USPS Product Cost Workshop August 16, 2011 Welcome • There have been criticisms of current costing system • We have developed a costing systems review team – Gathering feedback from external customers – Gathering feedback from internal customers – Will examine feasibility of suggestions • Purpose - To develop recommendations to improve cost reporting so that it will provide management the right tools to manage the business – both in terms of making decisions about operational changes and in making product and pricing decisions. 1 Meeting Overview Today’s Agenda • Welcome • Project Overview • Overview of Cost Systems • Expectations and Comments (Large Group Session) • Break-out Sessions • Reports from Break out Sessions • Closing Remarks 2 Introduce Team • • • • Project Owner: Tim O’Reilly Project Manager: Jennifer Bradley Lean Six Sigma Master BlackBelt: Izzy Sanchez Project Management Support: Jessica Powell Project Team • Karen Key (Products) • Josen Punnoose Products) • Tom Henry (Operations) • Myles Perkes (Cost Systems) • Naline Hampton (Cost Studies) • Greg Dawson (Pricing) • Marc Smith (CRA) • Haley Eubanks (International) • Barry Burns, (International) • Jim Crawford (International) • Jay Huntington (International) • Michael Goldman (IT) • Robert Raines (IMB) • Brian Code (Retail) 3 Project Overview • • • • • Interviewed External Stakeholders – Complete Interviewing Internal Stakeholders – In Progress External Focus Group - Today Feasibility Analysis of Recommendations Recommendation of next steps – End of October 4 Purpose of Today’s Meeting • To clarify and define customer needs • To gain insights into the prioritization of needs of our customers • Feedback from this meeting is one set of inputs into developing recommendations – External stakeholder interviews and internal stakeholder interviews are other two • Lean Six Sigma Tools will be used to dissect Voice of the Customer • Lean Six Sigma Tool was used to take input from interviews and develop break out session topics 5 Dissecting the Voice of the Customer Customer Ken Garner & Leo Rayman Comments Rates drive our customers Increase in initiatives in HQ provides incentive to mail area ROI is accuracy of cost data accuracy and precision are the most important to us there is no transparency on data for initiative Some colleagues have introduced ABC, and it may have some legs How are costs built? Cost data is too old and has to be refreshed Do bottoms up costing more reflective of real cost We don’t get involved in cost details and what goes into those Cost data should use best practices from market Cost must be precise and accurate cost must reflect cost of doing business We are interested in better methodologies for costing Need to study cost of operations Need to study how costs are being distributed by type of mail some type of mail cost is not correct Some type of mail cost is being assigned incorrectly personnel not assigned to do work can be increase cost by incorrect system assignment Make sure postage rates are as low as possible Rates must represent sustainability of USPS health Show rate adjustments based on data and proper cost process We have enough transparency of cost The degree of transparency helps justify adjustments Ensure we have reasonable explanation for cost items Cost methodology must be sound Cost explanations must be easy to understand Costs should explain worksharing value determination Need to have accountability for cost allocations and savings allocations Variation in customer based required simple explanations of cost explanations Think from the outside-in when it comes to data transparency Bob Rosser Cost methodology seems to be used to justify infrastructure Not using cost system to justify what is needed You must look for the least amount of costs and least amount of mail touch IOCS sampling is used to justify how to distribute bloated costs Vital that USPS looks at whole cost Who says cost is calculated correctly? The need to continue "mail moment" justifies cost Cost methodology doesn’t even use latest technology available, so cost are not right anyway Way too much fixed cost that shouldn’t be there Current cost process is not good Risks by themselves do not motivate mailers Mailers have to look at total ROI, and value of spend Mailers will reduce volume as costs go up Some rates and costs differentials do not make sense Worksharing type stuff don’t work "not covering cost", look into why that is, we don’t buy it What is all-in-there when it comes to cost? People want to know allocated labor costs, etc There are better ways than sampling to get cost right Use ABC, it was well received Motivate and incent mailers to get data Unique piece ID, use smaller data sets and more accurate models Old, obsolete costing methodology Anne Daley & Ashley Lyons Overall, happy with costs system Pitney Bowes no need to do overhaul, only needs basic improvements Needs rule making improvements You should tweak elements of system from time to time Some products are small qtty, and may not have enough samples System is generally good Sampling can be updated IMB only captures automation, can help improve but its not the end of ends Transparency is good enough to understand make recommendations to PRC It's an open system, we can identify