[House Hearing, 110 Congress] [From the U.S. Government Publishing Office] THE POSTAL SERVICE: PLANNING FOR THE 21ST CENTURY ======================================================================= HEARING before the SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF COLUMBIA of the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION __________ JULY 26, 2007 __________ Serial No. 110-199 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 52-714 WASHINGTON : 2009 ----------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001 COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HENRY A. WAXMAN, California, Chairman TOM LANTOS, California TOM DAVIS, Virginia EDOLPHUS TOWNS, New York DAN BURTON, Indiana PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California BRIAN HIGGINS, New York KENNY MARCHANT, Texas JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina Columbia BRIAN P. BILBRAY, California BETTY McCOLLUM, Minnesota BILL SALI, Idaho JIM COOPER, Tennessee JIM JORDAN, Ohio CHRIS VAN HOLLEN, Maryland PAUL W. HODES, New Hampshire CHRISTOPHER S. MURPHY, Connecticut JOHN P. SARBANES, Maryland PETER WELCH, Vermont Phil Schiliro, Chief of Staff Phil Barnett, Staff Director Earley Green, Chief Clerk David Marin, Minority Staff Director Subcommittee on Federal Workforce, Postal Service, and the District of Columbia DANNY K. DAVIS, Illinois ELEANOR HOLMES NORTON, District of KENNY MARCHANT, Texas Columbia JOHN M. McHUGH, New York JOHN P. SARBANES, Maryland JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland DARRELL E. ISSA, California DENNIS J. KUCINICH, Ohio, Chairman JIM JORDAN, Ohio WM. LACY CLAY, Missouri STEPHEN F. LYNCH, Massachusetts Tania Shand, Staff Director C O N T E N T S ---------- Page Hearing held on July 26, 2007.................................... 1 Statement of: Siggerud, Katherine A., Director, Physical Infrastructure Issues, U.S. Government Accountability Office; and Gordon C. Milbourn III, assistant inspector general for audit, Office of the Inspector General, U.S. Postal Service....... 5 Milbourn, Gordon C., III,................................ 35 Siggerud, Katherine A.................................... 5 Waller, John D., director, Rates, Analysis and Planning, Postal Regulatory Commission; and William P. Galligan, senior vice president, operations, U.S. Postal Service..... 72 Galligan, William P...................................... 73 Waller, John D........................................... 72 Winn, Michael J., director of postal affairs and mailing operations, R.R. Donnelley; Robert F. McLean, executive director, Mailers Council; Jerry Cerasale, senior vice president, government affairs, Direct Marketing Association, Inc.; and Timothy J. May, general counsel, Parcel Shippers Association................................ 89 Cerasale, Jerry.......................................... 109 May, Timothy J........................................... 120 McLean, Robert F......................................... 102 Winn, Michael J.......................................... 89 Letters, statements, etc., submitted for the record by: Cerasale, Jerry, senior vice president, government affairs, Direct Marketing Association, Inc., prepared statement of.. 111 Davis, Hon. Danny K., a Representative in Congress from the State of Illinois, prepared statement of................... 3 Galligan, William P., senior vice president, operations, U.S. Postal Service, prepared statement of...................... 76 May, Timothy J., general counsel, Parcel Shippers Association, prepared statement of......................... 123 McLean, Robert F., executive director, Mailers Council, prepared statement of...................................... 104 Milbourn, Gordon C., III, assistant inspector general for audit, Office of the Inspector General, U.S. Postal Service, prepared statement of............................. 37 Siggerud, Katherine A., Director, Physical Infrastructure Issues, U.S. Government Accountability Office, prepared statement of............................................... 8 Winn, Michael J., director of postal affairs and mailing operations, R.R. Donnelley, prepared statement of.......... 92 THE POSTAL SERVICE: PLANNING FOR THE 21ST CENTURY ---------- THURSDAY, JULY 26, 2007 House of Representatives, Subcommittee on Federal Workforce, Postal Service, and the District of Columbia, Committee on Oversight and Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 2 p.m. in room 2154, Rayburn House Office Building, Hon. Danny Davis of Illinois (chairman of the subcommittee) presiding. Present: Representatives Davis of Illinois, Norton, Marchant, and McHugh. Staff present: Caleb Gilchrest, professional staff member; Lori Hayman, counsel; Cecelia Morton, clerk; Ashley Buxton, intern; Ed Puccerella, minority professional staff member; Benjamin Chance, minority clerk; and Kay Lauren Miller, minority staff assistant and office manager. Mr. Davis of Illinois. Welcome, Ranking Member Marchant, members of the subcommittee, hearing witnesses and all of those in attendance. Let me welcome you to the Subcommittee on the Federal Workforce, Postal Service, and the District of Columbia hearing entitled, ``The Postal Service: Planning for the 21st Century.'' Hearing no objection, the Chair, ranking member and subcommittee members will each have 5 minutes to make opening statements and all Members will have 3 days to submit statements for the record. As I indicated, we are delighted that all of you are here, and I will begin the hearing. Ranking Member Marchant, members of the subcommittee and hearing witnesses, welcome to the subcommittee's hearing on the infrastructure and realignment of the U.S. Postal Service. Today's hearing will examine the Postal Service's efforts to update outdated mail delivery standards and how it intends to realign its infrastructure through consolidating operations and closing annexes. The Postal Service's delivery performance standards and results are central to its mission of providing reliable and efficient postal service. Standards are essential to setting realistic expectations for delivery performance and expectations. Timely and reliable reporting of performance results is essential for oversight transparency and accountability. Mail delivery standards are important, so the Postal Service and officials can monitor the progress of mail delivery in cities like Chicago. They are working to improve mail service. The Postal Service has informed me that based on an increased focus on mail processing and delivery performance, Chicago performance scores are showing a positive trend. The Postal Service, recognizing the importance of the timely delivery of mail, has integrated performance targets and results for some types of mail into its performance management system. However, all mail should be subject to mail standards. A decline in first class mail due to increased competition and shifts in population demographics has resulted in the Postal Service examining ways to realign its infrastructure. I am interested in hearing how the Postal Service intends to realign its work force, processing and distribution infrastructure to address these concerns. At the request of myself and other Members of Congress, the Government Accountability Office [GAO], has completed its report on the Postal Service's realignment efforts. The report entitled, ``U.S. Postal Service: Mail Processing Realignment Efforts Underway Need Better Integration and Explanation,'' discusses, among other things, the need for the Postal Service to establish measurable targets to meet cost savings goals and establish criteria for selecting facilities for consolidation and realignment. The report will be released today and will contribute greatly to today's discussion. I want to thank you all again and look forward to testimony from our witnesses. [The prepared statement of Hon. Danny K. Davis follows:] [GRAPHIC] [TIFF OMITTED] T2714.001 [GRAPHIC] [TIFF OMITTED] T2714.002 Mr. Davis of Illinois. At this time I would like to yield to the ranking member, Mr. Marchant. Mr. Marchant. Good afternoon, and thank you, Chairman Davis, for holding the hearing today about the U.S. Postal Service Infrastructure and Realignment. I understand that with any organization as large as the Postal Service, changes take time and a great effort from many diverse groups. As we continue our role on the subcommittee in providing oversight of the Postal Service, I am reminded it is not a perfect system, but one which is ever-changing and expanding. We can't expect a system which moves 213 billion pieces of mail a year to be perfect or stagnant. With the release and enactment of postal reform legislation, as well as the current challenges faced by the Postal Service, today's Postal Service faces many more challenges than ever before. But through such challenges come opportunity. I look forward to hearing from all of the witnesses today and learning more about the Postal Service and what it can do to maintain a viable delivery system in the 21st century. Thank you, Mr. Chairman. Mr. Davis of Illinois. Thank you, Mr. Marchant. We will now hear from our witnesses. First I would like to introduce the first panel. Panel one is Ms. Katherine Siggerud, who is Director of the Physical Infrastructure Issues Team at the Government Accountability Office [GAO]. She has directed GAO's work on postal issues for several years, including recent reports on delivery standards and performance, processing that work realignment, contracting policies, semi-postal stamps and biological threats. We welcome you. Mr. Gordon Milbourn III was named assistant inspector general for audit of the U.S. Postal Service Office of Inspector General in February 2005. He is responsible for all audits in the Postal Service areas of cooperation, financial management, technology and headquarter operations. If the witnesses would rise, it is the tradition of this committee to swear in all witnesses. So if you would raise your right hands. [Witnesses sworn.] Mr. Davis of Illinois. The record will show that each one of the witnesses answered in the affirmative. You may be seated. Thank you very much, and we will begin with Ms. Siggerud. STATEMENTS OF KATHERINE A. SIGGERUD, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; AND GORDON C. MILBOURN III, ASSISTANT INSPECTOR GENERAL FOR AUDIT, OFFICE OF THE INSPECTOR GENERAL, U.S. POSTAL SERVICE STATEMENT OF KATHERINE A. SIGGERUD Ms. Siggerud. Chairman Davis, Ranking Member Marchant, Mr. McHugh, thank you for your invitation to appear today at this hearing on the Postal Service and its planning for the 21st century. My remarks reflect reports we issued in 2005, 2006 and at this hearing today. On that basis, my statement will focus on first, major challenges affecting the Service's mail processing operations that have prompted the need for network realignment. Second, concerns we raised in our 2005 report and today's report about the Service's efforts to realign its mail processing network and implement its area mail processing consolidations. And finally, concerns we raised in our 2006 report about the Service's progress in implementing delivery performance information. Mr. Chairman, there is broad agreement on the Service's need to realign its processing networks. In addition to many of today's witnesses, the President's Commission and the Service's own transformation plan have called for action to assure that this network meets current and future processing needs, reduces costs, improves efficiency and eliminates redundancy. The Postal Accountability and Enhancement Act reinforced the urgency of this realignment effort. We found that several trends have created excess capacity in the network and productivity variations across plants. First, the changing marketplace and shifts in how customers use the mail, in particular, declining first class mail volume and increasing standard mail volume. Second, the changing role of mailers, as driven by work- sharing discounts, which involve mailers preparing, sorting or transporting mail to qualify for reduced postage rates. These activities allow mail to bypass mail processing and transportation operations. Third, evolutionary changes have resulted in a network of plants that are markedly different from one another, making it difficult to standardize operations. And finally, shifts in national demographics. Service facilities may not be optimally located due to changing demographics and transportation modes. Turning now to our concerns about the Service's realignment efforts, our 2005 report concluded that the Service did not have answers to important questions about how it intended to realign its mail processing networks. This conclusion still holds true today. We find that the Service's strategy for realigning its processing network first lacked clarity, criteria and processes for eliminating excess capacity in its network. Second, it largely excluded stakeholder input from its decisionmaking processes. Third, it was not sufficiently transparent and accountable; and fourth, lacked performance measures. Mr. Chairman, I want to emphasize that we support the Service's efforts to realign its processing networks, but we do have some