SECTION 2: PROGRESS AND OUTLOOK

In 2002 the Postal Service began monitoring all strategies contained in the Transformation Plan. This report focuses on progress made in 2004 and some deliverables scheduled for 2005 and 2006. The body of this report spotlights major transformation milestones and initiatives that realized significant gains or were completed in 2004. For explanations of milestones and initiatives that were the focus of action in 2002 and 2003, the Transformation Plan Progress Report (November 2003) should be consulted. The appendix to this report provides a summary of all strategies and substrategies contained in the original 2002 Transformation Plan.

2.1 FOSTER GROWTH THROUGH CUSTOMER VALUE

The Postal Service is financed solely through revenues generated by postal products and services. The Transformation Plan, under the overarching strategy of Foster Growth Through Customer Value, outlined opportunities to increase postal revenues through two main approaches: one, by enhancing retail access, and two, by adding value to and encouraging the growth of postal products and services.¹

2.1.1 RETAIL: EXPAND ACCESS TO POSTAL SERVICES

In the Transformation Plan the Postal Service promised to provide customers more options and better access to its products and services in order to make more efficient use of its extensive retail network. The shifting demographics of postal customers, the changes in customer lifestyles and behaviors, and the rise of new technology all affect how the Postal Service should provide access to its products and services. To encourage greater market growth, the Postal Service is employing technology to expand the use of self-service options and alternate points of access with such services as the Automated Postal Center (APC), vending machines, Stamps by Mail, Stamps Online, Stamps on Consignment, stamps through ATMs, Click-N-Ship, and Change of Address service online and via the telephone.

Move Simple Transactions Away from the Retail Counter

Many customers are unaware that there are convenient alternatives for buying stamps other than at a Post Office retail counter. Last year the Postal Service completed an advertising campaign that promoted alternative access to postal products and services, such as those mentioned above. This campaign included television and print ads, in addition to new logos and postal product signs displayed at the 60,000 locations selling stamps. Increasing awareness of retail alternatives to move simple transactions away from the retail counter is an ongoing effort that has been incorporated into normal business processes.

Create New, Low-Cost Retail Alternatives

As part of an ongoing effort to provide Quick, Easy and Convenient service to customers, the Postal Service will complete deployment of 2,500 APC units to high-traffic Post Office locations by late November 2004. APC units are customer-friendly self-service kiosks that allow individuals to conduct 80 percent of postal transactions available at window service. In many locations units will be accessible 24 hours a day, 7 days a week.

Optimize the Retail Network

Retail optimization is a dynamic and evolving process that establishes decision-making criteria for updating the retail network. When changes affect the retail network, such as a change in operating hours, the Postal Service uses a variety of media to advise the public, mailers, management associations, labor unions and employees of any such change. When a Post Office location is closed, however, the Postal Service follows a statutory procedure including customer notice and appeal rights.

In practice, few retail outlets are closed or relocated. In a normal year about 100 of approximately 28,000 Post Office locations are closed. When a Post Office location is closed, communities on average appeal less than 10 percent to the PRC, which remands less than 1 percent of the total annual closures to the Postal Service for further consideration.

Develop New Retail Services that Increase Customer Value and Postal Revenue

The Postal Service is conducting a limited test of Business Solutions Centers in targeted areas to meet the need for increased access of Postal Service products and services for small business customers. Business Solutions Centers provide a place for customers to meet with postal consultants to learn how to grow and retain their business using the mail and other postal products. The Postal Service also is expanding and enhancing services it already provides for government and larger commercial partners, such as acceptance of passport applications. As of September 2004 passport services were offered in 3,700 Post Office locations, an increase of 1,300 locations since September 2003. Due to increasing interest from government agencies and commercial businesses in utilizing space in retail lobbies, the Postal Service also has developed a Lobby Asset Valuation model to help determine the value of its lobby space. The model has been used to negotiate contracts and agreements for use of Postal Service retail space.

With First-Class Mail volume continuing to decline, the Postal Service is analyzing and initiating new ways to replace revenue and contribution to overhead.

Use Technology to Enhance Value

The Postal Service, operating within a highly competitive marketplace, is using technology wherever possible to enhance customer value of its products and services.

In October 2003 the Postal Service teamed with eBay to offer eBay sellers easy access to online postal shipping labels.

In August 2004 the Postal Service launched a Business Reply Mail Web site that provides information about how to use reply mail, allows customers to apply for permits, accepts fee payments via credit card or through the Centralized Account Processing System systems, confirms ZIP+4 codes, and electronically creates preapproved camera-ready formats for Business Reply Mail.