what we need Competitive products are less transparent, but understand why that is Domestic transparency is good enough International transparency is not good, and we have to guess on its reasonableness Deeper discount opportunity if we had International transparency We will like to see international data to help save more Flats and parcels costs can get confused and not capture correctly Basic cost system works well, transparency meets requirements Don’t use assumptions when you have empirical data Models don’t work well due to mail flow variety Parcel size can drive costs that are no captured Re-examine attribution, should not be done in isolation We can live with current cost system Would not advocate major overhaul needed Cost attribution allows discrimination and flexibility, but can create issues in revenue side Larry Buc No overhaul needed, some pieces can be updated SLS IOCS cost by product works well IOCS doesn't get to pricing model Don’t use bottoms up costing Expand IOCS survey methods Expand IOCS more than anything else Cost avoidance models "bottoms up" and replace assumptions with real data Bottoms up is very hard due to differing plant layouts IOCS will resolve bottoms up defenders Regulators stop you from changing wrong models What are regulators more likely to accept vs not in cost models? PRC will not accept volume variability PRC will not accept pricing elasticity Attribution levels can be seen as exploiting monopoly Bottoms up costing should not replace IOCS Lesson learned is that mail processing is too complicated Mods data is not reliable to get unit costs What would you do with manual ops for bottoms up costing? How to allocate non-handling in bottoms up costing? IMB will show how mail flows through but not cost Mail movement will not be captured by IMB Bottoms up costing used for studies, but not costing Bottoms up tends to be under-inclusive IOCS has understood properties and withstood time and test Need more sampling on IOCS Need more data and less assumptions in IOCS Where IOCS cant work, use bottoms up pricing Cost avoidance models capture workshare savings accurately Need to get the data for volume variability Do not throw the whole thing away People with criticism just don’t know how you do things, they don’t have a clue Tom Underkoffler Everything needs to be measured to find optimal times Medco All costs should be based on measurement system Costs should use time studies for how long things should take If cost is higher than expected, it should be investigated We present mail very detailed, others don't and we subsidize them We don’t know building blocks of cost We have accuracy of costing concerns Workshare is too high for benefits received Not having cost building blocks prevent us from reducing costs High concern with how data is compiled Using averages and not knowing the reality of real data Worry more about treatment of data vs accuracy of data Use tracking diagnostics to see true costs Not everyone is paying their fair share We are taking on new work and still pricing is going up Costs are not attributal but overhead Don’t know how cost models are built Build future products with better data We want to partner with you, but need idea of what costs really are Do a quick turnaround in costs models, weeks not years Need to know your cost components so we can help reduce costs Need to have highly accurate costs so we can agree to it Art Scakler Underlying discounts for cost avoidance are not adequate National Policy Council Discount don’t take into account what mailers have to do and spend Uses Larry Buc what cost is being counted for avoidance? Need better measurement of 1st class price elasticity First class mailers are more sensitive to price increases Mailers will aggressively move mail out of system due to budget All prices we have are down, but USPS prices are up For every $1 spent, $0.65 goes to postage USPS sees mail volume decline due to their increase in prices First class elasticity is way off in forecasted numbers USPS must internalize that things have changed for good Give us accurate measurement on pre-sort costs Discount for IMB is a joke No ROI in UMB until 2020 Pre-sort not getting savings like mail sizes, etc Savings requirements don’t cover cost to mailers USPS changes create huge costs for us, then mail rate increases Much more issues with accuracy of information Problem is misjudgment with elasticity Cost avoidance is a problem Price elasticity should be urgent and easy to fix Need to get a grip on compliance cost No more changes until financial crisis over Cost to mailers is enormous Mailers have to leave, reduce volume to afford service It is easy to get mail out of the system, electronic media can ramp up capacity Figure out what is cost to mailers first, what is the impact Budget guys will refuse to put money in mailings, and go on-line APWU contract hurts the USPS Labor contracts don’t take into account mailer views Jim O'Brien -Time Inc. Can't get to the bottom of periodicals cost raise Halstein Sadberg Periodicals has been increasing at higher rate compared to others Higher costs pass through as higher rates Current mail flow model needs to be updated since it is old and not real Cost of containers is no longer valid as old BMCs not friendly to