times, the OCRs may be started and staffed
9
with a feeder and sweeper before an ample backlog of mail is available to ensure
operation.
function as the gateway for non-barcoded
letters.
10
uninterrupted
The OCRs may start and stop early in the evening as
11
collection volumes ramp up. For this reason, I would expect the OCR volume-
12
variability to be relatively high, but less than the BCS.
13
d) Remote
Encoding
14
Remote encoding labor involves manually keying parts of the address so
.-
15
the OSS can apply the correct barcode.
16
transitional
17
images is available.
ia
at a time, most RECs process images from multiple plants.
19
one plant is light, employees
20
plant. Since there are no other work functions performed at RECs and because
21
the workforce
22
employees
home if there is not enough work to keep them occupied.
23
substantial
staffing flexibility, a backlog of images to process, and minimal set-up
24
and take-down
clerks.
These employees
Stafflng at the RECs consists largely of
are scheduled
such that a backlog of
Although individual operators only key images for one plant
If the workload
from
may be switched over to key images for another
is largely transitional,
management
has the flexibility to send
costs, I would expect volume-variability
With
to be nearly 100 percent.
4o Machineability is not a discrete choice. Marginally automation-compatible
mail
can physically be fed into machines, but increased jam rates reduce the cost
effectiveness of automated sortation.
_
41
-
1
e) Letter Sorting
2
Letter sorting machines mechanically
sort letters.
The full complement
for
3
an LSM is three feeders, twelve keyers, and three sweepers.
4
letters on a ledge from which a mechanical
arm picks up pieces and places them
5
in front of a keyer at a machine-determined
pace. The keyer reads the address,
6
and keys a code that determines
7
be dropped.
8
bins fill. The letters are placed in trays that have been labeled and aligned on
9
racks corresponding
The sweepers
The feeders place
into which of the LSM’s 277 bins the letter will
monitor the output bins and remove the letters as the
to the output bins. The keyers rotate with the
10
feeders/sweepers
11
letter-per-minute
12
sheer size of the crew means the initial start-up
13
would, therefore, expect less than 100 percent volume-variability,
14
substantially
to alleviate the strain associated
with keying at the 50 to 60
machine pace. LSMs have minimal set-up activities, but the
takes some coordination.
We
but not
less. The Postal Service has largely phased out its LSM equipment.
15
f)
16
Letter sorting cases have 88 separations,
Manual
Letter Sortation
but wings and dividers can be
17
added to increase that number to 132. Most letter cases have open backs SO
18
they can be swept while mail is being cased.
19
operations
20
likely it is to have feeders and sweepers.
21
and the sweepers
22
-
Machines
include sweepers and feeders.
Many manual letter-sorting
The larger the operation,
the more
The feeders stage mail at each case
pull sorted mail from the case and tray it.
Manual sortation operations
are worker paced.
Increased
mail volumes
23
create pressure to sort faster in order to meet dispatch requirements.
24
activity at the end of the operation is independent
25
must be swept.
26
employees
of volume-all
separations
Manual sortation relies heavily on the discretionary
and management
attention.
Sweeping
effort of the
Manual sortation is a backstop operation
42
in which automation
commitments.
rejects must be sorted in a timely manner to meet service
For these reasons we would expect volume-variability
to be less
than 100 percent.
4
g) Flat Sorting
Machines
5
FSMs sort flat-shaped
mail. The full complement
6
keyers and one loader/sweeper
7
Sometimes
8
do not have automatic feeding mechanisms,
9
with an upper bound set by the speed of the machine.4’
for an FSM is four
on each side for a total of six workers.
FSMs are run with partial crews.
The FSM 881 and 1000 currently
so the operation
is worker-paced,
The loader/sweepers
IO
are responsible
11
entry onto the belt. All FSMs have been upgraded with barcode readers.
12
the barcode readers are in use, the keyers simply set the flats in position, with
13
sortation proceeding
14
determine the output bin. Most flats are presented to the Postal Service in
15
bundles so loader/sweepers
16
activity, if the bundles have not been opened in an upstream operation.
17
loader/sweepers
18
removing full ones.
19
sweepers’
20
remove trays and sort them to rolling containers for dispatch or movement to a
21
secondary
22
and also clear jams when they occur.
23
for facing loose flats on the ledges so keyers can place them for
automatically.
Otherwise,
operation.
the keyers enter a code to
may have to open bundles as part of the loading
are also responsible
job easier.
When
for monitoring the output trays and
Some FSMs have tray take-away
Without the tray take-away
The sweepers
FSMs have some set-up costs.
The
systems that make the
system, sweepers
manually
must label empty trays to replace full ones,
Unlike the BCS and OCR, the FSM does
24
not have an output bin, but rather outputs flats directly to trays. Thus, trays must
25
be labeled and placed at every run-out before the machine begins operation.
4’ There are plans for automatic feeders for the AFSM 100.
43
FSMs are primarily used to sort First-Class
of mail are not usually commingled
Mail and Standard
Mail (A). Classes
prior to the incoming secondary
FSM is frequently swept and then set up for each class.
higher set-up costs and is human-paced,
sort so the
Since the FSM has
the volume-variability
of the operation
would be expected to be lower than BCS.
-.
6
h) Manual Flat Sortation
7
Manual flat sortation is performed
8
separations.
9
increase the total to 96. Manual flat sorters take flats from items and containers
A standard flat case has 36 separations,
but wings can be added to
10
and sort them into the separations
11
sometimes the sorter must open the bundles that are staged at the case or in
12
nearby rolling stock.
13
labeled to the destination.
14
sortation, but most do not. The use of dedicated feeders and sweepers
15
manual flat sortation relative to manual letter sortation.
16
labeled and require no set-up.
17
cases and employees
18
mail to the case for sorting.
19
productivity
20
flat sortation functions
21
timely processing.
22
unpredictable
in the case. As with the FSM operation,
Cases are swept by placing the flats in trays that are
Some have open backs and can be swept during
Cases are permanently
Flats for manual sortation are staged near the
in the manual flat sortation are responsible
Manual flat sortation is worker-paced
depends on discretionary
effort and management
partially as a backstop operation
Also FSM capacity is sometimes
volume of machineable
Increased
is rare in
for moving the
and
attention.
Manual
because rejects require
insufficient
to handle the
flats.
manual volumes will not result in proportional
increases in set
24
up, mail movement, or sweeping activities, so volume-variability
should be less
25
than 100 percent.
26
and the fact that manual flat sortation sometimes functions
23
P
using a case with a varying number of
The fact that increased volumes create pressure to sort faster
as a backstop for
44
1
FSMs means that volume-variability
2
percent.
should be substantially
less than 100
3
i) Manual Parcel and Priority Mail Sortation
4
Outgoing parcels are sent to the BMC without any sortation.
The
5
incoming manual parcel operations
6
setting up sacks and/or rolling stock, sorting parcels to the plant’s delivery units,
7
closing the sacks, and sorting the sacks to rolling stock for dispatch.
8
parcels, parcels in 5-digit sacks, NMOs, and First-Class odd shapes for the
9
delivery units of the plant are sorted in manual parcel operations.
10
11
in plants consist of locating equipment,
Loose
Priority Mail is
sorted in similar fashion to separate operations.
Manual parcel sortation is a low-volume
operation.
The set-up and take-
12
down is largely independent
13
operation’s
14
availability.
