    U.S. Postal Service: The Service's Strategy for Realigning Its
    Mail Processing Infrastructure Lacks Clarity, Criteria, and
    Accountability (08-APR-05, GAO-05-261).

    With declining mail volumes, increasing compensation costs, and a
    more competitive marketplace, the need for the U.S. Postal
    Service (Service) to increase efficiency and reduce expenses is a
    matter of increasing importance and concern. According to the
    Service, one area where it can become more efficient is in its
    mail processing and distribution infrastructure. The objectives
    of this report are to (1) describe major business and demographic
    changes and their effect on the Service's mail processing and
    distribution infrastructure; (2) describe what actions the
    Service is taking in response to these changes, and what
    challenges exist; and (3) discuss the Service's strategy for
    realigning its infrastructure.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-261
        ACCNO:   A21138
      TITLE:     U.S. Postal Service: The Service's Strategy for
    Realigning Its Mail Processing Infrastructure Lacks Clarity,
    Criteria, and Accountability
         DATE:   04/08/2005
      SUBJECT:   Cost analysis
    	     Mail delivery problems
    	     Mail transportation operations
    	     Postal facilities
    	     Postal service
    	     Strategic planning
    	     Federal agency reorganization
    	     Population statistics
    	     Agency missions
    	     General management reviews
    	     Mail processing operations
    	     Stakeholder consultations
    	     Transparency

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    GAO-05-261

                     United States Government Accountability Office

                         GAO Report to Congressional Requesters

    April 2005

    U.S. POSTAL SERVICE

     The Service's Strategy for Realigning Its Mail Processing Infrastructure Lacks
                         Clarity, Criteria, and Accountability

                                           a

    GAO-05-261

    [IMG]

    April 2005

    U.S. POSTAL SERVICE

    The Service's Strategy for Realigning Its Mail Processing Infrastructure Lacks
    Clarity, Criteria, and Accountability

                                     What GAO Found

    Several major changes have affected mail processing and distribution
    operations including marketplace changes, such as declines in First-Class
    Mail and increased competition; increased automation and mail processing
    by mailers; and shifts in population demographics. Effects of these
    changes include excess capacity in the mail processing and distribution
    infrastructure and variations in productivity among plants.

    Total Pieces Handled per Person per Hour in Processing Plants for Fiscal
    Year 2004

    The Service is exploring ways to realign its infrastructure by closing
    annexes, consolidating operations, and employing tools to model its
    infrastructure needs, while at the same time attempting to increase
    efficiencies in its current operations by expanding automation, improving
    material handling operations, creating a comprehensive transportation
    network, and introducing standardization programs. Also, as the graph
    above illustrates, there is a large range in productivity among plants.
    Reducing this range is difficult due to the complexity of operations and
    differences in plant layout. In addition, the Service faces challenges in
    eliminating excess capacity, while maintaining service standards, due to
    workforce rules and resistance to plant closings.

    Questions remain about how the Service intends to realign its processing
    and distribution infrastructure and workforce. The Service's strategy for
    realigning has not been clear because the Service has outlined several
    seemingly different strategies over the past 3 years. None of these
    strategies include criteria and processes for eliminating excess capacity,
    which may prolong inefficiencies. Also, the strategy lacks sufficient
    transparency and accountability, excludes stakeholder input, and lacks
    performance measures for results.

                     United States Government Accountability Office

    Contents

      Letter

    Results in Brief
    Background
    Major Changes Have Impacted the Service's Mail Processing and

    Distribution Infrastructure The Service Is Pursuing Several Initiatives in
    Response to Changes but Challenges Remain The Service's Strategy for
    Realigning Its Mail Processing

    Infrastructure Lacks Clarity, Criteria, and Accountability Conclusion
    Recommendations for Executive Action Agency Comments and Our Evaluation

    1 2 5

    14

    35

    53 59 59 60

    Appendixes

                  Appendix I: Appendix II: Appendix III: Appendix IV: Appendix V:

    Objectives, Scope, and Methodology
    Descriptions of Various Mail Flows with Diagrams
    Glossary of Postal Terms Used in this Report
    Comments from the U.S. Postal Service
    GAO Contacts and Staff Acknowledgments

    GAO Contact
    Staff Acknowledgments

    63

    65

    74

    82

    84 84 84

    Tables	Table 1: Table 2: Table 3: Table 4: Table 5:

    Table 6:

    Table 7:

    Table 8:

    Table 9:

    Common Types of Mail Preparation Service 6
    Common Types of Mailers 6
    2004 Major Processing and Distribution Plant Types 7
    Change in Average Rate and Volume for Priority Mail 24
    Factors Contributing to Productivity (Total Pieces
    Processed per Hour) in FY 2004 29
    Average Productivity (Total Pieces of Mail Processed per
    Hour) of Plants By Number of Employees for Fiscal Year
    2004 31
    Average Productivity (Total Pieces of Mail Processed per
    Hour) for Selected Operations by Area for Fiscal Year
    2004 34
    Number of Plants and Annexes Owned and Leased by the
    Service as of September 30, 2004 37
    Comparison of FY 2004 Productivity for Flat Sorting
    Operations 39

                                        Contents

    Figures	Figure 1: Figure 2: Figure 3:

    Figure 4:

    Figure 5:

    Figure 6: Figure 7:

    Figure 8: Figure 9:

    Mail Flow through National Infrastructure 10
    Location of Service Processing and Distribution Plants 12
    First-Class Mail and Standard Mail Volume, Fiscal Years
    1971 -2004 16
    Annual Percentage Change in Priority Mail and Express
    Mail Volumes, Fiscal Years 1994 to 2004 17
    Growth in Mail Volume for Workshared and
    Nonworkshared Mail, Fiscal Years 1972-2002 18
    Evolution of Mail Processing 20
    Number of Service Processing and Distribution Plants by
    Age 21
    Bedloaded Truck and Cardboard Containers 23
    U.S. Household Growth by State from 2000 to 2003 and
    Service Processing and Distribution Plants 26

    Figure 10: Productivity (Total Pieces of Mail Processed per Hour) at
    Small, Medium, and Large P&DCs for FY 2004 30 Figure 11: Processing of a
    Letter at a Multistory and a Single Floor Processing and Distribution
    Plant 32 Figure 12: Productivity (Total Pieces of Mail Processed per Hour)
    at

    Multistory Plants in Fiscal Years 2001 through 2004 33 Figure 13:
    Photographs of Empty and Full Flat Mail Cart 40 Figure 14: Automated
    Package Processing Machine 42 Figure 15: Low Cost Tray Sorter 43 Figure
    16: Service Bulk Mail Center and Hub and Spoke Program

    Locations 46

    Figure 17: Correlation Between BPI Productivity (Total Pieces Processed
    per Hour) and Activity Based Costing Unit Letter Processing Costs for
    Fiscal Year 2004 49

    Figure 18: Letter Mail Processing 67 Figure 19: Flat Mail Processing 70
    Figure 20: Parcel Processing 73

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    April 8, 2004

    The Honorable John M. McHugh The Honorable Danny K. Davis House of
    Representatives

    The United States Postal Service (Service) has developed a highly complex
    infrastructure that includes about 450 plants that process and distribute
    an average of 660 million pieces of mail per day. To meet its universal
    service obligation, which requires it to provide mail delivery services to
    all people residing in the United States, the Service delivered mail to
    over 142 million addresses in fiscal year 2004. This represented an
    increase in addresses over fiscal year 2003 of 1.8 million. Mail
    processing costs amount to about $20 billion annually, while annual
    transportation costs are about $5 billion. The Service is subject to a
    mandate to break even that requires that postal rates and fees shall
    provide sufficient revenues so that the Service's total estimated income
    and appropriations will equal as nearly as practicable its total estimated
    costs. For the first time in its history, the Service experienced
    declining First-Class Mail volumes for 3 years in a row. This trend is
    expected to continue and raises specific concerns, since traditionally
    First-Class Mail provided high revenue-per-piece, which helps cover the
    Service's institutional expenses.1 Another challenge is that compensation
    costs, which account for over 79 percent of the Service's total costs,
    grew 3 percent from fiscal year 2003 to 2004 while the number of full-time
    employees decreased. This increase in compensation costs is due in part to
    healthcare benefits that increased 7 percent over the same period. With
    major changes that affect its mail processing operations, including
    declining mail volumes, increasing compensation costs, and a more
    competitive marketplace, the need for the Service to increase efficiency
    and reduce expenses has become more urgent.

    In April 2002, in response to a GAO recommendation, the Service issued a
    Transformation Plan that outlined the steps it planned to take to address
    the challenges it faced. One key goal cited in the Transformation Plan was
    for the Service to become more efficient by standardizing operations and
    reducing excess capacity in its mail processing and distribution
    infrastructure. Mailer interest groups and a report by the Presidential
    Commission on the Postal Service also supported the goal of "rightsizing"
    the nation's postal infrastructure; that is, establishing a least-cost
    network

    1Institutional costs are costs that cannot be attributed to any specific
    class of mail.

    for the Postal Service and the entire mailing industry while improving
    overall efficiency and service.

    To assist Congress in monitoring the Service's progress in implementing
    the realignment of its mail processing and distribution infrastructure,
    this report addresses three key objectives. First, it describes major
    business and demographic changes and the effect of these changes on the
    Service's mail processing and distribution infrastructure. Second, it
    describes the actions the Service is taking to achieve a more efficient
    and flexible network in response to these changes, and the challenges
    associated with implementing these actions. Finally, it discusses the
    Service's strategy for realigning its infrastructure.

    To address these objectives, we interviewed mailing industry associations,
    postal officials at Service headquarters, and employee union
    representatives about their views of the major changes affecting mail
    processing and distribution operations and infrastructure, as well as the
    Service's plans, strategy, and progress to realign its infrastructure. We
    also visited several Service mail processing plants to observe operations
    and interviewed plant managers in the Pacific, Southeastern, Eastern, and
    Capital Metro areas about their efforts to improve efficiency. We analyzed
    Service productivity data and documentation related to its productivity
    and efficiency improvement efforts, including plans and implementation
    schedules. We also reviewed Service documents related to its
    infrastructure realignment and discussed the direction and progress of its
    realignment efforts with the Service's Chief Operating Officer, the area
    vice presidents, and other senior management officials involved in this
    effort. We assessed the reliability of the Service's data used in our
    assessment of productivity and efficiency and found it reasonable for our
    purposes. We conducted our review at Service headquarters and field
    locations between April 2004 and January 2005 in accordance with generally
    accepted government auditing standards. A more detailed discussion of our
    objectives, scope, and methodology is included in appendix I. We requested
    comments on a draft of this report from the Service and its comments are
    discussed later in this report and reproduced in appendix IV.

    Results in Brief	Several major changes, such as changes in the
    marketplace, the evolution of the Service's processing infrastructure,
    increased automation and mail processing by mailers, and changes in
    demographics have affected the Service's mail processing and distribution
    operations. The effects of these

    changes include productivity variations among plants and excess capacity
    in the mail processing and distribution infrastructure. For example:

    o 	Changes in the marketplace, such as electronic substitution for
    First-Class Mail and increased competition, led to declines in mail volume
    and changes in mail mix. From fiscal year 2000 to 2004 total mail volume
    declined by about 1.8 billion pieces.

    o 	The Service's processing and distribution infrastructure has developed
    over time resulting in plants that differ markedly from one another and
    exhibit wide variations in productivity. Also, some plants have evolved to
    exclusively process certain types of mail, which has driven up the cost
    per piece for those types of mail.

    o 	Mail processing operations transitioned from manual to automated,
    enabling plants to process mail in less time. At the same time, mailers
    have performed more mail sorting in exchange for discounts, requiring less
    processing once the mail reaches the plant.

    o 	Shifts in demographics and transportation may mean that the Service's
    processing plants are not ideally located. For example, U.S. household
    growth is greatest in the Western and Southern parts of the country, while
    the majority of mail processing plants are located in the East.

    To achieve a more efficient and flexible infrastructure, the Service is
    exploring ways to realign its infrastructure by closing annexes,
    consolidating operations, and employing tools to model its infrastructure
    needs. At the same time, the Service is attempting to increase
    efficiencies in its current operations by expanding automation, improving
    material handling operations, creating a comprehensive transportation
    network, and introducing standardization programs. The Service has
    recently reported notable improvements in productivity and efficiency. For
    example, over the past 4 years, the Service has reduced workhours by more
    than 170 million, and reduced career staffing by over 80,000 employees.
    Nevertheless, the Service faces challenges in reducing productivity
    variances among plants and eliminating excess capacity. For example,
    efforts to reduce productivity variances among plants are challenged by
    the complexity of operations and differences in plant layout. In addition,
    workforce rules related to moving employees among plants and resistance to
    plant closings make it difficult for the Service to reduce excess
    capacity. Consequently, it is not clear that reducing variations among
    plants, removing excess capacity, or improving efficiency, can be achieved

    consistently throughout the current mail processing and distribution
    infrastructure.

    The Service's strategy for realigning its mail processing and distribution
    infrastructure has not been clear because the Service has outlined several
    seemingly different strategies over the past 3 years. While the Service
    has announced various plans and strategies, including a modeling effort
    and an attempt to get more uniformity in its infrastructure, it recently
    announced that it is pursuing an evolutionary strategy-that will respond
    to opportunities as they arise-and has provided little information about
    any of these efforts. This evolutionary strategy and the lack of detailed
    information about it raise many issues, including what the strategy is and
    whether it will enable the Service to meet the challenge of removing
    excess capacity in its infrastructure by closing unnecessary facilities.
    Specific issues related to the Service's infrastructure realignment
    strategy include: (1) the Service's strategy does not include specific
    criteria and processes for eliminating excess capacity, including the
    removal of unnecessary facilities and (2) the Service's strategy is not
    sufficiently transparent and accountable, excludes stakeholder input, and
    lacks performance measures for results of decisions. The Service's limited
    communication makes it difficult for customers to work with the Service to
    achieve a least-cost network for the entire mailing industry, for Service
    employees to understand how they may be affected, for communities to
    understand how they will be affected, and for Members of Congress to
    explain to their constituents what the Service is planning to do.

    To enhance the Service's transparency of its decisions related to
    realigning its infrastructure, the Postmaster General should establish a
    set of criteria for evaluating realignment decisions and a mechanism for
    informing stakeholders as decisions are made. To enhance accountability
    for these decisions, the Postmaster General should develop a process for
    implementing these decisions that includes evaluating and measuring the
    results.

    In commenting on a draft of this report the Service concurred with our
    description of its mail processing and distribution infrastructure and the
    major business and demographic changes that have affected the Service's
    operations, but did not respond directly to our conclusions or
    recommendations.