pallets CRA cost don’t reflect marginal costs When volume went down, costs did not USPS can not reduce costs with lower volumes Costs underwater are not real at all Advantages in technology should have lowered costs, but doesn’t Need to pursue accuracy of data Cost figures for moving 5 digit pallets is study from 1980 Costs are no longer accurate since network no longer in use Periodicals costs larger than postal wages increase Improvement by mailers should have lower costs, but don’t When USPS applies costs to rates, rates do not reflects cost Marginal costs are not accurate When USPS reduced staff, low wage people go first, so average wage is up Cost recovery is less than 100% with lower volumes and high automation Flat sorters are not maximized, they have over capacity Map out workflows and put cost behind flow to track true costs Update data as well as models What happened to pallets? They became too expensive for mailers Operations wanted more 5 digit pallets to handle Additional cost of pallets made them not attractive to mailers Mailers have to react to rate increases and save costs IOCS is off the table from discussions with USPS management Need to create grid with different containers, pieces, for cost activities Cost base rate can help match cost to rate AFSM 1000 specs for machinability is based on phased out machines IOCS reflects what goes on in processing Problem with IOCS is missing activities when people not handling mail IOCS needs to reflect time in different stations Mail handling time is less and less, but can't capture all with IOCS Mail cost pools are not reliable Mail is overloaded with other old attributed costs Automation refugees are union agreement for excess people - manual bull pen IOCS off due to lack of RIF, moving people around Update costs to date Update costs models and use Dave Williams new SOP Use rate grid to have cost match rates HQ needs to make more central decisions to standardize and reduce costs Joy Franckowiak IOCS is increasingly obsolete in Flats operations Bill Olsen IOCS carrier time in office should be less since FSS is in Jeremiah Morgan Cost models are not up to speed with IOCS John Haldy If IOCS is cut back, why not use new system anyway Valpak Cost system not kept up with automation, small sampling A lot of full cost attribution is added, creating controversy Use IOCS and ensure all systems are additive Non IOCS costs must be captured from ground up Workshare discounts are based on old ways and is not data driven Discount rates should be the difference between before and after What does it cost to work mail that is not workshared Do bottoms up costing more reflective of real cost Do baseline of most pre-sorted mail Don’t use cost incurred, use cost calculated Account system does not capture cost not incurred Workshare discount is a crazy idea Rate difference between presorted and others should not be more than $0.10 Why does the USPS want to charge less than cost of processing mail? You can't do top down discounting In future, street time will increase a lot more, city carrier time will be huge USPS cost of excess capacity is nebulous Costs for excess capacity are made up on the fly The law requires you know what the costs are On competitive products you still need to know costs correctly Cost base pricing doesn’t matter, do market base pricing Stop doing studies, use data Plenty of mailers tell you cost don’t matter, they are stupid Is the overall level of attribution on the table? Foster associate reports Subsidizing of products creates polarization of products Price cap prevents loading of more cost into 1st class letters Reduce rates to increase volumes of 1st class mail what are truly fixed costs? Consolidate more plants, then use IP engineering to get to the real costs. Cheryl O'Day - Discover Understand that sampling methodologies are dictated Bob Brinkman Cost avoidance methodology is backwards Nicholas Wolf Buy into ABC are more accurate costing method Cost methodology is subtractive and should be additive We pay an inflated price for our efficient mail Studies and models are not substitutes for real data Data proxies are old Costing system lacks credibility because it lacks data Use real data and IMB for real data Data today is decades old Large discrepancy of cost method between real and rated cost Bottom up pricing will reveal discrepancies The cost difference between flats and letters is too large Underlying cost data must be real to justify costs Need to know the real costs Costs developed with proxies and layers becomes useless Models are not current Pull direct data from full service IMB, sample the rest Information about each piece at each rate should be available to mailers No useful data is available Need real data, not useless pdf reports Need to know of our 17 million pieces mailed this month, how many are 3 or 5 digits, etc We will need higher transparency in dominant space to create more opportunities Mailers don’t have data to justify 3% price increase We have to add cost to third parties to explain your rate increases The indirect cost of mailing is high in trying to figure out your data Indirect cost of using mail may help decide if we use USPS or not Use ABC and IMB for costing data Priority will be to create bottoms up costing Second