15
Setting up to sort to a large number of small stations and branches
16
set-up and take-down
17
delivery units, because larger volume separation
18
rather than sacks.
19
be substantially
20
time are substantial
workhours,
of volume and is often a substantial
depending
part of the
on the number of separations
Set-up includes obtaining,
staging, and placarding
and equipment
the equipment.
requires more
time than setting up an operation to sort to a few large
In total, volume-variability
frequently
use rolling stock
of manual parcel sortation should
less than 100 percent, primarily because set-up and take-down
relative to time spent actually sorting the parcels.
Small Parcel and Bundle Sorter-Priority
and Other
21
j)
22
The small parcel and bundle sorter (SPBS) is a machine with four to six
23
keying stations.42 The SPBS requires a sizeable crew, 1 O-l 2 employees,
24
depending
on local practice.
Mail is fed to each keyer via a short belt onto which
42 The SPBS cost pool also includes the small number of Linear Parcel Sorting
Systems (LIPS) that have been deployed.
45
-
1
mail from pallets, sacks, and rolling stock is placed.
2
Service has deployed auto feeder systems for the SPBS that permit the
3
machines to operate with fewer feeders.
4
mail is dumped onto a central conveyor belt, which then automatically
5
the keying stations.
6
In recent years, the Postal
With the auto feed conveyor system,
supplies
The SPBS sorts parcels and bundles when the keyers enter a numeric
7
code-the
first few digits of the ZIP Code for an outgoing scheme, the last three
8
digits of the ZIP Code for an incoming primary scheme, and the route number for
9
an incoming secondary
scheme.
The keyer may also enter a code indicating
IO
whether the pieces in the bundle are barcoded, and whether the pieces meet the
11
local criteria for sortation on an FSM.43
12
The runouts of the SPBS are spaced so that walk-behind
utility carts
13
(WUKs) can be staged at each runout.
14
are sorted into these WUKs and then handled by sweepers who put the mail into
15
rolling stock or gaylords.
16
among the multiple containers
17
additional
18
associate offices to use pouch racks (sacks hung from pipe racks) set up at one
19
or two of the runouts so that the low volume of mail for small AOs does not use
20
up valuable runouts.
21
In some ofices, the parcels and bundles
In some cases, sweepers
perform additional sorts
staged at a single runout.
sortation is performed.
In other cases, no
It is common for plants with numerous
Some plants have runout extenders that allow the mail to fall directly into
22
hampers or gaylords.
With the extenders, fewer sweepers
23
the mail falls directly into its outbound container.
are needed because
In a plant that requires limited
43 As discussed above, plants vary in their FSM capacity. Since the two FSM
models differ in their capabilities, the available deployment of each model is a
factor in setting criteria for which mail will be sent to the FSMs and which will be
worked manually.
46
1
separations,
2
runouts with extenders,
3
the possible number of separations
4
The SPBS operation
some plants without extenders will use hampers or gaylords at the
but each hamper or gaylord then uses two runouts and
is reduced.
is operator paced.
Jams are relatively infrequent.
5
When WUKs are used at the runouts with sweepers
6
there are very few interruptions.
7
mail flow may be interrupted while containers
8
down time for the SPBS is substantial
and varies with the availability of
9
containers
used at the runouts-sacks
10
removing mail manually,
When runouts are hampers and gaylords, the
and the type of containers
are changed.
The set-up and take-
are more work
to take down than hampers or gaylords.
11
Coordination
of the lo-12 person crew adds to start-up time. Once the
12
SPBS is in operation,
workhours
should vary closely with the number of bundles
13
sorted.
14
relationship
15
time. I expect that overall SPBS volume-variability
16
than 100 percent.
The overall degree of variability depends on length of run, Le. the
between the fixed set-up and take-down
17
k) Opening Units
18
The opening unit has two parts: preferential
time and the actual sorting
should be substantially
less
(pref) and non-preferential
19
(non-pref).
Pref opening is primarily the sortation of trays of First-Class
20
incoming from the rest of the world or outgoing to the rest of the world.
21
opening unit will also include trays (tubs) of First-Class flats and may also involve
22
Priority sacks and trays. The non-pref opening unit involves the manual sortation
23
and/or opening of sacks and bundles of Standard Mail (A).”
24
notwithstanding,
25
trays into rolling stock for outbound transportation.
the opening unit operation
letters
The pref
Its name
includes the sortation of outgoing
44 These functions may also be performed at the SPBS, in which case the plant
would have only limited opening unit (manual) operations.
47
-
Manual sortation of bundles from pallets and sacks is usually done into a
1
2
“corral” of rolling stock and/or sacks. The size of the corral is determined
3
number of separations
the plant needs and the kind of containers
4
number of separations
depends on the number of ADCs, 5-digit ZIP Codes, or
5
zones, and the machineability
6
FSM 881, FSM 1000, and barcoded.
7
the average volume to each separation.
8
sortation of flat trays from the FSM and manual operations
9
dispatch.
distinctions
The opening unit operations
10
by the
used. The
that are being made such as manual,
The types of containers
are determined
by
Opening unit activities also include the
have substantial
into rolling stock for
set-up and take-down
costs
11
that will not vary with volume, but rather vary with the number of separations.
12
Equipment availability varies across plants and the lack of equipment
13
increase set-up costs substantially.
14
the set-up and take-down
15
directly affected by the number of sortations
16
configuration
17
opposed to pitching.
18
urban areas are likely to have a large number of delivery units and also use more
19
separations
20
types.
21
The congestion
times. The productivity
can
of the plant also determines
of manual bundle sortion is
required and the physical
of the corral. A large number of sortions require more walking as
The number of sortations will vary across plants.
for machineability
The volume-variability
due to the deployment
Large
of more FSMs and FSM
of opening units would tend to be low because of
22
the substantial
non-volume-variable
costs of set-up and take-down.
23
pallets are staged can also lead to lower volume-variability.
Large urban offices
24
are more likely to have union rules that require mailhandlers
for staging mail into
25
the opening unit, resulting in greater non-volume-variable
costs.
The way
48
1
I) Pouching
2
The pouching operations
involve the sortation of bundles or small parcels.
3
The name “pouching”
4
sometimes
5
offices with relatively small volumes, such as associate offices.
6
branches would more likely be sorted into containers
7
wiretainers,
8
9
comes from the fact that the bundles and parcels are
sorted to sacks. The sacks are used to hold the sorted mail for
Large stations or
such as hampers, APCs,
or gaylords.
Pouching operations
consist of a configuration
pipe rack and other containers
of sacks hung on a tiered
around a belt or container that is the source of
10
mail to be sorted.
11
carry them to the container for the office in which they will destinate.
12
configuration
13
sacks on a pipe rack require that the mail be thrown from a shorter distance or be
14
placed directly into the sack. Productivity will be affected by the configuration
15
required for each plants service territory.
16
One or more clerks pick up bundles or parcels and throw or
of larger containers
Employees
allows more throwing.
clocked into pouching operations
A
The smaller openings
set up the operation,
in
which
17
means they locate, configure, and label the sacks or other containers
into which
18
the mail will be sorted.
19
operations
20
the pouching operation.
21
responsible
for obtaining mail from the staging area for sorting, though this is
22
sometimes
done by mail handlers.
23
involve moving a rolling container to the center of the configuration.
24
palletized mail it may involve using a pallet jack, although pallets are sometimes
25
put on dollies.