    Background	The Service's mail processing and distribution infrastructure,
    whereby mail is prepared for sorting on automation equipment by applying a
    barcode, sorted through various processing equipment, and transported
    between plants, consists of interdependent networks where operations in
    one part affect operations throughout. For example, if mail processing is
    delayed in one plant and misses the cut-off time for being loaded onto
    trucks for distribution, transportation will not be fully used because the
    trucks will leave without that mail. Subsequent processing will also be
    affected at plants that will receive this mail. In addition, the Service's
    infrastructure is part of a larger economic sector commonly referred to as
    the mailing industry. According to research conducted by the Mailing
    Industry Task Force, the Service, and the Direct Marketing Association,
    the core mailing industry is a $976 billion industry comprised of the
    Service, its competitors, direct and indirect mailers, and mail intensive
    business segments such as mail order, publishing, and printing houses.2
    This industry accounts for 9 million domestic jobs in all 50 states and
    the District of Columbia. Mailers generally use one of the four major
    classes of mail:

    o 	First-Class Mail consists mainly of bills, bill payments,
    correspondence, and advertising and also includes the expedited product,
    Priority Mail;

    o  Periodicals Mail encompasses mainly magazines and local newspapers;

    o 	Standard Mail is primarily bulk advertising and direct mail
    solicitations; and

    o 	Package Services Mail includes parcels, merchandise, catalogs, media,
    and books.

    Tables 1 and 2 describe the major types of businesses that make up the
    mailing industry and how they generally interact with the Postal Service.

    2Envelope Manufacturing Association Foundation for Paper-Based
    Communications, Postal Reform and Jobs, April 2, 2004, pg. 5.

    Table 1: Common Types of Mail Preparation Service

    Mail preparation services Description Where mail enters network

    Lettershop	Prepares mailings for other organizations and provides services
    Generally take mail to local processing such as personalizing, labeling,
    sorting, stuffing, and addressing plant. envelopes.

    Presorter/Consolidator	Accepts mailings from multiple sources,
    consolidates them, and Generally take mail to local processing presorts to
    the finest level that can be achieved. Often plant. consolidates mail from
    multiple sources to achieve quantity-based discounts.

    Fulfillment House	Receives, packages, and ships customer orders, generally
    for Generally take mail to processing plant retail sales companies. close
    to final destination.

                                      Source: GAO.

                            Table 2: Common Types of Mailers

    Mailers Description Type of mail

    Financial Institutions	Primarily banks that use the mail to send financial
    statements or Primarily First-Class Mail advertisements. Depending on
    mailer's size, it may use lettershops, presorters, or consolidators to
    prepare mailings.

    Government	Federal, state, and local governments. Depending on mailer's
    size, Primarily First-Class Mail it may use lettershops, presorters, or
    consolidators to prepare mailings.

    Catalog Companies Companies that sell merchandise through catalogs.
    Primarily Package Services

    Newspapers/Magazines	Organizations that produce publications issued at
    frequent intervals Primarily Periodicals or Standard Mail containing news,
    editorials, advertisements, and other articles of current interest.

    Commercial Industries	Industries that provide services or products.
    Depending on mailer's Primarily Standard Mail size, it may use
    lettershops, presorters, or consolidators to prepare mailings.

    Nonprofit Organizations	Organizations that conduct not-for-profit
    business. Depending on Primarily Standard Mail (Nonprofit mailer's size,
    it may use lettershops, presorters or consolidators to rate) prepare
    mailings.

    Source: GAO.

    The Service processes mail through its nationwide infrastructure according
    to shape and class of mail. There are three basic mail shapes (1) letters,
    which are small rectangular pieces no thicker than 1/4 inch; (2) flats,
    which are rectangular pieces no thicker than 3/4 inch; and (3) parcels,
    which are three-dimensional pieces weighing up to 70 pounds.

    The Service established national service standards over 30 years ago that
    direct how many days it should take mail to reach its destination,

    depending on its origin and mail class. For example, First-Class Mail has
    service standards of overnight, 2 and 3 days depending on the distance it
    has to travel. In addition, the Service developed class-specific
    processing networks to process specific types of mail including:

    o 	a Processing and Distribution Center (P&DC) network that primarily
    processes First-Class Mail, Periodicals, and some parcels, as well as some
    Standard Mail;

    o 	a Priority Mail Processing Center (PMPC) network that processes
    Priority Mail; and

    o 	a Bulk Mail Center (BMC) network that processes bulk Standard Mail and
    parcels.

    Each of these networks uses separate processing and distribution plants as
    described in table 3.

              Table 3: 2004 Major Processing and Distribution Plant Types

               Plant type                        Description               Number
    Processing and Distribution Processes and dispatches incoming and
                 Centers           outgoing mail for a designated
                 (P&DC)                         service area
         Air Mail Centers (AMC)    Mail plant at an airport that processes
                                           mail transported by air
                                   Processes and distributes bulk Standard
         Bulk Mail Centers (BMC)              Mail and parcels

    Priority Mail Processing Centers (PMPC) Processes Priority Mail

    Hub and Spoke Program (HASP)	Central point where mail from a group of
    plants is unloaded, combined, and sent on to destination

    Destination Delivery Units (DDU)	Facility where carriers pick up mail for
    final delivery and some limited processing for destination may occur
    37,159

    Source: U.S. Postal Service.

    Note: DDUs are generally post offices and are not considered processing
    plants for the purposes of this report.

    First-Class Mail is collected from mailboxes, houses, or post offices and
    transported to a P&DC or deposited directly at the P&DC by the mailer.
    Depending on where the mail originates from (origination) and where it is
    being delivered to (destination), this mail can be processed in multiple
    plants. It may be transported (1) directly between P&DCs, (2) through a
    hub and spoke plant, (3) through an air mail center, or (4) through a
    combination of these. Once the mail has reached the destination P&DC, the

    mail is transported to a delivery unit for carrier delivery. For example,
    a birthday card mailed from Washington, D.C., to Sacramento, CA, would be
    mailed as First-Class Mail and might follow these steps:

    1. picked up from mailbox by carrier and brought to local post office;

    2.	transported to Suburban Maryland P&DC where the postage stamp is
    cancelled and a barcode reflecting the proper destination is applied to
    the mailpiece so it can be sorted according to destination;

    3. transported to airport;

    4. flown to San Francisco, CA;

    5.	transported to San Francisco Air Mail Center where it is sorted to the
    proper destination plant;

    6.	transported to West Sacramento P&DC where it is sorted into delivery
    order; and

    7.	transported to local post office to be picked up by carrier and
    delivered to addressee.

    Priority Mail can either be processed in the Priority Mail network or in
    the P&DC network similar to First-Class Mail. For example, legal documents
    sent Priority Mail from Rochester, NY, to Sacramento, CA, might follow
    these steps:

    1.	transported from local post office to Rochester Priority Mail
    Processing Center where it is separated from local Priority Mail and
    sorted according to destination;

    2.	transported to Rochester Air Mail Center where it is assigned to a
    specific flight;

    3. flown to San Francisco, CA;

    4.	transported to San Francisco Air Mail Center where it is sorted to
    proper destination plant; and

    5.	transported to West Sacramento P&DC where it is sorted into delivery
    order; and

    6.	transported to local post office to be picked up by carrier and
    delivered to addressee.

    Discount mailings (Standard Mail, bulk parcels, etc.) can enter the bulk
    mail network by being weighed and paid for at the mailer's plant through a
    detached mail unit, or at a postal plant through a Business Mail Entry
    Unit. A mailing is initially processed at the bulk mail center where it
    was entered, and then pieces are transported to the bulk mail center in
    the area where it will be delivered. To receive additional discounts or
    achieve faster delivery time, the mailer can enter mail closer to its
    destination. This is called dropshipping. For example, a Standard Mail
    advertisement dropshipped from Washington, D.C., to Sacramento, CA, might
    follow this path:

    1.	accepted into mailstream through detached mail unit at a mailer's plant
    in Washington, D.C.;

    2.	transported by mailer to the West Sacramento P&DC and sorted into
    delivery order; and

    3.	transported to local post office to be picked up by carrier and
    delivered to addressee.

    Figure 1 depicts how mail flows through these networks, while figure 2
    maps the location of the Service's processing and distribution plants.

                         [This page left blank intentionally.]

    Major Changes Have Impacted the Service's Mail Processing and Distribution
    Infrastructure

    Since the U.S. Post Office Department was reorganized into the U.S. Postal
    Service by the Postal Reorganization Act of 1970, there have been several
    major changes, the effects of which include excess capacity in the mail
    processing and distribution infrastructure, as well as productivity
    differences among plants. These changes include:

    o 	changes in the marketplace and the role of industry that have resulted
    in declines in mail volume and changes in mail mix;

    o 	the evolution of the Service's processing and distribution
    infrastructure, and the advent of processing automation, that has led to
    an infrastructure consisting of processing and distribution plants that
    differ markedly from one another; and

    o 	changes in demographics and modes of transportation that affect the
    optimal location of the Service's plants.

    Changing Marketplace Has Led to Changes in Mail Volume and Mail Mix

    Electronic Diversion Has Led to Decreases in First-Class Mail Volume

    Changes in the marketplace, including the substitution of electronic
    communication for First-Class Mail, shifts in how customers use the mail,
    increased competition in overnight mail and package services, and the
    changing role of mailers, have led to changes in mail volume and mix.
    These changes have intensified the Service's future financial challenges.
    Historically, the Service's business model depended on revenues from
    increasing mail volumes to cover its expanding infrastructure. This model
    has proven more difficult to sustain because of the decreasing mail
    volumes, particularly in First-Class Mail. As the Service's Chief
    Financial Officer stated, "this shift in mail mix to lower
    revenue-per-piece mail classes will result in shrinking margins, which are
    used to maintain universal service."3

    First-Class Mail volume, the class that contributes the majority of
    revenue to institutional costs, declined 5 percent from fiscal year 2000
    to 2004 and this downward trend is expected to continue. The Service has
    attributed the declining First-Class Mail volume to the impact of
    electronic diversion as businesses, nonprofit organizations, governments,
    and households

    3Richard Strasser's presentation to the Service's Board of Governors
    year-end meeting on December 7, 2004. Universal service is not defined in
    law, but is understood to include affordable rates, 6-days per week
    delivery, and access to postal retail services.

    increasingly automate their financial transactions and divert
    correspondence to the Internet. For example, electronic bill payment
    allows users to pay bills using the Internet rather than sending checks
    through the mail. In 2003, the majority of noncash payments were made
    electronically; just 3 years earlier the majority had been made by check.
    Recent Federal Reserve studies found that the number of checks paid in the
    United States has continued to decline since it peaked in the mid-1990s.
    There were nearly 50 billion checks paid in 1995. By 2000, that number had
    declined to 41.9 billion and by 2003 that number had dropped to 36.7
    billion. Between 2000 and 2003, electronic payments increased from 30.6
    billion to 44.5 billion, an increase of over 45 percent.4 Further, recent
    legislation that became effective October 28, 2004, is intended to improve
    the efficiency of check processing and may reduce reliance on the physical
    movement of checks through the mail.5 It is likely that this change will
    accelerate the decline in First-Class Mail volume.

    Shift in Mail Usage Has Led to As a result of declining First-Class Mail
    volumes and the lower revenue per

    Challenges in Revenue piece provided by Standard advertising mail volumes,
    the Service will be

    Generation	challenged to generate sufficient revenue to cover
    institutional costs. From 1970 to 2000, First-Class Mail accounted for the
    majority of mail volume. However, as seen in figure 3, Standard Mail
    volume is on the verge of overtaking First-Class Mail volume. According to
    postal officials, Standard Mail volume is projected to be greater than
    First-Class Mail volume by fiscal year 2005.

    4The 2004 Federal Reserve Payment Study: Analysis of Noncash Payments
    Trends in the United States 2000-2003, Federal Reserve System, 2004.

    5The Check Clearing for the 21st Century Act (Check 21) was signed into
    law on October 28, 2003, and became effective on October 28, 2004.

     Figure 3: First-Class Mail and Standard Mail Volume, Fiscal Years 1971 - 2004

    Pieces (in billions) 197119721973

        1974197519761977197819791980 198119821983 1984198519861987 198819891990
               19911992199319941995199619971998199920002001 2002 20032004

                                    First-Class Mail

                                     Standard Mail

    Source: GAO analysis of U.S. Postal Service data.

    In fiscal year 2003, combined First-Class Mail and Standard Mail accounted
    for almost 94 percent of the Service's total mail volume. It takes
    approximately 2.5 pieces of Standard Mail to make up for the lost
    contribution from 1 piece of First-Class Mail. During fiscal year 2003,
    First-Class Mail declined by 3.3 billion pieces, resulting in a loss in
    revenue to be contributed toward institutional costs (contribution) of
    $675 million, while Standard Mail increased by 3.1 billion pieces for a
    gain in contribution of $256 million. The net loss in contribution from
    these two classes in fiscal year 2003 was $419 million.

    Increased Competition in Competition in the overnight and package business
    is increasing. In 1971,

    Packages and Overnight Mail the Service and United Parcel Service each had
    roughly a 50 percent share

    Have Hurt Mail Volume	of the national parcel market. FedEx entered the
    parcel ground delivery market with the acquisition of Caliber in 1998 and,
    by 2001, the Service's share of the parcel ground market had slipped to
    less than 10 percent. In addition, the Service's market share of overnight
    and 2 and 3 day air package services decreased between fiscal years 2000
    and 2003. As seen in

    figure 4, volume for the Service's products in this category, Priority
    Mail and Express Mail has declined precipitously in recent years.

    Figure 4: Annual Percentage Change in Priority Mail and Express Mail
    Volumes, Fiscal Years 1994 to 2004

    Percentage change 20

    15

    10

    5

    0

    -5

    -10

    -15

    -20 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

    Fiscal year

    Priority Express

                 Source: GAO analysis of the U.S. Postal Service data.

    Changes in the Role of Mailers 	Over the past 30 years, the role of
    mailers has changed, leading to further shifts in the mail mix. This
    change is due in large part to the advent of the Service's worksharing
    discounts. Postal worksharing activities generally involve mailers
    preparing, barcoding, sorting, or transporting mail to qualify for reduced
    postage rates. Key worksharing activities include (1) barcoding and
    preparing mail so the Service can sort it on automated equipment; (2)
    presorting mail, such as by ZIP Code or specific delivery location; and
    (3) entering mail closer to destination, commonly referred to as
    dropshipping. The first of many presort and automation worksharing
    discounts was introduced in 1976, followed by dropship discounts for
    periodicals in 1985, and Standard Mail in 1991. Presorting and barcoding
    by mailers allows the Service to avoid primary sorting activities, while
    dropshipping allows it to avoid transporting mail as well. For example,

    prior to dropshipping, mail entered the infrastructure at the point of
    origin. Dropshipping allows the mailer a discount for bypassing the
    origination plant and transporting the mail closer to its destination
    point.

    Presort discounts spawned the mail consolidation business, whereby
    consolidators gather mail from many different mailers, sort it, and convey
    it to the Service for final delivery. The dropship discounts were the
    catalyst for major growth within the consolidation business. As seen in
    figure 5, virtually all of the growth in volume since 1972 is in
    workshared mail. Worksharing contributes to excess capacity because mail
    volume bypasses operations that occur early in the processing and, in some
    cases, as with dropshipping, mail volumes bypass entire plants.

    Figure 5: Growth in Mail Volume for Workshared and Nonworkshared Mail,
    Fiscal Years 1972-2002

    Mail volume (billions) 250

    200

    150

    100

    50

    0 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
    2000 2002 Fiscal year

                   Source: GAO analysis of U.S. Postal Service data.