concerns. The Service has started to implement several network realignment initiatives. Overall, progress has been somewhat slow. These initiatives include area mail processing or AMP consolidations, development of a network of regional distribution centers, and creation of surface transportation centers. The realignment efforts are at different stages of implementation. For example, in February 2006, the Service said that it was planning to develop a network of between 28 and 100 regional distribution centers that would serve as the foundation for its processing network. However, the Service is apparently reconsidering this approach and Tuesday issued a request for information regarding hiring private suppliers to handle some or all business mail. At this point, it is not clear how these various initiatives are integrated or whether they are meeting the realignment goals. AMP consolidations focus on moving processing activities from one plant to another to achieve efficiencies. Our report raises several issues related to these consolidations. Concerns raised by us and others include the Service's unclear criteria for selecting facilities and deciding on AMP consolidations, use of inconsistent data calculations, limited measures of the effect of changes on delivery performance and lack of clarity regarding how stakeholder and public input is solicited and used. It is important to note that the Service is revising its guidelines for AMP consolidations to address these issues. After reviewing a draft of these changes, we made two recommendations. First, that the Service ensure that the facilities plan required by the Postal Accountability and Enhancement Act explains the integration of realignment initiatives and establishes measurable targets, and second, that the Service continue to improve the quality of public notices and engagement and increase transparency in decisionmaking. We reported last year on the Service's limited progress in measuring and reporting on its delivery performance. The report detailed the limited scope of the Service's delivery measures, which covered less than one-fifth of mail volume. We also covered the need to update delivery standards to reflect current operations, particularly for standard mail and periodicals. We reported on impediments to progress and recommended the Service provide clear management commitment and more effective collaboration with mailers to implement delivery measurement and reporting for all major types of mail. In conclusion, the Postal reform law officers the Service opportunities to respond to our recommendations from all these reports and requires the Service to submit a plan to Congress describing the strategy, criteria and processes for realigning its network. Also, the Service must develop modern service standards and annually report to the PRC on the speed and reliability of delivery of most types of mail. Mr. Chairman, this concludes my statement. I am happy to answer any questions the subcommittee may have. 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Thank you, Ms. Siggerud. Now we will turn to Mr. Milbourn. STATEMENT OF GORDON C. MILBOURN III Mr. Milbourn. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to discuss the Postal Service's network and its recent realignment efforts. I will also address our work in this important area and some of the challenges remaining. We describe the Postal Service's network in detail in our testimony submitted for the record, and an overview diagram is attached. As you know, the Postal Service has one of the world's largest distribution networks, built on the premise that first class mail volume and revenue will continually rise and cover costs. However, in recent years, single piece first class mail volume has decreased substantially. In addition, the increasing automation of formerly manual processes and work-sharing discounts that keep mail out of parts of the processing stream, have left the Postal Service network over-sized. In 2001, GAO placed the Postal Service on its high risk list, and Congress asked for a plan to address GAO's concerns. In response, the Postal Service's 2002 transformation plan included a redesign of its logistics networks, called Network Integration and Alignment [NIA]. Our NIA reviews identified the potential for stakeholder concerns about the fairness and accuracy of the process and the need for policies and procedures for independent verification and validation of the project models. In September 2004, the Postal Service announced the Evolutionary Network Development [END] initiative, as the next step in optimizing its networks. The Postmaster General indicated the change to END was made because of the unpredictability of mail volume and processing. A key feature of implementing END is the Area Mail Processing [AMP] study, which is used to consolidate mail processing functions, eliminate excess capacity and increase efficiency. Our END concerns have centered on the need for more effective resolution of stakeholder issues for both a top-down and bottom-up approach in using AMPs and for better project management. In reviewing some of the AMPs, we found their conclusions adequately supported, but we reported concerns, such as data problems and incomplete service impact documentation. The Postal Service is currently implementing our recommendations to improve the AMP process. Most recently, in October 2006, Postal Service management announced a reexamination of the assumptions behind the END initiative. This was followed closely by passage of the Postal Accountability and Enhancement Act, which requires a realignment plan by June 2008. Planning for large-scale projects can vary from long-range detailed plans with elaborately sequenced steps to short-range incremental approaches. Each has its merits and the Postal Service has chosen the incremental approach, which provides network flexibility as circumstances change, reduces risks inherent in attempting to make all network changes at once, allows testing via pilot projects in a more forgiving environment, generates incremental internal capital to cover the cost and tends to make the overall picture clearer as local problems are resolved. In recent years, this incremental approach has allowed the Postal Service to make progress in optimizing its network. For example, it has eliminated over 180 million work hours and converted over 30 facilities to a new infrastructure. This approach has also highlighted many significant challenges still being faced in realigning the network. For example, not all postal stakeholders share the same goals, as found in such fundamental issues as providing universal 6-day service, which may not make economic sense in all locations, and eliminating mail acceptance points, which would streamline the network and save costs, but often produces mailer opposition. The mix of volume and types of mail is constantly changing. Relationships with mailers are continuously evolving in regards to discounts and mail preparation and submission requirements. And the velocity of the build-down must avoid protracted, anemic staffing of an over-sized network which can lead to operational and service failures. The act does not specify a planning model and the Postal Service believes it is well served by using an order of battle approach that incorporates flexibility and expects external change to occur throughout the process. The Postal Service network much reach an optimal size that still provides enterprise resilience in the event of major disruptions, natural disasters or acts of terrorism. Further, robust measurement is needed to monitor cost and service impacts as the plan unfolds. Finally, the plan must be effectively communicated to all stakeholders to prevent surprises and a negative impact on customer service. The support of Congress and the Postal Regulatory Commission is critical during this time of great change in order for the Postal Service to continue providing universal service at affordable prices. We will continue to support postal efforts, and we are cognizant of our responsibility to keep Congress fully and currently informed. I will be pleased to answer any questions. 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Thank you both very much. I will begin questions. I will begin with you, Mr. Milbourn. You just indicated that the Postal Service's network should be resilient to such things as natural disasters or acts of terrorism. Could you enhance that for us? Mr. Milbourn. Absolutely. There are really two what I would consider main considerations when we think about enterprise resilience with the Postal Service's network. One involves what you just alluded to, localized or regional catastrophes of one kind or another, such as Hurricane Katrina or the anthrax attacks that occurred here in the Washington area a few years back. But there are also regular, significant events that affect the whole country. And what I mean by that is what we call the annual Christmas surge that occurs in November and December. This is one area that requires some degree of resilience in the network. The other is being able to resume processing and delivery in the event of a catastrophe such as a Hurricane Katrina that puts some facilities or post offices temporarily out of operation. The Postal Service has capacity in its network right now to handle these types of events. The challenge as we see it is that as they begin to streamline the network, can they continue to build in some resilience to handle the Christmas surge and to be prepared for catastrophes such as these. We think it is going to be very difficult to find the right balance between the costs that would be involved with that and the actual risk of a disruptive event. Mr. Davis of Illinois. So are you suggesting in terms of planning that the Service might put additional emphasis or more emphasis on planning for these likelihoods? Mr. Milbourn. Absolutely. These need to be carefully considered. The likelihood of the risk, which in the case of the annual Christmas surge is 100 percent. The likelihood of a Katrina is far less than that, but the impact of a Katrina in a local area is very significant. So there are ways to address those risks. It doesn't mean you have to build a network that is constantly large and can handle them. But you need to think about ways of sharing the risk, tying in with other networks that may be of assistance if something like that occurs. It just needs to be carefully thought out and planned for. Mr. Davis of Illinois. Thank you very much. Ms. Siggerud, in the GAO report that you released today, GAO recommended that the Postal Service enhance the planning, accountability and public communications related to its realignment efforts. How did the Service respond to that recommendation? Ms. Siggerud. We made observations in several different areas. Let me start with the AMP consolidations themselves. I said in my short statement that we had some concerns about the data analysis and criteria used in that process. Because the Postal Service is in the midst of revising those guidelines in ways that seemed largely responsive to concerns raised by us, the IG and the PRC as well, we didn't make specific recommendations there. Where we did make recommendations was in the communications side of the House. In particular, we have concerns about the content of some of the material that goes out to explain what is being studied and what actions might be taken. We thought those could be clarified and simplified in a number of ways. The Postal Service did agree with that. We also were concerned about this event called the town hall meeting and its timing with regard to when it could best bring useful information to bear on the AMP consolidations. The Postal Service also agreed that there would be some benefit to moving that town hall meeting earlier in the process. Finally, the Postal Service did not have, at the time we were doing our work, any indication in its guidelines how it would actually use this information obtained from the public through the town hall meeting or other sources. It has also agreed to clarify that. Then finally with regard to talking about integration and planning, we view the report that is due next June as the Postal Service's opportunity to respond to and explain what it plans to do in a number of area having to do with realignment of the network. Mr. Davis of Illinois. In 2006, GAO reported that the Postal Service did not measure and report its delivery performance for most types of mail and that its progress to improve delivery performance information has been slow and inadequate. Has the Postal Service made progress in measuring and reporting delivery performance since that time? Ms. Siggerud. Yes, we have seen some progress, mainly in planning and thinking about how it is that it will accomplish those activities that you just mentioned. Because the Postal Accountability and Enhancement Act called for development of modern service standards and for information about that to be reported to the Congress this December, the Postal Service has put together a series of work groups that are in fact making progress on those issues. We have been observing those activities, and