26
belt and containers
27
containers
Platform workers or workers clocked into up-stream
generally stage mail for the pouching operation
in the area adjacent to
The workers in the pouching operation are generally
The movement of mail into pouching may
At some facilities, the pouching operation
is configured
For
around a
are dumped onto the belt. As the mail is sorted, some of the
fill up and must be replaced.
In the case of sacks, this happens
49
P
1
frequently.
2
clocked into the pouching operation
3
Pouching operations
4
have some overlap.
5
-
it will happen less frequently.
are responsible
Workers
for replacing full containers.
are in many ways similar to opening units and sometimes
The time spent actually sorting the bundles can be expected to be
6
proportional
7
during sorting may not increase in proportion to sortation time, because most
8
containers
9
the operation can also be expected to be less than 100 percent volume-variable
to the number of bundles.
However, removal of full containers
can absorb a small increase in volume.
The movement of mail into
10
because increases in volume will occur without proportional
11
number of containers.
12
(e.g., weight, strapping quality), which can vary substantially.
13
the operation,
14
final take-down
15
F
With larger rolling containers
increases in the
Sortation time also depends on bundle characteristics
including the location and configuration
The initial set up of
of the equipment,
and the
would not be expected to vary with volume.
The overall volume-variability
of pouching hours will depend on the
16
relative proportions
of time spent setting up and taking down the operation
17
versus the time spent sorting mail. Facilities with SPBS have smaller volumes
18
left for manual pouching.
19
associate offices, it would be common to see the city zones being worked on the
20
SPBS and the associate oftices worked in pouching because the SPBS would
21
not have sufficient runouts for all the associate offices, and would require at least
22
some manual sortation.
23
higher proportion of set up costs because the mail volume to be sorted is
24
relatively smaller.
25
reduced volume-variability.
26
is likely to be substantially
In an office with city zones and a separate scheme for
Sortation to associate offices would also result in a
Like other manual operations,
the worker pacing will cause
For these reasons, the volume-variability
less than 100 percent.
of pouching
50
1
m) Platform
2
The platform operation group covers a range of activities.
Workers
3
clocked into the platform are responsible
4
exception of some local collection runs, which may be unloaded
5
clocked into culling and cancellation),
6
taken, moving the mail to staging areas in the plant, moving the mail between
7
operations,
8
and loading outbound
9
for unloading
determining
inbound trucks (with the
by workers
where the mail needs to be
moving the mail from the final sorting operation to the outbound
dock,
trucks.
Not all platform workers perform these functions.
Some workers, such as
10
tow motor drivers, are generally moving mail from and to the platform.
Other
11
workers are stationed primarily on the dock to load and unload trucks.
Trucks
12
have limited windows for loading and unloading
13
The workers who unload and load trucks have some waiting time between trucks.
14
Much of this time can be spent productively.
15
sort containers,
16
organize outbound
17
unavoidable.
18
so the vehicles can be quickly loaded or unloaded.
19
in order to stay on schedule.
The time between trucks is used to
stage mail to be taken into the plant, cross-dock
containers.
pallets, and
However, a portion of the waiting time is simply
Since truck schedules
are variable, the waiting time is necessary
The waiting time is not volume-variable.
Increased volumes may cause
20
increases
21
Even if the number of trucks increased, the number of dock doors limits the
22
number of crews needed.
23
overall waiting time by platform workers declines as a portion of the total.
24
in truck size, but it would not likely increase the number of trucks.
At some point, trucks are forced to queue-up
The vehicle loading/unloading
and container
and then
handling activities will also
25
tend to be less than 100 percent volume-variable.
The amount of time spent
26
opening and closing trucks should be roughly proportional
27
trucks.
to the number of
However, a one percent increase in mail volume would not cause a one
-.
51
,-
1
percent increase in the number of inter-plant network trucks,45 since the volume
2
increase would be accommodated
3
one percent volume increase will not generally result in a one-percent
4
containers
5
accommodated
6
because, for many separations,
all the mail fits in a single container.
7
variability in platform operations
should be substantially
8
given that it consists almost entirely of activities that are less than 100 percent
9
volume-variable.
by adding to existing containers
Platform operations
11
E.
After concluding,
increase in
that are not completely
are gateways
staffed for peaks, rather than average workload,
REASONABLENESS
Similarly, a
Some of the additional volume would be
10
12
-
in the network.
by running fuller or larger trucks.
full
Volume-
less than 100 percent
and backstops
that must be
creating spare capacity.
OF THE ESTIMATED
VOLUME-VARIABILITIES
based on the above operational
analysis, that volume-
13
variabilities
are generally less than 100 percent and that they vary across
14
operations,
still remaining is the task of obtaining point estimates that can be
15
used to calculate volume-variable
16
reports the results of model estimation that yields the required point estimates for
17
operations
18
with total pieces fed, hours, and productivity
19
I discuss those results vis-a-vis my operational
costs by cost pool. Dr. Bozzo’s testimony
that report piece handlings.
These are summarized
in Table 3 along
by cost pool. In the following section
analysis.
45 The volume-variability of highway transportation costs, cost segment 14.1, is
less than 82 percent for FY98. See Library Reference LR-I-3.
52
Point Estimates
cost Pool
Manual-Letter
Manual-Flat
Manual-Parcel
Manual-Priority
of Volume-Variabilities
Table 3
and Productivity
Estimated
Variability (%)
73.5
77.2
52.2
52.2
2,323
2.349
10.119
2,805
21,229
3,231
2.631
34.642
13.105
1,066
613
247
89.5
100.5
33,543
272,627
16,286
8.602
41.575
24.203
6,557
673
54.9
40,785
11.954
3,412
8,133
669
95.4
75.1
Cancellation
Hours (M)
60.472
17.803
45,983
81.7
64.1
OCR
BCS
REC
1
1. Manual Sortation
2
The estimated volume-variabilities
less than one, as expected.
3,900
for all the manual cost pools are
3
substantially
4
and parcels where the low volumes mean that set-up and take-down
5
substantial
6
higher volume-variabilities
7
by Cost Pool
TPHlHour
760
457
285
230
LSM
FSM
SPBS
TPH(M)
Analysis
FY98
portions of the total workhours.
The lowest estimate is for Priority Mail
Manual letter and flat sortation have
reflecting their substantially
larger volumes.
Manual flat sortation has slightly higher volume-variability
8
letter sortation.
Manual flat sottation
9
sortation as opposed to functioning
times are
involves proportionately
as a backstop.
than manual
more production
This can be seen from the
10
fact that the proportion
of flats sorted manually is more than twice the share of
11
letters sorted manually.46
12
sortation means more time at full capacity and greater volume variability.
Relatively less of a backstop role for manual flat
46 Only 13 percent of letter TPH occur in manual sortation [from Table 3,
45,983/(45,983+2805+33,543+272,627)],
but 28 percent of flat TPH occur in
manual sortation [8,133/8,133+21,229].
53
1
Given my operational
2
variabilities
analysis, the estimated
manual sortation volume-
are in the correct range and ordered as expected.
3
2. Mechanized
4
The estimated LSM volume-variability
Sortation
is 95 percent, which is a little higher
5
than I would have expected given its large crew size and role as a backstop
6
operation.
7
variability is of minimal consequence
However, with LSMs all but phased out, the estimated volumein calculating
8
For FSMs, the estimated volume-variability
9
than any of the estimates for manual operations.
subclass costs.
is less than one, but higher
The estimate is very
10
reasonable
11
than the automated
12
variability is the lowest among the mechanized
13
handlings is much smaller for the SPBS, so set-up and take-down
14
SPBS costs being substantially
given that it is worker-paced
letter operations.
and the volume per run is much smaller
For the SPBS, the estimated volumeoperations.