    Evolution of the Service's Processing and Distribution Infrastructure Has
    Resulted in Markedly Different Plants

    Plants Have Had to Accommodate Equipment in Buildings That Were Not
    Designed to House the Technology

    The Service's mail processing and distribution infrastructure has
    developed over time resulting in an infrastructure comprised of plants
    that are markedly different from one another. This evolution has resulted
    in some plants' inability to accommodate processing equipment because the
    floor space requirements differ for manual and automated processing; and
    the plants were not originally designed to house the advanced technology.
    Also, some plants exclusively process certain types of mail, which has
    driven up the cost per piece for those types of mail. Today, the Service's
    mail processing and distribution infrastructure includes plants that range
    in age from 2 to 72 years old, range in square footage from 455 square
    feet to 1,538,494 square feet, have different layouts, serve different
    processing functions, and do not share the same amount and type of
    processing equipment.6

    Originally, the Service developed mail processing and distribution plants
    to manually sort mail using pigeonhole cases. The Service took major steps
    toward mechanizing plants in the mid-1950s with the introduction of the
    letter sorting machine. The letter sorting machine required an operator to
    read the address on an envelope and key the information into a console. A
    conveyor belt system then directed the piece to the appropriate receptacle
    for the address. In the early 1980s, the Service began replacing the
    mechanized letter sorters with automated systems that used optical
    character readers rather than manual keying of addresses. The concept of
    mechanized sorting was expanded to include flats in the 1980s. The Service
    recently deployed automated flat sorters and has begun deploying automated
    parcel sorting equipment. Figure 6 depicts the evolution of mail
    processing operations.

    6Post Offices/DDUs are not included.

    Figure 6: Evolution of Mail Processing

    Manual Mechanized 1956 Bulk Mail Centers 1976

    Automated letter 1982	Automated flat 2000 Automated parcel 2000 Source:
    GAO.

    The floor space required to accommodate automation equipment is different
    than that needed to accommodate manual or mechanized sorting equipment,
    and not all plants have room for new equipment that could increase
    efficiency. As seen in figure 7, many of the Service's plants were built
    prior to the advent of automation. Therefore, some plants may not have
    enough floor space to accommodate the newer equipment.

    Figure 7: Number of Service Processing and Distribution Plants by Age

    Advent of the Service's Automation Program

    Source: GAO analysis of the U.S. Postal Service data.

    Note: Figure includes all processing and distribution plants, including
    P&DCs, BMCs, AMCs, PMPCs, Annexes, and miscellaneous plants, but excludes
    DDUs.

    Dedicated Mail Processing Some plants are part of dedicated networks that
    exclusively process

    Networks Have Driven Up Costs	certain types of mail and have resulted in
    higher costs. The Service developed dedicated mail processing networks
    within its infrastructure to process certain classes of mail, including a
    bulk mail network and a Priority Mail network. In general, by law, each
    postal product must cover the costs attributable to provision of that
    product plus a reasonable amount of institutional costs. Consequently,
    when a network is dedicated to only one type of mail, that type of mail
    must bear the costs of the dedicated network. In addition, with a
    dedicated network, transportation capacity utilization is limited to the
    amount of mail that is traveling through the dedicated network and
    redundancies can occur. For example, Priority and Standard Mail may be
    traveling through the same area and may even use the same roads; however,
    because they are processed in separate networks, they do not travel on the
    same truck. Therefore, two trucks that are 50 percent full might make the
    trip rather than one truck that is 100 percent full.

    In the 1970s, the Service developed a bulk mail network to maintain its
    share of the parcel market against United Parcel Service, and built 21

                         Age   Number of      Percentage of total
                               plants
                         >69               11                  2%
                       60 - 69              4                  1%
                       50 - 59              1                  0%
                       40 - 49             24                  5%
                       30 - 39             90                 20%
                       20 - 29             76                 17%
                       10 - 19            151                 33%
                         <10               99                 22%

    plants to process and distribute parcels. These plants also process sacks
    of bulk Standard Mail. As operations have evolved over 30 years, the BMCs
    have encountered a number of difficulties in trying to process the mail
    efficiently. Furthermore, bulk Standard Mail is increasingly bypassing the
    BMC network through dropshipping.

    Bulk letter mail, which first enters the bulk mail network in sacks or
    trays, can be processed more efficiently through automated letter sorters
    when it reaches the processing and distribution plants if it is presented
    in trays rather than sacks. Consequently, the Service made a concerted
    effort to move mail out of sacks and into trays. However, this move caused
    problems for the BMCs, which used sack-sorting machines. During our visits
    to postal plants, managers told us that sack-sorting machines were not
    designed to process rectangular trays. Sorting trays on the sack sorters
    often resulted in trays, which carry an average of 500 pieces of mail,
    breaking open and spilling mail over the conveyor belt. Consequently, the
    sack sorter had to be turned off while the individual mail pieces were
    collected and either sent to a P&DC for processing or processed on
    equipment that had been brought into the BMC specifically to deal with
    this problem. The BMCs were told by headquarters to remove all trays from
    automated equipment beginning in October 2004, and some BMCs are now
    processing the trays manually, which results in an increase in workhours.

    In addition, changes in the way trucks are loaded and unloaded have
    affected dock space at the BMCs. For example, when trucks were loaded at
    processing plants by manually stacking packages inside the truck
    (bedloaded), it took 8 hours to unload a truck filled to capacity. Today,
    the Service uses automated loading machines that fill containers with
    packages, which are then loaded by forklift into the trucks. Trucks are
    unloaded by forklift, and automated equipment dumps the containers
    directly onto the conveyor belts that lead to the sorting equipment. Using
    this procedure it only takes 30 minutes to unload the same amount of mail.
    Figure 8 depicts the difference between bedloaded and container-stacked
    truckloads. While this has been a great improvement in workhour savings,
    BMCs now have problems storing all the mail because of limited dock space.
    We also observed and were told that some of the equipment in the BMCs is
    so old that it cannot run at full capacity and in some cases was not being
    used. For example, in one BMC the tow-line-used for transporting mail
    throughout the building-was shut down 18 years ago because it needed
    constant repairs. Consequently, mail is moved between operations either
    manually or using forklifts and tow trucks.

    Figure 8: Bedloaded Truck and Cardboard Containers

    Source: GAO.

    The Service also has a dedicated network for its expedited product,
    Priority Mail, which has driven up the cost of Priority Mail and led to
    declines in volume. In 1997, the Service awarded a 5-year contract to
    Emery to develop a PMPC network on the east coast to improve Priority
    Mail's service performance. The Service also contracted with Emery to
    provide a

    dedicated transportation network for Priority Mail. Because the network
    only processed Priority Mail, all of the costs were borne by Priority Mail
    users. Large rate increases in 1999, 2001, and 2002 for Priority Mail,
    coupled with service problems, contributed to a 31 percent decline in
    Priority Mail volume from fiscal year 2000 to 2004. Table 4 shows rate
    increases and mail volumes. Consequently, the Service cancelled its
    processing and transportation contract with Emery in 2001, absorbed the
    processing back into its infrastructure, and contracted with FedEx for
    transportation services. While the Service is still processing Priority
    Mail in PMPCs, it is moving Priority Mail operations into other processing
    plants. It has also begun converting some PMPCs to Logistics and
    Distribution Centers (L&DC), which process multiple types of mail, and
    according to Service officials, it is the Service's intent to eventually
    convert all PMPCs to L&DCs.

    Table 4: Change in Average Rate and Volume for Priority Mail

                        Date   Percent rate increase       Percent volume decline
                January 1999                      7.2%                         6%
                   July 2001                     17.2%                        11%
                   June 2002                     13.5%                        15%

    Source: GAO analyses from Postal Rate Commission and U.S. Postal Service
    Data.

    Note: Volume declines are between fiscal years 1999 and 2001, 2001 and
    2002, and 2002 and 2004. July 2001 is the implementation date of the
    Recommended Decision in the R2000-1 rate case, which was modified by the
    Service's Board of Governors.

    Postal Service Plants May Not Be Optimally Located Due to Changes in
    Demographics and Transportation

    Due to population shifts, household growth, and the changing
    transportation landscape in the United States, Service plants may not be
    optimally located. The Service stated in September 2003 that, "population
    shifts, changes in mail processing technology, and external events that
    occurred during the last two years, have required dramatic shifts in
    operating conditions resulting in rising costs to maintain the existing
    network."

    Most Service processing plants are located in eastern states-states that
    historically have had the highest populations. During the 1990s, U.S.
    household growth trends began moving west and south, with Nevada and
    Arizona ranking as the two fastest growing states in the nation. As seen
    in figure 9, the majority of the Service's processing plants are located
    in states whose household growth is not as rapid as others. The Service
    has said that

    the operational challenge it faces in 2004 and beyond is to locate
    processing plants and employees within efficient reach of most of the
    population, while at the same time providing universal service to the rest
    of the nation at reasonable cost.

    domestic mail was moved by rail on over 10,000 trains nationwide. In 1965,
    only 190 passenger trains carried mail, and by 1970, virtually no
    First-Class Mail was carried by rail. In September 2004, Amtrak announced
    that it would discontinue transporting mail for the Service. Changes have
    also taken place in the Service's use of air transportation. As a result
    of the September 11, 2001, attacks, new federal aviation security
    restrictions prohibited the transportation of mail weighing more than 16
    ounces on commercial flights. As a result, the majority of the mail
    previously transported by commercial air has shifted to surface
    transportation or is flown by FedEx. Ongoing shifts in transportation have
    created an environment where most mail is now moved by highway and air,
    and some processing plants would be better located so that major highways
    and airports are easily accessible.

    Changes Have Contributed The changing marketplace, evolution of mail
    processing, and shifts in

    to Variations in Productivity demographics have contributed to variations
    in productivity across plants

    Among Processing Plants 	and excess capacity. The growth in infrastructure
    over time has resulted in differences in processing plants and contributed
    to variations in

    and Excess Capacity 	productivity and cost among plants. The decline in
    mail volume and the evolution of mail processing have contributed to
    excess capacity.

    Productivity Varies among Plants	Average productivity-total pieces
    processed per hour-varies among the Service's mail processing and
    distribution plants, which indicates that some plants are not processing
    mail as efficiently as others. Service officials have attributed this
    variation to several factors, including size of plant as measured by
    workload, number of employees, layout of plants, and the use of
    nonstandardized processes. An analysis of productivity data for processing
    and distribution plants for fiscal year 2004 indicates that none of these
    factors, in isolation, can explain the variations; rather, as seen in
    table 5, it seems that plants with low productivity exhibit a number of
    contributing factors. For example, according to a Western Area Postal
    Service official, the processing plant in Spokane, WA, is one of the most
    productive plants because the plant is new, all operations are performed
    on one floor, and it has an automated system to transport mail among the
    different operations. The processing plant in Des Moines, IA, on the other
    hand, has very low productivity. This plant is 50 years old, has multiple
    floors where processing occurs, does not have enough dock space, and does
    not have adequate floor space for new processing equipment.

    Table 5: Factors Contributing to Productivity (Total Pieces Processed per
    Hour) in FY 2004

            Least Productive Plants       A         B         C       D         E
                       Productivity     519       727       819     852       873
                           Workload 721,178 3,525,133 2,909,649 660,421 2,468,013
                          Employees   1,144     4,336     2,883     850     2,319
               Workroom Square Feet 273,600   984,290  490,125  116,888   626,918
                                Age      19        72         9      70
                         Multistory      No       Yes       Yes     Yes       Yes
             Most Productive Plants       F         G         H       I         J
                       Productivity   2,641     2,651     2,678   2,763     2,854
                           Workload 287,661  855,680   324,030  500,396   197,942
                          Employees      85       275       110     144       120
               Workroom Square Feet  35,322  43,007    56,775    37,222    27,816
                                Age       7        39        13       8
                         Multistory      No        No        No      No        No

    Source: GAO analysis of U.S. Postal Service data.

    According to Service managers, a plant's annual workload impacts its
    productivity. The Service classifies its plants based on the number of
    workhours that should be required to process the plant's annual workload
    (earned hours).7 The classifications are small-295,000 or less earned
    workhours, medium-between 295,001 and 680,000 earned workhours, and
    large-more than 680,000 earned workhours. According to the managers, small
    plants are more efficient then larger plants because operations at small
    plants are not as complex as operations at larger plants and large plants
    often have additional responsibilities. For example, one plant manager
    told us that the plant he had previously managed had a large contingency
    of mail carriers that operated out of it in addition to the plant's
    processing duties, which lead to space constraints. Larger plants often
    consolidate and sort mail from smaller plants, which makes sorting schemes
    more complicated and requires additional workhours to accommodate the
    increased complexity. However, as seen in figure 10, there are also large
    gaps in productivity among the plants within each size

    7The Service determines how many earned workhours a plant should need by
    dividing that plant's workload by the average productivity of the 25
    percent most productive plants.

    classification. Therefore, it appears size, as measured by workload, is
    only one contributing factor to the variation in productivity among
    plants.

    Figure 10: Productivity (Total Pieces of Mail Processed per Hour) at
    Small, Medium, and Large P&DCs for FY 2004

    Productivity

    3,000

    2,854

                                      2,544 2,572

    2,500

    2,000 1,970

    1,700

    1,500 1,495

    1,013

    1,000

                                          727

    519

    500

    0 Small Medium Large

    Plant size

    High

    Average Low Source: GAO analysis of U.S. Postal Service data.

    Service officials also told us that the size of the workforce employed at
    a plant impacts the plant's productivity. According to these officials,
    plants with large numbers of employees have lower productivity than plants
    with fewer employees because with fewer employees, management has better
    visibility and therefore better control over its operations. Plants with
    fewer employees also have fewer layers of management and more direct
    manager to employee contact. One manager, who had managed both large and
    small plants, told us that productivity increases can be attributed to
    making sure employees are doing what they are suppose to be doing and that
    this is easier to manage with a smaller number of employees. Table 6 shows
    the average productivity for plants broken down by number of employees.

    Table 6: Average Productivity (Total Pieces of Mail Processed per Hour) of
    Plants By Number of Employees for Fiscal Year 2004

                        Number of employees Average productivity

                                       <500 1,960

                                     500-999 1,614

                                   1,000-1,499 1,463

                                   1,500-1,999 1,443

                                      >2000 1,148

    Source: U.S. Postal Service.

    Another factor, according to Service officials, is the physical layout of
    plants, particularly when plants are multistoried, because more time is
    spent moving mail between floors and among operations. For example, one
    multi-story plant that we visited has a number of difficulties in
    processing mail. Currently, the plant receives mail on the first floor,
    transports the mail to the third floor where it is cancelled, then sends
    the mail to the second floor for processing, and then back to the first
    floor for outgoing trucks. Due to cost constraints, the plant does not
    have an automated system to transport mail among the different floors and
    all mail must be moved among the floors by elevator. Unfortunately, many
    of the elevators are continually out of service. According to the manager
    at the plant, there are 13 elevators in the building and on a good day, 8
    elevators are working. Consequently, according to the manager, more
    workhours are used to move mail around and prepare it for operations then
    would be used in a singlefloor plant. This lowers productivity and
    increases the plant's processing costs. Figure 11 depicts the processing
    of a letter at a multistory plant versus a single-floor plant.

