2.4 ENABLING STRATEGIES

During 2004 significant progress was made on numerous enabling transformation initiatives in support of the Postal Service's commitments to foster growth through customer value, improve operational efficiency, and enhance a performance-based culture. These initiatives, which ranged from financial management to privacy, are at various stages of completion.

2.4.1 ENHANCE FINANCIAL MANAGEMENT

The Postal Service is improving financial management by reducing outstanding debt, enhancing reporting transparency, financing the delivery network, and exploring alternative investments for deferred retirement liabilities.

Reduce Outstanding Debt

In theTransformation Plan the Postal Service committed to reducing outstanding debt by recovering prior year losses and maintaining a disciplined capital investment program.

A debt reduction plan of $800 million was incorporated into the 2003 Integrated Financial Plan. However, the Postal Civil Service Retirement System Funding Reform Act of 2003 (Public Law 108-18) significantly increased Postal Service cash flows. Aided as well by the increased flexibility provided by the refinancing activity undertaken in 2003, the Postal Service reduced debt by $3.8 billion to an outstanding balance of $7.3 billion.

For 2004 the planned debt reduction was in the range of $4.2 to $4.7 billion, well beyond the estimated $2.7 billion required by Public Law 108-18. The Postal Service ended 2004 with $1.8 billion in debt outstanding, a reduction of $5.5 billion from the prior year, resulting in the lowest level of year-end debt since 1984. Interest expense on Postal Service debt in 2004 totaled $14 million, which was $321 million below the 2003 level, and the lowest since 1972. For 2004 the interest savings, net of investment income, that can be attributable to the 2003 refinancing, is estimated to be $275 million.

Enhance Reporting Transparency

The Postal Service completed the following initiatives in 2004 to enhance reporting transparency: The Postal Service released the 2003 Annual Report, which included additional financial information in its footnotes and an expanded Management Discussion and Analysis section.

Beginning with postal quarter I 2004 the Postal Service has reported significant financial information on its commercial Web site, www.usps.com, consistent with the Securities and Exchange Commission (SEC) Form 8-K type reporting requirements.

Consistent with SEC Form 10-Q type reporting requirements, the quarterly Financial Reports were expanded in 2004 to include an enhanced Management Discussion and Analysis section, additional financial statements that provide the same level of detail as contained in the Annual Report, and segment analysis by product and function.

In early 2004 the Postal Service completed its conversion to monthly reporting from the 13 accounting periods used previously. Monthly reporting has eliminated confusion about the postal calendar year and allows comparisons of Postal Service financial results with those of competitors, customers, government, and other econometric databases, all of which generally report financial data in calendar quarter and monthly formats. The Postal Service also implemented a new general ledger system in 2004.

In 2004 the Postal Service established procedures that align with certain requirements in Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). The Postal Service identified its major processes and is documenting and assessing them as part of its program management responsibilities consistent with SOX.

Finance Delivery Network Expansion on Current Basis and Explore Alternative Investments for Deferred Retirement Liabilities

The Postal Service has considered adding a provision that allows for inclusion of land acquisition costs in the revenue requirement in future general rate cases. This provision could be included in the next omnibus rate case.

Postal Service efforts to address retirement liability issues and the Postal Civil Service Retirement System (CSRS) Funding Reform Act of 2003 (Public Law 108–18) have resulted in the Postal Service now having two fully funded pension plans. This replaces the strategy of exploring alternative investments for retirement liabilities.

Public Law 108–18 included a transfer to the Postal Service of the CSRS benefit cost associated with military service previously funded by the U.S. Treasury. This amounted to a retroactive cost transfer of $27 billion. Resolution of this matter has been the subject of congressional interest throughout 2004, and legislation that would return the cost of military service for Postal Service retirees to the U.S. Treasury is pending in both the Senate and the House.