The volume of
result in total
less volume-variable.
15
3. Automated
16
The estimated volume-variabilities
Operations
for automated
operations
are all above
17
75 percent.
18
small proportions
19
variability is the lowest, no doubt reflecting, the OCR’s role as the gateway for
20
non-barcoded
21
highest estimated volume variability except for Remote Encoding, for which the
22
estimated variability is 100 percent.
23
are essentially
24
closely monitored for productivity
This is as expected.
These are machine-paced,
of set-up and take-down
operations
time. The estimated
with
OCR volume
letter mail. The BCS volume variability is almost 90 percent, the
My operational
no set-up and take-down
analysis indicates that there
costs for RECs.
REC activities are
(though not machine-paced),
and RECs have
54
1
maximum scheduling
2
volume-variabilities
flexibility.
The magnitude
and ordering of the automated
is fully consistent with my operational
3
4. Cancellation
4
The estimated volume variability of cancellation
analysis.
is only slightly higher than
5
the estimate for manual parcels and Priority Mail. Cancellation
6
a gateway operation.
7
early arriving volumes are cancelled and fed to downstream
8
At the other end of operation there must be the ability to handle late arriving
9
volumes quickly and get them into down stream operations
10
times.
The estimated
11
operational
it is imperative that
operations
quickly.
to meet dispatch
variability may seem low, but it is wholly consistent with my
analysis.
12
5. Summary
13
Dr. Bouo’s
14
analysis.
15
variability.
16
those that are not.
17
In order to make service commitments
is the epitome of
point estimates are very consistent with my operational
Those operations with gateway or backstop roles have lower volumeThe operations
I believe Dr. Bouo’s
that are machine paced have higher variability than
point estimates are robust in that all models that are
18
consistent
with the Postal Service’s network structure and pattern of volume
19
growth yield very similar results.
20
volume-variability
21
best available point estimates, and that they are sufficiently accurate to use in
22
computing
My analysis indicates that mail processing
is less than 100 percent.
Postal Service marginal costs.
I also believe Dr. Bouo’s
are the
55
1
III.
COST POOL AND DISTRIBUTION
2
3
A.
SO-CALLED “MIGRATED”
COSTS ARE PROPERLY
PART OF MAIL PROCESSING
Historically,
4
/-‘~
5
partitioned
6
using IOCS data.
7
methodology
8
accomplish
9
the IOCS-based
KEY ISSUES
into mail processing,
window service, and administrative
components
In Docket No. R97-1, the Postal Service proposed the
be changed to use the MODS codes of the sampled employees
the partition.
The Commission’s
to
cost method continues to employ
partition to apportion Cost segment 3 costs among its mail
processing,
11
based partition I advocated
12
administrative
13
component.
14
cost partition, he considered
15
IOCS-based
16
Mr. Sellick did not otherwise claim to have considered
17
classification
window service, and administrative
components.47
and window service components
into the mail-processing
While UPS witness Sellick generally supported
components
The MODS-
in Docket No. R97-1 “migrated” costs from the
the MODS-based
it necessary to revert most “migrated” costs to the
to maintain traditional volume-variability
assumptions?’
the changes in cost
on their merits.4g
The Postal Service’s MODS-based
partition of clerk and mailhandler
19
assigns $622.4 million of base-year “support” costs for miscellaneous
20
support operations to component
21
support and $301.4 million is Function 4 support).
22
activities involves little handling of mail; indeed, many of the work activities
23
recorded in IOCS under question 18G traditionally
costs
and
3.1 costs (of which $321 million is Function 1
The nature of these support
have been classified as
47 PRC Op., Docket No. R97-1, Vol. 1, at 126.
48 Docket No. R97-1, Tr. 26/14171-72,14183-89,
4g Ibid.
AS
clerk and mail handler costs, Cost segment 3, have been
10
18
CLASSIFIED
Tr. 36/19487-90.
56
1
administrative
(Cost component
3.3) costs.
2
component
3
support costs and are therefore piggybacked
4
from Cost segments 2-12.
5
The traditional
3.3, most administrative
In the traditional treatment
costs are considered
general overhead or
on a composite
method has two main shortcomings.
6
mail processing
7
are spread across IO disparate cost segments.
8
rightly questions the mechanical
9
support costs in the absence of supporting
of Cost
of field labor costs
First, it assumes that
support costs vary in proportion to labor costs from pools that
application
The recent Data Quality Study
of this method to the distribution
evidence.50
of
The second shortcoming
IO
is that the traditional
11
available to more narrowly identify the causes of these costs. Such information
12
does exist, however, in the form of the MODS operations
13
employees
14
the cost-causing
15
associate the costs specifically with Function 1 or Function 4 operations,
16
than broadly with all field operations together.51
17
method wrongly assumes that there is no information
are clocked.
While the clocked operation
into which sampled
generally does not identify
activity with a particular cost pool, it does, nonetheless,
These distinctions
are important because volume-variabilities
18
distribution
keys52 vary widely across cost segments.
19
“administrative”
20
more accurate association
21
recommend
22
does, in my opinion, represent an improvement
and cost
Treating the
portion of the support cost pools as part of component
of support costs with their causal factors.
that this change in cost classification
rather
be adopted.
3.1 is a
I therefore
This change
in the costing methodology
5o Data Quality Study, Technical Reporf #I: Economic Analysis of Data Quality
Issues, prepared by LINX, a division of A.T. Kearney, Inc. for the U.S. Postal
Service, April 16, 1999, at 57-59,67-68.
51 Ibid.
52 Cost distribution
to subclass.
keys are the vectors of shares used to partition a pool’s costs
57
P
1
independent
2
to apply to the Function 1 sortation operations.
3
“all costs associated
4
the authors of the Data Quality Study report.53
5
6
7
6.
8
9
C
of the volume-variability
method the Commission
ultimately decides
It is also a step towards grouping
with an activity.. .to the activity cost pool,” as advocated
by
MODS MAIL PROCESSING SUPPORT COSTS SHOULD BE
DISTRIBUTED TO SUBCLASS USING THE COSTS ASSOCIATED
WITH THE ACTIVITIES BEING SUPPORTED
The Postal Service’s new distribution
method for support costs resembles
the historical method for general administrative
costs rather than the historical
10
method for other mail processing
11
ignore the small fraction of direct tally data in the MODS Function 1 and Function
12
4 support cost pools and to distribute the volume-variable
13
proportion to the volume-variable
14
case of the Function 4 support operations,
15
window service.
16
sampled employees,
17
activities that constitute the bulk of the tallies in these cost pools, and, therefore,
18
do not necessarily
19
operations.
I believe that it is appropriate
costs in the supported
the supported
to
costs in those pools in
operation groups.
In the
activities include
The direct tally data represent actual handlings of mail by the
but we believe these handlings are incidental to the support
represent the true patterns of cost causation.
The proposed
method for distributing
Function 4 support costs addresses
20
two major shortcomings
21
former LD48-Adm
and LD48-0th
22
former LD48-Adm
cost pool, which Dr. Bradley assumed to be non-volume-
23
variable, should be partly volume-variable.
24
quasi-administrative
25
including activities traditionally
of the Postal Service’s R97-1 method for distributing the
cost pools.