it looks like there are a lot of ideas out on the table, and that this report that is coming out this December is promising in terms of its responsiveness to the issue on the standards. With regards to measurement, there's two activities going on. The Postal Service will be required to report to the Postal Regulatory Commission on its delivery performance. It will take some time before the information that is needed will be available on a large scale basis to deliver on that. So there need to be some decisions made about whether there will be sort of interim measures used before the concept of intelligent mail provides more widespread and reliable information. In addition, of course, the Postal Regulatory Commission is setting up its own regulations about what would constitute the best type of information in terms of delivery performance. There has been a lot of activity on that front as well, in terms of comments provided to the Regulatory Commission from mailers and other stakeholders. Mr. Davis of Illinois. Thank you very much. Mr. Marchant. Mr. Marchant. Thank you, Mr. Chairman. Ms. Siggerud, your report in 2005 and 2007 concluded that the Postal Service is not sufficiently transparent and accountable on how it intends to realign its processing network. Transparent and accountable to who? Ms. Siggerud. Well, I would say of course to the Congress itself, which has an interest in this area. To the public and as well to the mailing industry which relies on the Postal Service for an important part of the economy. What we are really saying here is that when there is a transformation effort of some kind, which is really what this is, that the concept of transparency, and we have also said this in other areas, of course, transparency is really what are we trying to accomplish, what are our views on how we are going to get there. And then accountability is really then how do we know when we get there, how are we going to measure our performance. There are a variety of ways to accomplish this type of effort. The Postal Service is making progress on those concepts with regard to some of these individual efforts that I talked about. The plan as a whole, though, is still somewhat in development and lacking in a few of those areas. Mr. Marchant. Do you think that the fact that the major element that the labor negotiations and the contract with the letter carriers, do you think it is possible for the Postal Service to make those final changes and those final plans and make them available until they finalize those negotiations and know what their work force costs are going to be, etc? Ms. Siggerud. Well, yes, we think it is. Clearly the waiver issue and the cost associated with labor is very important in planning. But I really, a lot of what we are talking about here of course is also the network itself and the fixed costs associated with that. We have seen a fair amount of progress in certain areas of this network planning. What we haven't seen is an integration of what the vision is and how we are going to get there. I understand that the Postal Service places a very substantial challenge in this area. But it has been clear from the transformation plan the Postal Service put on itself, the President's Commission and from the direction from the Reform Act in December that there is a very strong interest in making progress and having some of the transparency and accountability that we have been talking about. Mr. Marchant. What would you consider to be your most important concern over at the Post Office, in their realignment? Ms. Siggerud. In the realignment area, well, I think what we would like to see is some clear goals set for this realignment effort in terms of timeframes, in terms of costs to be achieved, for example. And if a plan could be put together, some vision, perhaps, even for segments of the realignment that we are talking about, so that the mailing industry, the public and the Congress have some sense of what to expect, that would be, in our view, very good progress. Mr. Marchant. Mr. Milbourn, what do you see as the biggest network realignment challenge? Mr. Milbourn. I agree with Ms. Siggerud that the one she just cited is enormous. I would add to that by saying, I think the ability of the Postal Service to reduce its costs substantially while still delivering service equal to, if not better than, the service that it currently delivers, is an enormous challenge. And that incorporates streamlining of the network. But you alluded to the work force and union negotiations, it kind of goes beyond that. But I think the streamlining of the network is a huge piece of that, and how they are able to plan for and accomplish massive streamlining focused on costs and still be able to focus on and deliver the service at the same time is a real challenge. Mr. Marchant. Thank you, Mr. Chairman. Mr. Davis of Illinois. Thank you very much. Ms. Norton. Ms. Norton. Thank you very much, Mr. Chairman. I appreciate this testimony. I am interested in an overarching and I think obvious question, in light of the fact that the Post Office is here, we in Congress are quite pleased to look past, and that is whether essentially this model gives the Postal Service today a mission impossible. First of all, we are dealing with a model that we enacted, we passed in 1970, and of course, we updated the act most recently, and very recently have updated it. But I have trouble finding any precedent for the model we are dealing with. And I am very interested in your ideas on planning. I would like to know if you can think of any comparable model that, for example, presents the kinds of issues that have come before us. The Postal Service has been told to meet the same conditions that private mailers meet. We told them to do that in 1970. Think of what 1970 was. It was pre-technology, no one even envisioned that there would be a faster, cheaper, way to communicate. If you decide to cut out even one post office some place, it is a major issue in that community, and Members of Congress will join the community in saying, you had better not do it. Yet the Postal Service has had some success in fighting through that. We think they will perhaps have more success. Nevertheless, as an example, that is an 18th century model. Much of the Postal Service still is a model from this original act passed, setting up the Post Office of the United States of America, and it came in controversy, came before this committee on outsourcing, major issue. Because postal workers, for reasons that range from security reasons to their own employment object to what looks like creeping outsourcing. Private mailers don't have that problem. Even the Congress will take on the Postal Service on something that it recognizes that half the time across party lines we don't even recognize. While I recall a few years ago when the Postal Service did what every big private corporation does and got sponsorship of the Olympics, and so it was the Postal Service logo. Members of Congress, I am telling you, Republicans as well as Democrats, came forward and said, what in the world are you doing sponsoring the Olympics? You know, gone from everybody's brain was the notion that this is what private corporations do, and they don't do it on a whim, they do market surveys. We talk about major disruptions. Well, you know, private companies who go down the drain, we have had a major disruption of the worst kind here, everybody has to prepare for that. They have to prepare for it in a very special way, because nobody will accept we have had a major disruption if we can't deliver the mail. The delivery times, each Member will hold the Postal Service accountable for delivery times within its jurisdiction. It is a major problem here even in the Nation's capital and this region. A number of years ago, they had to get their ducks in a row. We talk about stakeholder input. There is lots to be said to that. The more you get of that, of course, the more demands there are going to be on the Postal Service of the kind that everybody's grandmama made, got to have Saturday delivery, got to have what we have always had. And finally, of course, I mentioned the granddaddy of them all, whether you will think that the Postal Service is just a complete and total anachronism based on technological changes and a generation that increasingly doesn't even use newspapers other normal contraptions of modern society, but depends on technology. I am interested in an overriding issue that one, whether there is any model like this in the world, and whether you think planning will overcome all of these obstacles. If I could name, the closest model I can think of is one that the Congress has completely rejected, and that is that while we have a railroad system that harks back to the 19th century, every modern society says if you want to have a railroad system and you have to have one and you want to have passengers, you have to massively subsidize it. Well, the United States says, hey, we are not going to subsidize Amtrak or anything else, you are on your own. And by the way, keep them running and modernize the thing. So we just look away from the obvious issues. Well, you can do that on Amtrak and you will end up with what we have today and people get on planes, buses or whatever. On the Postal Service, the Congress won't tolerate it. At the same time, the Congress is saying, you do the same thing UPS does, you need to do the same thing FedEx does, you do it without one cent from us. I for one find all this very intriguing, structurally and intellectually. But I need to hear from experts whether you think this is a model that can survive the ages. Ms. Siggerud. Ms. Norton, those are a lot of questions. I will answer what I can. I have to say that I think your observations---- Ms. Norton. It really is one question. I just gave you examples of what I think Congress just looks past and says, you all do it anyway, don't tell us, just do it. Ms. Siggerud. I think your summary of the challenge was right on, that is that the Postal Accountability and Enhancement Act said the Postal Service, in fact, harkening back to 1970, the Postal Service should act as a business. This most recent act said that postage rates need to be held, of course, to the rate of inflation. But many stakeholders, including the Congress, have taken off the table a number of cost control options that the Postal Service could use to respond to that rate cap that you were mentioning. Ms. Norton. And you could depend on us not to put them back on the table. [Laughter.] Ms. Siggerud. I guess I want to focus on the issue of, is there another model out there like that. Clearly, the Postal Service is the biggest post in the world, and handles a larger volume than any other country. But I want to focus my comments on this concept of the network that we have been talking about and the costs associated with that. The closest model that we have in the United States, to the challenges of right-sizing that network is really the BRAC approach, where there is in some excess capacity stakeholders who want a variety of different things and indeed, to cut costs. To the extent that has been a successful approach, and there are differing views on that. There are a couple of things that have been key to that. One is that the BRAC process set out principles, what are we trying to accomplish, what tools do we have. It named people that would be important for making those decisions and then it laid out a process for making decisions. Whether that is useful in thinking about the costs the Postal Service faces may be worth considering. Ms. Norton. By the way, that is a very interesting and intriguing thing, given the experience with BRAC, one wonders how far down the Postal Service would have to get before Congress politically embraced that model. But it is a very interesting and intriguing notion. Yes, Mr. Milbourn. Mr. Milbourn. I have seen a couple of different models, one very close over a fairly extended period of time and the other just from some reading and research. But they both offer some lessons learned, I think. One is the Internal Revenue Service. I spent a fair amount of my career there, and both started there and then came back to it after the Reorganization Act of 1998. They had a modernization program and a restructuring program that was on two different levels. One was to go from a regionally based structure to a taxpayer type or a customer type driven structure. That was actually a fairly easy thing to do. Commissioner Rosati took that bull by the horns and did a very remarkable job of reorienting the people of the IRS and the structure and some of the processes. The very difficult part that they have been struggling with since I first worked there in the early 1980's is the issue of modernizing their computer systems. They have been attempting to modernize their archaic master file for 20 some years now, and are not dramatically close to finishing yet. And they have had a series of very extensive plans. But as the plan unfolds, and time passes, technology changes, the world changes around them, much as you were saying. So the plan has had to change and evolve over time. They have had to basically retrench