2.4.2 EXPAND USE OF SUPPLY CHAIN MANAGEMENT

Through the implementation of a supply chain management (SCM) process across the organization, the Postal Service has achieved a total of $1.4 billion in cost savings, reductions, and avoidances along with revenue generation since 2000. In 2004 more than $641 million was attributed to SCM activities. The Postal Service achieved these benefits of SCM by analyzing what is bought, where it is bought, how it is bought, and even how suppliers obtain it.

In the area of strategic sourcing, the Postal Service consolidates local and regional buys into national contracts, leveraging previously fragmented buying power. The national contracts for information technology equipment and services, retail terminals, and office equipment yield continuous year-over-year impacts. In 2004 the Postal Service impact from these three areas was $148 million.

In its efforts towards continuous improvement, Supply Management is using reverse auctions to capture true market pricing, compress competition, reduce cycle times, and lower total cost of ownership; applying standardization principles to reduce the variety of items, brands, and parts purchased; or outsourcing inventory management and distribution functions to increase efficiency and lower costs. To date the Postal Service has run nearly 600 reverse auctions, accounting for over $320 million in purchasing spend.

The standardization of maintenance, repair, and operating supplies has positively impacted costs by over $500 million in 2004, while improved management of vehicle inventories helped avoid $4.8 million in costs in 2004. An in-depth market analysis and benchmarking study of the utility industry led to the implementation of a Shared Energy Savings Program, which resulted in savings of $8.7 million in 2004.

Focus is also placed on innovations in product or service design. This is accomplished by listening to stakeholders and examining each link in the supply chain for possible cost reduction opportunities.

Applying SCM techniques during the purchase of modifications for AFSM 100s Flats Identification Code Sorter resulted in cost avoidances of over $9 million in 2004.

The Postal Service's Easy Ebuy Access program has been recognized as one of the most innovative information technology programs in government. Implementation of a new Contract Authoring and Management System (CAMS), slated for early 2005, will expand SCM e-business process capabilities by interfacing requisition data among the Easy Ebuy Access application, CAMS, and a new accounts payable system. Integration of these systems will provide the ability to capture spend data for identifying future cost reduction opportunities.

Finally, the Postal Service completed development of policy design objectives and criteria within its purchasing function to maximize the flexibility given to it under current law and to reflect commercial best practices. Final language was published in the Code of Federal Regulations to establish purchasing regulations and procedures that have the force and effect of law. Purchasing changes are in progress and will be fully implemented in 2005.

2.4.3 STRATEGICALLY APPLY TECHNOLOGY

In the area of technology, the 2002 Transformation Plan called for enhancing security, upgrading the infrastructure, and providing universal computing connectivity. The following sections highlight progress in these three areas.

Enhance Security Across All Technology

To ensure the security, privacy, and continuity of the nation's mail, the Postal Service is enhancing security across all technology. Strategies to accomplish this initiative include education and training, application certification, contingency planning, intrusion protection, and automated monitoring. These activities are well underway for completion by 2006. Some examples of progress made through 2004 include:

• Certifying 60 percent of critical or sensitive applications.
• Establishing compliant recovery plans for 57 percent of critical applications.
• Completing the deployment of 100 percent of intrusion detection sensors.
• Providing an additional layer of protection at more than 300 mail processing facilities to enhance security.
• Blocking more than 4 million non-business related and inappropriate Web sites.
• Scanning more than 13 million e-mail messages and 1 billion incoming Internet transactions monthly, which has prevented hundreds of thousands of viruses and harmful e-mails from entering the system.
• Providing security awareness and training to more than 130,000 Postal Service computer users in 2004.

Upgrade the Infrastructure

The Enterprise Data Warehouse (EDW) is the repository that collects Postal Service data from multiple sources for reporting and data analysis to provide a single source of information. Enforceable standards are being developed to ensure that this major database offers the reporting tools to support credible, reliable, consistent, and timely cross-functional analysis and reporting and that it provides customers an integrated view of all corporate data. Approximately 3,000 users now access the EDW daily, and produce more than 40,000 reports each week. EDW response time has also improved greatly in the last six months. The average report time is now less than 41 seconds, with 90 to 95 percent being completed in less than one minute. Performance will continue to improve as technical teams work with the user community to streamline report queries and fine-tune the system. More than 120 data sources are now housed in the EDW. During 2004 more than 5,000 employees were trained in Micro-Strategy — the query language used to extract reports from the EDW — and both the number of users and reports have increased significantly.