First, it recognizes
that costs in the
Second, it reflects the fact that the
Function 4 costs are driven by all Function 4 activitiesclassified as mail processing
and window service.
53 Data Quality Study, Technical Repoti #M Alternative Approaches for Data
Collection, prepared by LINX, a division of A.T. Kearney, Inc. for the U.S. Postal
Service, April 16, 1999, at 40.
58
Note that the migration of costs from Cost component
3.2 to Cost component
3.1
under the Postal Service’s new method are mainly to other Function 4
operations,
in particular Function 4 support.
between the traditional
appropriately
mail processing
distributed.
a less clear distinction
This means that costs “migrating”
and window service components
To the extent that the MODS-based
between the cost components,
reality that mail processing
are
partition provides
it is simply capturing the
and window service activities overlap in most delivery
units.
9
IO
11
12
C.
THE POSTAL SERVICE’S METHOD FROM DOCKET NO. R97-1
PROVIDES THE MOST ACCURATE ESTIMATES OF THE SUBCLASS
DISTRIBUTION
OF MIXED-MAIL OBSERVATIONS
Witnesses
representing
Periodicals
mailers have been sharply critical of
13
the Postal Service’s treatment of mixed-mail tally costs for the past three rate
14
cases, claiming that it unfairly burdens Periodicals
15
Standard
16
mail classes.54
17
underlying
18
container tallies, and address the concerns articulated
19
previous dockets.
20
21
22
23
Mail (A), with mail processing
costs that ought to be borne by other
In this section of my testimony,
the Postal Service’s distribution
The key assumptions
mail processing
mail, as well as much of
I enumerate
of mixed-mail,
the key assumptions
empty item, and
by these witnesses
in
of the Postal Service’s proposed Base Year CRA
cost distribution
methodology
include:
1. The contents of items tallied as “mixed-mail”
subclass distribution
in IOCS have the same
as direct item tallies of the same item type.
54 Docket No. R90-I, Tr. 27/l 3276-334 and Tr. 37/20479-505
[Stralberg].
Docket No. R94-I, Tr. 15/7128-35 and Tr. 25/l 1818-906 [Stralberg], Tr.
26Af12352-66
[Cohen]. Docket No. R97-I, Tr. 2611381 l-l 3980 and Tr.
36/192814,
19289-90, 19292 [Stralberg].
59
/--
1
2
distribution
3
item type.
4
with empty item tallies have the same subclass
as the costs associated
3. The costs associated
same item distribution
6
tallies of the same container type.
4. The costs associated
9
item tallies, by item type.
11
subclass distribution
12
tallies, calculated
with identified container
with tallies of items in mixed-mail
have the same subclass distribution
5. The costs associated
container tallies have the
as the costs associated
8
IO
with direct item tallies of the same
with non-identified
5
7
~-~
2. The costs associated
containers
as the costs associated
with direct
with empty container tallies have the same
as the costs associated
using assumption
with non-empty
container
4.
13
These assumptions
14
containers
15
more broadly, using item tallies in all allied labor cost pools. Table 4 shows the
16
dollar-weighted
17
are applied within cost pools, with the exception of platform
(number 4) where the subclass distribution
of the contents is imputed
tallies associated with each of the above assumptions.
Assumption
1 involves non-empty
item tallies, which represent only 1 .I
18
percent of total costs.
Past criticism of this assumption
has focused on the
19
possibility of data collector (or “selection”)
20
been argued that items containing certain subclasses
21
mail) are more likely to result in direct tallies than items containing
22
subclasses.
23
respect to Periodicals,
24
tallies than mixed-mail
bias in the IOCS sampling rules. It has
(in general, workshared
other
Time Warner witness Stralberg has made this argument with
i.e. that Periodicals
items are more likely to result in direct
60
Analysis
Table 4
of Y 1998 Mail Processing Handling Tally Costs
For MODS Offices Only
(dollar weighted, millions of dollars)
Relevant
Assumption
Direct Pieces
Items:
Direct
Mixed Non-Empty
Empty
Total Items
Containers
Direct
Identified
Non-Identified
Empty
Total Containers
All
Subclasses
$3,353.53
% of Total
Handling
58.8
Regular
Rate
Periodicals
$126.96
% of Total
Handling
44.6
1
2
1,029.53
64.47
281.19
I,37519
18.1
1.1
4.9
24.1
75.44
4.81
17.58
97.83
26.5
1.7
8.2
34.4
4
3,4
5
34.56
475.93
19.89
444.53
974.91
0.6
a.3
0.3
7.8
17.1
3.61
27.53
1.25
27.22
59.61
1.3
9.7
0.4
9.8
21.0
5,703.63
100.0
284.43
100.0
Total Handling Mail
1
tallies.55 Therefore,
2
distribute mixed-mail item tallies to Periodicals.
Mr. Stralberg claims, keys based on direct item tallies over-
3
The only definitive way to evaluate this criticism would be to undertake
4
study of the contents of mixed-mail items, and observe whether they actually
5
contain relatively fewer Periodicals
6
study, however, would not be worthwhile.
7
tallies (5,625 tallies out of a total of 22,404 total item records) were mixed-item
pieces than direct items. Performing
a
such a
For 1998, only 25 percent of all item
55 Docket No. R97-I, Tr. 26/13827. Note that Mr. Stralberg makes two distinct
claims. First, and probably more importantly overall, items containing Periodicals
and Standard Mail (A) are more likely to constitute identical mail than all items.
Tr. 26/13830. Second, non-identical items subject to counting (i.e., sacks, parcel
trays, con-cons, and pallets) containing Periodicals mail or parcels tend to be
easier to count than all items subject to counting, and therefore IOCS data
collectors, pressed for time to meet their quotas, tend to count them in favor of
other items. Tr. 26/l 3831. See also Docket No. R94-I, Tr. 25/l 1849 [Stralberg]
and Tr. 26AI12352-62
[Cohen].
61
1
tallies.
2
cost of observing a sufficient number of tallies to meaningfully
3
not bias exists would be high. Even assuming that such a study could be done in
4
a way that would produce meaningful
5
worthwhile
because the tallies at issue constitute just 1 .I percent of total mail
6
processing
tallies that involve handling mail.
7
,--
Because mixed-item tallies occur unpredictably
and relatively rarely, the
results, the exercise would not be
To illustrate why such a study would be unjustifiable,
8
following hypothetical
9
the presence of Regular-Rate
infer whether or
consider the
case that maximizes any potential bias toward overstating
Periodicals
in mixed-mail items-namely,
IO
the extreme position that there could be no Regular Rate Periodicals
11
items at all. If, following witness Stralberg’s
12
to distribute none of the costs associated with non-empty
13
to Regular Rate Periodicals,
14
handling tallies would only change from 4.99 percent to 4.90 percent-a
15
of 0.09 percentage
16
that none of the sampled non-empty,
17
Rate Periodicals.
18
this subclass’s
points-and
The assumption
in mixed
advice, the Postal Service were then
mixed-mail item tallies
share of the costs associated
with
change
this, again, based on the extreme assumption
mixed items actually contained
that no non-empty
19
in IOCS actually contain Regular-Rate
20
unwarranted
21
distributed
22
very strong operational
23
shows the distribution
24
Regular Rate Periodicals
Periodicals
association
Regular-
items that are observed as mixed-mail
Periodicals
is almost certainly
because nearly one-fourth of the non-empty,
to Regular-Rate
taking
mixed-item tallies
come from brown sacks, which have a
with Regular-Rate
of costs associated
Periodicals.56
with non-empty,
Table 5
mixed-item tallies for
by item type.