along the way. I think that is a key lesson learned. If you are having a long-term restructuring that you need to be flexible enough to be able to account for changes in the environment and new things that come at you over time. The other model, and this is one I am far less familiar with, but some of the European posts, Deutsche Post, for example, it is my understanding when they embarked on a modernization project, and admittedly, it is dramatically smaller than what we are talking about here, they elected to do what amounted to shock therapy. They just re-did everything at once, re-did their processing, re-did their equipment. That is my understanding of it. I don't see that the Postal Service could do something like that because of the enormous cost involved. But there certainly are some lessons learned, good, bad and indifferent, from taking that kind of approach. Mr. Davis of Illinois. Thank you very much, Mr. Milbourn. We will go to Mr. McHugh. Mr. McHugh. Thank you, Mr. Chairman. Welcome. By way of editorial comment, I would say how much I know we all appreciate the continued efforts of both the GAO and the Inspector General. Over my 14 years of involvement in these issues, we have called upon GAO repeatedly to guide us and to assist us. This is the latest initiative, and we are always not just very happy but very much in need of your help and we appreciate that. As someone who had a little something to do with the creation of an independent inspector's office, a few bumps and grinds aside, I think it was a wise decision. We are seeing a little bit of that today. Mr. Milbourn, I hope I didn't bob my head too hard in agreement as you were talking about what perhaps is one of the most profound and yet in its structure one of the most simple challenges the Postal Service faces, that is to cut costs but do it in a way that hopefully enhances service. Yet as I look through the GAO report, one of the more striking statements I saw, and probably because it was bold headline, but it is also in the text, was that USPS does not have a mechanism for determining AMP consolidation impacts on delivery performance. And then they go on to talk about there are some proxies, but proxies are not direct performance standards. How do we help the Postal Service to develop that kind of process? And the second question is more rhetorical, how can you really go through a very necessary and yet critically dangerous process like the AMP without having some kind of performance standard measurement? Do you have any answers to that or suggestions, either one of you? Mr. Milbourn. I do think it has to be something on a global scale. In other words, I don't think that the Postal Service can approach individual AMPs from the standpoint of trying to set performance or service standards for that individual consolidation. To me, I tie this back to the requirements of the new act that says they have to do this kind of thing globally for the different categories of mail. Once they have that, then they have the criteria to use with each individual AMP. What we have been finding in our reviews with the AMPs is simply the fact that they have to be very cognizant of and analyze what are the expected changes when they make a consolidation to the standards that they already have and ideally to future ones as they become established. And that needs to be a critical part of the decisionmaking on whether in fact to consolidate under any given AMP. Mr. McHugh. Ms. Siggerud, any thoughts on that? Ms. Siggerud. I would agree wholeheartedly with what Mr. Milbourn said. I think constructing some sort of delivery performance measurement approach AMP by AMP would be not a good use of the Postal Service's resources and probably not possible. We do need to look to this time down the road when the reporting standards and the new technology will make such type and measurement available. Mr. McHugh. So we can, I think, all agree it needs to be system-side and that we don't really have the answers at the moment as to what those are. This is a work in progress, but-- and I hope the Postal Service agrees--it is a work that has to be completed if you are going to have an efficient evolution to a new model and one that enhances delivery performance, yes? Ms. Siggerud. Yes. Mr. McHugh. Well, that really, that was 4 minutes. Mr. Milbourn, you talked about probably one of the best ways to de-conflict the process, and the gentlelady from the District of Columbia was talking about some of the challenges of having Congress involved. But probably the best thing we could do is tell Congress you can't contact the Postal Service, particularly in AMPs. I just had two go through it, and I will tell you, I wrote a few letters, and I am sure we all did. But you talk in your testimony about reconciling what you defined to be the sometimes conflicting message, that is a very gentlemanly way of putting it, sometimes conflicting messages from influential stakeholders and mitigate their risk for possible to preclude paralyzing inaction. Boy, how can we do that, because that is a hard one. Mr. Milbourn. This is going to be really tough, because there are so many important stakeholders out there. There is of course Congress. But there are also mailers. And you and me receiving mail at our house are an important stakeholder. I think the Postal Service needs to reach out very broadly to all possible groups to solicit this kind of input in an attempt to resolve these kinds of conflicting views. The question I think that will remain is, is it within the Postal Service's authority to elect to resolve some of these on its own, or will it be directed to do certain things irrespective of what seems to be the best business decision to make with all of the necessary input? Mr. McHugh. Mr. Chairman, I should have left him alone, he wasn't paying attention to the clock. If I may, with your forbearance, just one what I hope will be a quick question. Ms. Siggerud, you spoke about, and of course, the topic here today is the mandate for modernizing service standards and measures. You talked about the PRC involving itself in their necessary work of developing regulations. I am just curious, did you have a chance to assess the PRC's efforts there, or is that progressing in a sufficient manner, do you think? Ms. Siggerud. We have not assessed the PRC's efforts in this area at this time. Mr. McHugh. Thank you, Ms. Siggerud. Mr. Milbourn, I don't expect you have an opinion on that? Mr. Milbourn. No, sir. Mr. McHugh. OK, thank you. Thank you, Mr. Chairman. I told you it would be brief. Mr. Davis of Illinois. Thank you both very much. We may have some additional questions that we would like to submit to you in writing. But given the fact that we've got three panels, we will proceed and thank you very much for your testimony. While we are getting ready to seat panel two, let me just acknowledge that we are always pleased to have present former Members of Congress who have deliberated long and hard on these issues. I see that former Representative William Clay. Sir, we are delighted that you are here. Thank you. While you are being seated, I will go ahead and introduce the witnesses. Panel two is Dr. John Waller, who has been director of the Office of Rates, Analysis and Planning of the Postal Regulatory Commission since February 2005. His primary responsibilities are directing the technical advisory staff of the Commission in supporting the commissioners in all proceedings and the development of commission reports. Mr. William P. Galligan was named senior vice president of operations in May 2005 and reports to the Deputy Postmaster General and Chief Operating Officer. Mr. Galligan has responsibility for the Postal Service's engineering facilities, network operations management and delivery and retail functions. Gentlemen, we welcome you both and thank you very much. If you would stand and raise your right hands. [Witnesses sworn.] Mr. Davis of Illinois. The record will show that each one of the witnesses answered in the affirmative, and we will begin with Dr. Waller. STATEMENTS OF JOHN D. WALLER, DIRECTOR, RATES, ANALYSIS AND PLANNING, POSTAL REGULATORY COMMISSION; AND WILLIAM P. GALLIGAN, SENIOR VICE PRESIDENT, OPERATIONS, U.S. POSTAL SERVICE STATEMENT OF JOHN D. WALLER Mr. Waller. Thank you, Mr. Chairman. Thank you for the opportunity to be here today. My remarks are based on the Commission's 2006 proceeding on the evolutionary network development plans of the Postal Service. A copy of the Commission's opinion is attached to my full written statement. The Commission endorses the Service's goals to create a more efficient and flexible postal network that realizes cost savings while maintaining service standards. The Commission also recognizes both the value of using modern, computerized optimization and simulation techniques to identify mail processing facilities for consolidation and the need to conduct site-specific reviews of individual facility consolidation plans as a reality check on the outputs of the computer models. However, the Commission's analysis identifies significant problems that could result in a less efficient network with slower service. For instance, the emphasis on consolidating operations from smaller plants into larger ones, rather than consolidating from less productive plants into more productive ones. Focusing on more productivity holds more promise. Transportation was not adequately considered in the END plants. It was not clear how nationwide transportation would be realigned, since the backbone of the network, the regional distribution centers, is shrouded in uncertainty. The Postal Service estimated there could be anywhere from 28 to 100 such centers. At the local level, only 6 of the 17 of the consolidation plans reviewed by the Commission revealed estimated transportation cost savings. As of last year, network development plans did not consider the significant changes in mail processing and transportation that will occur with the introduction of the flats sequencing machines. These machines are huge, expensive and were not incorporated in the planning models. The Postal Service recognizes that its network redesign program could have a significant impact on service. However, in the proceeding, it did not provide a reliable estimate of the volume of mail that would experience either a downgrade or an upgrade in days to delivery. Nor did it estimate how often the Postal Service would need to move up collection times from the blue boxes or require earlier bulk drop-offs at their plants in order to meet performance standards. Nor did it provide information on the impact consolidations might have on time of delivery during an individual day to the homes and businesses. The Commission also found problems in faulty assumptions in the computer models; in particular, not using actual mail processing productivity and cost characteristics. Instead, the models assumed idealized operations that ignore currently wide disparities in productivity among plants. There is also assuming that unit costs decrease as plant sizes increase and this conflicts with evidence presented to the Commission. The site-specific development evaluation problems included lack of consistency in review procedures, lack of criteria for approval or disapproval of proposed consolidations, lack of public and mailer input and a severe tardiness in errors and analysis in the post-consolidation reviews where the Postal Service would learn as it goes forward. While changes have been made and were made during the time of the proceeding, it was questionable if flaws have been remedied, particularly given the GAO report that has just been released. In closing, let me emphasize that the Commission believes that the Postal Service should have the flexibility and authority to adjust its operations and networks to meet its business needs and create cost savings and efficiencies. However, the Postal Service must be accountable and transparent to all postal customers and be sensitive to the needs of the communities it serves. Thank you. I will be pleased to answer any questions you may have. Mr. Davis of Illinois. Thank you very much, Dr. Waller. Mr. Galligan. STATEMENT OF WILLIAM P. GALLIGAN Mr. Galligan. Good afternoon, Mr. Chairman, Ranking Member Marchant, members of the subcommittee. I am pleased to be with you today. As senior vice president of operations for the Postal Service, I am responsible for engineering, facilities, delivery and retail operations and most relevant to our discussion today, network operations. There is a close and inter-dependent relationship amongst these activities. They have a strong influence on the viability of our network. Ultimately, our service standards and ability to meet them are based on the effectiveness of the network. I look forward to discussing both of these important issues with you. It is important that we view them within the context of the Postal Accountability and Enhancement Act, which was enacted last December. The law resulted in major changes that affect not only the Postal Service, but the entire mailing industry. One of the most significant changes is the requirement that price adjustments for our market-dominant