Another innovation launched in September 2004 was the Return Receipt (Electronic) service that allows the sender to receive an electronic facsimile of recipients' signatures.

As the Postal Service provides more information about the mail to its customers, it envisions that end-to-end visibility of mail in the mailstream will become a reality. This vision, termed Intelligent Mail service, has three main components: uniquely identify mail and its aggregates (i.e., mail containers such as trays), develop and deploy an enabling infrastructure, and enhance address quality.

Uniquely Identify Mail and Aggregates

A key element of Intelligent Mail service is the OneCode Vision, which refers to the creation of one distribution barcode per mail type that uniquely identifies the mail and its aggregates. In 2004 the Postal Service developed and began testing such a distribution code to identify letters and flats. Known as a four-state code because four different types of bars comprise the code, the code includes distribution and customer applied information. It also enables customers to select multiple services. In a similar development in 2004 the Postal Service also created a new, enhanced distribution label to uniquely identify trays and distribution information.

Develop and Deploy Enabling Infrastructure

The information-sharing requirements of a successful Intelligent Mail effort depend on a supportive infrastructure. The Postal Service is developing and deploying enterprise-wide common infrastructures that will capture codes on mail and disseminate the information in near real-time. In 2004 Phase I of the Mail Processing Infrastructure (MPI) program was completed on time and under budget. This program upgraded the wiring in 62 processing and distribution centers. MPI maximizes performance by ensuring flexibility, data integrity, and adequate bandwidth for communication between mail processing equipment and systems. Phase II, which will upgrade an additional 108 facilities, began in May 2004. By the end of September 2004, 27 plants were completed.

Enhance Address Quality

The Postal Service, working closely with the mailing industry, is improving the filing of change-of-address orders. These efforts include improvements to the Internet Change of Address (ICOA) process, which has been deployed nationwide, and the development of Telephone Change of Address (TCOA), which was deployed to four areas in 2004. ICOA and TCOA are used by a growing number of households and businesses, and represent 6 percent of change-of-address orders filed in the closing months of 2004. The Postal Service also is redesigning the paper change-of-address form to make it easier to use and to improve the quality of information received from customers. Another initiative to improve the quality of addresses used by mailers is to ensure more frequent use of move update products that provide change-of-address information to qualified mailers. The overall benefits and impacts of such a change are being studied and, if warranted, will be implemented in the future. Procedures for Address Change Service (ACS) have been reviewed and improved to increase the provision of electronic notification, reducing the number of expensive, manual ACS transactions. The National Change of Address Linkage System (NCOA Link) was implemented in 2004 to replace the legacy NCOA system and further protect the privacy and security of customer information. NCOA Link provides access by mailers to secure data while providing a convenient means for correcting outdated customer addresses.

Design Rates and Mail Preparation to Match Customer Capabilities and Needs

Streamlining the postal ratemaking process and developing more flexible procedural solutions to rate and classification cases have allowed the Postal Service to increase its responsiveness to customer needs. A number of key initiatives have been undertaken in this area.

The Postal Service has focused on a process to develop and implement negotiated service agreements (NSAs). The process facilitates customer-specific experimental contract pricing agreements that seek to increase volume and revenue and reduce costs. Beginning in September 2003 the Postal Service entered into its first NSA with Capital One Services. By the end of 2004 this NSA is estimated to have produced cost savings and new contribution that greatly exceed rate case projections.

In June 2004 two new functionally equivalent NSAs with Bank One Corporation and Discover Financial Services were filed at the PRC. These NSAs test the Postal Service's ability to expedite contract pricing for NSAs functionally equivalent to those already approved. The Board of Governors approved the NSA with Discover Financial Services in October 2004.

In June 2004 the Postal Service also filed at the PRC an experimental case to test the pricing for a Priority Mail flat-rate box. As proposed, customers will be allowed to choose from two box options, both with the same cubic volume, and will be charged one identical rate, regardless of weight or distance. The Board of Governors approved the experiment in October 2004.

In July 2004 the Postal Service filed a case with the PRC to test a new pricing approach for Repositionable Notes, self-adhesive notes placed by mailers on the outside of mail. The notes can be removed by the customer and used as a reminder.

Experimental Periodicals mail co-palletization dropship discounts for high-editorial publications will be implemented in fall 2004. This classification will help to reduce costs of Periodicals' mail by encouraging high-editorial, heavy-weight, small-circulation publications to co-palletize and dropship. These discounts would fill a gap in an ongoing co-palletization experiment.