priority will be to create useful reporting Don’t rely on proxies, special studies and complicated models Avoid analysis of convenience vs what is needed Provide analysis in a format we can use computers to use (not pdf) Mury Salls - DST Mailing Svcs Cost pools too generic for commercial business volumes Cost pools haven't changed in decades and don’t apply to Commercial Cost pools only apply to 1st class mail Commercial costing includes retail costs, even though we don’t use counters Collection costs don't apply to commercial mail since we deliver to plant Other mail we have is cross docked and not worked in plant Our mail doesn’t go through originating plant, still we pay for it Collection and processing of commercial mail is not represented in cost pools 55% attributal cost is horrible, need to get much better Not familiar with what is not attributed costs USPS has not shared actual cost it takes to process 1 oz. or 2-3 oz. pieces Commercial 1st class needs move out date requirements and other activities not in workshare all the extra cost for 1st class mail is not in cost avoidance mail volume variability, what is that? Cost of accepting mail has high impact on volume variability we have trucks dedicated to go into UPS planes cost avoidance for volumes are not captured data is available for cost avoidance, but not used why are you using estimates when data is available Don’t mix time and motion studies with different type of mail - doesn’t work Need to start with data, but data is old today IMB and full service IMB should make data capture easy Use information to create real costing for each mail piece, use your data isolate cost pools that are really attributable with IMB, carrier time to deliver can be found and costed Use IMB to drive real cost data Use DPS % to estimate in-office delivery costs USPS assumes 0% savings on workshare collections Benchmarks used are obsolete Cost avoidance is a bad way to do pricing Carol Kliewever - HarlandClarke Why are parcels not covering their costs? Patrick Gallivan ACR report doesn’t tell story of lack of coverage Joe Rawlins There is no explanation as to why no coverage No feedback as to what we can do as mailer to help cover cost We can be more efficient is we knew where and why we don’t cover costs Our parcels are easy to process but get lumped with inefficient parcels No info as to how overhead is allocated- is a mystery Overhead is easily manipulated to do anything We are surprised when ACR comes out, confusing and doesn’t add up When rates goes up, we need to go deeper into workstream to make up the cost added No transparency on overhead, so we don’t know how to react Mailers feel USPS stuck it to us, high rate increases We are incented to take action, but when we do we get penalized on the other side If we induct mail close to destinating location, plant volume will go down and overhead goes up Rate goes up to make up for loss volume that the USPS generated in the first place Overhead goes up to make up for bloated plant costs Efficiency is empty USPS trucks is excessive We don’t get recovery for additional work to make USPS better by cross docking our mail No one has price model with all the work we do to reduce costs and rates Can USPS trucks go full to sectionals and rent empty truck space? We cant help pricing committees, we don’t know what's in there If parcels cover 72% of cost, what is missing 28%? when you get to understand the model, it changes there is a black hole so we cant understand models Pricing group in USPS makes up models, cant explain them USPS can spin anything on the models, no methodology Allocation is not based on bottoms up, no engineering help to get it right USPS sticks costs to others if they miss revenue USPS will have nothing to give us in Sept for cost coverage USPS thinks they are the only game in town USPS service providers will need to raise prices, and you will pass that issue to us Why additional $3 in parcel select returns? No explanation given Forcing mailers to go to sectionals is due to labor contract issue USPS does not use cost decisions based on efficiency Work with mailers, tell us why we are coming up short Make sure all understand overhead costs and allocations consistently apply overhead costs USPS plays with rate classes and punishes certain subclasses USPS is not sharing information now days - hard to obtain With competitive products things will get worse, no cap Delivery of a product can cost more than the product itself USPS is arrogantly saying "we are the only game in town" When products go up 20%, there is no reasonable way to explain that Pricing is intentionally inflated need to have a fair, consistent, transparent process Rita Cohen Alarmed at unit cost attributable to magazines Sandy Glick Cost increases faster than inflation Magazine.org Magazines are not being measured correctly for costing Unit cost should go down with workshare, but it doesn't High increase in automation should reduce costs We take on more work to reduce cost and USPS raises rates IOCS designed to capture what was being performed IOCS data is old and needs refreshing too many tallies of non-mail handling due to automation, people just watch mail Bad assumptions for subclasses in IOCS Operations have changed, but cost systems have