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What changes are coming to the United States Postal Service, and how will they affect shippers? How will the hurricanes hitting the Gulf Coast affect logistics in that region and beyond? And the pandemic has accelerated interest in transportation management systems.
Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast. Hi, I'm Dave Maloney. I'm the editorial director at DC Velocity. Welcome.
Logistics Matters is sponsored by DCV-TV. Five channels of streaming video are yours for the viewing on DCV-TV. Major improvements have recently been made to the DCV-TV platform to enhance the viewing experience, provide greater search capabilities, and to expand the capacity of the video library well beyond the 3,000-plus videos already in the archive. Be sure to check it all out at DCVTV.com.
As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be along to provide their insight into the top stories of this week. But to begin, what is the future of the United States Postal Service? Can we count on it for timely parcel shipments? For the answer to that question, here is Ben and today's guest.
Thanks, Dave. Joining us today is Dr. Phil Evers, who's an associate professor of supply chain management at the University of Maryland's Robert H. Smith School of Business, where he teaches courses in purchasing, transportation, and inventory management.
Thanks for being here today. Phil.
Thank you for having me, Ben.
We have a lot to talk about today, because there are lots of changes that the U.S. Postal Service, which just in May confirmed its latest Postmaster General, whose name is Louis DeJoy. And he comes to the agency from a background as a logistics executive with XPO Logistics, the enormous transportation and third-party logistics provider, and he has stated a goal of being at the agency to try to right the ship in terms of its financial operationswhich, the agency has been posting for many quarters, for several years now, some real steep financial losses. And it's been interesting to see some of the early changes that he's made to try to have the agency operate more profitably. And so, we would love to dig in a little bit to those, and see what some of the impacts might be from customers' point of view. Can you explain a little bit to us about what the mission of USPS is?
The mission of the U.S. Postal Service is essentially to provide services to bind the nation together. Think of this in terms of first-class mail. The obligation is to provide prompt, reliable, and efficient services to all areas. I think the big issue here is, how do you define "prompt, reliable, and efficient." That could be in the eye of the beholder.
Over time, the mission has changed. In 1970, the United States Postal Service was removed from its cabinet position within the federal government to an independent federal agency within the executive branch. By removing this, the intention was to ensure that there was a continuity of management. Prior to that time, some of you may be aware that postmasters at individual post offices were often political appointees. The 1970s changed that so there was more of a traditional business-management focus within the Postal Service.
Interesting. I didn't realize some of that history there.
As you say, the post office has been around for a long time, and it seems like some of the basic ground conditions have shifted under its feet. For example, with the advent of email, people are sending fewer postal letters. And with the advent of e-commerce, people are sending a lot more parcels through the network. So, can you explain a little bit why the USPS has been losing money for so long, and what sort of changes might be needed to fix that?
Sure. Recognize that federal agencies are typically not profit-driven. At bestat bestthey strive to be breakeven. And that's the case with the U.S. Postal Service. When they do generate a profit, they tend to face scrutiny. Are they charging too high of rates? Are they cutting corners? Are they not providing the appropriate level of service?
In 2006, Congress passed legislation requiring the U.S. Postal Service to prepay retiree and health benefits 75 years in advance. Ever since 2006, the U.S. Postal Service has had big deficits, roughlynot completelybut roughly equivalent to the size of these payments. Obviously, a change to the prefunding law would have a tremendous impact on the Postal Service financial status.
Interesting. Yeah. And I imagine that those conditions are very different from what some of the other agencies providing similar services, like a FedEx or a UPS, might face. It seems that they probably don't have to manage that same sort of prepaid burden there, on their books.
Most other state and federal agencies do not prepay their retiree benefits in advance. Certainly not 75 years in advance.
Right, right. It's a really important thing to keep in mind here. Are there other factors that come into play on how the agency performs? And how might those impact the service that people see?
Sure. So let's start with some facts. On the revenue side, the Postal Service is having two components. There's a non-competitive component and a competitive component.
The non-competitive space is essentially first-class mail. First-class mail volumes are down roughly 50% since their peak in the early 2000s. That's not coming back. And currently, rate increases on first-class mail are based on inflation. It's unclear to what extent cost changes based on volumes are considered in the rate increases. Moreover, mail categories are generally priced such that there are no cross-subsidies. For example, first-class mail is expected to pay its own way. Bulk mailwhat some people might call junk mailbut, bulk mail and pre-sorted mail are also expected to pay their own way as well. So it's not like first-class mail is subsidizing bulk shippers or vice versa.