products cannot exceed annual growth in the consumer price index. These products represent 90 percent of our business. Unfortunately, some key cost drivers, such as energy and health care benefits regularly exceed CPI growth. With this requirement, the challenge for the Postal Service is to reduce costs and increase productivity, while providing high quality, affordable, universal service to our Nation. One approach we are pursuing is the examination of our processing and distribution and transportation network. Today's network is a product of an evolutionary process that began when our system was created over 230 years ago. It expanded to serve a Nation that was growing in population and territory. This infrastructure was adjusted over time to accommodate steadily growing mail volumes, the latest trends in transportation technology and specialized facilities to achieve greater efficiency. In 1970, more than 2,000 facilities performed outgoing mail processing. Today, the number is less than 400. But in view of changes in mail volume, and the types of mail entering our system, we must continue to make our network even more efficient and capable of satisfying our customers' needs. Since 1998, single piece, first class volume has declined by almost 14 billion pieces, or 25 percent. This erosion continues by 1.5 billion pieces each year. Without offsetting system adjustments, this volume erosion reduces network efficiency and negatively affects our bottom line. We have also seen a growing shift to pre-sort mail which enters our system much closer to its final delivery point. In 1970, virtually all mail moved in and through our system. Today about 40 percent of the mail we handle no longer requires end to end transportation. This decline in single piece first class mail and the entry of more mail deeper into our system means that our network is not aligned with current and future needs. Excess mail processing and transportation capacity drives up unnecessary costs and challenges our ability to operate within the statutory limits of a rate cap. As Postmaster General Potter testified here last week, our challenge is to close the gap between prices and costs while maintaining quality service. He explained that management could proceed along any of three paths. The first is continuing status quo, which is obviously unacceptable. The second path is extensive contracting out of work now performed by our employees. But this could undermine labor-management and employee relationships that are so important to contributing the excellent service we provide our customers every day. We prefer a third path, working cooperatively with our stakeholders to confront the critical issues we are facing as an organization and as an industry. The continuing modification of our network to reduce duplication, increase efficiency, accommodate new equipment and meet changing needs of our mailers is a strategy we are pursuing along this path. Network adjustments have contributed to our ability to achieve record levels of service, customer satisfaction and unprecedented levels of productivity. Based on more recent stakeholder input, we have been working to improve our business processes related to implementing network changes. These include expanded public notice, expanded public input and increased transparency. Through all of these changes, we remain committed to our customers by maintaining overall service responsiveness and to our employees by not laying off a single career postal employee. The new postal law also requires us to develop modern service standards and related measurement systems. Together with a large and diverse group that represents all elements of the mailing community, we are working to identify what changes may be warranted. We are on target to complete this process next month. We are already consulting with the Postal Regulatory Commission so that new service standards can be published by late December. In developing measurement systems, we are exploring the possible use of our intelligent mail bar code as part of an information platform that will allow us to leverage internal passive data collection to efficiently measure actual service performance. We look forward to working with our stakeholders, particularly the Postal Regulatory Commission, in achieving agreement on revised service standards and measurement systems. I appreciate having the opportunity to discuss these important issues with you today and I would be pleased to respond to any questions you may have. [The prepared statement of Mr. Galligan follows:] [GRAPHIC] [TIFF OMITTED] T2714.057 [GRAPHIC] [TIFF OMITTED] T2714.058 [GRAPHIC] [TIFF OMITTED] T2714.059 [GRAPHIC] [TIFF OMITTED] T2714.060 [GRAPHIC] [TIFF OMITTED] T2714.061 [GRAPHIC] [TIFF OMITTED] T2714.062 [GRAPHIC] [TIFF OMITTED] T2714.063 [GRAPHIC] [TIFF OMITTED] T2714.064 [GRAPHIC] [TIFF OMITTED] T2714.065 Mr. Davis of Illinois. Thank you gentlemen very much. Mr. Galligan, I think you present a rather comprehensive look at some of the problems and difficulties which the Service is facing, especially when you talk about the decline in first class mail and decline in the number of pieces of mail that there is to be delivered. Given these difficulties, or given these realities, redesigning and streamlining the postal infrastructure has been under consideration for quite some time. When you consider service to customers, the needs of mailers, the future impact of automation, and the entire environment in which you are working, what do you envision the new network looking like? And when would you see it sort of coming online in terms of saying, here is what we think it is really going to have to be? Mr. Galligan. Mr. Chairman, I think that in much of the discourse around this subject, we have to look at it from two different points of view. Our core competency as an organization is our network of delivery and retail facilities. That intact is a fundamental strength of our organization. Our processing and distribution centers, that are world- class, with letter and flat automation and we are adding to that flat automation base as we move forward with the flat sequencing system, form the backbone of our future network. We also have an excellent air strategy that is part of that network, that moves mail in the air via two very competent suppliers and a select number of commercial airlines. Where we are right now, I know it has been called unclear, but it is in fact part of a business concept that we are working through, is what do we do with our long-haul ground network and what has been called our bulk mail center network. We are working through market research on that effort, and certainly we intend to be out with our facilities plan in accordance with the new law by June of next year. So my vision of the future at this point in time is we are certain that the erosion of first class mail continues. The consolidation of outgoing facilities continues on a very evolutionary scale. Our air network strategy is very clear. The work we are doing right now that will bring certainty to our total ground network and our bulk mail center network is still to be determined. It is a work in progress. Mr. Davis of Illinois. You gave great credence to the relationships between all components of the system, that is, management and labor, working cooperatively together. What mechanisms do you have in place to solicit input from the unions and management associations relative to planning the new system or the new design? Mr. Galligan. We fully intend, as we move through examination of any business process, to communicate to our impacted organization, union organizations, what it is we are looking at, research and how that would play out. We have already been in communications, I personally, with leadership around where we are with our business concepts. These are not plans, these are not decisions. These are essentially steps forward for us to build a business case that will ultimately bring to fruition a full-scale facilities network plan for the U.S. Postal Service. I look forward to working with the leadership of all impacted labor organizations to be very up- front in that regard. Mr. Davis of Illinois. Dr. Waller, what are the PRC's views on the Postal Service's strategy for realignment that you have heard up to this point? How do you respond to what you have heard? Mr. Waller. Well, a lot of what we have heard is still similar to what was there last year. It isn't as if that much time has gone by. So a lot of the reactions are the same that are in the report. It has just been pointed out that particularly the big hole is the BMC network, and what is the strategy going to be there for that. I think new initiatives are being pursued by the Postal Service, from what was just said, to try and firm that up. I think that is a useful move because you can't, unless you know what the backbone of the major transportation system is going to be, it is hard to adjust and say anything more than we said before. I think some of the criticisms still hold. I don't know to the extent that they are going to revise their use of the models that were a part of the END process. But to the extent there, they do need some revisions to put in inputs that reflect more reality of what is going on out there in the field right now. There is a great diversity in the performance among the plants. Until that comes before the Commission, a lot of times there is no explanation of why that diversity exists. It is just said to be fixed and persistent over time. Until some of those are understood better, it is going to be hard to understand how they are going to affect that ending up with a more productive network. Hopefully that will be taken care of, too, and they will have more realistic models if they continue to use that approach. Mr. Davis of Illinois. Thank you gentlemen, very much. Mr. Marchant. Mr. Marchant. Mr. Waller, you said in the last part of your testimony that the PRC has brought transparency to the postal network development plans. But the previous panel specifically said that was not the case. Mr. Waller. I think where we were when we started the case to where we were when we ended the case, when the case started and took a great deal of effort on the part of the people asking questions to find out exactly how many of the facilities were under consideration for modification, I think this enlivened the process very much, the review of them that has been going on then across the country right now. We, I think through the asking of questions about the AMP process, got much more public input. There was a lot of forces causing that to happen. But as it became apparent, as the case started, that very little was out there in the public, including just what was the list of candidate facilities that had come out of all this modeling process, I think that helped add transparency. I think the AMP process did improve with more public input. But just identifying that was a need has, I think, been a value added. Mr. Marchant. So you don't view the Government Accountability Office, do you view them as an adversary or as someone who is helping you? Mr. Waller. Oh, I think it is very useful. I think they endorsed and reiterated a lot of the conclusions that were in our advisory opinion. I think there is a lot of similarity and they just picked it up and said, yes, in the few months that have gone by, not much has changed. Mr. Marchant. I have a bulk mail facility in my district. When it comes to the bulk mail facilities, is that really a public input issue? Or are the retail facilities more of a public input? Mr. Waller. I think it is a public--any part of the node that mail is particularly dropped off, there are particular discounts that are for the BMCs. If you close or move them, people that are using them as an input are going to have to adjust where they, and it may be more expensive for them. Mr. Marchant. So in this case, the public would be the retailers, the mailers. Mr. Waller. It would be retailers, it would be the local communities, too, that would be affected. I think the broader you set a net to get ideas, the better off you are going to be, because the more people are going to understand the needs. So I would say both the local community, the labor, people who understand the local issues. But in particular, the mailers that actually use it have to, I mean, it has been pointed out that the work sharing concept has evolved to a large extent. Well, that is where now the mailers are doing a lot of the work previously done by the Postal Service and inserting it deeper into the system. Those insertion points are very critical, both to the mailer, what kind of service are they going to get at that insertion point, etc., and if you start mixing those up, you have to examine the impact it is going to have on them. For instance, I would assume that there are a lot of possibly mailers near you, consolidators near your center who have built infrastructure themselves. So it is not just the Postal Service that would end up changing. There would be changes within the mailers who would use it. If they can't continue to use it in an efficient way, then the system itself overall is not going to get