Position Mail as a Key Communications Medium and as a Customer Relationship Management Tool

Through such efforts as the re-launching of www.usps.com, the continuation of the Direct Mail Affiliate Merchant Program, the Simple Formulas Tool Kit, Direct Mail Made Easy Seminars, and ongoing customer outreach and liaison programs like the Postal Customer Councils and the National Postal Forum, the Postal Service has incorporated the positioning of mail as a key communication medium and as a customer relationship management tool into normal business procedures.

Enhance Package Services

The Postal Service has a number of continuing strategies to position itself better in the package market.

Carrier Pick Up is a service that allows customers to contact their carriers online and arrange a pick-up on the following day at no additional cost. This service allows the customer to communicate directly with the carrier and provide specific instructions or requests online instead of leaving personal notes in mailboxes or waiting to talk to the carrier. Carrier Pick Up was piloted in November 2003; national implementation was completed in August 2004.

In October 2004 Parcel Return Service (PRS) completed the first year of its two-year experiment. PRS is a service that enables merchants or their agents to collect returned merchandise at selected postal facilities, which are often the same facilities where these customers enter their outbound mailings.

Map Channel Strategies Around Customer Needs, Contribution, and Growth Potential

The Postal Service continues to improve its marketing effectiveness by implementing plans to target its marketing programs toward key mailing segments. Customer Connect is a program that encourages carriers to inform customers, primarily small to medium businesses, about products and services available through the Postal Service. Nearly 7,000 carriers working out of 1,500 Post Office locations are currently participating in the program and expansion will continue in 2005.

In the spring of 2004 the Postal Service launched a new Internet-based eBSN Web site that allows major mailers to track responses and add business information to the Business Service Network 24 hours a day, 7 days a week.

In the summer of 2004 new PostalOne! software replaced the legacy Permit system's acceptance unit and business reply user functions. The new technology provides more timely information and easier access for acceptance and verification processes.

Develop New Features and Services

In 2003 the Postal Service introduced Customized MarketMail and Priority Mail prepaid flat-rate envelopes. In 2004 Click-N-Ship was updated to allow customers who purchase Priority Mail and Express Mail postage paid labels to add insurance to these purchases. Additionally, in 2004, for added customer convenience the Postal Service requested an experimental Priority Mail flat-rate box in two shapes. Developing new product features and services is an ongoing effort that has been incorporated into business procedures and product offerings.

Develop a Corporate Pricing Plan

The major criteria that determine the Postal Service's prices are established by the Postal Reorganization Act of 1970. The Postal Service works within these statutory parameters to price its products and services in response to customer needs and other market demands. The Postal Service corporate pricing plan encompasses an internal process that includes rate design, communication with stakeholders, and legal review. As part of transformation the Postal Service committed to improving its pricing process and began by addressing the needs of specific customer segments, specifically with a redesign of the Domestic Mail Manual (DMM).

In 2004 the Postal Service continued its redesign of the DMM series of publications with release of a Chinese-language version of the DMM 100, A Customer's Guide to Mailing. The earlier release of the DMM 100 included both an English and Spanish version. In addition, both a large print version and an audio version of the DMM 100 are currently under development. The DMM 200, A Guide to Mailing for Businesses and Organizations, was published in 2003, and a revised version of the DMM 300, Domestic Mail Standards of the United States Postal Service (a general guide to mailing), will be released in 2005. Further DMM versions and updates are being incorporated into ongoing and normal business operations within the Postal Service.

Generate New Revenue for the Postal Service by Retaining and Increasing International Market Share

The Postal Service is moving actively in the international mail market as it seeks to retain a viable share of the growing international mail and package business. These efforts place greater emphasis on delivery performance for all classes of international mail, particularly in the packages market.

In 2004 the Postal Service had strong revenue growth in international packages due to stable prices and continued improvements in service, resulting from pay-for-performance agreements for Global Express Mail and effective management of delivery providers in key economic regions for the United States including Europe and Asia. The Postal Service also maintained service continuity of its Global Express Guaranteed service — the Postal Service's premier international delivery service to more than 190 countries and territories worldwide — by entering into an alliance with Federal Express. In addition, the Postal Service continues to work closely with its largest customers by providing valued added customs systems to ensure smooth clearance across borders. Such activities to generate revenue and increase international market share have been incorporated into normal business procedures within the Postal Service.

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.