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National Business News

USPS Updates Its Business Plan to Profitability; Saturday Delivery Will End

Feb 20, 2012 - The U.S. Postal Service (USPS) updated its business plan last week for returning to profitability and long-term financial stability. While essentially consistent with announcements last fall, last week’s details incorporate important refinements of financial projections and recommended legislative reforms needed to be passed by Congress.

And, the announcement appears to mean that the USPS will not be bailed out by Congress subsidizing current service standards. So, significant changes will, in fact, take place.

In the Savannah area, the USPS has proposed closing their SCF processing center in West Chatham County, slowing down mail delivery in the area.

“The plan we have developed requires a combination of aggressive cost reduction, rethinking the way we manage our healthcare costs, and comprehensive legislation to reform the business model of the Postal Service,” said Postmaster General, Patrick Donahoe. “If provided the flexibility to quickly implement this plan, we can return to profitability and better serve the American public. If not, we risk becoming a significant burden to the American taxpayer.”

At its core, the plan requires the reduction of annual costs by at least $20 billion by 2015, rising to more than $22 billion by 2016. This cost reduction is necessary given projected declines in First-Class Mail volume, which has already has dropped by 25 percent since 2006. However, the Postal Service can achieve only a portion of these reductions under current business model constraints; legislative changes are needed to achieve the full $20 billion in cost reductions.

The plan includes reduced overnight delivery of First-Class Mail; delivery outside the local area up to 200 miles will be delivered within 2 days; and delivery to destinations over 200 miles will be delivered within 3 days. Mail, even with a county, will be slowed down.

The USPS projects that they will lose business because of slower service, but the loss is
“dwarfed by projected network cost savings,” they state. And, they acknowledge that “much of the customer base is unaware of the current standards, notably overnight delivery,” within a wide area which will end.

Georgia has 11 SCF centers that process mail. Savannah’s center processes all mail with the first three digits of 313 and 314 and South Carolina mail for zip codes beginning with 299. The USPS has announced that they may process Savannah’s mail through Jacksonville or Charleston, affecting the jobs of 200 employees at the Savannah center. Additionally, the USPS outsources mail processing to several local mailing companies during peak periods.

If the legislation desired is not passed the USPS could incur annual losses as great as $18.2 billion by 2015, and accumulate a total debt of $92 billion by 2016. The Postal Service is a self-financing federal entity that generates its revenue from the sale of postal products and services.

The five-year plan provides an achievable roadmap to long-term financial stability and independence from taxpayer support, and provides for full repayment of $12.9 billion in debt currently owed to the U.S. Treasury. A central tenet of the plan is that success is not dependent upon achieving a mix or subset of reforms: the scale of the financial challenge requires that all of the major elements be pursued concurrently and fully executed within a short window of opportunity.

Among the major legislative reforms recommended, the most significant include enabling the Postal Service to provide employee health benefits independent of federal programs ($7.1 billion annual cost reduction), and transitioning to a national five-day delivery schedule ($2.7 billion annual cost reduction).

The Postal Service also is aggressively pursuing the realignment of its mail processing, retail and delivery operations, which is expected to yield more than $8.1 billion in annual cost reduction. Additionally, the Postal Service is seeking other significant cost reductions and is continuing efforts to grow or retain revenues within its current business model.

The plan has been subjected to independent review and analysis by Evercore Partners, one of the nation’s leading independent investment banks and a prominent financial advisor on major corporate restructurings. Evercore Partners played an important role in analyzing Postal Service models and assumptions, and validating the approach taken by management to develop the plan. The plan also reflects prior business model analysis from McKinsey & Company and revenue projections from the Boston Consulting Group.

"We have set out a roadmap to put our current financial crisis behind us and we are highly confident that it is achievable,” said Donahoe. “However, our success depends on whether we can quickly implement our proposed changes, and that depends on whether we can gain the necessary legislative reforms we need to move ahead.”

The Postal Service is a vital part of the nation’s economic infrastructure, providing a reliable, secure, and affordable delivery platform that sustains a $900 billion mailing industry that employs 8 million people.

Currently, there are 32,000 retail locations, and annual revenue of more than $65 billion and delivers nearly 40 percent of the world’s mail. If it were a private sector company, the U.S. Postal Service would rank 35th in the 2011 Fortune 500.


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