more efficient. So it has to be considered as not just what is happening to the Postal Service, but what is happening to the people who insert mail into the system and then how fast it gets to the people who are receiving the mail. Mr. Marchant. Well, and every 2 years, all of us have the opportunity to get into the bulk mail business. [Laughter.] Especially in media markets like Dallas, where that is the only affordable way to communicate, whether it be campaign or MRA. So it is a vital interest to all of us. But yes, my district is surrounded, DFW Airport. So yes, the bulk mail people have located there, J.C. Penney, all of the major mailers. I appreciate your efforts. Thank you. Mr. Davis of Illinois. Thank you very much. You mean television is too---- Mr. Marchant. For my district it is. [Laughter.] Mr. Davis of Illinois. So you can't be doing much of that. Let me just ask an additional question or so. Mr. Galligan, nobody likes to mention or make reference to, but I did note that Mr. Milbourn in his testimony did suggest that there might be times when you might have to look at the appropriateness of 6 day delivery in some instances, or some places. Is there much thought or conversation given to that kind of thinking? Mr. Galligan. I know Congresswoman Norton mentioned mission impossible. I don't share that we are on a mission impossible course, but it is a mission challenged. My personal opinion, and I think it is shared by our Postmaster General, is that the issue of 6 day delivery cuts to a public policy debate that goes to the notion of universal service. I can assure you that organizationally, in my delivery and retail organization, we are not preoccupied at this point in time with any notion around changing our days of delivery to a 5-day model or an every other day model. There would be a point in time where our cost burden against the top line revenue is so out of whack that needs to be considered. I think it is a matter of public policy debate. I think it would cut through to the very notion of the mail monopoly and universal service. And not to pass a monkey off my back, Mr. Chairman, but I kind of think that issue would probably fall up to your Chair. Mr. Davis of Illinois. Well, I think it is something that certainly some people give thought and consideration to. And I think it is something that we have to be cognizant of. I will agree with your initial assessment that there are no simple solutions to very complex problems. There are complexities which do in fact exist. I think what we all want to do is try and make sure that we have a viable Postal Service that does in fact embody the principles of universal service and the principles of work opportunities and all of those things that we have come to know it as being. So let me thank you gentlemen for your testimony. I am sure we will be continuing to look at all of that. Let me also just indicate that Congressman Adam Schiff has questions that he would like to submit as part of the record to the Postal Service for answers. Without objection, that will be so ordered. Gentlemen, thank you very much. We appreciate your being here. While our third panel is being seated, I will go ahead and introduce them. Panel three, Mr. Michael Winn, has served as the director of postal operations for R.R. Donnelley, who is a member of the Association for Postal Commerce. Mr. Winn has been active in many printing industry associations and has been a member of the graphic arts industry for over 30 years. I might also indicate that R.R. Donnelley is one of the major business operations in my congressional district. We are indeed pleased and delighted to have them. Mr. Robert E. McLean has been the executive director of the Mailers Council since 1996. He furnishes management services for the non-profit advocacy organization, serves as its public spokesman and represents the Council on Capitol Hill. Mr. Jerry Cerasale joined the Directing Marketing Association [DMA], in 1995. As senior vice president, Government Affairs, he is in charge of the DMA's contact with Congress, all Federal agencies and State and local governments. And Mr. Timothy May serves as general counsel and postal counsel to mail order companies, mailer associations, publishers and organizations of postal employees, including the Parcel Shippers Association, the National Association of Postal Supervisors, NetFlix and Capital One. Gentlemen, welcome. And if you would rise and raise your right hands. [Witnesses sworn.] Mr. Davis of Illinois. The record will show that each one of the witnesses answered in the affirmative. And welcome. Mr. Winn, we will begin with you. STATEMENTS OF MICHAEL J. WINN, DIRECTOR OF POSTAL AFFAIRS AND MAILING OPERATIONS, R.R. DONNELLEY; ROBERT F. MCLEAN, EXECUTIVE DIRECTOR, MAILERS COUNCIL; JERRY CERASALE, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION, INC.; AND TIMOTHY J. MAY, GENERAL COUNSEL, PARCEL SHIPPERS ASSOCIATION STATEMENT OF MICHAEL J. WINN Mr. Winn. Thank you, Mr. Chairman. Mr. Chairman and members of the subcommittee, thank you for providing me this opportunity to testify on behalf of the Association for Postal Commerce [PostCom]. I am a member of PostCom's board of directors and the executive committee of the board. On behalf of PostCom's membership, we appreciate the opportunity you have provided PostCom to submit our views on the significant postal issues that you are examining in this hearing. PostCom's membership consists of businesses and organizations, large and small, that use the postal system to communicate with their customers, donors and constituents. PostCom membership also includes the printers, logistics companies, fulfillment houses, software providers and others to make use of the postal system possible. Collectively, our membership is estimated to account for in excess of 70 percent of all the revenues the Postal Service receives from the standard mail sub-classes. But our interest in the postal system goes far beyond these sub-classes. It is estimated that PostCom members accounted for about 50 percent or more of the total volume of catalogs weighing over one pound, books, audio and video materials and parcels that the Postal Service handles each year. Our membership also makes extensive use of first class mail and of both domestic and international shipments handled by alternative service providers, such as UPS, FedEx and DHL. PostCom thus has a vital interest in assuring the existence of an efficient, responsible, financially stable and competitive Postal Service. My company, R.R. Donnelley, is the largest printer and postal logistics provider in the United States. As a mail service provider, we work with our customers to prepare enormous amounts of mail in all classes: periodicals, catalogs, parcels and letter mail. R.R. Donnelley produces a very significant portion of the mail pieces that are processed by the Postal Service and provides logistics for even more. The passage of the Postal Accountability and Enhancement Act was a critical step to enable the Postal Service to address the difficult issues that it confronts in the current market environment. The Postal Service faces the continued expansion of postal delivery points, which increases its costs and at the same time, a decline in the rate of growth of mail volume, which adversely affects revenues. With the passage of this act, Congress altered the regulatory framework in a comprehensive manner that strengthens regulatory oversight and enhances transparency, while providing the Postal Service the necessary management incentives to meet these challenges through greater operational efficiency and high quality service standards. PostCom supported the passage of the Postal Accountability Act and we are deeply grateful for the hard work that this committee put into that effort. Mr. Chairman, we submitted detailed written testimony, so I will give a summary today. First, on postal realignment or END, Evolutionary Network Development, PostCom members support the realignment of the network, because we need an efficient, cost- effective method of delivering our message to the consumers. However, there is room for improvement in the way the realignment process is operating. That is really around communications. The ultimate objective of the network redesign is to have an efficient network based on the needs of delivery, the new automation that is being deployed to efficiently process the mail, and to control costs. However, if it is done without a proper communication plan, which any good business should have, it is going to be incurring costs that are unnecessary. I will give you an example. If we do not have a transparent view of how the network is going to be realigned, as logistics providers, we quite often have trucks redirected in transit from one facility to another. Our customers make mail plans to meet in-home dates months, sometimes weeks in advance. So we depend on the communication from the Postal Service as to where we are going and how to most efficiently get it there. Redirections increase costs and possibly even create delays for our customers. Let's talk about another thing under the banner of network realignment, and that is, as the Postal Service is deploying new automation and changing the mail preparation requirements that are put on mailers and mail service providers, we have to be careful not to just shift costs out of the Postal Service out of the private sector, we look at total system costs to our customers, the mailers, as the correct way to be realigning the network and changing requirements for mail preparation and delivery. A little bit on service standards. Service standards are absolutely vital to the mailers, along with good measurement and reporting. The reason is that an entire business decision is based on an in-home date. A mailer needs to know when their message is going to reach the consumer, so they can respond accordingly. I will give you two brief examples. Periodicals, subscribers buy periodicals because they expect to receive the periodical at a certain time. If that is not maintained, it is very likely that the subscriber will not re-subscribe. So the business decision there is, how do you produce the periodical with a dependable service standard and measurement to reach a certain in-home date. Even more challenging is on the side of the catalogs. Catalogs start with an in-home date and from there they develop their mail plan, when they are going to drop the mail. From there, they tell their printer when they are going to be able to print. Then there is a decision on the inventory and the content of that catalog. Coordinating the in-home date with inventory on hand and a staff call center is the challenge. And it all stems from service standards with critical entry times. Critical entry times can also be affected by the automation that is being deployed. If that changes, we need transparency in seeing how that is going to change, so we can adjust our mail plans and other planning accordingly. In conclusion, I would like to thank you, Mr. Chairman, and the subcommittee, for allowing me to testify today on behalf of PostCom. We appreciate your accepting of our written testimony. [The prepared statement of Mr. Winn follows:] [GRAPHIC] [TIFF OMITTED] T2714.066 [GRAPHIC] [TIFF OMITTED] T2714.067 [GRAPHIC] [TIFF OMITTED] T2714.068 [GRAPHIC] [TIFF OMITTED] T2714.069 [GRAPHIC] [TIFF OMITTED] T2714.070 [GRAPHIC] [TIFF OMITTED] T2714.071 [GRAPHIC] [TIFF OMITTED] T2714.072 [GRAPHIC] [TIFF OMITTED] T2714.073 [GRAPHIC] [TIFF OMITTED] T2714.074 [GRAPHIC] [TIFF OMITTED] T2714.075 Mr. Davis of Illinois. Thank you very much. Mr. McLean. STATEMENT OF ROBERT E. MCLEAN Mr. McLean. Thank you, Mr. Chairman, Mr. Marchant. The Mailers Council is the largest group of mailers and mailing associations in the Nation. We represent for-profit and non-profit mailers, both large and small, that use the Postal Service to deliver correspondence, publications, parcels, greeting cards, advertisements and payments. Collectively, the Council accounts for approximately 70 percent of all of the Nation's mail. The Mailers Council believes that the Postal Service can be operated more efficiently, supports efforts at containing postal costs, and has the ultimate objective of lower postal rates without compromising service. We welcome this opportunity to testify on the creation of delivery service standards and performance measurement systems. These were issues of singular importance to mailers who lobbied for their inclusion in the Postal Accountability and Enhancement Act, the Postal Reform bill signed into law last December that many people on this dais had something to do with. Whatever differences mailers may have had on other sections of the bill, our members were and are unified in their support for standards and a meaningful performance measurement system. There are several reasons why we are interested in new delivery standards. For many mail classes, the Postal Service today has delivery guidelines, not standards. And its measurement systems fail to measure the type of mail that compromises most of the volume it delivers. Although Title 39 directs the Postal Service to operate like a business, in this area the