not changed with them Costs system should reflect how mail should be handled, not how is handled Wrong assumptions in cost system adds costs to us, higher rates We tried various workshare options, and still rates go up, why? Manual handling- should be more machine use for mail if mail comes in late, USPS processes mail without thinking about costs Facilities know how they do in services scores, but no idea on cost of products plants do not look at costs, only hours in their budget Something is missing in costs, but don’t know what Critical entry time for periodicals is not adhered to SOP's for mail handling are not used in the field Excess capacity shows up as elevated costs Field achieve their budgets, but products costs are not being looked at Manual extra unnecessary handling adds more cost Mixed mail handling at offices can add extra costs USPS does pretty good job on reports Once a year data is problematic Accounting numbers are not consistent yet field does not know how they are doing product by product A system design in 1970 wont work today Because of system not useful at detail level, it confounds the costs Models have correction factors that don’t relate to anything Institutional costs can be allocated differently if you know real costs Bottoms up system will take too long to create Tweak current system with improvements and make it valid Review IOCS and other systems and improve only what is needed no model will catch all costs no matter how good model is Gene DelPolito Costing system is ancient, same since inception Jessica Lowrance system not flexible for today's environment Postcom system is stuck in anachronistic way Class of mail impairs proper workshare costing cost pools for worksharing not sophisticated Workshare typically not captured in cost Workshare not reflected in pricing based on current state Business mail cost should not be lumped with single piece costing should reflect reality of bulk mail Benchmarking used does not represent reality consider a product for each discreet method mails comes in need to capture mail cost based on real flow Price future based on modern marketplace USPS needs to know how to do commercial pricing Bottom up costing should be enabled Top down costing does not capture real $$ Measure true cost end to end and stop the benchmarking If you do ABC, Workshare goes out the window as cost built into product Don’t come up with so many products Huge investment in IMB, stupid not to use it Pricing is constrained by marketplace support market driven pricing / don’t under cost and loose need to know real product cost so we can help with selling it old world thinking, time to break that costs are masked and reconstituted, hard to see Old models are outdated due to major changes in hardware IOCS have been criticized, use MODS data Hamilton Davidson Rates have gone up significantly Robert Mitchell Perception that flats are not covering their costs American Catalog Association What can we do to reduce costs? No one has defined what bottom up costing is people has different opinions of what bottom up costing is IMB gives you piece counts, but no idea about time Notion of marginal cost will help understand the beginning of cost Marginal costing approach is not arbitrary Rates should reflect the effect of the costs they create Don't forget marginality if you make changes to system Assumptions used to create costs are no longer valid Carrier assumptions for costing are wrong based on today's world Why does letters rates go up a little and flats a lot the commission neglects what we told them costs are pretend costs and not real non profit rates are extremely low costs at year end should be lower based on all improvements during year You are irresponsible managers to make decisions on pretend costs non sampling error is good compared to sampling error A "should cost" model should be developed Identify best practices for each operation Time to review assumptions in cost models need to understand variable costs cost system should be as simple as possible, and transparent there are no standard processes in USPS Cost should be visible so people can see it old data into new models if bad practice if you can't process catalogs efficiently, don’t do the business ABC doesn’t use marginality at all ABC is like spending dollars chasing dimes Explain Factor Price index ABC doesn’t do variable costs do a cost benefit analysis for all projects embrace variability into costing Anita Pursley Buckets in cost pools are too broad to be useful RR Donnelly What is the real cost of processing catalogs? Attack those costs skepticism about costs, since there is no rationale Need to explain what the components of costs are All improvements we make don’t impact pricing need to know the difference in pricing from ACD If we knew the costs, we could help USPS be more efficient Topic Bottom-Up Costing Workshare IOCS Cost Accuracy From over 850 items captured directly during the 1:1 interviews Marginal Cost Cost Attribution Summary need Advocate Bottom-Up Costing Advocate mapping out and determine cost of each activity Move to bottom-up, start small, use IMB for one product for a full year Don’t use Bottom-Up (overall) Don’t waste $ chasing dimes Don’t replace valid system Bottom-up not well defined Bottom-up