56 For FY98, 70 percent of direct brown sack tallies were identified with RegularRate Periodicals.
62
Table 5
BY98 Distributed Non-Empty Mixed Item Tally Costs
Regular-Rate Periodicals by Item Type
MODS I&2 Offices
(dollar-weighted,
millions)
Tally Dollars
Item Type
Bundles
Flat Trays
Letter Trays
Pallets
Brown Sacks
White #I Sacks
White #2 Sacks
White #3 Sacks
Other Items
Total
1
Assumption
Percent of Total
$0.472
0.350
0.026
0.819
1.174
0.220
0.795
0.215
0.737
7.3
0.5
17.0
24.4
4.6
16.5
4.5
15.3
4.810
100.0
9.8
2 involves empty item tallies, which represent 4.9 percent of
2
the costs associated
with handling tallies.
3
lumped, for purposes of discussion,
with non-empty,
4
greatly exaggerates
of any potential bias arising from the latter.
5
There is no question of selection bias with respect to empty items: to my
6
knowledge
7
items. The Postal Service distribution
8
type, observing
9
distribution
the importance
While empty item tallies are frequently
no one has argued that data collectors
mixed-item tallies, doing so
improperly
key methodology
an empty item gives the same information
of the handlings as a non-empty
association
identify empty
assumes that, by item
about the subclass
mixed item. This is reasonable
IO
light of the strong operational
between
item type and subclass.
11
illustrate this point I have compiled Table 6, which classifies the empty-item
12
tallies by type that are distributed to Regular-Rate
13
Service method.
14
tallies come is quite reasonable.
15
brown sacks.
Periodicals
in
To
under the Postal
The distribution of item types from which these empty item
Nearly 60 percent come from flat trays and
Another 18 percent come from white sacks, and 10 percent from
-.
63
1
pallets.
Regular-Rate
Periodicals flats are typically entered by mailers as
2
bundles on pallets or bundles in sacks. They are generally sorted to flat trays
3
during processing.
Table 6
BY98 Distributed Empty Mixed Item Tally Costs
Regular-Rate Periodicals by Item Type
MODS I&2 Offices
(dollar-weighted, millions)
Tally Dollars
Percent of Total
Flat Trays
Letter Trays
Pallets
Brown Sacks
White #I Sacks
White #2 Sacks
White #3 Sacks
Other Items
$5.111
0.280
1.836
5.093
0.491
2.120
0.574
2.078
29.1
1.6
10.4
29.0
2.8
12.1
3.3
11.8
Total
I 7.583
100.0
Item Type
4
Assumption
3 involves non-identified
containers.
Looking back to Table 4,
5
we see that the costs associated
with these tallies constitute only 0.3 percent of
6
total handling costs. As with non-empty
7
suggestions
8
unable to identify.57 Like the non-empty
9
directly observe the data collection process due to the low frequency of non-
mixed items, there have been
of bias resulting from the types of containers
data collectors are
mixed items, it would be impractical to
IO
identified mixed-container tallies. For 1998, only 2 percent of all container tallies
11
($19.95 million out of a total of $974.91 million total container tally dollars) were
12
non-identified
13
14
mixed container tallies.
Using Regular-Rate
identified containers
Periodicals
as an example, even if none of the non-
were distributed to Regular-Rate
57 Docket No. R97-1, Tr. 26/13833-7
[Stralberg],
Periodicals,
14043-5
that subclass’s
and 14049 [Cohen]
64
1
share of total handling costs would decline by only 0.02 percentage
2
assumption
3
extreme.
4
distributed
that none of the non-identified
Table 7 shows the breakdown
to Regular-Rate
container tallies are Periodicals
of non-identified
Periodicals
points.
The
is
container tallies
by container type.
Table 7
BY98 Distributed Non-Identified
Mixed Container Tally Costs
Regular-Rate Periodicals by Container Type
MODS l&2 Offices
(dollar-weighted,
millions)
Container
Type
Tally Dollars
BMC-OTR
ERMC
GPCIAPCIGPM
Hamper
Nutting Truck
Postal Pak
Utility Cart
Wiretainer
Multiple Items
Other
The distribution
of Total
$0.097
0.082
0.292
0.306
0.022
0.009
0.091
0.074
0.144
0.130
7.7
6.6
23.4
24.5
I .a
0.7
7.3
5.9
11.5
10.4
I ,248
100.0
Total
5
Percent
of container types from which these non-identified
6
container tallies come is quite reasonable.
7
GPCIAPCIGPMS.~~
8
these containers
9
frequently
Regular-Rate
Nearly one fourth come from
Periodicals
bundles are commonly
which are also used to transport flat trays.
part of exigent dispatches
10
Nearly one-fourth
11
bundle-sorting
12
bundles.
13
recording of non-identified
operations,
Like non-empty
Further, GPCs are
where container identification
come from hampers.
sorted into
Hampers are commonly
is difficult.
used in manual
and to hold and transport the contents of broken flats
mixed items, there is no factual evidence of bias in the
container tallies; the costs associated
58 GPC, APC, and GPM are high-sided
rolling containers
with these
that open on one side.
65
/-
1
tallies are too small to make any material difference in the distribution
2
the cost of a survey to investigate this issue would be prohibitive given the
3
relative scarcity of non-identified
4
Assumption
container tallies.
4 uses the subclass distribution
of direct items not in
5
containers
6
identified and non-identified
7
total handling costs. Once again, this assumption
8
selection bias. It is, rather, an empirical question that can be resolved by
9
sampling containers
10
containers
to infer the subclass distribution of items in containers.
containers,
to the IOCS distribution
It affects
which together represent 8.6 percent of
cannot be criticized for
and comparing the subclass distribution
In 1995, Christensen
11
-
key; and
of the items in
of direct items.
Associates
undertook
such a study for platform
12
operations
13
sampling frame.
14
were randomly sampled, and the subclass distribution
15
containers
being handled was sampled by teams of Christensen
16
collectors.
The team of collectors made it possible to sample the contents of
17
nearly all observed items and containers-even
18
times.
19
at eight plants.5g The plants were randomly chosen using a stratified
At each site the employees
clocked into platform operations
of the mail in items and
Associates
those with exigent dispatch
The platform study produced a relatively small sample from which to draw
20
inferences.
21
containers
22
they are not a perfect match, there is no evidence of any obvious bias. For
23
data
Table 8 below compares the subclass distribution
to the IOCS direct item subclass distribution
Periodicals,
of the items in
for each item type. While
the Platform study yields a larger cost share for Periodicals,
24
but the small sample size of the Platform Study is not sufficient to override IOCS.
25
The point is simply that the Platform Study provides no evidence of bias in IOCS.
5g See Library Reference
LR-I-115.
66
Table 8
Subclass Profile of Items in Containers
Platform Study vs. Platform Dist’n Key
All Items (percent)
FY95
Platform
Study
Distribution
Class
First
Priority+Express
Periodicals
Standard (A)
Standard (B)
All Other
Column Sums
1
Assumption
FY95
IOCS
Platform
Dist. Key
45.7
11.4
13.3
25.3
2.8
1.6
100.0
50.6
2.6
11.5
32.7
1.1
1.4
100.0
5 involves empty container tallies.
