The major themes this group of associations has concluded from the tours and subsequent discussions are:

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1 INDUSTRY MEMO TO: Megan Brennan, Chief Operating Officer and Executive Vice President, USPS FROM: Gene Del Polito, President, Association for Postal Commerce (PostCom) David Steinhardt, President and CEO, IDEAlliance Ken Garner, President and CEO, Association of Marketing Service Providers (AMSP) Bob Galaher, Executive Director and CEO, National Association of Presort Mailers (NAPM) RE: Ongoing flat shaped mail observations PostCom, IDEAlliance, AMSP, and NAPM continue to hear concerns coming from all of our members which are the businesses that do the most to create and add mail to the USPS distribution stream. As we represent the most diverse group of business mailers and related mail suppliers and stakeholders, there is fear that the Postal Service is developing a one size fits all strategy for the processing and delivery of flats which may be taking the Postal Service and the industry in some wrong directions. We urge the Postal Service to take some time and revisit some of the questions and concerns we are raising about the various flats products you are handling, as well as other pressures upon your delivery system that can influence costs. Recently, the Postal Service provided members of the flats strategy group an opportunity to visit a Destination Delivery Unit (DDU) in Fairfax, Virginia on two different occasions. These visits have sparked healthy discussion within the industry, leaving many of us with questions. The evolution of mail has been underway for quite some time and the Postal Service has been moving forward with a base set of assumptions that raises questions within the industry. By revisiting these assumptions together, the industry believes that we can create a solid footing for moving forward in a manner that is productive and cost effective to both the Postal Service and the industry. The major themes this group of associations has concluded from the tours and subsequent discussions are: Standard Operating Procedures Although our observations are from two visits of the same DDU, our members have been to countless other DDUs. There seems to be different procedures followed in how mail is handled at the carrier s case. Is there a standard operating procedure that all units must follow or is it up to the postmaster s discretion? If there is a Standard Operating Procedure, how does HQ ensure that these procedures are followed? Industry understands that there are different work rules for the different carriers based on the union contracts. Has the Postal Service ever looked at best practices across the delivery units for rural and city carriers? If so, how closely are carriers required to follow them? 1

2 Delivery Point Sequencing The Postal Service said that 93% of letters are Delivery Point Sequenced. All work to this point on the delivery point sequencing of flats is based off the USPS experience on letters. According to the Annual Compliance Report, total FSS flats coverage for FY13 was 18% and AFSM 100 was 70%. From the two visits to the DDU through the USPS flats strategy group, we learned that only 60% of candidate flats from FSS are DPS d, which means there is a 35 40% leakage of flats from the FSS. Leakage, as defined by USPS delivery operations, is any flat that needs to be cased. Leakage Questions What causes leakage? There appears to be a number of reasons that candidate flats either do not make it onto machines, or they drop off. The industry is interested in learning why so it can work with the USPS to ensure all pieces are handled in the most cost efficient way. For example, where the USPS accepts FSS mail at a non FSS site, it must transport this mail from one facility to another. The emphasis on meeting service standards could lead to bypassing automation, and ultimately result in manual processing. Much work has already been done through MTAC in developing the Mail Optimization Matrix (MOP). Should there be more of a focus by mailers and the USPS on the process and handlings identified, specifically between FSS and non FSS zones? Does the USPS track the cost of maintaining service standards? How much of this leakage is now incurring these extra handlings and cost in a FSS area that would not be experienced in a non FSS Zone? During the two DDU visits, industry saw that some of the flats received two handlings. The first was by a clerk(s) who took flat shaped mail and small parcels from hampers and put them in carrier tubs. Then the carrier was taking those tubs and casing the mail. This raises the following questions: Why do some flats go straight to the carrier for one handling while others get two handlings (one by a clerk who sorts to carrier tub and then by carrier for casing)? Is there really a value for LOT (Line of Travel) Sequence as required for carrier route? Why do manual handlings occur? Where do manual handlings occur? FSS Rejects FSS Rejects is mail inducted into the machine but is not delivery point sequenced. The industry believes the nationwide percent to be as high as 10 percent. The number one root cause of Rejects is what the USPS calls Out of Sort, which means ZIP codes are being inducted onto the machine that the FSS machine has either processed already or does not process at all. The Rejects then find their way to the same collection area, but with no indicator of why. Therefore, the operator has no idea why a piece rejected and his/her only option is to re induct the mail into the FSS or flow the mail to the ASFM 100 which has a high chance of being in a different building. These Rejects end up not meeting established service standards adding cost into the system. Value of Carrier Route With about 70% of the industry produced flats volume being Carrier Route (CR), has the USPS begun to reconsider its original intentions for the FSS. Since only 25 30% of all flats are processed on FSS, the main focus for the mailing industry and Mail Service Providers specifically, will be the non FSS flat volume. That has been reinforced since the Postal Service 2