not get what we need – marginal verticality Bottom-up won’t work can’t capture all costs – still need adjustment factors Models do not include cost or value of compliance with prep rules The concept of cost avoidance is a problem The BMM benchmark is a problem Not all cost differences are included in models Worksharing is more complex than the models track Models include costs that should be attributed to retail products The models are impressive Use a 2-part CRA adjustment factor in FCM Improvements made by mailers don’t flow through Input data needs to be updated Flows need to be updated IOCS not reliable IOCS developed for manual operations now out dated. Automation – too many non-handling and indirect tallies Overall works well IOCS seems to justify high costs Historically OIG questioned IOCS Problems with small sample size Even if use IMB, need sampling for manual operations Cost pools too broad Should consider expanding IOCS to include workshare Use IOCS and ensure all systems are additive Important to have accurate costs. Needed to support all types of efforts, it’s the law, especially so for competitive products. Concern on inaccuracy. “costs seen as too high or greater than they should be. Need to know real costs. Defect in the way costs are calculated Alarmed at unit costs for magazines, rise in costs. Flat, parcel costs done wrong Costing lacks credibility because it lacks data. MODS data not reliable Operations have changed, but cost systems dated. CRA doesn’t reflect marginal costs Excess capacity cost made up on fly Costs/models out of date Costs supporting pallet rates are outdated Old mail flow models Data is decades old Use new SOP for Periodicals models. (unlike other methods) is not arbitrary don’t lose focus on marginal costing (needed in delivery costs as well) to support pricing and management decisions Over attribution occurs due to inclusion of non-handling, mixed mail tallies and overhead costs. Need to study mail processing volume variability to get this correct – lamented outcome of past rate case decisions by PRC. On other hand, some said there was under attribution – surprised that USPS can only attribute 50 percent or 55 percent of its costs. Attribution should be much higher, only SG & A should be institutional. Need to use short-run or short-term costing. While long-run based costing is useful, also need short-run to consider short-term contracts and consideration of discounts more than just seasonal price adjustments. Need to be able to determine when additional mail volume offers a positive contribution or covers the truly variable costs. Volume Variability No Overhaul Actual Data General Operations Understand costs Reporting IMB Transparency Carrier Costs Using cost to manage Should cost Average cost Costs didn’t go down as much as volume. Much inflexibility on reducing staffing and infrastructure. Excess capacity shows up as elevated costs. Need to study excess capacity. Assumptions out of whack with reality – excess capacity arose due to big volume decline – overstating costs. No need to overhaul whole system Fix only what doesn’t work Do basic improvements Don’t start over Use real measured data and not samples Replace assumptions with facts Update co sts to current workflows Ensure sampling is accurate for small volume products Replace assumptions with data for workshare Pallets not being scanned, not used due to price increase Manual handling should be limited and sorters maximized Labor contract adds costs Identify best practices and use for pricing Consolidate more plants, use IP engineering for true cost capture What makes up cost? Need building blocks of cost Need to understand cost coverage Why parcels not covering unit cost Need to understand reason for cost increase If we know costs we could help you Simple explanation of costs needed UC Explain why rates go up after workshare implementation Format of the data isn’t presented in a useable manner Frequency (>1 year) ACR doesn’t tell full story- lack of coverage Would like more granularity (e.g. by customer) USPS does an overall good job No ROI on IMB until 2020 USPS should use IMB for cost data IMB is not enough information, no time dimension, mail not on machines, doesn’t tell you where labor is Domestic side is transparent International is not transparent enough We can’t help pricing committees if we don’t know what’s in there Cost system should be precise and accurate Cost system doesn’t seem transparent or understood by industry Too many non-handling tallies to used to allocate costs With automation more work moving from carrier in-office to street time Facilities don’t know their costs by products Processing decisions made irrespective of cost Engage mailers - show mailers (mailflow) and ask which steps actually add value Can’t reduce/manage what you don’t measure Don’t always see USPS make good cost decisions based on efficiencies Develop and use optimal cost for models Costs should be based on work needed, not actual expenditures Mailers don’t want to be charged for inefficient operations Cost pools set up to do generic FCM Should know weight based cost (2-3 oz letters) Higher volume more efficient mail subsidizing lower volume mail Commercial mail subsidizing non-profit Offsite Focus Group Topic 1 Topic 2 