    Figure 12: Productivity (Total Pieces of Mail Processed per Hour) at
    Multistory Plants in Fiscal Years 2001 through 2004

    Productivity

    2,500

    2,251 2,134

    2,000 1,995 1,963

    1,500

    1,381

    1,130 1,165

    1,000

    727 600 577 655

    500

    0

    2001 2002 2003 2004

    Fiscal year

    Highest productivity

    Average productivity Lowest productivity Source: GAO analysis of the U.S.
    Postal Service data.

    Another factor in the productivity variation between plants is that the
    Service does not have standardized processes across plants. Consequently,
    one plant may be using a very efficient method to sort mail while another
    plant may be using a less efficient method. For example, table 7 shows the
    productivity of common automated mail processing operations varies by area
    (the Service has divided its national network into nine geographic areas).

    Table 7: Average Productivity (Total Pieces of Mail Processed per Hour)
    for Selected Operations by Area for Fiscal Year 2004

                                             Prepare                        Small
                                     collection mail  Letter               parcel
                                         for sorting sorting Flat sorting sorting
                                Area          (AFCS) (DBCS)  (AFSM 100)    (SPBS)
                       Capital Metro          15,768   6,667        1,944
                             Eastern          15,226   7,809        1,992
                         Great Lakes          17,547   8,003        1,999
                            New York          15,251   8,202        2,095
                           Northeast          16,452   7,868        1,912
                             Pacific          18,982   9,123        2,039
                           Southeast          17,007   8,231        2,063
                           Southwest          15,178   8,066        2,060
                             Western          16,132   8,545        1,976
             Difference between Most
                and Least Productive                                  183
                                Area           3,804   2,456

    Source: U.S. Postal Service.

    The Service Has Excess Capacity	According to Service officials, declining
    mail volume, worksharing, and the evolution of mail processing operations
    from manual to automation equipment have led to excess capacity. There are
    different types of excess capacity including:

    o 	excess workhours, which occur when more workhours are used than are
    necessary for processing the mail;

    o 	excess physical infrastructure, which occurs when more square footage
    is available for processing mail than is necessary (this may include
    entire plants);

    o 	excess transportation capacity, which occurs when trucks are run at
    less than full capacity; and

    o  excess machine hours, which occur when machines sit idle.

    Declines in mail volume have led to excess equipment capacity because less
    mail is being processed on the same amount of equipment. As stated
    earlier, worksharing contributes to all types of excess capacity because
    more mail volume is bypassing Service operations that occur early in the

    process, such as cancellation and initial sorting. In the case of
    dropshipping, volumes of mail bypass entire plants. With automation, mail
    can be sorted faster than with manual processing. This has led to earlier
    processing completion times and higher productivities. On average, 525
    pieces of letter mail can be sorted in 1 hour using manual processing
    operations, while 8,171 letters can be sorted in 1 hour using automated
    processes. Consequently, mail no longer needs to be processed on all plant
    shifts and equipment is being used fewer hours a day. Advancements in
    technology have also lessened the need for certain types of plants, such
    as air mail centers and remote encoding centers-which are separate plants
    established to perform address barcoding on letters that could not be read
    by the automated equipment in the mail processing plants.

    The Service Is Pursuing Several Initiatives in Response to Changes but
    Challenges Remain

    To achieve a more efficient and flexible infrastructure in response to
    changes in the marketplace, the evolution of the mail processing
    infrastructure, and shifts in demographics, the Service is exploring broad
    infrastructure realignment, while at the same time pursuing several
    initiatives to address inefficiencies in its current infrastructure. In
    its 2002 Transformation Plan, the Service outlined its network
    optimization effort, the goal of which was to create a flexible logistics
    network that reduces mailing industry costs, increases overall operational
    efficiency, and improves service. The Service has also taken some concrete
    steps to realign its infrastructure by closing some processing annexes,
    approving construction on plants in certain locations, and consolidating
    operations in various plants. In addition, the Service is pursuing several
    initiatives to improve efficiency in its current infrastructure. It is
    expanding automation, improving material handling operations, creating a
    comprehensive transportation network, and introducing standardization
    programs in an effort to reduce workhours and increase productivity. The
    Service faces challenges in reducing variations in productivity across
    plants in part because standardization efforts are hindered by the
    complexity in operations and the physical differences in plants. The
    Service also faces challenges in reducing excess capacity while
    maintaining service standards, including workforce rules, and stakeholder
    resistance to plant closings.

    The Service Is Working Toward Realigning Its Infrastructure to Address
    Changes

    To assess its overall infrastructure in relation to changes that have
    occurred, in November 2001, the Service began developing a modeling tool
    designed to identify the least-cost network, given current service
    standards, under several network scenarios. According to the Service, the
    model will "help the Service determine which plants remain viable and
    necessary within the future infrastructure, and what distribution and
    transportation roles [would] be performed by plants that remain as parts
    of an optimal, fully integrated network." According to the Service's
    Transformation Plan, a plan to implement the results of this modeling tool
    was to be completed by December 2002. By November 2003, the Service had
    collected detailed operational and volume data and had developed
    data-based models. In January 2004, the Service reported that the models
    were being tested and validated. Since then, there has been little public
    information on the results of these models or the Service's implementation
    plans.

    The Service has also begun closing annexes-temporary plants used for mail
    operations when space is limited- and consolidating mail processing
    operations in order to address the issue of excess capacity. While new
    construction is also taking place, some of these projects have been in the
    planning stages for years. Consequently, it is unclear whether the Service
    is incorporating its future infrastructure needs into its current
    projects.

    Between fiscal year 2002 and 2004, the Service closed 50 annexes.
    According to Postal Service officials, decisions to close annexes are
    based on volume and do not take future network configuration into
    consideration. Because annexes are usually staffed by temporary employees,
    for whom the Service does not have the same notification and reassignment
    requirements as it does for permanent employees, they are easier to close
    than other plants and the closing can be done relatively quickly and with
    little controversy. Also, while most processing plants are owned by the
    Service, most annexes are leased and therefore can be closed without
    having to dispose of the asset. Table 8 shows the number of plants and
    annexes owned and leased by the Service.

    Table 8: Number of Plants and Annexes Owned and Leased by the Service as
    of September 30, 2004

                                Type Owned Leased Total

                                   Plants 330 60 390

    Annexes 20 45

    Source: GAO analysis of U.S. Postal Service data.

    However, according to Service officials, closing annexes is a short-term
    solution. In some cases, the Service is planning on eliminating certain
    types of plants altogether. For example, the Service's Chief Operating
    Officer told us that there is no longer a need for processing mail at air
    mail centers because, due to technological advances, mail can be assigned
    to specific flights right at the mail processing and distribution plants.
    The leases for air mail centers are typically very expensive; and in many
    areas of the country, the Service is considering closing down the plants
    as the leases expire. Another example is the reduction and eventual
    elimination of the separate address barcoding centers, remote encoding
    centers. Enhancements in the ability of automation equipment to read
    addresses have now significantly reduced the need for remote encoding
    centers. Initially, the Service had 55 of these centers and is now down to
    17.

    In several areas, rather than closing entire plants, the Service has
    consolidated sorting operations at several plants into one plant. For
    example, in the Pacific Area, Saturday mail processing has been
    consolidated from 23 plants to 11 plants. An area official told us that
    the consolidation effort began a few years ago in response to volume
    declines. The official pointed out that consolidation of Saturday mail
    processing reduces processing costs, but may increase transportation costs
    because the mail has to be rerouted to the plant that is processing the
    consolidated volumes. The Service is able to consolidate Saturday
    processing because there is no delivery on Sunday. Therefore, the Service
    can reroute the mail and still meet its service standards. Officials in
    other areas told us that they are also consolidating Saturday processing.
    While efforts to close plants and consolidate operations have taken place,
    the Service has not provided any public information on its future closings
    and consolidations, nor does it have a standard procedure in place for
    closing plants, and instead operates on a case-by-case basis.

    The Service has begun constructing, or has approved funding for the
    construction of new plants because, as stated earlier, some plants cannot

    accommodate necessary equipment, do not have room for current operations,
    or are not optimally located. For example, in Philadelphia, the Service is
    building a new processing and distribution center to replace the current
    one, which was built in 1935 and consists of two four-story buildings
    connected by a bridge. Mail at this plant is processed on separate floors
    and is moved between operations using elevators. The new plant will be two
    stories but will have a tray management system that will assist in moving
    the trays between the floors. It will also be able to accommodate
    mail-processing equipment that will not fit in the current plant and will
    have more dock space. According to the manager at the Philadelphia plant,
    moving to the new building should increase productivity and decrease the
    workhours currently needed to move mail between operations. The Postal
    Service Board of Governors has also approved funding for new plants in
    Maine and Michigan.

    The Service Is Increasing Its Automated Operations to Improve Productivity
    and Efficiency

    Letter Processing Automation

    The Service is completing the automation of letter mail processing and
    focusing efforts on automating flats and parcels to increase productivity
    and reduce costs in response to changes that have occurred in the mailing
    industry. The Service is automating the processing of
    undeliverable-asaddressed mail, deploying automated flat sorting equipment
    and deploying a promising new parcel-sorting machine. However, increased
    automation contributes to excess capacity and it is not clear how the
    Service intends to reduce this excess capacity as its operations become
    more automated.

    The Service is continuing its automation of letter mail by focusing on
    controlling the cost of undeliverable-as-addressed mail, which includes
    mail that is improperly addressed and change of address mail. Annually, an
    average 4.3 billion letters are undeliverable-as-addressed and require
    additional processing steps to verify and sort the mail to the correct
    address. This mail costs the Service approximately $1.8 billion a year.
    Currently, undeliverable-as-addressed mail is processed to the delivery
    unit where the carrier identifies the piece as undeliverable. The mail is
    then transported to a Computerized Forwarding System site, where the
    undeliverable-as-addressed mail is manually keyed and redirected for
    processing to the correct location. This means that each piece is
    essentially processed twice, resulting in increased costs. To address this
    expenditure, the Service is deploying software technology called the
    Postal Automated Redirection System. By scanning each piece of mail and
    comparing it with a computerized database of change of address forms, the
    software identifies undeliverable-as-addressed letter mail at the first
    automation handling and redirects the mail to the current address, thus,
    reducing the

    handling and transportation of undeliverable-as-addressed mail. The
    Service expects to save approximately 5 million workhours annually upon
    completion of the program. However, upon completion, the Postal Automated
    Redirection System will only redirect undeliverable-asaddressed letter
    mail. Flat undeliverable-as-addressed mail will continue to be processed
    through the Computerized Forwarding System.

    Flat Processing Automation	The Service has recently deployed automation
    equipment for flat mail that is intended to improve productivity and
    reduce handling costs of over 50 billion flat pieces processed each year.
    In 1982, the Service began moving flats out of manual processing by
    introducing mechanized sorting machines. However, the Service experienced
    problems with the mechanized machines, including frequent jams and high
    maintenance costs. Many of these problems were due to mail pieces that
    were wrapped in plastic, or too flimsy to be processed on the equipment,
    and resulted in an increase in the unit mail processing cost for flat
    mail, particularly periodicals. In fiscal year 1996, the Service began
    replacing the older machines with a flat sorting machine (FSM 1000) that,
    although still not automated, was designed to handle pieces wrapped in
    plastic and less rigid pieces. In 2000, the Service also introduced an
    automated flat sorting machine (AFSM 100) that contains an automated flat
    feeder and optical recognition technology to read addresses. In plants
    that do not have enough flat volume to justify deployment of the AFSM 100,
    the Service is modifying the existing FSM 1000 to include scanning
    capabilities that replace the need for manual keying. The AFSM 100 has a
    throughput rate of 17,000 or more flat pieces of mail per hour, which is
    more then twice as fast as the FSM 1000. As seen in table 9, the higher
    throughput results in higher productivity than manual or mechanized
    operations.

    Table 9: Comparison of FY 2004 Productivity for Flat Sorting Operations

    Flat sorting operation Productivity Pieces Handled per Hour

    Manual Flats 427

    FSM 1000 433

    AFSM 100 2,011

    Source: U.S. Postal Service.

    While the AFSM 100 has a faster throughput for processing flat mail than
    its predecessor, when it was first deployed, mailers experienced problems
    with the feeder system ripping the covers, which generally contain

    addresses, off of magazines. Consequently, subscribers were not receiving
    their magazines or were receiving just the cover. The Service is currently
    working to enhance the feeders with upgrades designed to significantly
    decrease the amount of damage. In addition, the equipment requires many
    workhours to prepare the mail to be fed through the machine. Therefore,
    some of the benefit of the increased productivity may be lost. For
    example, most mail that will be processed on the AFSM 100, must first be
    stacked into a flat mail cart, which takes 40 minutes for one employee to
    fill. Due to the speed at which the AFSM 100 can process flats, six carts
    have to be manually prepared for each hour the AFSM 100 is run, resulting
    in a significant amount of workhours needed to prepare the flat mail and
    square footage needed to store the prepared mail waiting to be processed
    on the equipment. The Service has said that it is exploring ways to
    automate and standardize the mail preparation process to reduce workhours.
    Figure 13 shows empty flat mail carts and the space needed to store them
    and the volume of flat mail in a flat mail cart when it is full.

    Figure 13: Photographs of Empty and Full Flat Mail Cart

    Source: GAO.

    Unlike letter mail that is sorted on automated sorting machines into the
    order the mail will be delivered on the carrier route (delivery point
    sequence), flat mail must be sorted manually by the carrier into delivery
    order. The Service is exploring automation that would sort flat mail into

    delivery sequence order to reduce the need for the carrier to sort flats
    in the office and technology that would package flat and letter mail
    together for delivery operations to eliminate carrier sorting. While this
    technology is still in the research and development stage, it could
    eventually have a significant effect on the Service's infrastructure and
    on operations and mail processing across the entire postal network
    including how mailers prepare and present their mail to the Service. This
    has raised concerns among mailers.

    Parcel Processing Automation	To increase efficiencies in parcel
    processing, the Service has developed automation to reduce manual handling
    and increase processing capacity. The Service has deployed the Singulator
    Scan Induction Unit (SSIU), which has improved productivity and sort
    accuracy for processing packages at the BMC by reducing the need to
    manually key in parcel addresses. The SSIU is capable of scanning over
    5,000 parcels per hour, and eliminates 80 percent of all clerk keying
    operations at 19 of the 21 BMCs. The equipment cannot be installed in the
    remaining 2 BMCs due to the unique design of the equipment and the layout
    of the plants.

    The Service is also in the process of deploying the next generation of
    parcel sorting equipment at the processing and distribution plants called
    Automated Package Processing Systems (APPS), which will process small
    parcels and bundles of mail. The APPS machine is expected to replace the
    small parcel and bundle sorters in larger plants and does not require
    manual keying of each piece, reducing workhours significantly for the
    Service. The automated package processing machine is expected to increase
    processing capacity, productivity, and sorting accuracy of parcels and
    bundles of mail. However, as seen in figure 14, the APPS machine is very
    large and many plants do not have the floor space to accommodate it. There
    are several standard configurations for the APPS machine that require
    between 12,100 sq. ft. and 32,100 sq. ft. Some Service officials expressed
    concern because they do not have enough room for the new machine in
    processing plants, and there are only a few plants that will be able to
    accommodate the equipment.