On the other hand, there's also the competitive space, and that's the express-mail and package side. That business has been growing dramatically over time. But it is competitive and they doand the U.S. Postal Service does not have a monopoly in that area. As we know, there's UPS, FedEx. Amazon has stepped in as well. From the Postal Service perspective, there's no foreseeable reductions in sight. The number of packages that they handle continues to grow. Moreover, package shipments can be priced in accordance with market forces.
So, over time, there's been a dramatic shift in the Postal Service delivery composition, from the non-competitive first-class mail to the competitive package and express mail. On the cost side of the business, there are over 30,000 post offices in the U.S. Add to that all of the processing facilities, the vehicles, the equipment, plus approximately 600,000 employees, many of whom are organized, and all told you have an extremely large infrastructure with very high fixed costs. With this type of structure, pricing is a challenge.
There's the difference between rural deliveries and urban deliveries. Obviously, urban deliveries tend to be a lot less expensive. There's a lot more volume in a small space, a lot more density. Rural deliveries are much more expensive, especially in some parts of the U.S., which are extremely rural and very, very difficult to get to. Moreover, they are big cross-subsidies in terms of distance. It's a whole lot more expensive to send a letter or a package across the country than it is across a city. And not all of these things are taken into account in the pricing. The result of all this: Very difficult situation that the Postal Service finds itself in.
Yeah, it sounds like some real challenges. It'stheir hands certainly seemed tied by some of those differences in competitive pricing between parcels and letters and expensive rural delivery. And those soaring consumer expectations that we cover so oftenalso called the Amazon effect by many peopleabout wanting their service as fast as possible, for as little as possible in fees there. Do you have any ideas about what USPS can can do going forward, and what sort of changes that customers might see, both on the parcel side and the letter side?
Sure. So, let's look at this in terms of the Postal Service's strengths and weaknesses.
One of the strengths of the Postal Service is, it is a government agency without a profit motivation. So, that gives them a little bit more leeway in terms of what they do and how they do it. And another benefit of being a government agency is they avoid a lot of taxes. They don't pay property taxes on their buildings, they don't pay vehicle taxes on their fleetsthings like that. So they do avoid certain costs. Another strength of the Postal Service is that they gowell, practicallyevery address in in the U.S. six days per week. That's a tremendous strength that no other carrier is even close to doing. Nor do most carriers want to do that six days a week. They provide last-mile service for, not only their own shipments, but also for many shipments from Amazon, UPS, and even FedEx.
The weaknesses of the U.S. Postal Service, though, are many as well. First off, they're a government agency without a profit motivation, and they can be subject to political involvement. One proposal that's been made is to charge rates based on ZIP code, similar to the zone pricing that a UPS or a FedEx might charge.
Some of the possible changes: First off, you have a postal carrier that goes to every location every day of the week. Take advantage of those delivery routes. For example, you could set up meter readings so that, as the postal carrier drives by a home, they read the utility meters, whether it's electric or water. Another possible change is to cut back on daily deliveries. Again, we're talking here last-mile service. And as we all know, in all aspects of logistics, last-mile service tends to be by far the most expensive. One way of cutting back on daily deliveries might be to have fewer deliveries per week. Another possibility is perhaps maybe not to do daily delivery service at all. Recognize that through the mid-1800s, mail actually had to be picked up by customers at the post office. Now how many people would actually drive to their post office to get the mail every day? I'm not sure that that many would, but that may also indicate the true value of daily delivery. Now, of course, the big drawback of this approach is its impact on package deliveries. Another possible change is a charge for delivery service. My economist friends all tell me if you want to find out the true value of postal service, charge the recipients for delivery, and see how many people would actually sign up for that.
Now, certainly there are other possible changes, and there could be a lot of operational changes as well. I'm not sure that there is an answer here. Otherwise, I believe the U.S. Postal Service would already be doing it. Unfortunately, the timing, with the current pandemic, and of course, the upcoming election, it's an unfortunate time to be doing some of those changes.
Right? It sure is. Boy, that's a fascinating array of potential changes that we might see at an agency that so many of us are accustomed to interacting with nearly every day. Thank you so much for walking us through some of the possibilities there in the future. It's obviously going to be something that the entire country is keeping its eyes on going forward here. Appreciate so much your being with us today, Dr. Evers.
We've been talking today with Dr. Phil Evers from the University of Maryland's Robert H. Smith School of Business.
Thank you for joining us.
Thank you for having me.
Thank you, Phil and Ben.