3 announced that there are no plans at this time for Phase II FSS. At the same time, mailers and PostalOne! are working to comply with the required FSS mail prep that was implemented in January. While the transition is ongoing as a result of late details from the USPS which resulted in software development delays, we are concerned that the Postal Service may not have considered the unintended consequences related to the required prep. Could service standards be at risk because FSS mail can no longer bypass automation? Is there an alternative way to move that mail if capacity and/or machine problems are experienced? The growth of carrier route through comail has taken cost out of mail processing in non FSS or AFSM covered areas because it bypasses processing. In some cases, that mail is cross docked and also bypasses bundle sorting. This fact can be seen in mail processing costs for Carrier Route mail as laid out by Ginny Mayes in the May 2013 meeting that several industry members attended. While the Postal Service focuses on reducing delivery costs, there has been an increase in processing costs on FSS. Questions had been raised by mailers initially as to whether the reduction in delivery costs could offset the processing of mail, not once but twice, that was never on automated equipment before FSS.Carrier Route. Is there a better understanding by the Postal Service on the net outcome of the total system wide cost of FSS flats? And if so, what is the projection and plan moving forward? You had previously stated that FSS scheme prices would be no more than Carrier Route prices when the transition away from Carrier Route was implemented. It appears as though costs are not in line with that promise of pricing. Is that the main reason why it took so long for USPS to make the mail prep mandatory and move to FSS pricing which still includes Carrier Route? How much has the reduction in flat mail volume over the last 7 years hurt efficiencies and cost on FSS? And because of that volume loss, is the USPS building volume for FSS to gain efficiencies by adding volume that probably would never go across the machine, such as Saturation and High Density? Are cost avoidances shrinking? The USPS, along with the industry needs to break out FSS covered areas and non FSS covered areas? There are different processes and efficiencies that exist and need to be examined and considered when developing prep and pricing strategy for the future. As mentioned earlier, MTAC through one of its task teams created MOPs that need to be examined and the associated costs to these processes need to be considered to see where net value and opportunities exist across facility operations, transportation, and at the delivery unit. Periodicals Since FSS processing begins at noon, there are issues that exist around the 8am CET (for FSS if bundle prep is needed) and 4pm CET (for non FSS if bundle prep is needed) for dailies, weeklies, and bi weeklies. For most monthlies, CETs are not as critical to their delivery plans. Is part of FSS leakage due to missed bundles sorts prior to FSS piece processing? Are there manual handlings coming from overcapacity on APPS/SPBSs? Will these CETs remain now that Phase II of Network Optimization is postponed? Saturation Mail PostCom saw during the DDU visit that facilities were getting more than one EDDM piece on any given day. The Postmaster makes the decision if pieces get deferred until the next day, or the pieces are merged for city carriers because of 3 bundle requirement (DPS letters, DPS flats, cased mail). Merging was defined as sorting with cased mail as the carrier pulls it from its case in walk sequence order, or the carrier thumbs through FSS trays and adds the other EDDM pieces. 3