Postal Service is doing quite the opposite. Private sector companies would not conceive of functioning without standards for one fundamental reason: setting standards and measuring the organization's success in achieving them makes the organization better. Only by measuring performance can an organization identify where problems exist and then correct them and reward managers for their improvements. We believe that creating new delivery service standards and performance measurement systems can be done in a way that will satisfy mailers for four reasons. First, because of improvements in the technology found in every mail processing facility, much of the data needed to determine delivery performance already exists. Second, data collection for delivery measurement in classes that affect the larger mailers can be developed without large new expenses. Third, any additional cost would be an insignificant portion of the postal budget. And fourth, mailers will dedicate their time to working with the Postal Service to design these processes, because they will help make management more efficient and hold down postage costs. As for the features we expect to see in the new delivery standards, they must be realistic and reliable. The Postal Service must avoid lowering existing service standards. We need new and more complete reporting of delivery performance as well. Mailers are interested in the speed and consistency of delivery. So we need a system that will tell us if the Postal Service is achieving both goals. New delivery performance reports must be timely and detailed by geographic location. The Mailers Council opposes the concept of fining the Postal Service should it fail to meet delivery standards. Because the Postal Service receives 100 percent of its revenue from mailers, the imposition of a fine would actually be a fine on mailers. The Postal Service's board of Governors must encourage the creation of new executive compensation systems that reflect management's ability to meet those standards. These systems must offer greater compensation where consistent, on-time delivery is met. You also asked us to comment on the closing and consolidating of postal facilities. In its efforts to improve delivery performance and in response to ongoing changes in mail volume and composition, the Postal Service will need to consider consolidating some of its facilities. We will support the Postal Service in realigning its mail processing and delivery networks. We recognize that closing a postal facility is difficult, because it affects the lives of so many individuals. However, right-sizing the postal network is an essential step to keeping down the cost of postage. Therefore, we hope Members of Congress, including members of this subcommittee, will support such decision that are essential to improving postal efficiency nationwide. Where consolidations have been handled successfully, postal managers communicated with mailers, employees and the public served early and often. They also allowed sufficient time to plan delivery and transportation changes. Where such consolidations have been handled poorly, postal managers have moved too quickly and failed to sufficiently discuss the implications with its customers, like Mike, and its employees. The Mailers Council members have spoken with senior postal officials, including Postmaster General Jack Potter about how network realignment will be handled in the future. As a result, we are confident that mailers will be brought into discussions earlier and that we will be assured that managers in the field will have the resources they need to be able to implement such difficult changes. Mr. Chairman, thank you again for this opportunity to represent our views on these important postal issues. We will gladly answer any questions you and your colleagues have. [The prepared statement of Mr. McLean follows:] [GRAPHIC] [TIFF OMITTED] T2714.076 [GRAPHIC] [TIFF OMITTED] T2714.077 [GRAPHIC] [TIFF OMITTED] T2714.078 [GRAPHIC] [TIFF OMITTED] T2714.079 [GRAPHIC] [TIFF OMITTED] T2714.080 Mr. Davis of Illinois. Thank you very much. Mr. Cerasale. STATEMENT OF JERRY CERASALE Mr. Cerasale. Thank you, Mr. Chairman, Mr. Marchant. It is a pleasure to be here. Thank you for inviting the DMA to give our comments on this important matter. I am Jerry Cerasale, the senior vice president for government affairs for the DMA. DMA is an association, the largest American association of multi-channel marketers, using the mail, internet, television, radio, telethon, to reach customers and potential customers, and also those who support those marketers. Mail is an important cog in the direct marketing industry in the United States, which has an effect of over $1.4 trillion on the American economy. The Postal Service needs flexibility in order to create an efficient transportation, sorting and delivery network. We support the Postal Service in those efforts and we supported the Reform Act giving the Postal Service management those tools to try and reach an efficient system. But we cannot and we must be vigilant against allowing realignment to become a hidden rate increase, a rate increase to mailers beyond the CPI cap. I will give you a couple of examples. One, change the time of delivery for bulk mail to a facility from 6 p.m. to 6 a.m. Think about a magazine that is necessary to get information out quickly. That is a huge cost to them, because that eliminates an entire day. They have to change their entire operations. Think about changing where you have to drop ship your mail. An example, an absurd example, but interesting example, you require J.C. Penney in Texas to enter their mail not in Dallas, but in Chicago, or R.R. Donnelley to enter not in Chicago but in Dallas. Those are huge increases, and just changing where you have to enter the mail can in fact be a hidden increase toward mailers. So we have to be aware of that as you look at realignment as well, although the Postal Service is required and must work to realign the network, especially with diminishing first class mail volumes. The Reform Act also talked about service standards, and that is one of the things that you wanted to hear about today. We hope that we are very cooperative with all the players in setting up these service standards, including the Regulatory Commission. I think we must start where we are, where the guidelines are, where the standards are now. That is a good starting place on where the negotiations should begin. But it is important to note that smaller mailers that mail nationwide that are the bulk of DMA membership, and especially the non- profit mailers, receive very, very poor service for mail that is going across the country. Standard mail can be 2, 3 weeks for delivery. In this day and age of our transportation networks, the Postal Service can and must do better. But again, in setting the goals, setting the standards which have to be met, that is only half the way. We have to have performance. The Postal Service must meet those standards. That is important, because as you have heard, mailers rely upon when the mail will go into the home. And the Postal Service's goal should be not to meet them 95 percent of the time, they should meet them 100 percent of the time. That is success, not 95 percent. These measurement standards should be open for all to see. It is important to understand that they meet them. Operators are hired, fulfillment people are hired, e-mail messages, Web page advertisements, in-store advertisements are all geared to when the mail is going to reach the potential customer. And it is important that they meet them. We know it and the Postal Service meets its. And standard mail is unique, direct mailers are unique. Because you have to meet it, not beat it. The same problems occur if the mail gets to the home before expected. The ads aren't there, the operators aren't there, the inventory may not be there. So in our view, you have to meet it, not beat it, not miss it, meet it. We think it is important that the measurement standards, you can't have a measurement for each piece of mail. But it has to be regionalized, it has to be disaggregated enough so it is not just the entire Postal Service. We have to be able to measure and see where the problems are. Marketers have to know where the issues are, where do they have to change their entry. Maybe you get better service in one region than another, and you have to change your pattern, your mailing pattern, in order to have the in-home date the same. I thank you for this opportunity and am willing to answer any questions you may have. [The prepared statement of Mr. Cerasale follows:] [GRAPHIC] [TIFF OMITTED] T2714.081 [GRAPHIC] [TIFF OMITTED] T2714.082 [GRAPHIC] [TIFF OMITTED] T2714.083 [GRAPHIC] [TIFF OMITTED] T2714.084 [GRAPHIC] [TIFF OMITTED] T2714.085 [GRAPHIC] [TIFF OMITTED] T2714.086 [GRAPHIC] [TIFF OMITTED] T2714.087 [GRAPHIC] [TIFF OMITTED] T2714.088 [GRAPHIC] [TIFF OMITTED] T2714.089 Mr. Davis of Illinois. Thank you very much. We will go to Mr. May. STATEMENT OF TIMOTHY J. MAY Mr. May. Thank you, Mr. Chairman. My name is Timothy May, I am a partner in the law firm, Patton Boggs, and am general counsel of the Parcel Shippers Association, on whose behalf I appear today. Parcel Shippers is an industry association whose membership packages, largely from businesses and consumers, and companies that support those activities. Our main objective is to encourage a competitive environment that results in the best possible service at the lowest possible cost. Our members use all the private carriers as well as the Postal Service. Our members have a hand in the vast majority of the Postal Service's products and the package services class, which is now categorized as competitive products under the new law. They also ship and consolidate for delivery to the Postal Service hundreds of millions of packages such as first class mail parcels, standard mail parcels, bound printed matter and media mail. Those are now categorized as market-dominant products. It is for those products that the Postal Service must in the future develop measurement standards and reporting systems. At the moment, for most other mail, the market-dominant mail, Postal Service really only has guidelines, if you can call them that, rather than standards. And it doesn't really measure mail that consists of the most substantial volumes it delivers. For example, for most packages, the delivery is anywhere from 2 to 9 days, depending upon where you put it in and where it is going. In the case of standard parcels, those less than a pound, the standard delivery is in 3 to 10 days, depending upon how far it goes. But again, those really aren't standards. It is kind of a guideline and we hope it gets there. There is very little measurement of that. What our members want is a consistency of speed and reliability. We are particularly concerned about products that are delayed beyond the expected time of delivery, which we all refer to as the tail of the mail. Those are the several percentages of mail that just don't get there on time. The customers are irate, all kinds of business is lost, there are a lot of costs involved in reshipping to them. But as far back as 2000, parcel shippers asked the Postal Service for delivery standards, performance measurements and reporting for a new category of package services called Parcel Select Service that was approved in 1999 by the Postal Rate Commission. That began a collaboration between our association and the Postal Service's Mailers Technical Advisory Committee, to resolve issues such as how to start and stop the service clock, and critical entry times. Those issues are now resolved today. We have excellent Parcel Select delivery standards, 1 day for parcels entered at the destination delivery unit, 2 days for parcels entered at the destination sectional center facility and 2 to 3 days for parcels entered at the destination bulk mail facility. That is excellent service, and we are getting very high performance, upwards of 98 percent on time. Last year, the Government Accountability Office, and you had testimony today, issued a generally critical report on Postal Service delivery performance standards, but said that a noteworthy exception was the standards that evolved through the collaborative efforts of parcel shippers and the Postal Service for parcel select parcels. While these standards and reporting techniques were developed for what are now deemed to be the competitive products, we see no reason why that same or similar standards are not reasonable as well for market-dominant packages. The Postal Service now measures and reports for us using delivery confirmation data that allows the service to be accurately measured and reported at a very detailed level. Parcel Select shippers can get detailed summary reports regarding the performance delivery on their own parcels and can compare that with reports of aggregated data to see how they are doing compared to their peers. Much-improved technology is now available such as intelligent mail bar code, and that provides transparency, such as tracking and tracing. Unique identification of mail pieces should be the norm in the future, not the exception. Also in the future, any