Affinity diagram session completed to 103 distinct Customer Needs in 18 Categorical topics Topic 3 Topic 4 6 Project Overview – What we have heard Need to completely rethink Cost system Need for Bottom Up Costing IOCS is obsolete Need to get rid of cost avoidance models Using the IMB scans as much as possible Can’t manage what you can’t measure Don’t overhaul Entire System Bottom up cost model is not panacea IOCS works, consider expanding Overall, cost avoidance models do good job Not clear IMB tells you a lot about what is going on More than ever, accuracy and precision of costing data is important today 7 Break Out Session Topics • Understanding Bottom Up Costing – Specifically define bottom up costing. – What are the risks/costs/benefits of using? • Data Source Discussion (IMB, IOCS, etc) – Discuss if and when IOCS sampling should be replaced by another data source (ex. IMB). – What are the risks/costs/benefits? • Workshare Model Discussion – What should be measured / included in the cost avoidance estimates – What are the risks/cost/benefits • Cost Data Discussion – Is there cost information that USPS does not either currently produce or provide, that you believe you need? – What are the risks/costs/benefits? 8 Break-Out Session Overview • Four Rooms – Room are assigned • Within each room, will further break down into four groups. • Each room has the same four topics • Participants will rotate through topics; Moderator will signal when to change • Discussion led by participants • Participants vote on most important points – vote done by stickers • Report out to main group 9 Costing System Overview What do we mean, we say costing system? - The costs used to develop our products - Both the methodology and data used to develop these costs - Includes how the costs are reported – both frequency and level of detail 10 Costing System Overview Cost and Revenue Analysis Report (CRA) • Produces costs by product • Methodology overview – Obtain total accrued costs – Estimates attributable costs – Distributes Attributable Costs to Products using Distribution Keys • In-Office Sampling System (IOCS), Transportation Accounting System (TRACs), City Carrier Costing System (CCS) • Produced Annually • Reports Data on a National Level • Does not have a line item for every level of workshare 11 Costing System Overview Workshare Cost Models • Provide additional granularity beyond CRA • Uses modeling to estimate specific cost savings associated with specific workshare activities • Most models tie back to the CRA with adjustment factors • Most focus on cost avoidance estimates, not bottom up cost 12 Costing System Overview Costing for Contract Pricing • Costing begins with national average unit cost for most similar product • Adjustments made for partner-specific characteristics when possible – Costs for parts of postal network bypassed are removed from national average unit cost – Costs for additional activities not ordinarily part of national average unit cost are added in – Partner’s mail mix (shape, weight, cube, haul, degree of dropship) incorporated into the unit cost considerations 13 Cost System Overview • The Current Cost System has undergone various types of reviews and audits. – PRC Annual Compliance Determination – Ernst & Young (for revenue and volume) – OIG audits regularly, as required by PAEA – GAO audits, as requested – Reviewed by customers and competitors • Never failed audit • PRC has found compliance 14 Cost System Overview - Level of Accuracy • Statistical Significance of the Sampling System First-Class Mail and Standard: ± 1% Periodicals and Priority Mail: ± 2% Package Services and Express Mail: ± 3% Parcel Select and Parcel Return: ± 4% International: ± 5% • What Does this Mean ? Product Cost per Piece 95% Upper Bound 95% Lower Bound First-Class Mail $0.211 $0.210 $0.213 Priority Mail $5.246 $5.102 $5.391 Express $11.647 $11.256 $12.038 International $2.798 $2.579 $3.017 15 Cost System Overview • Current System…. – – – – • Is trusted and approved by PRC Ties back to general ledger and operation costs Reflects what actually happened, not “ideal cost” Adapts to product and operation changes Limitations – – – – – – – – Limited to national focus Only provides annual reporting Lack of product data at finer detail levels Less precise measurement of low-volume products (special studies required) Some dated special studies Cause of product cost changes are not readily apparent PRC regulates costing methodology changes No estimate of short-run marginal cost 16 Expectations/Feedback • Follow-up – Report out highlights to MTAC on Thursday, August 18th – We will send a summary of feedback to you by end of next week – We will share recommendations and justification with you in early November • Your Expectations / Feedback 17 Rules of Conduct • • • • Feel free to voice your opinion, but let others speak Please do rotate through each of the topics. Please keep to your assigned break out room. If you need help, seek out the moderator. 18 Break Out Sessions • Break Out Room Assignments are on Name Tag • Questions? 19 Next Steps • Report out highlights to MTAC on Thursday, August 18th • We will send a summary of feedback to you by end of next week • We will share recommendations and justification with you in early November 20