During 2004 the Postal Service modernized, secured, and simplified its infrastructure with the Advanced Computing Environment (ACE) program. ACE will allow the Postal Service to realize significant savings by 2006 through centralizing and reducing support functions for the 130,000 Postal Service computer users at 28,000 postal facilities nationwide.

Through the implementation of ACE, 270 software packages were reduced to 60. Through 2004, 147 national applications were converted to ACE, and 12,000 servers were removed from the field. While the number of servers, support sites, and, therefore, costs are decreasing; capacity has increased. Service has not suffered because the system is less cumbersome, less complex, more reliable, and easier to maintain and manage. Renegotiated contracts have reduced labor rates paid to contractors by as much as 37 percent. Consolidation and use of remote management tools are also lowering support costs, including the elimination of 330 field contractor positions, 200 contractor positions from the Raleigh facility, and an additional 250 contractors from the help desk function from 2002 through 2004. ACE supports the Postal Service's Intelligent Mail products and other transformation initiatives.

In 2004 the Postal Service also continued upgrading its midrange computing infrastructure. The midrange computing infrastructure supports new technological and application changes without jeopardizing legacy computing on mainframes. The midrange computing level has the least costly applications, operations, and support services. The upgrade started in 2003 and will continue through 2006. When the upgrade is fully implemented in 2006, approximately 30 percent of the workload from the Postal Service's mainframe environment will migrate to midrange computing, thereby reducing costs.

Provide Universal Computing Connectivity

Like other large organizations, the Postal Service is becoming more mobile and more reliant on technology. With network technology demands growing daily, the network infrastructure must be upgraded. As a result, the Postal Service is employing consolidated voice, data, video networks, and wireless technology to ensure universal computing connectivity.

In mid-2002 the Postal Service started migration to a single network infrastructure to support movement of the mail and access to the mail by the thousands of users who require enterprise technical resources. More than 6,000 postal network locations were transitioned to this high speed data network in 2004; the next section of the network is scheduled to migrate in the next two to three years.

2.4.4 ENSURE THE SAFETY, SECURITY, AND PRIVACY OF THE MAIL

In 2004 the Inspection Service completed development and staffing for the Comprehensive Intelligence Analyst Support function, which collects, analyzes, and assesses criminal and terrorist threats against the Postal Service. It also staffed the physical security specialist positions, which were created to conduct physical security surveys, threat assessments, risk analyses, and facility design reviews.

In 2004 the Inspection Service completed training in response to threats of weapons of mass destruction and hazardous materials (HAZMAT), which enables inspectors to respond capably to HAZMAT and Biological Detection System alerts.

The Inspection Service also completed the nationwide assessment of its security force, which is transitioning to a mobile, highly visible, hybrid security force comprised of Postal Police and contract security personnel.

The Inspection Service established two National Law Enforcement Communications Centers in 2004, which consolidate and improve monitoring and response capabilities for communications and alarm systems. They will be operational by the end of calendar year 2004.

Also in 2004 the Inspection Service continued initiatives to reduce and deter criminal attack against postal products, services, and assets by continuing the development and deployment of high security cluster boxes; continuing the use of Comprehensive Security Reviews and the Facility Risk Rating Model to improve the security of postal facilities; and partnering with major mailers to improve the security of their facilities. Collectively, these actions have led to approximately a 20 percent decrease in mail theft instances.

Privacy

During 2004 the Postal Service completed all of its transformation privacy initiatives, including the ability to track and process Freedom of Information Act (FOIA) requests electronically with the final implementation of its eFOIA tracking system. The eFOIA tracking system shortens the response time for requests and improves compliance with the statutory requirements on documentation and reporting. With approximately 1,500 FOIA requests annually, this electronic system has resulted in simpler, less burdensome compliance.