Parcel shipping: USPS set to go the "first mile"
A Q&A interview with United States Postal Service executive Jim Cochrane looks at new pricing and the competitive landscape
Jeff Berman, Group News Editor -- Logistics Management, 5/16/2008
Earlier this month, the United States Postal Service (USPS) officially introduced new prices for various products and services. These changes are a direct result of The Postal Reform Accountability and Enforcement Act that was signed into law in late 2006 and represents the first major overhaul in postal pricing in more than 30 years. When LM reported on these changes in April, industry analysts suggested that these changes will put the USPS in a better position to compete with industry titans UPS, FedEx, and DHL and allow the USPS to run like a business as opposed to a government agency.
The new law allows the USPS to revamp how it determines pricing, change prices when needed, and introduce new or customized products in response to customer demand. Some of the new changes that took effect on May 12 include: Parcel Select, its “last mile” offering, which will include pricing and volume incentives for large- and medium-sized shippers; Parcel Return Service, which enables customers to return packages to businesses, and transition to a weight-based pricing system that will result in price reductions for lighter packages; Express Mail, premium overnight delivery has switched to a zone-based pricing system that will deliver lower prices for closer destinations; and Priority Mail with an overall increase of four percent, with average retail prices rising by about 6 percent, but customers using electronic postage will receive reduced prices, which on average are 3.5 percent lower than retail prices.
LM/RBI Supply Chain Group News Editor Jeff Berman recently spoke with USPS Vice President of Ground Packages Jim Cochrane about the new pricing changes and how USPS plans to dive into the “first mile” side of the business by picking up return packages for competitors at customers’ doors. The following is a transcript of that conversation:
LM: What is the plan for the USPS to get into the “first mile” segment of the business?
JC: If I look at this marketplace, we have some pretty tough competition out there, and we are all pretty good at what we do. We are also all a little different in some ways. We buy a lot of logistics services from FedEx; nobody can move things in the air better than FedEx. They do a great job for our expedited products like Express Mail and Priority Mail. UPS also helps us out with airlift for those products. We recognize them as world class logistics companies and buy services from them. If I look at us and where we fit into the marketplace…it is with our capabilities in the “last mile”—delivering to the household. We are now also trying to focus on the “first mile” side, taking things out of the household to be delivered. We currently deliver products in the “last mile” for FedEx (FedEx Smart Post), UPS (UPS Basic), and DHL (DHL@home); we call it “co-opetition” at its best, as is buying logistics services from them. We think our “last mile” capabilities are unparalleled, the most efficient, and the most ecologically sound. It is the best value in the marketplace for outbound shipping. Our “first mile” strategy, though, centers on returning items, product recalls, recycling items, and repairs. And as we become more and more enamored with electronics, the need for repairs will continue to grow.
LM: Where are you presently involved in these “first mile” services?
JC: We are doing a lot of work with ink and toner delivery and cell phones and other things like that with residual value. There is a social need to keep these things out of landfills, as well as a business opportunity with the manufacturing and refurbishing of these items. And as the B2C (business-to-consumer) market continues to grow in the coming years, the growth of online shopping will drive more returns. We think we are uniquely positioned for retrieving things from the household, whereas our competitors are best at retrieving things from businesses. Our reach is 146 million addresses, and we think that capability positions us to really grow the return business.
LM: How does the USPS plan to be more economical than the competition with “first mile/last mile” delivery and pickup? Is it a matter of straight pricing or are there other service-related benefits grouped into that?
JC: There are a few dynamics. One is that in many ways paying the USPS $1.50 to deliver a package is a cheaper delivery option in rural and some suburban areas for our competitors. We believe that Parcel Select rates are compelling enough, especially as the price at the pumps goes up every day. To counter our increase in Parcel Select services (the average overall increase is 5.7 percent), we are offering discount and rebate programs for the first time. We are fully integrated with excellent tracking throughout our system—scanning items at the door and before we go out on the street. The visibility is there, and the costs are lower, bringing a real value proposition to Parcel Select. In today’s economy, we think that makes it attractive.
LM: What about the B2B (business-to-business) side of things regarding the new rates that took effect on May 12? What can shippers expect and what are the biggest competitive differentiators?
JC: If you go by market segment, we have completely revamped Express Mail—our overnight product. We have gone from a flat rate to zone-based pricing. Our research showed that the predominance of the overnight business was traveling 300 miles or less. So we have improved that price position for overnight needs that stay within a “short haul.” In many cases, if you were using overnight products with the USPS, your price went down pretty significantly if you were staying within 300-to-400 miles. If you are using our competition, you have another place to look and have a choice. At the same time, we have increased our reach to well more than 1,000 offices to the overnight network and are going to more places overnight than we ever have gone before.
LM: How does this help the USPS in such a competitive marketplace?
JC: Competition is pretty fierce out there. We are all looking to extend our networks and our abilities…whether you are on the ground and trying to get to places that are in four days down to three. For us, we shifted delivery times in many rural areas from two days to one or from end of day to noon. There has been a pretty solid revamp on our overnight product. And delivery on Saturdays is standard, which is unique. A lot of customers have needs for overnight that don’t end on Friday, and some are approaching us with volume on Friday for Saturday delivery. We also have a Sunday delivery network that is a little more limited, but there are opportunities for some critical parts and things of that nature for Sunday delivery. There is a premium on that, but we are the only ones out there delivering on Sunday’s and holidays.
LM: With the Postal Reform Accountability and Enforcement Act signed into law and the recent pricing changes now official, in what ways is the USPS specifically positioned to run more like a business than a government agency?
JC: With the new law we are working under, our shipping products are now all eligible for traditional contract pricing. We have separated retail and commercial at its simplest level. The most traditional change with the law is the ability to adjust rates annually, which was previously something we did every third year. The ability to sit down and negotiate contract pricing with a retailer or a shipper is probably the biggest headline of the changes that have taken place. There is someone else you can talk to and negotiate with. Shippers will win on this. In the long run, it gives them more choices.
LM: How is the current fuel situation impacting business?
JC: We estimate that a penny at the pump costs us—with our 220,000 delivery vehicles—about $8 million. If you think about how fuel has gone up in the last [40] days, you can see how it hits our bottom line. We are just like FedEx and UPS in that regard, noting that fuel is a big driver of cost increases. We are not exempt from that; it is actually one of the leading drivers for our [May 12] price change and is something we have had to catch up on. Not all of our vehicles run on gas, though. We also have the largest fleet of alternative fuel vehicles that exists in the country, running on electric and natural gas, and we are testing hydrogen vehicles in California and in Washington, D.C. with General Motors.
LM: What are you hearing from your shipper-based customers in regard to the current domestic economic climate?
JC: Obviously, the economy is affecting retail spending. We are a little different from UPS and FedEx, where we are a little heavier in B2C shipments. Retail is slow in general, and we are all challenged with volume. We are having our own issues. There is not a lot of granular market growth. In some ways, it has made pricing tougher for all of us. I do see a general trend where people are buying their way out of air [services] onto ground, which works very well for Parcel Select. We believe that is the best value out there, with a combination of price and service that works well.
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Never mind that it is trivial, in the big picture, even if it is true. ,
Ganry49 - 2009-13-10 04:53:00 EDT -
You see, we have to analyze who we should be talking to in our advertising. ,
Mr.Carrot19 - 2009-10-10 18:38:00 EDT -
Great info., keep it coming
Joe Donnelly - 2008-9-7 12:21:00 EDT
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