Christensen Associates Finds that $2.5 Billion of U.S. Postal Service Costs Are Tied To Current Service-Standard Levels

Categories: News, Studies

January 9, 2011 - A. Thomas Bozzo, Sam Cutting, Travis Grau, and Joe Henningfield

At the request of the Office of the Inspector General, Christensen Associates investigated areas of potential cost savings for a hypothetical one-day relaxation of service standards—defined as the number of days from entry of the mail into the postal system until delivery.

We examined costs in the Postal Service’s mail processing, transportation, and delivery functions. We identified approximately $2.5 billion in costs for FY 2010 that are partly or wholly related to service standards. However, because of the interrelation of functions, not all of these costs are available as potential cost savings from extending service standards by one day. We noted that service standard changes could also enable significant, but not easily quantified, cost savings through network optimization.

 Our full report is available at the Office of the Inspector General’s website.

Summary of Findings

  • The Postal Service pays workers wage premiums for work on night shifts and on Sundays, which is required in large part to meet one-business-day service standards for local First-Class Mail. We identified premium pay costs of $336 million for “preferential” products in FY 2010. Relaxing service standards could allow mail processing to be scheduled largely during day shifts and away from Sunday, avoiding premium pay costs.
  • We also identified $1.1 billion in other mail-processing costs that may, in part, result from service standards for retail First-Class Mail. Data on costs and workhours by time of day suggest that these partly reflect elevated staffing levels used to clear outgoing mail to meet preferential mail service standards.
  • Service standards for First-Class Mail and Priority Mail determine whether mail travels by ground or by more expensive air transportation. Relaxing service standards by 1 day could allow the Postal Service to obtain significant transportation cost savings by shifting some 2-3 day mail from air to ground transportation.
  • Overtime pay is another potential source of service-related cost savings. The Postal Service paid $811 million in overtime wages in 2010. It is unclear how much of this cost is tied to service standards, but a substantial portion of overtime coincides with the Monday delivery workload peak.
  • Cost savings from service reductions may be offset by loss of mail volume because demand for postal products would be lower, other things equal, under reduced service standards. Analysis of demand-side effects was beyond the scope of our analysis.
  • Our analysis was intended to quantify service-related costs, not to recommend any specific service changes or related operational changes.