As with empty items, the
2
issue is not selection bias, but rather whether or not the empty container tallies
3
provide the same subclass information
4
would be difficult to deny the connection
5
empty container
handlings within a cost pool are not representative
6
those containers
in the same cost pool. For example, if all empty container
7
handlings occurred on the platform, then applying a distribution
8
solely from identified platform container tallies would be biased toward the
9
subclasses
10
containers
are handled in all cost pools. And, while platform handling of empty
11
containers
represent one-fourth
12
account for 40 percent of all non-empty
13
disproportionately
as identified container tallies.
over all operations,
present in platform containers.
While it
it is conceivable
that
of the uses of
key derived
However, empty
of all empty container tallies, platform tallies also
container tallies.
Even though there is no evidence that a broader distribution
would be
14
more accurate, we have calculated subclass costs based on a broad distribution
15
key to quantify the potential impact.
16
subclass using the Postal Service methodology,
17
empty container tallies are distributed to subclass.
We recalculated
mail processing
costs by
changing only the way that
Under the alternative method,
67
P
1
empty container tallies by container type are summed across cost pools and
2
distributed to subclass using a distribution
3
pools of the costs associated
4
compares the final results of our experimental
5
Postal Service has submitted in this docket.
6
with non-empty
As Table 9 demonstrates,
container tallies by type. Table 9
method with the methodology
the differences
small. There is no evidence to suggest that the broader distribution
8
container tallies is better-l
9
within cost pools is the preferred method.
still believe that distribution
In summary, five key assumptions
handling tallies.
of empty
of empty container tallies
However, these results demonstrate
that the debate is largely nugatory given the small difference
11
the
between the two methods are
7
IO
--
key based on the sum across all cost
in the results.
underlie the Postal Service distribution
12
of non-direct
13
data collector bias. However, even in those two cases, there is no indication of
14
bias; it would be very difficult to check with a survey; and even the most extreme
15
hypothetical
16
distributions.
17
subclass distribution
18
study by Christensen
19
to assume otherwise.
20
relationship
21
them. These are not bias issues, but rather operational
22
strong operational
23
broader distribution
24
such a change would not be preferred, but it would have minimal impact in any
25
case.
corrections
Of these five, only two (#3 and #I) could involve
would make little difference in terms of relative cost
One of the assumptions
(#l) involves the equivalence
for items outside and inside containers.
Associates
of the
The small sample
did not yield any evidence that would cause us
Finally, two assumptions
between empty items/containers
(#2 and #5) involve the
and items/containers
evidence to support the assumptions.
key for costs associated
questions.
with mail in
There is
Our investigation
with empty containers
of a
indicates that,
68
Table 9
Comparison of Volume Variable Cost Methodologies
BY99 ClarkslMailhandlers Mail Processing Volume Variable Costs
MODS 182 Offices
Class
1st Letter and Parcels
1st Presort
1st Cards, Non Presort
1st Presort Cards
Priority Mail
Express Mail
Mailgrams
Periodicals-Within
County
Periodicals - Regular
Periodicals - Special Nonprofit
Periodicals - Classroom
Std (A) Single-Piece
Std (A) Commercial ECR
Std (A) Commercial Regular
Std (A) Nonprofit ECR
Std (A) Nonprofit Regular
Std (6) Parcel Post
Std (B) Bound Printed Matter
Std (B) Special Standard Mail
Std (B) Library Mail
US. Postal Service Mail
Free Mail for the Blind/Handicapped
International
Registry
Certified
Insurance
COD
Money Orders
Stamped Envelopes
Special Handling
PO Box
Other
32.915
Grand Total
USPS
Methodology
costs f$OOO)
3.989,434
968,519
148.792
26,176
522,614
79,728
166
7,600
411,017
69,287
3.011
64,808
208,984
1.409,423
33,768
313,770
74,021
41.331
27,310
4,770
91,987
9,442
212,644
32,978
15,022
1,220
232
3,655
122
485
2,867
8.808,097
Empty
Container
Distribution
costs 60001
3,990,751
967,640
148,725
26,157
528,044
81,440
165
7,655
411,495
69,117
3,031
64,664
208,359
1,399.979
33,401
312,367
75,150
40,910
24,121
4,782
92,424
9,456
220,436
30,433
15,516
1,261
281
3.654
122
489
2.867
8.808,098
Difference
~.sOOO)
1,317
-979
-67
-19
5,430
1,712
0
55
478
-170
19
-144
-625
-9,444
-367
-1,403
1,129
-421
-3,189
12
437
14
7,792
-2,545
494
41
50
-1
0
4
0
89
0
Difference (%1
0.03
-0.10
-0.05
-0.07
1.04
2.15
-0.09
0.72
0.12
-0.25
0.64
-0.22
-0.30
-0.67
-1.09
-0.45
1.53
-1.02
-11.68
0.26
0.48
0.15
3.66
-7.72
3.29
3.33
21.38
-0.02
-0.04
0.92
-0.02
1.1
0.00
--
69
P
1
2
3
D.
4
In Docket No. R97-I,
volume-variabilities
6
Dr. Bouo
7
additional analysis.
8
those estimates in the current filing.
for the allied operations:
(USPS-T-15)
platform, opening, and pouching.
updates those estimates and reports on some
The Postal Service, however, has decided not to incorporate
My analysis of the allied operations
indicates that the allied operations
IO
have lower volume-variabilities
11
consistent with Dr. Bozzo’s estimates.
12
volume-variability
13
are distributed to subclasses
14
segment 3.1. This method essentially treats the not-handling
15
with respect to all Cost segment 3.1 workload.
than the distribution
operations-a
To compensate
result
for the use of 100 percent
for the allied cost pools, the not handling tallies in those pools
The broad distribution
16
using a key developed from all cost pools in Cost
costs as variable
of allied costs is used as a compromise,
since the
17
Postal Service was not ready to resubmit a method incorporating
18
volume-variabilities
19
results (i.e., subclass costs) when compared to those based on estimated
20
volume-variabilities
21
one should infer that this compromise
22
equivalent to non-volume
23
correctly distributed
24
25
E.
26
F-
the Postal Service proposed the use of estimated
5
9
.-
PENDING FURTHER STUDY OF ALLIED LABOR COST CAUSATION,
THE “NOT-HANDLING”
PORTIONS OF THE ALLIED LABOR COST
POOLS SHOULD BE DISTRIBUTED BROADLY
for allied cost pools. This compromise
and distribution
estimated
yields reasonable
keys specific to each cost pool. However, no
means that not-handling
variable costs, or that non-volume
costs are
variable costs are
broadly over all of Cost segment 3.1.
IOCS-BASED COST POOLS SIGNIFICANTLY
MODS COST METHODOLOGY
The Postal Service’s Base Year CRA introduces
27
distributing
mail processing
28
supplants the LIOCATT-like
costs at non-MODS
distribution
offices.
IMPROVE THE NON-
a new method for
The new method
method used by the Postal Service and
70
1
the Commission
2
MODS and BMC methods.
3
simplified version of the MODS cost pools, but are based on activities recorded in
4
IOCS tallies as is done with the BMCs.
5
the non-MODS
6
already accepted for the MODS offices and BMCs.
7
in Docket No. R97-1 with a cost pool approach
The non-MODS
cost distribution
operation groupings
similar to the
resemble a
The motivation for the change is to bring
method up to the standard
of the methods
Separate cost pools are defined for the major activity groups in the non-
8
MODS offices.