Now let's turn to some other supply chain news from the week. Victoria, you reported this week that the pandemic is accelerating interest in new logistics technologies. And one of the latest areas to gain some steam is transportation management systems, better known as TMS. What are users looking to gain from them?
Sure. Well, a study this week from Odyssey Logistics & Technology, they studied 350 shippers earlier this spring. And they found that companies are really looking to TMS solutions for a variety of reasonsparticularly to increase shipping transparency, to automate cost management, and to really, what theydo what they say is "close the customer communication gap."
So when it comes to shipping, maintaining communication with customers consumes a huge amount of time and can cause a lot of stress for pretty much everyone in the channel. So, automating that process really helps reduce that stress and anxiety. So they said that this has really been exacerbated during the pandemic, as we've seen with the volatile, you know, marketplace we're dealing with. So alleviating the stress is really helpful. So the communication aspectimprovement there is a big plus, and a big reason why they're seeing increased interest in these kinds of systems.
Can you share some of the statistics that came from the survey?
Absolutely. So, a couple of things stood out to me.
So first, the researchers found that nearly two-thirds of respondentsabout 65%said that particularly having cloud-based access to shipping operations is either critically important or very important, considering the effects of Covid-19 on logistics operations. So, that really shows that, you know, what's going on recently, you know, they really want access to that information.
Second, as the pandemic continues, they found that more than half of respondents said they're likely to reassess integrating a cloud-based TMS. So, you know, those that don't have it now are really, really looking at that, as I said, to sort of gain, gain that visibility, transparency, that kind of thing. So, to me, it's just further proof that technology, you know, continues to shape the business landscape, and logistics in particular.
Yeah, I think we will continue to see the growth of those cloud-based technologies. Thank you, Victoria.
Ben, Hurricane Laura is making its way through the middle of the country as we record our podcast, leaving, of course, lots of devastation in its wake, sadly. What effects is it having on supply chains?
That's right, Dave. Hurricane Laura was a Category 4 storm when it made landfall yesterday, which was early on Thursday, in Louisiana, some parts of Texas. And that made it even stronger than Hurricane Katrina, which hit New Orleans back in 2005 as a Category 3.
So some of the impacts on supply chain have been happening for days, even before it arrived. The major container ports were closed, at Port Houston and New Orleans. Oil refineries were shut down.
But fortunately, we seem to have dodged the worst potential harm, since the storm swung slightly East at the last minute. So it missed the major refineries in Houston, which is the biggest concentration of chemical plants and oil, petroleum refineries in the country. And also that it passed much faster over land than Hurricane Harvey did three years ago. And our listeners may remember that Hurricane Harvey had caused much of its damage because it sort of stalled out over the coast and just generated enormous amounts of rain and flooding over a series of days.
Some of what you just talked about were anticipating the storm's arrival. Now that Laura has hit, do you see that those potential effects actually happened?
We have seen some effects actually happen for sure.
I mean, one example is that there was a rise in spot rates in the trucking market, as shippers had scurried to move their inventory out of the path of the storm. So that's going to have effects on the trucking market, as I said.
And another impact will probably be rising gasoline and diesel prices, because whenever those oil refineries shut down, that creates a shortage and that tends to drive prices up.
A third change, of course, is that there's an enormous amount of wreckage in terms of the impact on physical infrastructure, and that has left hundreds, or perhaps thousands of businesses without electrical power all on the coast.
So, a lot of these changes will certainly be felt for some weeks to come.
Thank you, Ben. Hopefully, help will come to those who need it. And of course, we encourage our listeners with logistics capabilities that can be applied to relief efforts and helping people to go to the American Logistics Aid Network at ALANaid.orgthat's A-L-A-N-A-I-D dot orgto see what they can do to help. And also go to DCVelocity.com to find out more on these and other stories.
Thanks, Ben and Victoria, for sharing highlights of our news this week.
Thank you, Dave.
You're welcome. Good to be here.
And again, our thanks to Professor Philip Evers of the University of Maryland for being with us today. We encourage your feedback on this topic and our other stories. You can email us at podcast@dcvelocity com.
And a reminder that Logistics Matters is sponsored by DCV-TV. Be sure to check out the latest videos on DCVTV.com, the largest and best source of videos for the supply chain industry, including DCV-TV Channel 4. This viewer-contributed channel includes hundreds of videos that DC Velocity readers and industry suppliers have uploaded directly to the channel. Stop by often to see the latest uploads. Go to DCVTV.com to view them.
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We'll be back again next week with another edition of Logistics Matters, when we will look at what the rest of the year will look like for the transportation industry. Be sure to join us. Until then, please stay safe and have a great week.
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