    Figure 14: Automated Package Processing Machine

    The Service Is Improving Its Material Handling Operations

    The Service is working to expand mechanization and improve productivity in
    order to reduce workhours in the methods employed to move mail between
    operations, prepare mail for processing, and load and unload mail from
    trucks, known as material handling. However, cost concerns limit the
    effectiveness of these initiatives. The Service has deployed various
    systems to move trays of mail throughout its processing plants, including
    the low cost tray sorter, the tray management system, and a prototype of
    the universal transport system. Between fiscal year 2000 and 2003, the
    Service reduced its material handling workhours in 244 processing plants
    by 11 million or 11 percent. However, the Service recently announced that
    it was curtailing the deployment of the universal transport system because
    of low return on investment.

    To reduce material handling workhours and limit the amount of manual labor
    needed to move mail between operations, the Service has deployed Low Cost
    Tray Sorters (LCTS), which are essentially conveyor belts used to

    move trays of mail between various operations. LCTS will replace the
    current method of loading mail into handcarts, manually moving the
    handcarts between operations, and unloading the handcarts. According to
    the Service, LCTSs are configured to the unique needs of each particular
    processing plant and are only justified and deployed on a site-specific
    basis. To date, the Service has deployed the LCTS in 160 plants; however,
    the Service has stated that additional site-by-site justifications are
    possible resulting in additional LCTS deployments. Figure 15 shows one
    version of the LCTS.

    Figure 15: Low Cost Tray Sorter

    Source: GAO.

    The Service has also installed the Tray Management Systems in a number of
    postal plants. The Tray Management Systems is an automated system that
    manages and controls mail transport, staging, and retrieval of letter and
    flat mail trays throughout a plant on a conveyor belt system by scanning
    barcodes and directing the trays to mail processing equipment. The Service

    initially planned on deploying 42 systems but temporarily suspended
    deployment because of capacity and reliability problems. In 1998, the
    number of systems to be deployed was reduced to 23 sites costing $497.3
    million. Only three multistory plants have the Tray Management System.

    The Service recently abandoned an effort to automate material handling due
    to low return on investment of its experimental Universal Transport
    System. This system was designed to expand the processing of product lines
    beyond that of traditional Tray Management Systems, which only process
    letter and flat trays. Instead, the Universal Transport System is a system
    that transports trays, bundles, packages, and sacks throughout a plant to
    enhance work processes and improve information flow. The Service spent
    $27.3 million developing this system in a processing plant in Fort Myers,
    FL, over the past 5 years. However, the Service stated that it has no
    plans for deploying the system to other processing plants.

    The Service Has Made Changes to Its Transportation and Distribution
    Network to Address Demographic and Transportation Changes

    The Service Has Developed a Tool to Improve Information Used to Optimize
    Truckload Capacity

    To improve efficiency in its transportation and distribution network, the
    Service is implementing programs designed to increase utilization of
    truckload capacity, increase flexibility in transportation contracting,
    and reduce redundancies.

    The Service has developed a Transportation Visibility Strategy designed to
    help management increase utilization of truckload capacity. According to
    Service officials, currently, 35 to 40 percent of truckload capacity is
    not being used, and without accurate and complete data on mail volume per
    truck, the Service has been unable to optimize load capacity. One way in
    which the Transportation Visibility Strategy is intended to increase
    efficiency is by using actual volume data in network planning and
    optimization. Instead of relying on estimates to determine truckload
    volume, the new strategy will incorporate scanning technology and data
    management software to determine the origin and destination of mail, and
    to assign it to a specific route. Having more accurate data on how much
    mail is coming from or going to any given destination will enable the
    Service to analyze mail density on travel routes, and consolidate mail
    traveling to the same location, resulting in fuller trucks. The Service
    has stated that this strategy will be employed at about 130 plants by fall
    2005, which will afford it the ability to capture data on 78 percent of
    the Service's

    The Service Is Working to Increase Flexibility in Its Transportation
    Planning

    The Service Intends to Reduce Redundancies in Transportation and
    Distribution Systems by Expanding Its Hub and Spoke Program

    originating highway volume and automate 70 percent of the data collection
    activities that are currently performed manually.

    The Service has implemented a new contract management system to support
    the solicitation, award, and administration of its highway contract routes
    and improve flexibility in the transportation network. Traditionally, the
    Service has entered into 4-year contracts with its transportation
    suppliers. According to Service officials, at times, these contracts do
    not support efforts to create a flexible transportation network. This is
    because 4-year contracts commit the Service to agreements that may not
    reflect changing needs such as mail volume fluctuations and changes in
    processing operations. Also, the Service may not be able to easily add or
    remove needed trips. Service officials have stated that the use of the new
    contract management system, in addition to the mail volume data provided
    through the Transportation Visibility Strategy, will allow the Service to
    enter into 1 or 2 year transportation contracts that allow it to more
    accurately plan transportation and routing of mail. The Service is also
    planning to implement a Transportation Optimization Planning and
    Scheduling tool that is intended to allow it to conduct long- term
    planning and dynamic scheduling of its mail transportation. The Service
    manages over 17,000 highway contract routes and as contracts are renewed,
    these new systems will allow the Service to assess costs and service
    performance associated with these contracts.

    The Service plans on expanding its hub and spoke program (HASP), and
    modifying its Bulk Mail Center (BMC) networks to address redundancies in
    its transportation and distribution network. Currently, the Service
    transports First-Class Mail through its HASP network and Standard Mail
    through its BMC network, which may create redundancies on routes serviced
    by both networks. Figure 16 shows the current locations of HASPs and BMCs.
    By eliminating redundancies across these networks, the Service believes
    that it will be able to cut its transportation costs and improve its
    efficiency. HASP creates a consolidation hub within an area, thus
    eliminating some inter-plant truck trips between different processing
    centers, and their associated costs. Currently, the Service has 13 HASPs
    located in 8 of its 9 regional areas. The Western Area, which is the
    largest of the Service's 9 geographic areas, covering 1.7 million square
    miles, does not have HASP. The Service is considering developing two HASPs
    in this area, attaching them to the Kansas City, MO, and Denver, CO,
    processing and distribution centers. Another method the Service is
    considering to reduce redundancies in its transportation network is to
    modify its BMC network

    Breakthrough Productivity Initiative and Standardization

    Activity Based Costing

    The Service has developed a Breakthrough Productivity Initiative that
    measures each plant's processing performance against nationally
    established targets to increase processing productivity and decrease
    variations in productivity between plants. This initiative includes a
    recognition program that provides plant managers with financial incentives
    to perform at their target productivity. The Service establishes target
    groups and productivity targets for each of these groups. Plants are
    placed in a group and are compared with the other plants in the same
    group. Postal officials explained that incentives to increase productivity
    are given in the form of bonuses for managers and reduced budget
    allocations for plants.8 As part of this initiative, the Service has
    established a Standardization Program. This program identifies "proven
    practices" in mail processing that have resulted in high productivity for
    processing plants and communicates these practices, and the subsequent
    increases in productivity that result from them, to other processing
    plants.

    The goal of standardization is eventually for all plants to certify that
    they are reaching set performance targets. Because there may be more than
    one way to reach a productivity target, a plant does not have to use the
    proven practice; it only has to meet its productivity target and is
    provided with a proven way to meet the goal. In addition, targets are
    reviewed to determine if they need to be adjusted based on demonstrated
    performance. The first operation to be certified under this program is the
    Automated Flat Sorting Machine (AFSM 100). The AFSM 100 operations have
    been standardized, and all plants that use this machine must be certified
    in them, that is, the operations must all be as productive as their given
    target. Certification of this operation has resulted in the Service
    achieving a 6.8 percent increase in performance in fiscal year 2003 with
    44 percent of its sites certified. Further, as of August 2004, with 100
    percent of its sites certified, the Service achieved record productivity
    performance of 2,015 pieces per hour being processed, for a 17.7 percent
    increase in productivity over fiscal year 2003.

    The Service has begun using an Activity Based Costing program to determine
    differences in unit operating costs among plants and to identify
    opportunities for savings in plants. For example, a plant's mail volume,

    8Each area and plant is given a baseline budget, and its budget allocation
    is subtracted from this baseline. The budget allocation is determined by
    the amount of unused opportunities for efficiency that an area or plant
    has. The more unused opportunity it has, the less operating money it gets.

    maintenance needs, or workforce size may affect the plant's operating
    costs. The Activity Based Costing program assigns costs to plants for
    specific activities and products and provides managers with the ability to
    identify potential areas where high costs can be reduced. To date, the
    program is not used in BMCs, but will be piloted in three BMCs in fiscal
    year 2005.

    Using Activity Based Costing in conjunction with BPI would allow plant
    managers to view the costs associated with different levels of
    productivity. Managers have an incentive to increase BPI productivity but
    the costs associated with this productivity may be high. As seen in figure
    17, there is a strong correlation between BPI productivity and the cost of
    processing letter mail. However, not all plants with high productivity
    have low processing costs. For example, two plants with very similar
    productivities in fiscal year 2004-2,251 and 2,250 total pieces per
    hour-had average letter processing unit costs that were about 2 cents
    apart, with one being about 4.8 cents, and the other about 2.8 cents.
    Service officials have said that there are plans to expand the Activity
    Based Costing program. Activity Based Costing was made available to
    managers in 2003, and officials stated that they are continuously
    receiving requests from interested employees for training.

    of the model is only as good as the data collected and how it is used. For
    example, a headquarters' official told us that data can be manipulated to
    show a desired outcome. During our plant visits, some managers told us
    that they were unable to use the Labor Scheduler because its outputs were
    unrealistic and could not be implemented.

    The OIG also found that there was ineffective communication between the
    Labor Scheduler program office and plant management. Management was
    unclear on how to use the model and how to use and communicate the model's
    results. For example, the OIG found that managers were unsure how to
    manage multiple employee shift start times. This concern was also raised
    during our site visits, when a plant manager told us that the model's
    output recommended the plant shifts should start at 12-14 different times.
    The plant manager said that it would have been hard for managers and
    employees to keep track of the schedules.

    The Service Faces Challenges in Addressing Productivity Variations among
    Plants and Excess Capacity

    Difficulties in Reducing Variations in Productivity among Plants

    Despite the recent progress the Service has made in improving efficiency
    and cutting costs, it faces challenges in reducing productivity variances
    among plants and eliminating excess capacity.

    The Service has had difficulty reducing variations in productivity across
    plants, in part, because standardization efforts are hindered by the
    complexity in operations and the physical differences in plants. In fiscal
    year 2001, the average productivity at small plants was 446 pieces per
    hour higher than the average productivity in large plants. This difference
    shrunk to 405 pieces in fiscal year 2002, then rose again in fiscal year
    2003 to 436 pieces per hour, and 474 pieces in fiscal year 2004. According
    to postal officials, a key effort directed toward reducing this variation
    in productivity is its standardization program. These officials said that
    it is difficult to standardize some operations, such as material handling
    and collection, because these operations are affected by so many
    variables, such as how many trucks need unloading on any given day and how
    the mail is prepared on the truck. Thus, it has been difficult to
    establish a measurement on which to evaluate them. Standardization is also
    hampered because there are so many different buildings in the Service's
    infrastructure that it cannot develop one uniform layout. For example, the
    automated parcel-sorting machine has standard operating procedures to
    maximize its output, but it comes in different physical designs to
    complement different plant layouts.

    Service officials told us that engineers have been studying processing
    plant layouts for years, and have ideas as to what the most efficient
    layouts are, but have not been able to generalize plant layouts because
    not all plants have the same equipment in them. Another difficulty in
    achieving standardization, according to these officials, is that because
    the workforce is primarily decreased through attrition, standardization
    processes occur incrementally, in tandem with changes in the workforce.

    Reducing or Eliminating Excess The Service faces challenges in eliminating
    excess capacity while

    Capacity Is Difficult	maintaining service standards, which drive dispatch
    times at processing plants. For example, one way to reduce excess capacity
    in the form of workhours and transportation capacity is to consolidate
    mail-processing operations from many plants into one plant. If some of the
    plants are then closed and equipment disposed of, then excess physical
    infrastructure and machine capacity is also reduced. However, according to
    a Service official, service standards impede consolidation of mail
    processing because consolidation requires re-routing mail from plants that
    are closer to collection or delivery points to plants that are farther
    away. This official said that relaxing service standards could greatly
    increase the amount of consolidation that could be achieved. The challenge
    is to reduce excess capacity while maintaining service standards.

    The Service and its unions have negotiated workforce rules, which are
    important in documenting how work in the plant will be performed and in
    protecting workers' rights. According to Service managers, contractual
    workforce rules reduce management's flexibility to reduce excess capacity
    because these rules govern reassignments and terminating positions that
    are no longer needed. For example, several Service managers told us that
    it is difficult for them to move excess employees to positions where they
    are needed because of these workforce rules. These workforce rules include
    steps to be followed when eliminating positions, and rules regarding
    transferring employees between positions, such as clerks, mailhandlers,
    and carriers.9 When transferring between positions, employees will often
    lose their seniority so they elect not to transfer. Therefore, if a plant
    has too many clerks and not enough mailhandlers, it cannot simply move
    some clerks to mailhandler positions. In addition, moving employees
    between plants requires the Service to follow specific steps that often
    limit managers' flexibility. One area vice president told us that it is
    very

    9Mail processing clerks perform a variety of duties related to processing
    mail; mail handlers move mail between operations; and carriers deliver the
    mail.

    challenging to move employees from one plant to another. For example, this
    vice president had worked out an agreement between the regional unions to
    allow employees to move from a plant that had too many employees to a
    plant with too few. However, local union representatives wanted part-time
    employees in their district to be converted to full-time employees and
    given positions in the plant with openings rather than have current
    full-time employees from the over-staffed plant move. Therefore, they
    halted the agreement at the last minute. The workforce contracts also
    include "no layoff" clauses and procedures that must be followed when
    plants are closed or tours consolidated, including a formal agreement that
    requires 60-days notice whenever the Service is going to close a plant.

    Another obstacle to eliminating excess capacity is the resistance the
    Service has historically encountered when it tries to close plants. In
    each of the three cases we reviewed, the Service encountered resistance to
    its plans to close plants. For example:

    o 	When the Service wanted to move operations from the Pendleton, OR,
    plant to nearby Pasco, WA, because of equipment limitations in Pendleton,
    many people protested. Local congressional representatives made a formal
    request to the Service not to close the plant. In response, the Service
    modified the equipment to fit into the existing plant.

    o 	When the Service considered moving the business mail entry unit from
    St. Paul, MN, to Minneapolis, MN, because of security concerns and cramped
    plant space, local union members and representatives got involved and
    urged the Service to reconsider. Although none of the 30 employees at the
    St. Paul plant would have lost their jobs, their schedules and commutes
    would have changed. The Service agreed to delay the closing pending
    further review.

    o 	At the Marina Del Rey, CA, processing and distribution plant, local
    managers began moving some operations out of the plant and consolidating
    them with operations at the Los Angeles, CA, plant. Before any decisions
    were announced at the headquarters level, word got out that the plant was
    being considered for closing. Local unions contacted local government
    representatives, and union members picketed the plant. Some of this
    resistance was due to the Service's failure to communicate with its
    employees and unions regarding the Marina Del Rey plant. National union
    representatives told us that the Service never contacted them about the
    possible closing, and they only heard about it after the possible closing
    was discussed in a newspaper article.