4 Is this Standard Operating Procedure? Is this just for EDDM? Or is the USPS doing this to other Saturation Mail? How is this cost allocated? If the USPS tallies based on top piece, is the cost of merging being added to flats/carrier route? Industry Concerns of Mandatory FSS Prep The 250 lb minimum requirement for FSS prep is causing issues within the industry. It was an optional prep requirement prior to January 2014, and because it added cost for mailers, it contributed to the low participation rate. Now that the USPS has made it mandatory, mailers are forced to absorb the cost. This has implications that the USPS has failed to recognize. From our members, we have heard about the increase in costs resulting from the increase in the number of pallets, as well as handling and transporting those pallets. Some of our members have seen an increase of over 40 percent in the number of pallets being created. We have to believe that the USPS will also incur more cost than expected related to additional pallets in MTE inventory, handlings and transportation. For those reasons, we ask the Postal Service to reconsider this requirement. The Postal Service needs to evaluate how it structured the DFSS pricing. Right now mailers have the option to take mail to the DFSS or to the local plant where the Postal Service would transport to the DFSS. We would hope that the USPS will closely monitor the transportation cost of this mail volume in FY14 to determine if greater savings can be achieved by increasing DFSS discount, thereby incenting mailers to go to the DFSS and bypass USPS transportation. At the current discount, the incentive does not exist for mailers to make the trip to the DFSS that is separate from what is currently a DSCF entry. Postal Facts That Generate Industry Questions In the FY13 ACR, USPS said that FSS mail processing costs were increased and carrier costs were decreased; while AFSM 100 volumes increased and costs went down. Carrier costs were not mentioned at all by the Postal Service. o Did the costs go up or down, and how does this compare to what the USPS did or did not expect? o Can the USPS offset the double handling of Carrier Route flats on the FSS machines with the current one handling at the delivery unit? The Postal Service in the Joint Industry USPS Flats Meeting presentation showed the following Mail Processing Costs (Labor and Indirect) by Cost Pool for FY12. o Why the difference for the various classes? Are these end to end costs, and are we comparing apples to apples with the same final state of the output product? Or are these just the mail processing costs that actually take place at these individual facilities? For example, manual processing/casing of flats is done at delivery units. So is column 3 simply co located Delivery Unit cases that reside in a plant? Plant, NDC/FSS Plant, AFSM100 Plant/Manual Piece Std Flats Mail Std Carrier Route Mail Periodicals o In this same presentation, the USPS showed the two largest costs by function to be processing and delivery. Here are the figures from that presentation. What s in these costs? One can imagine no CR flat 4

5 mail having a higher cost in delivery as more flat mail has to be manually sorted to Incoming Secondary (i.e. 5dg zip to the carrier ). The MOP mail flow costs will help us understand this better since it is very difficult when costs are all lumped together. FY12 Processing Delivery Std Flats Mail Std Carrier Route Mail Periodicals Suggestions for Improvement Evaluate the system wide merit of 5D pallets based on entry, considering the impact of cost and service. Evaluate the need for 250 lb minimum pallets. Again, this will only make sense to the industry if given the proper incentive because of the cost associated with additional lighter weight pallets. Evaluate DFSS rates, factoring in the impact of dropship locations and the cost incurred when entered at non FSS facilities. Evaluate the merit of exploring the software and workflow modifications for FSS as well as DBCS (letters) for industry to be incented to provide presorted product that is the equivalent of DPS Pass 1 output. For FSS this would essentially double the capacity that could be DPS processed on flats. The USPS would essentially do the final merge and sequencing operation. This would take advantage of the industry's ability, when incentivized, to consolidate and create density that could help the Postal Service reduce cost and gain efficiencies. Industry Recommendations The USPS not only needs to update its flats costs that were presented to the industry in May 2013, but needs to do a deep dive into those costs related to the same period last year. It also needs to look at the MOP flows that were developed by MTAC and assign costs to those flows. This will provide a necessary view of total combined costs across facility operations, transportation, and the delivery unit. The ultimate goal is to better identify key leverage points for net cost reductions. There needs to be a FSS leakage task team developed that includes members of the USPS and industry. There needs to be a non FSS strategy team developed to discuss ideas on efficiencies for areas not covered by FSS. At the end of FY13, FSS coverage was 18%. This could be a bigger area of opportunity as it appears that ~70% of flats are processed through the ASFM100. There needs to be a deep dive into the value of carrier route and co mail and the implications if it goes away. USPS pricing, operations, and delivery need to be involved at all times during these discussions. We re concerned that the USPS is taking a one size fits all approach to everything. There is a perception that anything appearing to cut costs is good business for the Postal Service. Because of the diverse nature of flats, whether Saturation, Periodicals or Standard Mail, we urge the Postal Service to look more closely at some of these assumptions. Before changing a rule or regulation that adds to mailers costs of preparation, the Postal Service should more closely evaluate the cost savings for the Postal Service throughout the country and its varied network. If the savings can only be captured in certain circumstances or will not apply to all processing and delivery across the country, then having different requirements and/or options would make more sense for the USPS and mailers. We hope that our observations, questions, concerns and suggestions will further add to the discussions around a Flats Strategy. Our involvement in the discussion of costs associated with flats and the development of a flats strategy is a 5

6 confirmation of our commitment to cost reduction, processing efficiencies and service improvements. We look forward to your response, and the opportunity to level set so that we can focus on the key issues related to flats processing, transportation and delivery. Thank you. CC: Pat Donahoe, Postmaster General, USPS Cathy Moon, Manager, Operations Integration & Support, USPS Krista Finazzo, Chief of Staff COO, USPS Jim Nemec, Vice President, Consumer and Industry Affairs, USPS David Williams, Chief Inspector, USPS Office of Inspector General David Williams, Vice President, Network Integration, USPS 6