2.2 INCREASE OPERATIONAL EFFICIENCY

The Transformation Plan described 10 specific, efficiency-based strategies to eliminate costs from the Postal Service's operating systems. The major progress made since publication of the Transformation Plan to implement each of these strategies is described below.

ENHANCE ALREADY EFFICIENT LETTER PROCESSING

In June 2002 the Postal Service awarded a contract for Phase I of the Postal Automated Redirection System (PARS), which allows the Postal Service to intercept undeliverable-as-addressed mail very early in the distribution process and redirect those mailpieces to their appropriate next handling, thereby eliminating unnecessary delays and handlings. A successful first article test for this process was completed in November 2003. Deployment to mail processing facilities began in January 2004, and PARS was partially deployed to nine sites. Due to some mail processing integration issues, deployment was temporarily placed on hold. However, deployment resumed and 29 sites have accepted PARS units. Deployment of Phase I is expected to be completed by November 2004.

COMPLETE AUTOMATION OF FLATS PROCESSING

The Postal Service has developed several automation programs for the flat mailstream. The Transformation Plan focused on strategies to increase machine throughput, improve address recognition, enhance feeder systems, and add tray handling systems. A number of key investments have been made in these areas.

An automated flat feeder and optical character reader modification was added to the Flat Sorting Machine 1000, which is capable of sorting thick, hard-to-handle, flat sized pieces. Consequently, the name was changed to the Upgraded Flat Sorting Machine 1000 (UFSM 1000). The modification will increase machine throughput. Deployment of these equipment modifications was completed in 2004.

• The Automatic Tray Handling System for the AFSM 100 upgrades take-away conveyors with a state-of-the-art system that automatically dispatches full trays and replaces them with empty trays that are properly labeled. This system has been delayed to allow time to evaluate proposed technological design changes that could reduce costs and space requirements. Deployment is now expected to be completed by the end of 2006.
• A system similar to the AFSM 100 automatic tray handling system has been designed for the UFSM 1000. This program has been indefinitely suspended based on a strategic review of long-term plans for the UFSM 1000.

Another improvement to flats distribution is the consolidation of the keying of non-machine readable addresses on flats at the remote encoding centers with the Flats Remote Encoding System (FRES). This effort enables the Postal Service to standardize and improve the efficiency of the AFSM 100 video encoding operation. It will also provide an infrastructure to support other remote encoding demands for PARS and the Automated Package Processing System (APPS). A contract to develop FRES was signed in November 2003. A first article test is expected to be completed in February 2005.

EXPAND MECHANIZATION OF MATERIAL HANDLING OPERATIONS

The Postal Service has implemented a number of operational initiatives focused on material handling activities. Two projects to expand mechanization of material handling operations, the Low Cost Tray Sorter (LCTS) and the Universal Tray System (UTS), were highlighted in the Transformation Plan.

LCTSs are justified and deployed on a site-specific basis and typically are operational within four-to-six months of approval. To date 160 units have been deployed; additional site-by-site justifications are possible, resulting in additional possible equipment deployments.

The installation of UTS was completed in Ft. Myers, FL, in 2003. There are no further plans for additional deployments due to both a low return on investment and a focus to pursue simpler, lower cost, standardized solutions.

IMPROVE DELIVERY EFFICIENCY

Delivery, the Postal Service's largest cost center, grows each year due to the addition of approximately 1.8 million delivery points annually. Two significant research and development efforts began in 2004 — a Flats Sequencing System (FSS), which would allow the delivery point sequencing of flats, and Delivery Point Packaging (DPP), which would combine both letters and flats into individual delivery point packages.

FSS automates the manual sequencing of flats into delivery order. Fabrication and in-plant testing of prototypes began in July 2004 and will continue through September 2005.

DPP will sort letters and flats into a single unit that can be delivered as a delivery point package, with the package sequenced for delivery. Contract awards to develop this equipment are scheduled to be made in November 2004.

The development and training for a delivery route optimization modeling tool (Carrier Optimal Routing) was completed in April 2004. The route optimization process can assist in reducing workhours, vehicle mileage, and costs while improving safety.

A highly publicized transformation program, testing of the Segway Human Transporter, a motorized scooter which the Postal Service deployed experimentally along various postal routes, was suspended in 2004 until a more adequate battery can be developed.

DEPLOY NEXT-GENERATION PACKAGE SORTING EQUIPMENT

The Postal Service continues to see package delivery as a revenue growth opportunity and is pursuing greater efficiency in package sorting activities. Deployment of the next generation of sorting equipment for parcels and bundles, APPS, began in July 2004 and is expected to continue through September 2005. In total 74 APPS are planned to be deployed to 70 mail processing facilities.

OPTIMIZE TRANSPORTATION AND DISTRIBUTION NETWORKS

Several transportation management systems have been developed to ensure that mail is transported and routed effectively, and significant efforts have been made to assess costs and service performance associated with contracted transportation.

The Transportation Optimization Planning and Scheduling effort, which will help the Postal Service actively plan and execute its transportation operations, is in the process of gaining consensus and stakeholder buy-in.

The Surface Air Support System provides the Postal Service with a comprehensive transportation "visibility" approach through the capture of all scanned information for mail traveling via Federal Express and commercial air carriers. The scanned data are linked with the Surface Air Management System assignment data for payment reconciliation and service performance assessment. National deployment of surface scanning is expected by July 2005.

Efforts to create a flexible logistics network to reduce costs, increase overall operational effectiveness, and improve consistency of service, formerly called Network Integration and Alignment, continues as an evolutionary process. This effort, now more accurately called Evolutionary Network Development, currently focuses on a proposed bulk mail center (BMC) retrofit transition effort. This is a planning effort to possibly redefine BMCs as regional distribution centers for all parcels and bundles, as well as to function as part of a hub and spoke program. Existing networks are continuously reviewed and adjusted in response to changing circumstances.

INCREASE RETAIL AND CUSTOMER SERVICE PRODUCTIVITY

Customer service productivity improvement strategies include continued automation of Post Office backroom activities, automation of mail forwarding, and standardization of operational best practices. The Postal Service has delayed the review process to baseline staffing requirements for Computerized Forwarding System sites, due to the anticipated impact of PARS.

Since publication of the Transformation Plan, the Postal Service reviewed retail facility designs in order to reduce overall construction costs for small facilities. As a result of this redesign effort, the cost of facilities constructed using this approach has been reduced by 50 percent.

IMPROVE PERFORMANCE MANAGEMENT

The key activities planned to improve performance management in the Transformation Plan and other direct labor reviews, which were completed in November 2003, have been incorporated into normal business procedures. Area Mail Processing Consolidation is ongoing. Priority Mail standardization was completed in September 2003.

MANAGE REALTY ASSETS

Due to ongoing efforts to review and aggressively manage excess real estate, the Postal Service realized gross revenues from property sales of $23.5 million in 2004. After subtracting the book value of disposed assets and fees, the Postal Service had a net gain of $11.2 million (these figures are subject to final audit). In addition, the Kansas City, MO Main Post Office and Arlington, VA Main Post Office were sold for a combined value of $24.1 million, with the sale value used to offset the cost of replacement facilities.

INTERNATIONAL AIR TRANSPORTATION DEREGULATION

The initiative to study deregulation of air transportation rates for the transportation of international and military mail, to gain the authority to contract competitively for such transportation in the open market, requires legislative action. The Postal Service continues to analyze the impact of this change and will continue to seek legislative support.