9
processing
Unlike the MODS plants, the majority of the non-MODS
costs are incurred in manual sortation activities.
mail
Besides manual
IO
letter, flat, and parcel operations,
11
offices include some automated
12
equipment)60 and allied operations.
13
and out of the facility, as well as some “opening” activities such as distribution
14
bundles and trays to carrier routes. A small amount of cost is associated
15
dedicated
16
aforementioned
17
miscellaneous
18
with each of these cost pools for non-MODS
19
the other activities carried out in non-MODS
distribution
(mainly using CSBCS or DBCS
Allied operations
Registry and Express Mail operations.
includes moving mail into
Table 10 shows the dollar-weighted
The volume-variable
IOCS-based
with
Costs not classified in the
pools are included in a pool for mail processing
activities.
of
support and
tallies associated
offices.
portions of the cost pools are determined
method; see witness Bozzo’s testimony
using the
20
traditional
(USPS-T-l
21
further discussion. The details of the use of IOCS to obtain volume-variable mail
22
processing
23
T-l 7).
costs are covered in the testimony of witness Van-Ty-Smith
w Large AOs may have an FSM.
5) for
(USPS-
71
Summary
cost Pool
Manual Letter
Manual Flats
Manual Parcel
Auto Dist
nRegistry
nExpress
Allied
Mist/Support
LDC
14
14
14
11
18
18
17
18
Direct
Pieces
477,670
313,339
79,535
51,554
6,703
5,144
155,902
107,638
of BY99 Mail Processing
Direct
82.123
61,473
2,014
25,740
0
432
78,422
8,735
Table 10
Tallies (dollar weighted,
All Subclasses
Non-MODS Offices
Items
Mixed
Mixed
Non-Empty
Empty
1,096
7,549
678
5,781
529
1,264
561
4,326
578
88
0
0
3,738
15,912
587
2,338
Total
90,768
67,930
3,797
30,628
666
432
98,071
11,638
$000) for ClerkslMailhandlers
Direct
Identified
244
5.717
1,083
10,592
93
4,150
407
4,745
0
245
0
150
3,409
40,475
235
2,651
Containers
NonIdentified
3,230
2,167
421
0
0
0
3,520
1,313
Empty
8,522
10,389
8.600
4.175
535
0
39,384
3,299
Total
17,714
24,230
13,264
9,326
780
150
88,788
7,498
Grand
Total
586.151
405,499
96,596
91,509
8,149
5,726
340,781
126,775
72
1
The distribution
methods are generally the same as those used for
2
comparable
MODS cost pools.
3
costs are distributed
4
are ‘filled” using direct tallies in the same operation
5
tallies do not contain information
6
and are therefore
7
pools, the not-handling
8
handling distribution
9
Express cost pools; the not-handling
using tallies in the same operation,
ignored.
11
complete technical details.
12
13
14
F.
over all non-MODS
if possible.
The not-handling
of the cost driver
distributions.
support
The allied not-
automated
distribution,
and
tallies in the support cost pool are
cost pools. Again, witness Van-Ty-Smith
provides
NEW “ENCIRCLEMENT”
RULES ARE NEEDED TO ENSURE
APPROPRIATE
DISTRIBUTION OF VOLUME-VARIABLE
COSTS TO
SPECIAL SERVICES
In this docket, the Postal Service has implemented
16
to assign tallies to subclasses
17
services.
18
Ty-Smith.
19
and mixed-mail tallies
In the case of the allied and mail processing
includes the manual distribution,
distributed
the volume-variable
on the subclass distribution
tallies receive cross-pool
10
15
For sortation operations,
rules
that had previously been assigned to special
The details of the new encirclement
The reasoning
new encirclement
4~
rules are provided by witness Van-
behind the change is discussed
The theory set out by Dr. Christensen
mail processing
here.
in Docket No. R97-1 indicates that
20
volume-variable
costs should be distributed
21
the extent that they “cause” handlings (or, more generally, that they cause the
22
volume-related
23
mailpieces
24
because the handlings would still have been necessary to process the pieces
25
had they been mailed without the service.
26
pieces bearing special services result not from the provision of the special
27
service, but from the handling of the pieces as mail of the underlying
cost drivers) in an operation.
to special services to
Many observed handlings of
endorsed for special services are not caused by the special services
Therefore,
many IOCS direct tallies of
subclasses
-Y
73
,--
1
(the “normal feature”).61
2
ons” to mail pieces of eligible subclasses-the
3
in addition to postage-the
4
the “normal feature” cost of the pieces.
5
6
7
8
G.
9
,--
Since the Postal Service offers special services as “addmailer pays the special service fee
special service volume-variable
costs must exclude
SOME STREAMLINING
OF DISTRIBUTION KEY PROCEDURES
HELPS THE POSTAL SERVICE’S DISTRIBUTION KEY METHODS TO
BETTER MATCH THE THEORY LAID OUT BY WITNESSES PANZAR
AND CHRISTENSEN
IN DOCKET NO. R97-1
The volume-variable
cost distribution
methods proposed by the Postal
10
Service in Docket No. R97-1, and adopted by the Commission,
11
features that may not be in full accord with the distribution
12
witnesses
13
represent the subclass distribution
14
Dr. Christensen
15
subclass distribution
16
showed that the appropriate
17
subclass distribution
18
Panzar and Christensen.
theory laid out by
In theory, the distribution
of the volume-related
noted that for most mail processing
includes some
key should
cost driver(s).
operations,
the appropriate
is that of the mail handlings in the same operation.
subclass distribution
could be represented
He also
by the
of the IOCS handling tallies.62
While mixed-mail tallies convey information on the mail handled in various
19
cost pools by virtue of the close relationship
20
and certain shapes and/or classes of mail, not-handling
21
information.
22
purpose of constructing
Therefore,
” Some services-e.g.,
handling in processing
subclass.
the appropriate
distribution
between mail items and containers
tallies convey no such
treatment of not-handling
key shares for volume-variable
tallies for the
costs is to
Certified-provide
for no additional or preferential
and distribution, beyond that afforded the underlying
62 Docket No. R97-1, Tr. 34/18221-2.
mail
74
1
ignore them.63 For some cost pools-primarily,
2
pools-the
3
handling tallies in proportion to all direct and distributed
4
(including special services).64
5
distributions
6
distribution
7
collective share of the special services, relative to the shares based on the
8
handling tallies alone.
9
weight in the special services, the differences
Docket No. R97-1 distribution
special service related cost
method did so, by distributing
not-
mixed handling tallies
However, in other cost pools, the not-handling
excluded the special services, with the effect of raising the
key share of (collectively)
the mail subclasses
Since the distribution
and lowering the
keys for the affected pools had little
between the handling shares and
10
the final distribution
key shares for the subclasses
11
combined with the proposed encirclement
12
R97-1 treatment would tend to underdistribute
13
special services.
14
eliminates the differential treatment of special services in the distribution
15
the not-handling
16
distributions
17
shares on the observed handlings alone.
Therefore,
tallies.
were small.
Particularly
changes, however, the Docket No.
volume-variable
the Postal Service’s proposed
costs to the
distribution
method
step for
In the cost pools where broadly based not-handling
are not warranted,
this has the effect of basing the distribution
63 This would also be the appropriate treatment of not-handling
operations, once causal models of allied labor volume-variable
available.
64 In this case, the distribution
distribution.
key shares are unaffected
key
tallies in allied
costs are
by the not-handling