    The Service's Strategy for Realigning Its Mail Processing Infrastructure
    Lacks Clarity, Criteria, and Accountability

    We developed criteria for evaluating the Service's strategy, including how
    effective it would be in eliminating excess capacity and whether the
    strategy was transparent and accountable. The Service's strategy raises
    several issues. First, the Service's strategy for realigning its mail
    processing and distribution infrastructure is unclear. Second, it does not
    include specific criteria and processes for eliminating excess capacity,
    including the removal of unnecessary facilities. Third, the Service's
    strategy excludes stakeholder input, is not sufficiently transparent and
    accountable, and lacks performance measures for results of decisions.

    The Service's Strategy for Realigning Its Mail Processing and Distribution
    Infrastructure Is Not Clear

    The Service's strategy for realigning its mail processing and distribution
    infrastructure has not been clear because the Service has outlined several
    seemingly different strategies over the past 3 years. In 2002, the Service
    announced a strategy for realigning its infrastructure that outlined an
    ambitious effort to "initiate sweeping logistics changes." According to
    the Service, a modeling tool referred to as Network Integration and
    Alignment (NIA) was to be used to determine what specific changes would be
    made. These changes were to include consolidation of plants, redefined
    roles for plants, reduced transportation costs, and a streamlined network.
    An implementation plan for this strategy was to be developed by December
    2002. However, to date the Service has not developed an implementation
    plan. Following a recommendation we made, in November 2003, the chairman
    of the Senate Committee on Governmental Affairs and a senator asked the
    Service to provide a plan on how it intended to optimize its
    infrastructure and workforce that described the criteria, process, and
    data the Service was using to make decisions, as well as the strategies,
    timing, and funding necessary.10 In December 2003, the chairmen, and
    ranking minority members, of the House Committee on Government Reform and
    the Special Panel on Postal Reform and Oversight also asked the Postal
    Service to submit a plan on how it intended to fund capital investments
    needed to ensure the long-term viability of the Postal Service, including
    how the Service intended to rationalize its infrastructure and workforce.
    In response, in January 2004, the Service submitted to the House Committee
    on Government Reform, a report entitled, Infrastructure and Workforce
    Rationalization: Funding Key Capital Investments. This report, which

    10U.S. Government Accountability Office, Postal Pension Funding Reform:
    Issues Related to the Postal Service's Proposed Use of Pension Savings,
    GAO-04-238 (Washington, D.C.: Nov. 26, 2003).

    was not made public by the Postal Service, described a "promising
    alternative" being considered that the Service called a consolidation hub
    concept. Under this concept there would be two basic types of facilities,
    origination and destination facilities, which would be the initial
    recipients of collection mail and the final plant before delivery, and
    consolidation hubs where the mail would be consolidated and distributed.
    According to the report, "the major difference between this concept and
    the current mail processing environment is that it envisions a single
    uniform network."

    Since issuance of this report, Postal Service officials told us that
    nothing is planned across the entire network but rather opportunities will
    be reviewed as they arise. In a speech before the 2004 National Postal
    Forum11 the Postmaster General called this strategy the Evolutionary
    Network Development (END) and explained it in the following manner:

    "A couple of years ago there was a lot of fanfare and misunderstanding
    about a concept known as "NIA" -Network Integration and Alignment. Many
    saw it as the ultimate plan to consolidate and close facilities. Well,
    it's not.

    "Why? Because nobody can predict 5, 10, or 15 years from now what mail
    volume will be, or what type of mail processing equipment we will be using
    to sort the mail. So we have decided, instead, to do what we've done for
    decades. That is, take the next step in evolving our networks, and that's
    our E-N-D game -- short for Evolutionary Network Development.

    "It's an END game that never ends, because rationalizing and optimizing
    security, plants, processing systems, transportation, and staffing is
    something we have to continue to do to keep our networks efficient and our
    systems affordable."

    Neither the Service's report, the strategy outlined in meetings with
    Postal Service officials, or the Postmaster General's speech sets criteria
    for making realignment decisions, nor do they include a process for making
    these decisions. In addition, no details about the Service's vision of how
    its planned changes will remove excess capacity in the network, minimize
    productivity variances, maximize overall efficiency, or how much the
    Service will save in costs has been provided. The Service has procedures
    that it uses when making decisions to consolidate operations in its mail
    processing plants, which are outlined in appendix N of the Transformation
    Plan. These procedures include a feasibility study, preparation of
    proposal documentation, an approval process, and implementation steps.
    However, in discussions with Service officials, we were given vague and
    confusing

    11PMG Jack Potter's speech at the 2004 National Postal Forum.

    information on the Service's procedures for closing plants. Consequently,
    it is not clear how these procedures relate to the Service's realignment
    strategy, whether these procedures are used when closing plants, are
    applicable to all plants, or if these procedures are used consistently. In
    addition, the procedures outlined in appendix N lack specificity regarding

    o  who is responsible for initiating proposals,

    o  who conducts feasibility studies and how,

    o  what criteria are used to evaluate proposals,

    o  who is responsible for approving these proposals,

    o  how these proposals are implemented, and

    o  who is held accountable for these decisions.

    It is also unclear how stakeholders are notified, when they are notified,
    and by whom.

    In Attempting to Evaluate the Service's Strategy We Developed Criteria

    In evaluating the Postal Service's strategy, we established criteria based
    on the Service's stated goals for realignment, our previous work, the
    Committee on Government Reform report that accompanied House postal reform
    legislation (House Report), the Committee on Governmental Affairs report
    that accompanied Senate postal reform legislation (Senate Report), and the
    President's Commission on the United States Postal Service (Commission)
    report.12 In its Transformation Plan the Service stated, "the mail
    processing network infrastructure will be redesigned to meet volume
    forecasts, customer requirements, and competitive pressures. Streamlining
    and simplifying the distribution network will permit consolidation of
    sorting facilities and elimination of excess resources." In our previous
    work, we emphasized the importance of transparency and accountability

    12House Report Part 1 -Postal Accountability and Enhancement Act 29-006,
    Report 108672, 108th Congress (Washington, D.C.: September 8, 2004).
    Report of the Committee on Governmental Affairs, United States Senate,
    Postal Accountability and Enhancement Act Report 108-318, 108th Congress
    (Washington, D.C.: August 25, 2004). President's Commission on the United
    States Postal Service, Embracing the Future: Making the Tough Choices to
    Preserve Universal Mail Service (Washington, D.C.: July 31, 2003).

    for government institutions such as the Postal Service.13 Both the House
    and the Senate Reports also state the importance of transparency to the
    Service achieving its realignment goals. In previous testimony, we stated
    that in order to be successful in its realignment the Service will need
    the input and support of its major stakeholders, such as mailers,
    employees, communities, and government representatives.14 The Commission
    has stated that it is important for the Service to ensure that an
    appropriate process for soliciting and dealing with stakeholder concerns
    is implemented. The Service identified one of the benefits of realignment
    as reduced total costs for the Service and mailers. Accordingly, in
    evaluating the Service's strategy for realigning its infrastructure, we
    used the following criteria:

    1.	Will the Service's strategy result in a network that is efficient and
    flexible, and will it lead to the elimination of excess capacity?

    2.	Does the Service's strategy include stakeholder input, and is it
    transparent and accountable under the following guiding principles;

    o  It is based on a clear, transparent, and consistently applied process.

    o 	It ensures that when decisions are made they are conducted as fairly,
    effectively, and efficiently as possible.

    o  It provides for accountability in connection with decisions.

    The Service's Strategy May Not Reduce Excess Capacity and Is Not
    Transparent and Accountable

    It is unclear how the Service's strategy will result in elimination of
    excess capacity because it does not include criteria for making
    realignment decisions that include considering the effect on excess
    capacity, nor does it include performance measures related to eliminating
    excess capacity. In addition, the Service's strategy excludes stakeholder
    input and is not sufficiently transparent or accountable. The strategy
    does not include criteria for making decisions or processes for
    implementing decisions,

    13U.S. Government Accountability Office, U.S. Postal Service:
    Transformation Challenges Present Significant Risks, GAO-01-598T
    (Washington, D.C.: April 4, 2001). U.S. Government Accountability Office,
    U.S. Postal Service: Bold Action Needed to Continue Progress on Postal
    Transformation, GAO-04-108T (Washington, D.C.: November 5, 2003).

    14GAO-04-108T.

    which would help ensure fairness and effectiveness, nor does it include
    performance measures for evaluating decisions.

    The Service's Strategy May Not In discussions with Service officials, we
    were told that the closing of the

    Result in Elimination of Excess Marina Del Rey processing plant was a good
    example of the Service's

    Capacity 	strategy. The Service will close the Marina Del Rey plant and
    move operations into its South Los Angeles plant. The Marina Del Rey plant
    had productivity in fiscal year 2004 of 1,598 pieces per hour, while the
    Los Angeles plant had productivity of 1,139 pieces per hour. According to
    Service officials, none of the 900 employees at the Marina Del Rey plant
    will lose their jobs. Instead they will be relocated. The Service has also
    stated that it has no immediate plans for the building once the operations
    are moved out of it. It is not clear how closing this plant will increase
    efficiency or reduce excess capacity. Criteria for making realignment
    decisions would help clarify the Service's decisions.

    As stated earlier, the Service has also been consolidating shifts across
    its infrastructure. These consolidations have contributed to the Service's
    impressive reduction in workhours over the past 3 years. However,
    consolidating shifts may lead to excess capacity in other areas. For
    example, if mail is no longer processed on certain shifts this means that
    the processing equipment sits idle during that shift. In addition, if
    several plants in a particular area have eliminated processing shifts it
    may be feasible to consolidate these plants and dispose of excess physical
    infrastructure. Due to the Service's lack of transparency about the
    results of its network modeling activities, however, it is difficult to
    assess the extent of opportunities for eliminating unnecessary plants. The
    Service's strategy of taking advantage of opportunities as they arise may
    not result in consolidations or closings in the areas with the most excess
    capacity. Having realignment criteria that outlines at what point an area
    should begin closing plants may result in better alignment of resources
    with mail volumes.

    In addition, the Service's approach of taking advantage of opportunities
    as they arise may prolong inefficiencies and may not address the most
    pressing needs. For example, the Service has been deploying automation
    equipment throughout its network although some of the plants that are
    receiving equipment may ultimately be closed, which would necessitate
    moving or disposing of the equipment. Similarly, equipment and
    transportation costs will be higher than necessary if the network is not
    as streamlined and simplified as it could be. Furthermore, maintaining an
    infrastructure that is larger than necessary requires the Service to spend

    resources that it could employ elsewhere. In addition, the Service may be
    forgoing revenue from the sale of excess properties.

    The Service's Strategy Excludes The Service strategy excludes stakeholder
    input and is not sufficiently

    Stakeholder Input and Is Not transparent or accountable because it is not
    based on a clear, transparent

    Sufficiently Transparent or and consistently applied process; it is not
    clear that when realignment

    Accountable	decisions are made they are conducted as fairly, effectively,
    and efficiently as possible; and it does not have performance measures for
    results to provide accountability in connection with realignment
    decisions. To achieve its realignment goals of an efficient and flexible
    network, the Postal Service will have to have a strategy that is both
    transparent and accountable. According to the Committee on Governmental
    Affairs report that accompanied the Senate postal reform legislation in
    2004, "it is vitally important that the Postal Service go about its
    facilities realignment in the most transparent manner possible.
    Transparency will [sic] make it possible for those affected by the Postal
    Service's actions to see the connection between those actions and the need
    to preserve the vital services the Postal Service provides."15

    The Service's lack of external communication excludes stakeholder input
    that could prove valuable in developing a least-cost network for the
    entire mailing industry. Some stakeholders have complained that the
    Service does not consult with them during planning, but only communicates
    when it has already made its decisions. Mailers explained that this
    approach often leads to uncertainty and lower investment in the mailing
    industry. For example, one representative of a large mailing company told
    us that uncertainty about what the Service is planning to do about new
    discounts, and new processing operations, stifles this mailer's investment
    in its own infrastructure. Union representatives also expressed concerns
    about limited information related to the Service's realignment plans and
    how these plans might affect postal employees.

    The Service has stated that it is reluctant to publicly disclose
    information on its realignment strategy because it believes that it will
    meet with resistance from employees, communities, and government
    representatives if it tells them what it is planning on doing too far in
    advance. While employees and communities may resist changes that affect
    them, congressional staff members have told us that Members of Congress
    would be better prepared to respond to constituent concerns that arise
    when the

    15Senate Report 108-318, p. 25.

    Service considers making changes to its infrastructure if the Service
    provided better information, such as the Service's criteria for its
    decisions.

    To better inform stakeholders on its infrastructure realignment decisions,
    the Service needs to make public its decisions and the criteria used to
    make these decisions. There are various avenues the Service could use to
    inform the public of changes and limit the burden of disclosure. For
    example, the Service could include a list of the changes that were made to
    the Service's infrastructure during that year and changes that are planned
    for the coming year in one of its existing reports, such as the Service's
    annual Comprehensive Statement.

    Conclusion	The Service faces future financial challenges due to its
    declining First-Class Mail volume and has excess capacity in its current
    infrastructure that impedes efficiency gains. The Service has stated that
    one way to increase efficiency is to realign its processing and
    distribution infrastructure. However, important questions remain about how
    the Service intends to realign its infrastructure to meet its future needs
    because the Service has not provided clear public information about its
    planned direction for realigning its infrastructure and workforce. The
    Service's currently stated strategy is an evolutionary approach that
    prolongs inefficiencies related to excess capacity and productivity
    differences among plants, resulting in higher costs. The Service's lack of
    communication often leads to confusion among stakeholders and communities
    about what the Service is doing and why and excludes input that could
    prove valuable to developing a least-cost network across the entire
    mailing industry. Because the Service does not have criteria to be
    considered, or a process to be followed, when making realignment
    decisions, it is not clear that these decisions will be made in a manner
    that is fair to all stakeholders or that is efficient and effective. It is
    also not clear that the Service's strategy provides accountability for
    realignment decisions, because there is no process for evaluating results,
    no criteria for measuring results, and no stated policy for making
    managers accountable for decisions.

    Recommendations for 	To enhance the Service's transparency of its
    decisions related to realigning its infrastructure and ensure that these
    decisions advance the Service's

    Executive Action	realignment goals, we recommend that the Postmaster
    General take the following three actions:

    o  establish a set of criteria for evaluating realignment decisions;

    o 	develop a mechanism for informing stakeholders as decisions are made;
    and

    o 	develop a process for implementing these decisions that includes
    evaluating and measuring the results, as well as the actual costs and
    savings resulting from the decisions.

