Friday, October 14, 2011

Step 3: Profit!

The USPS wants to close the West Medford Post Office, because it currently turns a profit of only $300,000 a year and is less than 2 miles from the Medford Square Post Office. They are remarkably bad at explaining their reasoning, so everyone wonders why the USPS would want to give up $300,000 a year by closing a profitable branch. The USPS reasoning is presumably that if they close West Medford then the income will all shift to Medford Square when people bring their mail there, and the costs at West Medford will mostly be eliminated, so their total profit between the two branches would be higher.

On the cost side, the USPS is not exactly being honest. The West Medford labor costs are by far their highest expense. Those costs cannot be eliminated, since the workers cannot be laid off. The USPS will save maybe $50,000 a year on rent, utilities, cleaning, maintenance, and equipment.

On the income side, the USPS is being bizarrely optimistic. Some mail volume will go to the nearest branch, particularly for the sorts of mail which have no competition: postage-paid envelopes, first class mail, international mail. But Express Mail and domestic package shipping is a huge portion of their income at local branches, and that shipping has competition from UPS and FedEx. The USPS is betting that most people and businesses will not shift that sort of shipping over to UPS and FedEx just because of having to bring packages to Medford Square instead of West Medford. After all, it’s only an added 5-10 minutes of travel time, an added 5-10 minutes spent waiting in line, and the extra inconvenience of more difficult and unpredictable parking, parking further away from the door, and carrying packages up an extra flight of steps (or an extremely long ramp). For an infrequent shipper, that’s not a big enough obstacle to change their mail volume significantly. For a frequent shipper, that adds up quickly into an incentive to explore alternatives. And frequent shippers are the customers that the USPS should be most concerned about attracting and keeping.

My particular business situation is not unique among mail order businesses. We spend $10,000 a year on shipping. $1000 of that goes to FedEx Ground, and $9000 goes to the USPS. Of the USPS volume, most is picked up at our location (and is therefore counted as Medford Square income, since Medford Square handles those), some is dropped off at Medford Square, and some is dropped off at West Medford. We are probably only counted as $500 of income for West Medford, since that’s all the mail volume we drop off there.

But when we decide on which sorts of packages we are going to ship through FedEx Ground vs. through the USPS, we don’t know which packages we’re going to have picked up and which we’re going to drop off. What we do know is that the West Medford option, 5% of our annual shipping volume, accounts for the majority of our most important packages, and is by far the fastest and least stressful drop-off location for urgent packages. So we set the USPS as a default for 90% of our shipping because of that 5% that goes to West Medford. If the USPS closes West Medford, we will have to reconsider our shipping plan, and we could easily shift at least 40% of our shipping over to FedEx Ground, rather than shifting that West Medford 5% over to Medford Square. If we do that, the USPS will see $7 of lost Medford Square income for each $1 of lost West Medford income on our mail volume.

The problem for the USPS in modeling these outcomes is that they offer frequent shippers like us no way to express the importance of particular branch locations to our shipping decisions. I’ve asked if there is any way to have the USPS appropriately apportion the income they receive from us between West Medford and Medford Square, and there isn’t. That would require cooperation from Medford Square, and Medford Square doesn’t want to do anything that would hurt their apparent bottom line by attributing any income to West Medford. The USPS can’t figure out how to compete with FedEx and UPS, but they have figured out how to compete destructively with themselves.


Amy said...

Ugh, really? That's my post office. Dunno if I'd switch to Medford Sq or just do my postal business in Davis when I'm running other Davis Sq errands.

Amy said...

(It's not technically my post office, our incoming mail comes through Davis and that's where we have to pick things up. But it's the post office I *use*.)

Michael said...

That's exactly what the USPS fails to take into account. I used to use the Tufts branch all the time, until the parking there became impossible. They're planning to close that one as well, even though they only pay $1/year in rent for the space.

If I remember right, your incoming mail comes from Union Square initially, and then gets left at Davis if you need to pick it up.

Jennifer said...

Operations research.