good performance measurement system, to be effective, will have to disaggregate data on the tail of the mail, that mail that is there too late, how much is it, where is it, so those packages are delivered later than the standard. The law now requires that 6 months after the development of the standards and measurement system, after that, the Postal Service has to file a plan to meet these standards. Also, a central part of that plan deals with postal facilities. Congress found, as you know, that there were more facilities than the Postal Service needs, and that streamlining of the distribution network could pave the way for potential consolidation of sorting facilities and the elimination of excess costs. The Postal Service must detail its plan for this rationalization of the infrastructure. The Postal Service was already at work on that prior to the enactment of the recent reform law, and even adopted a proceeding at the Postal Rate Commission called the Evolutionary Network Development changes [END]. You had some testimony just prior to this from the director at the Postal Rate Commission about that proceeding and the deficiency they found in the Postal Service's approach. Interestingly enough, Congressman, one of our large members, we developed this information to give to the Postal Rate Commission, one of our large members in Dallas, that ships out of the bulk mail center in Dallas, one of the proposals, but again this was all very sketchy, one of the proposals of the Postal Service was to do away with the bulk mail facilities and substitute in their place up to perhaps 100 regional distribution centers. In Texas, if that were to happen, there would likely be five distribution centers in Texas instead of the one bulk mail center. They are not going to move it to Chicago, but they did have plans to move it out of the BMC and to move it into these new regional distribution centers. Our member calculated the additional costs to them of having to bring their parcels to five distribution centers around the State rather than the one BMC in Dallas, and also to have to do away with bed-loading, because they were going to require containerization, and the amount of the cost to that mailer for those packages being shipped out of Texas, they estimated it to be an increase of anywhere from 16 to 26 percent in their total costs. Now, the Postal Service had given no consideration to that whatsoever, the impact of that on mailers, the cost to mailers. So that is simply unacceptable, and that has to be considered. We have been working with the Service, again through the MTAC process, on END. Our committee has formally presented a position paper to MTAC on this restructuring. That is attached to my testimony as Exhibit 1. That paper explains the principles we believe should guide the Postal Service as it realigns its network. Consistent deliveries, lower end to end cost in service, enhancing work-sharing discounts, visibility, effective containerization, not just--not eliminating bed-loading, unless that is necessary, and maximum automation. The Service needs to heed advice from committees such as ours and we believe that the success that we had and that can solve the process on standards can be a model for the facilities streamlining that has to take place. Obviously that process requires consultation not only with mailers, but with the communities affected and employees of the Postal Service who will undoubtedly be affected. We hope that the subcommittee will continue to scrutinize carefully the progress the Service makes in rationalizing its infrastructure and in formulating and implementing new standards and measurements of service and reporting systems comparable to what we now have for Parcel Select. Thank you for this opportunity. [The prepared statement of Mr. May follows:] [GRAPHIC] [TIFF OMITTED] T2714.090 [GRAPHIC] [TIFF OMITTED] T2714.091 [GRAPHIC] [TIFF OMITTED] T2714.092 [GRAPHIC] [TIFF OMITTED] T2714.093 [GRAPHIC] [TIFF OMITTED] T2714.094 [GRAPHIC] [TIFF OMITTED] T2714.095 [GRAPHIC] [TIFF OMITTED] T2714.096 [GRAPHIC] [TIFF OMITTED] T2714.097 [GRAPHIC] [TIFF OMITTED] T2714.098 [GRAPHIC] [TIFF OMITTED] T2714.099 [GRAPHIC] [TIFF OMITTED] T2714.100 [GRAPHIC] [TIFF OMITTED] T2714.101 [GRAPHIC] [TIFF OMITTED] T2714.102 Mr. Davis of Illinois. Thank you very much. Mr. Marchant, do you have any questions? Mr. Marchant. Yes. Last week the subcommittee looked at the issues concerning outsourcing on the part of the Postal Service. Do you or your members or your clients have any views on the whole concept of outsourcing and independent contractors? Mr. May. We are not, per se, opposed to outsourcing. But to us, we think you have to make the case for it. You have to demonstrate that it really cannot be done effectively in-house and that indeed, you will save money by going out of the Service. And also, there are important considerations you have with your employee agreements. The contract the PMG just signed with the Letter Carriers Union, for example, does not allow them to surplus any existing Postal Service carrier routes by outsourcing them. So they don't have a free hand in this. But as in private industry, labor and management collectively bargain and they agree. The Postal Service is somewhat handicapped, because under the present system, in an impasse, they have to go to impasse arbitration. That has often been not satisfactory. Happily this time, for example, with the Letter Carriers contract just consummated, they were able to reach an agreement without having to go to arbitration. But certainly there will be occasions when there will be outsourcing. But we don't have a position per se on it. We are not urging that it be done. If it makes sense, do it. But make the case that it does. Mr. Marchant. Mr. Cerasale, do you see the effective future of the Postal Service's being effective using some kind of outside contractors, do you see that as an essential part of an effective delivery system for your clients and customers? Mr. Cerasale. The Postal Service has historically used contractors for transportation and so forth in the past. I agree with Mr. May that they have to make a case for it. One of the things for an efficient Postal Service and how it works, however, is that the labor management climate within the Postal Service, the Postal Service has to work and work well, and that means management and their employees working together and working well. That is part of an efficient Postal Service as well. We are not opposed to contracting out. But we are not saying that you have to contract out. We think that right at the moment, it is part of the collective bargaining agreements, I think, with all the unions. The Postal Service has to work within that framework that it currently has. I don't think you take it off the table. I don't think you say, it is not there. I think it is part of what the Postal Service has in front of it, part of the tools it has to work with and with its employees. But an efficient Postal Service, one that works efficiently for us is one that works with its employees who are, where there are customers, are they both employees and Postal Service. So it has to work together. So that is a part of what efficiency is as well. Mr. Marchant. Thank you, Mr. Chairman. Mr. Davis of Illinois. Thank you very much. Gentlemen, during this part of the discussion, on two or three occasions I heard differentiation between guidelines versus standards, or I heard mention that in some instances, the Service has guidelines but not standards. What is the difference? Mr. May. Well, Mr. Chairman, a standard is something you have committed to, that you will get delivery. For example, the commitment we have for Parcel Select standards is if we drop our packages at the destination delivery unit, that is the standard, which means we have been guaranteed and our customers can rely on that, that is going to be delivered in 1 day and with a 98 percent success rate. So that is a standard. A guideline says, well, it will take anywhere from 2 to 9 days, depending on where it is in the system. That is a guideline. Frankly, to the extent that they even measure it at all, it is less than 50 percent accurate. So lots of work has to be done there. There is no reason why everybody can't have the same kind of standards and reportability and reliability that we have been able to achieve for Parcel Select by cooperating with the Postal Service. Mr. Davis of Illinois. And you are wanting the Postal Service to move closer to a level of exactness? Mr. May. Exactly. And we see no reason why, within some tolerance, they can't have the same quick delivery, quick certain delivery guidelines and reporting systems for all of the mail, not just Parcel Select. Mr. Cerasale. From our view, what you measure is what you receive. So the real key for these standards is, we have to have measurement of those standards. That is where management will put efforts and make sure they meet them. So the big key in service, creating service standards, is the measurement and the guidelines that we have. There really is not measurement there. Mr. McLean. The other key to this is that performance measurement that we are discussing today will be much more detailed and will be made public. The standards that are being established are a fine idea, but without the measurement, they would essentially be meaningless. Today the Postal Service has two measurement systems involving outside auditors. One measure the general public attitude toward the Postal Service, and the other measures the very small percentage of a specific type of mail. These standards will be much broader, as will the performance measurement systems. So we will get a much better sense of how the Postal Service is doing when it comes to delivering large chunks of the mail that really provide almost 80 percent of their revenue throughout the year, not just the revenue that comes from a very small subset of a single class of mail. Mr. Davis of Illinois. As the Postal Service goes through its thinking about realignment, are you all satisfied that you have an opportunity for input into the process? Mr. May. Well, we certainly have. We have no complaints about that. That doesn't mean they are going to listen to us and agree with everything we have said. But we have, largely through the Mailers Technical Advisory Committee process, we have had and are continuing to have the opportunity to present our views on standards for other package services and measurements, how they will be measured, and also our views, and we will put it in writing eventually, what our position is on the restructuring of the infrastructure of the Postal Service. As I say, we have gone into print with that. It is attached to our testimony. Mr. Davis of Illinois. Mr. Winn. Mr. Winn. I would have to answer that question as no, we have not had sufficient communications nor been really allowed to provide good input from our perspective. I will give you the example. We have consolidation facilities all over the country where we consolidate mail and then we drop ship it certain times at certain locations in the Postal Service. The location of those facilities is critical to where we are entering mail. So if the network is realigned without visibility into what it is going to look like in the future, our consolidation facilities may be in totally the wrong places. We will have to move, increased costs to our customers, again, total system costs. Mr. Davis of Illinois. Mr. McLean. Mr. McLean. I think that where the Postal Service could improve in this area is by talking to us more often and giving us more lead time when it plans on changes, whether they are closing or consolidation. Mike, in his testimony, gave a great deal of attention to the in-home delivery date, and that is what is really affected, as well as the transportation costs that mailers will be required to pay. Mr. Galligan, the witness who testified earlier today, has been very accessible to us. We are in the process of trying to schedule a meeting with the Postmaster General and our entire membership some time between now and the end of the year. The network realignment will be one of the topics that we will talk with him about. So we are seeing more accessibility. We just hope that we will see more information a little farther ahead than we have in the past. Mr. Davis of Illinois. Mr. Cerasale. Mr. Cerasale. The accessibility is there. I don't necessarily think that we have seen all the information that we think we should receive and that is a really important part of the discussion, is to take a look at the plans and then listen to us as we talk on them. I think we are encouraged by where the Postal Service is moving on this. But the jury is still out whether or not they really are giving us the plans and having some meaningful discussion on them. Mr. Davis of Illinois. Well, it looks like our timing is perfect. Gentlemen, I want to thank you all for your testimony, for being here with us. I want to thank all of the witnesses for appearing and all of those who have come. Of course, we have a vote on and I have to go and vote, so this hearing is adjourned. [Whereupon, at 4 p.m., the subcommittee was adjourned.]