    In taking these actions, the Service should reconcile any planned
    infrastructure realignment changes with the criteria used to make the
    decisions.

    Agency Comments and Our Evaluation

    The U.S. Postal Service provided comments on a draft of this report in a
    letter from the Chief Operating Officer and Executive Vice President dated
    March 18, 2005. These comments are summarized below and included as
    appendix IV. The Service concurred with our description of its mail
    processing and distribution infrastructure and the major business and
    demographic changes that have effected the Service's operations. The
    Service did not comment on our conclusions or recommendations.

    With respect to the Service's statement that one of the key strategies of
    its Transformation Plan is an initiative called Evolutionary Network
    Development (END), this initiative was not discussed in the Service's
    Transformation Plan. Instead, the Transformation Plan discussed an
    initiative referred to as Network Integration and Alignment (NIA), which
    called for analyzing and redesigning the existing network with the goal of
    creating a flexible logistics network and reducing overall costs for both
    the Service and the mailing industry as a whole. In addition, NIA was to
    determine which facilities would be necessary within the future
    infrastructure. In its January 2004 report to Congress on its
    infrastructure and workforce rationalization, the Service further
    discussed the status of NIA and said that it planned to pilot network
    alternatives in 2005 and if the results of the pilots were favorable, it
    could have a completely optimized network in place by the end of 2009. The
    NIA initiative appears to be more comprehensive and integrated in scope
    than the evolutionary approach referred to as END, which was described to
    us as a strategy that takes advantage of opportunities as they arise. As
    stated in the body of this report, the Service's strategy remains unclear
    because the Service has outlined seemingly different approaches to
    realigning its processing and distribution infrastructure.

    Regarding the Service's statement that Area Mail Processing (AMP) is one
    of the tools it uses to implement the goals of END, we remain concerned
    that these goals may not be realized because it is not clear whether AMP
    includes criteria for making realignment decisions, and if so, what these
    criteria are, and that therefore the processes associated with AMP are not
    responsive to the recommendations we made. Furthermore, the AMP guidelines
    do not include determining the disposal of facilities or the reduction of
    excess capacity. Consequently, it is not clear how AMP directly relates to
    reducing excess capacity, furthers the overall redesign of the mail
    processing and distribution infrastructure, or relates to the Service's
    vision of its future infrastructure.

    The Service also stated that the decisions it makes will be made with
    stakeholder input. However, it is not clear how stakeholder input will be
    incorporated into realignment decisions. As previously mentioned,
    congressional staff told us that Members of Congress would be better
    prepared to respond to constituent concerns if the Service were more
    transparent regarding its infrastructure decisions. Hence, we continue to
    believe that a formal mechanism for notifying stakeholders of realignment
    decisions, as we recommended, is vital.

    The Service stated that because it cannot accurately predict future
    changes in the hard copy communications and package delivery industry, the
    changes it seeks to make must be incremental. However, the President's
    Commission pointed out in its report that regardless of the economic
    climate, the nation is due the most cost-effective, efficient,
    high-quality Postal Service that can be provided. To this end the
    Commission recommended that the Service accelerate its efforts to redesign
    the postal network. Furthermore, the Service itself stated in its
    Transformation Plan that this is "the ideal time to initiate sweeping
    logistics changes."16 We believe that without clarity, criteria, and
    accountability in its realignment strategy, the Service risks falling
    short of achieving the major productivity gains that will be needed to
    offset rising costs and maintain high-quality, universal postal service at
    affordable rates.

    As agreed, unless you announce the contents of this report earlier, we
    plan no further distribution until 30 days after the issue date. At that
    time, we

    16U.S. Postal Service Transformation Plan, p. 30.

    will send copies of this report to the Chairman and Ranking Minority
    Member of the House Committee on Government Reform; the Chairman and
    Ranking Minority Member of the Senate Committee on Homeland Security and
    Governmental Affairs, Senator Thomas R. Carper, the Postmaster General,
    and other interested parties. We will also provide copies to others on
    request. This report will also be available on our Web site at no charge
    at http://www.gao.gov.

    If you have any questions regarding this report, please contact me at
    siggerudk@gao.gov or by telephone at (202) 512-2834. GAO contacts and
    acknowledgments are listed in appendix V.

    Katherine Siggerud Director, Physical Infrastructure Issues

    Appendix I

                           Objectives, Scope, and Methodology

    To describe the impact of major changes on the Service's mail processing
    and distribution infrastructure, we discussed with Postal Service
    officials, mailing associations, mailers, and union representatives their
    views on changes that have occurred in the mailing industry and the
    impacts these changes have had on the Postal Service. Through our initial
    discussions we narrowed the focus of our objective to three major changes,
    (1) changes in the marketplace, (2) the evolution of mail processing and
    its related infrastructure, and (3) shifts in demographics and
    transportation modes. To gain more insight into the first change, we
    analyzed mail volume trends over the past 30 years and reviewed literature
    related to these trends, including special reports prepared for the
    President's Commission on the United States Postal Service, a special
    report prepared by Pitney Bowes for the 12th Conference on Postal Delivery
    and Economics, Postal Service presentations, and articles and studies
    prepared by mailers and mailing groups. In addition, we discussed the
    cause and effect of mail volume declines with Service officials. We also
    reviewed, analyzed, and discussed with Service officials, mailers, mailer
    associations, and union representatives, articles related to competition
    in the mailing industry and changes in the role of mailers. To further our
    understanding of the evolution of mail processing, we reviewed, analyzed,
    and discussed with Service officials, data related to the age, location,
    size, ownership, and equipment complement of the Service's processing and
    distribution infrastructure. We also reviewed literature on the history of
    mail processing and changes that have occurred in mail processing
    operations over the past century. In addition, we conducted site visits to
    mail processing plants in the Capital Metro, the Eastern, the
    Southeastern, and the Pacific areas, and discussed mail processing changes
    with management at these plants. We also discussed related changes with
    eight area vice presidents and the Manager of Capital Metro Area
    Operations, as well as Service officials, mailers, mailer associations,
    and union representatives. To assess the impact of demographic shifts, we
    reviewed, analyzed, and mapped geo-spatial data from the Postal Service
    and Census Bureau. We also reviewed related articles and Service
    documents. To analyze the impact of these changes, we reviewed, analyzed,
    and discussed with Service officials, data related to productivity and
    cost variances, as well as excess capacity in the Service's processing and
    distribution infrastructure.

    To describe the actions the Service is taking to achieve a more efficient
    and flexible network in response to these changes, and the challenges
    associated with implementing these actions, we reviewed, analyzed, and
    discussed with Service officials the Service's Transformation Plan and
    related updates. We also reviewed Postal Service documents related to

    Appendix I
    Objectives, Scope, and Methodology

    operations, including Annual Reports, Comprehensive Statements, Capital
    Investment Plans, Investment Highlights, Five-Year Strategic Plans,
    Corporate Automation Plans, Integrated Plan for Operations, and
    documentation related to specific programs. We conducted site visits to
    plants in the Capital Metro, the Eastern, the Southeastern, and the
    Pacific areas, and discussed initiatives and programs with management at
    these plants. We also discussed these initiatives and programs and the
    challenges associated with them with eight area vice presidents and the
    Manager of Capital Metro Area Operations, as well as Service officials,
    mailers, mailer associations, and union representatives.

    To discuss the issues related to the Service's strategy for realigning its
    infrastructure, we discussed with Service officials, including the
    Service's Chief Operating Officer, how the Service intended to approach
    realignment. We also reviewed Postal Service documents, including the
    Transformation Plan, Infrastructure and Workforce Realignment: Funding Key
    Capital Investments, and documents related to realignment. In addition, we
    reviewed postal reform documents, including the Committee on Government
    Reform report that accompanied House postal reform legislation (House
    Report), the Committee on Governmental Affairs report that accompanied
    Senate postal reform legislation (Senate Report), and the President's
    Commission on the United States Postal Service (Commission) report. In
    addition, we discussed the Service's realignment efforts with mailers,
    mailing organizations, and union representatives.

    We used productivity and cost data provided by the Postal Service to
    assess the impact of changes on the mailing industry. We did some testing
    of the data by performing basic logic tests, reviewing all related
    documentation, and discussing with agency officials any apparent
    inconsistencies or inaccuracies we found with the data. On the basis of
    those discussions, we adjusted the data to ensure that the inconsistencies
    or inaccuracies we found were corrected or clearly explained. Based on our
    testing, we determined that the required data elements are sufficiently
    reliable for the purposes of this engagement.

    We received written comments on a draft of this report from the United
    States Postal Service. The comments we received are discussed near the end
    of the letter and the written comments are included in appendix IV. We
    conducted our review at Service headquarters and field locations between
    April 2004 and January 2005 in accordance with generally accepted
    government auditing standards.

    Appendix II

    Descriptions of Various Mail Flows with Diagrams

    Letter Mail Processing	There are a number of different processing
    operations that letter mail must undergo before arriving at its final
    destination. Containers of loose mail are collected from collection boxes
    and transported to plants that handle collection mail through a dual pass
    rough cull machine that separates machinable letter mail from other mail.
    The other mail consists of flat mail, bundles, and nonmachinable pieces
    that go to different mail streams for processing. Once the mail is
    separated, machinable letter mail is transported to an advanced facer
    canceller system (AFCS). The AFCS prepares letter mail for down stream
    automated processing by facing the mail in the proper position, canceling
    the postage, and separating letters into three categories. Currently,
    these categories include (1) handwritten address letters, (2) machine
    printed address letters with no barcode, and (3) machine printed address
    letters with a barcode. AFCS enhancements in 2005 will provide greater
    readability that will enable a more defined separation of the mail.

    Machine printed address letters without a barcode are transported to the
    multiline optical character reader (MLOCR) machine where a barcode is
    applied to the letter piece. If the address is not readable by the MLOCR,
    the mailpiece is scanned and an image sent to an off-site remote encoding
    center (REC). There, human operators view a scanned image of the envelope,
    key-in the correct address information, and transmit the results back to
    the mail processing plant where a correct barcode is applied to the
    physical mailpiece on a delivery barcode sorter-output subsystem
    (DBCS-OSS) for continued automated processing. Handwritten mail from the
    AFCS is sent directly to a DBCS-OSS and images of these pieces are
    electronically transferred to the REC. Results from keyed information are
    returned to the DBCS-OSS where a barcode is applied to the letter piece
    and sorted to its appropriate destination. Machine printed address letters
    with a barcode are also sent directly to a DBCS-OSS for processing.

    Once the letters have barcodes, the mail is then sorted by ZIP Code on a
    DBCS-OSS or a delivery barcode sorter (DBCS). Letter pieces destinating in
    a different location are sorted to the first 3 digits of the ZIP Code.
    These pieces are then ready for transport to other postal plants for
    further processing. Letter pieces that are destinating in the same area
    are sorted multiple times-this includes mail already presorted from other
    processing plants. These letter pieces are sorted to 5, 9, or 11 digit ZIP
    Code levels.

    During letter processing, pieces that are nonmachinable or have
    nonreadable addresses will be rejected from the automated equipment and
    must be manually processed. Depending on where in the process the piece

    Appendix II Descriptions of Various Mail Flows with Diagrams

    is rejected, employees will try to reintroduce the mail back into
    automation. If the mail cannot be reintroduced into the automation
    process, employees will sort the mail by hand to the 3, 5, 9, or 11 digit
    ZIP Code level.

    Besides collection mail, the mailing industry also delivers discount mail
    or "bulk mail" to plants for processing. To claim the lower postage rates,
    the mailer must have a minimum quantity and do some additional work that
    makes it easier for the Postal Service to handle the mail. Based on how
    efficiently they can be processed, mailings are classified by the way they
    are prepared, including machinable, nonmachinable, and automation. A
    single mailing usually includes multiple levels of ZIP Code sortation.
    Discounted letter mail will be inducted into the mail stream at the
    appropriate level of distribution based on mail class, preparation, and
    sort level. Figure 18 shows how letter mail is processed.

              Appendix II Descriptions of Various Mail Flows with Diagrams

    Flat Mail Processing	There are a number of different operations that flat
    mail undergoes before arriving at its final destination. Collection mail
    is loaded into a dual pass rough cull machine that separates flat mail
    from other mail. The other mail consists of letter mail, bundles, and
    nonmachinable pieces that go to different mail streams for processing.
    Once the mail is separated, employees will manually ensure that correct
    postage is applied and render the postage unusable-cancel-on each flat
    piece of mail.

    Once canceled, the flat pieces are prepped to be placed on a machine for
    sorting. Currently, there are three different types of flat sorting
    machines: automated flat sorting machine (AFSM 100), upgraded flat sorting
    machine (UFSM 1000), and flat sorting machine (FSM 1000). Flat pieces
    destinating in a different location from where it originates are sorted on
    one of the three flat sorting machines to the first 3 digits of the ZIP
    Code. These pieces are then ready for transport to other postal plants for
    further processing. Flat pieces that are destinating in the same area will
    be sorted again to the 5 digit ZIP Code on one of the three flat sorting
    machines-this includes mail already presorted from other processing
    plants. The AFSM 100 and the UFSM 1000 are also used to sort flat mail to
    the carrier route level-9 digit ZIP Code. If the address is not readable
    by the AFSM 100 or the UFSM 1000, then the flat piece is scanned and an
    image is sent to an off-site remote encoding center (REC). There, human
    operators view a scanned image of the flat, key-in the correct address
    information, and transmit the results back to the mail processing plant
    where a correct barcode is applied to the flat.

    Throughout flat processing, there will be mail that is rejected by the
    flat sorting machines or due to physical characteristics is unable to be
    processed on flat sorting equipment. Employees will try to reintroduce the
    flats that were rejected back into the machine for reprocessing. If the
    mail cannot be processed on the machines, employees will manually sort the
    mail by hand to 3, 5, or 9 digit ZIP Code levels.

    Besides collection mail, the mailing industry also delivers discount mail
    or "bulk mail" to plants for processing. In order to claim the lower
    postage rates, the mailer must have a minimum quantity and do some
    additional work that makes it easier for the Postal Service to handle the
    mail. Based on how efficiently they can be processed, mailings are
    classified by the way they are prepared, including machinable,
    nonmachinable, and automation. A single mailing usually includes multiple
    levels of ZIP Code sortation. Discounted flat mail will be inducted into
    the mail stream at the

    Appendix II Descriptions of Various Mail Flows with Diagrams

    appropriate level of distribution based on mail class, preparation, and
    sort level. Figure 19 shows how flat mail is processed.

    Appendix II Descriptions of Various Mail Flows with Diagrams

                            Figure 19: Flat Mail Processing

              Appendix II Descriptions of Various Mail Flows with Diagrams

    Parcel Processing	Parcels can be processed a number of different ways
    depending on the mail class and size. The equipment used and the type of
    sortation will depend on the origin and destination of the parcel.
    Automation and mechanization are only available at selected postal plants.

    Parcels	Any class of parcels can be sorted on a small parcel and bundle
    sorter (SPBS) machine. If a parcel is destinating in a different location,
    then a human operator at the SPBS machine manually keys in the first 3
    digits of the ZIP Code, which directs the piece to the correct destinating
    bin. At dispatch time, the parcels are ready for transport to the
    destinating postal plant for further processing. If the parcel is
    destinating in the same area, then the human operator at the SPBS machine
    manually keys in the last 3 digits of the ZIP Code, which directs the
    piece to the correct destinating bin. At dispatch time, the parcels are
    ready for transport to a local office for manual sortation to the delivery
    address.

    The Service is also in the process of deploying the next generation of
    parcel sorting equipment at postal plants called the Automated Package
    Processing System (APPS), which will replace the SPBS machine in some
    larger plants. The APPS machine will not require human operators to
    manually key ZIP Code information for each parcel. APPS automates package
    processing by providing high-speed throughput, automated package
    induction, singulation, and optical character reader (OCR)/barcode reader
    (BCR) address recognition. If the OCR/BCR technology is unsuccessful, an
    image of the parcel will be transmitted to an off-site remote encoding
    center (REC), where address information will be keyed in the same matter
    as letter mail. APPS deployment will continue through FY 2006.

    Package Services	Package Services and presorted Standard Mail parcels from
    mailers are processed on a primary and secondary parcel sorter machine
    (PSM). A human operator will look at each parcel to locate a barcode
    indicating the piece's ZIP Code destination. If a parcel has a barcode,
    the piece will be sent on a conveyor belt through the package bar code
    scanner (PBCS), which will scan the barcode and directs the piece to the
    correct destinating location. If the parcel is destinating outside the
    area, then the mail will be sorted to the first 3 digits of the ZIP Code.
    If the parcel does not have a barcode, ZIP Code information is read by a
    human operator who will

              Appendix II Descriptions of Various Mail Flows with Diagrams

    manually key in the destination ZIP Code location. The PBCS will then
    affix a barcode to the parcel and directs it to the correct destinating
    location.

    All parcels that are barcoded and destinating in the area can be sent
    through a singulate scan induction unit (SSIU) for sorting. Parcels are
    sent one at a time through a weigh-in-motion scale and then through a
    scanning tunnel that will read the 5 digit ZIP Code and direct the piece
    to the correct destinating bin. At dispatch time, the parcels are ready to
    be transported to a local office for manual sortation to the delivery
    address.

    Nonmachinable Parcels	A nonmachinable outside (NMO) parcel cannot be
    sorted by postal equipment because its size or weight exceeds machine
    capacity or some other aspect requires the piece to be handled manually.
    Examples of NMOs include tubes, tires, golf clubs, and plants. If a parcel
    is destinating in a different location, then the piece will be sorted to
    the first 3 digits of the ZIP Code. The piece is then ready for transport
    to other postal plants for further processing. If the piece is destinating
    in the same area, then it will be sorted to the 3 or 5 digit ZIP Code and
    transported to a local office for manual sortation to the delivery
    address.

    Throughout parcel processing, some pieces will be rejected - barcodes are
    unreadable, no barcode is applied, and packages break open. These parcels
    will be reintroduced into the PSM for processing. If the mail cannot be
    reintroduced into the PSM for processing, then employees will process the
    mail manually to the appropriate delivery address. Figure 20 shows how
    parcels are processed.

    Appendix II Descriptions of Various Mail Flows with Diagrams

                              Figure 20: Parcel Processing

                                      Source: GAO.

    Appendix III

                      Glossary of Postal Terms Used in this Report

    Advanced Facer Canceller A machine that separates letter mail by address
    type-script, barcode, and

    System (AFCS)	machine imprinted-in support of the automation effort. AFCS
    has image lifting capability needed to support the Remote Bar Coding
    System.

    Automated Flat Sorting A fully automated flats sorting machine designed to
    streamline flats mail

    Machine 100 (AFSM 100)	processing operations and at the same time
    significantly reduce manual processing. The AFSM 100 receives mail via
    automatic feeders, acquires images of script and typed mail for video
    encoding, and processes mail using optical character recognition
    technology.

    Air Mail Center (AMC) 	A postal plant at an airport that receives,
    distributes, and dispatches mail transported by air.

    Automated Package The Service's next generation for sorting parcels and
    bundles of mail. The

    Processing System (APPS)	APPS will automate package processing by
    providing greater processing capacity through automatic package induction,
    singulation, and address recognition. It uses a carousel-type cross belt
    sorter subsystem that provides high-speed throughput.

    Breakthrough Productivity A program that identifies best processing,
    retail, and delivery practices and Initiative (BPI) uses this information
    to standardize operational processes.

    Bulk Mail	Mail that is rated for postage partly by weight and partly by
    the number of pieces in the mailing. The term is generally used to refer
    to Standard Mail (A).

    Bulk Mail Center (BMC)	A highly mechanized mail processing plant that
    distributes Standard Mail in piece and bulk form.

    Business Mail Entry Unit The area of a postal plant where mailers present
    bulk, presorted, and

    (BMEU) 	permit mail for acceptance. The BMEU includes dedicated platform
    space, office space, and a staging area on the workroom floor.

               Appendix III Glossary of Postal Terms Used in this Report

    Collection Mail	Mail deposited into a collection box or lobby drop, as
    well as mail collected by letter carriers on their delivery rounds.

    Computerized Forwarding A centralized, computerized address
    label-generating operation that

    System 	performs address correction and forwards or returns
    undeliverable-asaddressed mail to customers.

    Delivery 	The act of taking mail from the post office to the customer. The
    mail is taken to the customer's business or residential delivery address
    or picked up at a post office - whether post office box, window, or dock.

    Delivery Bar Code Sorter This machine is used for processing letters that
    are already barcoded.

    (DBCS) 	DBCSs come in multiple configurations; most machines have between
    190 and 220 sortation bins. The DBCS is used for outgoing processing,
    incoming primary sortation, and Delivery Point Sequencing (DPS).

    Delivery Point Sequencing 	The process of arranging mail in delivery order
    for a particular carrier route.

    Delivery Unit	A post office, post office station, or post office branch
    that has mail delivery functions.

    Destinating Mail Incoming mail arriving for its point of final delivery.

    Destination Delivery Unit A customer service unit that processes mail for
    one or multiple ZIP codes

    (DDU) 	within its own associate office. The DDU may contain a limited
    amount of automation equipment. The DDU generally provides mail delivery,
    bulk mail acceptance, and performs actions related to all products and
    services offered.

               Appendix III Glossary of Postal Terms Used in this Report

    Detached Mail Unit	An area in a mailer's plant where postal employees
    perform mail verification, acceptance, dispatch, and other postal
    functions.

    Dropshipping 	Typically the movement of a mailer's product on private
    (nonpostal) transportation from the point of production to a postal plant
    located closer to the destination of that product.

    Dull Pass Rough Cull This machine separates machinable mail into different
    mail streams.

    Express Mail	A mail class that provides expedited delivery service for
    mailable matter subject to certain standards. It is available in five
    basic domestic service offerings (Same Day Airport Service, Custom
    Designed Service, Next Day Service, Second Day Service, and Military
    Service). Express Mail International Service is available between the
    United States and most foreign countries. Express Mail is a Service
    trademark.

    First-Class Mail	A class of mail that includes all matter wholly or partly
    in writing or typewriting, all actual and personal correspondence, all
    bills and statements of account, and all matter sealed or otherwise closed
    against inspection. First-Class Mail comprises three subclasses:
    postcards, letters and sealed parcels, and Priority Mail. Any mailable
    matter may be sent as First-Class Mail. First-Class Mail is a Postal
    Service trademark.

    Flat	A mailpiece that exceeds one of the dimensions for letter-size mail
    (11-1/2 inches long, 6-1/8 inches high, 1/4 inch thick) but that does not
    exceed the maximum dimension for the mail processing category (15 inches
    long, 12 inches high, 3/4 inch thick). Dimensions are different for
    automation rate flat-size mail eligibility. Flat-size mail may be
    unwrapped, sleeved, wrapped, or enveloped.

    Flat Sorting Machine (FSM) A machine that mechanically sorts flats by ZIP
    Code.

               Appendix III Glossary of Postal Terms Used in this Report

    Hub and Spoke Program For surface mail, primarily for 2-day committed
    mail. HASP includes a

    (HASP)	central point ("hub") where mail for a group of offices ("spokes")
    can be unloaded from a series of incoming trips, massed according to their
    intended destination, and then sent on to that destination on another
    trip. Savings are realized because each trip does not have to drive to
    each individual office or spoke to drop off just a portion of its total
    load capacity.

    Letter 	A mail processing category of mailpieces, including cards, that do
    not exceed any of the dimensions for letter-size mail (that is, 11-1/2
    inches long, 6-1/8 inches high, 1/4 inch thick).

    Letter Sorting Machine	A large mechanized machine that can sort letters
    into as many as 277 bins. Operators physically read the address and then
    manually enter an extraction code, via keyboard, based on their memory of
    the sort scheme loaded into the machine's computer software.

    Low Cost Tray Sorter	A tray sorter used for inbound tray sorting
    operations and outbound dispatch operations to reduce material handling
    workhours.

    Mailer	An entity that prepares and/or presents a mailing to the Postal
    Service. In some cases, a mailer is the agent for the actual owner of the
    mail.

    Mailpiece A single addressed article of mail, usually a letter, flat,
    card, or parcel.

    Multiline Optical Character An optical character reader that reads and
    interprets more than one line of Reader the delivery address on a
    mailpiece.

    Nonmachinable Outside	A parcel or mailpiece that, because of size, weight,
    or other characteristic, cannot be sorted by mechanized mail processing
    equipment and must be handled manually. The parcel is called an outside
    because it cannot be placed in a sack or other mailing container.

               Appendix III Glossary of Postal Terms Used in this Report

    Optical Character Reader An automated mail sorting machine that interprets
    the address information

    (OCR)	on a letter-size mailpiece and sprays the corresponding ZIP Code
    information onto the piece as a barcode. The OCR consists of a mail feed
    unit, transport unit, stacker modules, computer with a control system,
    video monitor, and printer.

    Originating Mail 	Outgoing mail and local mail that enter the
    mailstream-that is, the point of origin-for mail processing and delivery.

    Outgoing Mail	Mail sorted within a mail processing plant that is
    dispatched to another plant for additional processing or delivery.

    Package Services 	A class of mail that comprises four subclasses: Bound
    Printed Matter, Library Mail, Parcel Post, and Media Mail. There is no
    minimum weight limit for Package Services.

    Parcel	Mail that does not meet the mail processing category of letter-size
    mail or flat-size mail. It is usually enclosed in a mailing container such
    as a carton.

    Parcel Sorting Machine A large machine with an input station controlled by
    a computer that sorts

    (PSM)	and discharges parcels from transport trays to primary and secondary
    positions.

    Periodicals	A class of mail consisting of magazines, newspapers, or other
    publications formed of printed sheets that are issued at least 4 times a
    year at regular, specified intervals (frequency) from a known office of
    publication. Periodicals mailers must generally have a legitimate list of
    subscribers and requesters.

    Postal Automated A system designed to intercept and process
    undeliverable-as-addressed Redirection System mail using automated
    techniques.

               Appendix III Glossary of Postal Terms Used in this Report

    Presorted Mail	A form of mail preparation, required to bypass certain
    postal operations, in which the mailer groups pieces in a mailing by ZIP
    Code or by carrier route or carrier walk sequence - or other Postal
    Service recommended separation.

    Priority Mail	First-Class Mail that weighs more than 13 ounces and, at the
    mailer's option, any other mail matter weighing 13 ounces or less.
    Priority Mail provides expedited delivery. Any mailable matter may be sent
    as Priority Mail. Priority Mail is a Postal Service trademark.

    Priority Mail Processing The core function of a Priority Mail Processing
    Center is to provide an

    Center (PMPC)	operational foundation capable of delivering consistent and
    reliable Priority Mail service.

    Processing and Distribution A central mail plant that processes and
    dispatches part or all of both

    Center (P&DC)	incoming and outgoing mail for a designated service area. It
    also provides instructions on the preparation of collection mail, dispatch
    schedules, and sorting plan requirements to mailers. The plant is usually
    a sectional center plant or a general mail plant, but it can also be a
    dedicated mail processing plant without a station or branch.

    Remote Encoding Center	A Postal Service unit that uses advanced technology
    to assign barcodes to hand-addressed mailpieces physically located at a
    general mail plant. After the mailpiece image is displayed on a computer
    terminal, an operator, who is at the center, keys in the ZIP Code and the
    street address in order to match this information with that in a database.
    This allows for the imprinting of the barcode and automated mail
    processing at the general mail plant.

    Sack 	A container generally used to transport flat-size mail, parcels, and
    loose pack mail. It is made of sewn fabric (usually nylon, polyester,
    canvas, or plastic with an opening at one end) and is closed with a draw
    cord and fastener.

               Appendix III Glossary of Postal Terms Used in this Report

    Sack Sorting Machine (SSM)	A mechanized, operator-controlled machine
    similar to a parcel sorting machine but of heavier construction, that
    sorts sacks of mail.

    Service Standards A stated goal for service achievement for each mail
    class.

    Small Parcel and Bundle A modular machine that sorts small parcels and
    packages or bundles of Sorter letters and flats to 100 specific bins for
    either delivery or processing.

    Singulator Scan Induction Equipment that automates the entry of barcoded
    parcels onto the

    Unit (SSIU)	secondary parcel sorting machines at bulk mail centers.
    Packages first enter a singulator area where they are aligned in single
    file and spaced, and then sent through a dimensioning unit, which measures
    external dimensions and weight. Next, parcels pass through an omni scan
    tunnel where their barcodes are read. Finally, the parcel is inducted onto
    the parcel sorting machine.

    Standard Mail	A class of mail consisting of mailable matter that is not
    required to be mailed as First-Class Mail or is not mailed as Periodicals.

    Tray	A container used in postal plants to hold letters and First-Class
    Mail flats. It is used as a basic unit of mail quantity for purposes of
    preparing mail to qualify for discounted postage rates.

    Tray Management System TMS uses tray identification, transport, storage,
    and process control

    (TMS)	technologies to automate the movement and staging of trayed letter
    and flat mail between most mail sortation operations.

    Walk Sequence	The order in which a carrier delivers mail for a route. This
    order is required for most carrier route presort mail.

               Appendix III Glossary of Postal Terms Used in this Report

    Undeliverable-As-Addressed Mail that the Postal Service cannot deliver as
    addressed and must forward (UAA) to the addressee, return to the sender,
    or send to a mail recovery center.

    Universal Transport System 	A system that has the ability to process
    letter trays, flat tubs, sacks, parcels, and bundles.

                                      Appendix IV

                         Comments from the U.S. Postal Service

    Appendix IV
    Comments from the U.S. Postal Service

    Appendix V

                         GAO Contact and Staff Acknowledgments

    GAO Contact Katherine Siggerud (202) 512-6570

    Staff 	In addition to the person named above, Teresa Anderson, Tida
    Barakat, Margaret Cigno, Collin Fallon, Kerry Lipsitz, Kathy Gilhooly,
    Brandon

    Acknowledgments Haller, and Jason Kelly made key contributions to this
    report.

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