Editor’s note: In this article, originally published in the July 1973, Fortune wrote that the Postal Service “cannot operate as a self-sustaining business without continually raising rates or sacrificing service.”
These days, it seems, just about everybody has some personal horror story to tell about the U.S. Postal Service. A check mailed by a woman in Charleston, West Virginia, to Ravenswood, fifty-two miles away, took nine days to arrive–by which time she received a delinquent-payment notice. On Valentine’s Day a resident of Elizabeth, New Jersey, received a Christmas card postmarked December 10. A department store in Atlanta sent out a large third-class mailing, properly presorted, seven days in advance of a sale. The announcement reached most customers after the sale was over.
On occasion, letters embark on extraordinary detours. A real-estate agent in Coral Gables, Florida, mailed a contract to a lawyer five blocks away. It arrived five days later, having made a round-trip journey to Los Angeles. More entertaining was the experience of an Atlanta businessman who last April was invited to a ceremony at the local post office. The invitation reached him ten days after the event.
“Some damn bad mistakes”
Complaints inundated the Postal Service. Both the Senate post-office committee and the House subcommittee on postal service scheduled hearings on the deplorable state of the mails. In February, Postmaster General E.T. Klassen assembled a meeting of his eighty-five district managers in Washington to find out what had gone wrong. By early March he was confessing to the Senate committee that “we were so hell-bent on [cutting] costs that we did not pay enough attention perhaps to service. …We made some damn bad mistakes.”
Klassen’s confession–and the breakdown in mail service that evoked it–must be considered a major turning point for the U.S. Postal Service, which is two years old this month. The time had come to scale down some overly optimistic expectations. When the Postal Service was born by act of Congress as an “independent establishment of the executive branch,” both Congress and postal management thought that if the system could be run as a business, it would not only provide better service but would ultimately be self-sustaining, or close to it. It would accomplish these goals through better management and greater efficiency. Like any other well-run business, it would keep a firm rein on costs, and it would eventually charge most mail users the full price of services rendered.
But in its very first attempt to act like a hard-nosed business firm, the system had obviously come a cropper. Not that Klassen had intended to slight service in order to control costs. In a strongly worded statement in March of 1972, he declared that “service and customer courtesy must once again become a way of life throughout the entire Postal Service.” But the postal management also saw from the start that, unless rates were to increase rapidly, it would have to hold down on payrolls, which account for 85 percent of the budget. Accordingly, one of the service’s first moves was to reduce the staff by encouraging older employees to take early retirement. In the Washington and regional headquarters, the head count dropped from 6,000 to 4,000 in 1971. Many experienced managers were soon to be grievously missed. Then, late in March, 1972, after the Postal Service had scheduled a $900-million annual rate increase to go into effect at the beginning of 1973, Klassen attempted to stave it off. He announced a system-wide job freeze to reduce the rosters through attrition, and by the end of July, the payroll was down by 33,000 people-for a saving of nearly $400 million a year.
Management’s expectation was that the reduced staff would operate with enhanced efficiency because of additional mechanization and the use of sophisticated systems of mail sorting and routing that require less handling per piece. But much of the new equipment was late in arriving, and the new systems proved to be horribly accident prone. At the same time, staff cuts had eroded the capacity of the system to process mail in the old ways, and the impact on service became dramatically evident when the huge volume of Christmas mail rolled in.
After the damage was done, Klassen veered in the opposite direction, sending word to the field that service now had the top priority. Costs were not to be disregarded, but it was imperative that the mail move on time. Conditions gradually improved, as more workers were hired, more mechanization came on line, and snarls were gradually unraveled in the complex logistical systems used to channel mail around the country. Costs increased, of course, and will go up still further in a new labor agreement now being negotiated. Although the Postal Service has not announced it, a rate increase of as yet undetermined size will have to be imposed early next year.
Klassen’s switch in priorities, within a year, highlights the inescapable dilemma of the Postal Service. If the system’s delivery standards are to be maintained, its costs must rise, for it is a labor-intensive industry. More mechanization, more efficient routing systems, tighter management, and better working conditions all help to improve productivity. But none of the improvements that are planned, or any that could be contrived, will increase productivity fast enough to keep pace with the mounting wage bill. Unit labor costs must rise.
If the postal system is to be run just like other businesses, rates have to rise as costs rise, no matter how onerous the burden on business or private users of the mails. One alternative, of course, would be a planned and orderly reduction in the speed or frequency of service–but recent experience indicates that substantial economies at the expense of service are intolerable to the public. The only other alternative is to finance the rise in costs by subsidy–or, as a practical matter, to provide a partial subsidy that could mean some rise in postal rates, as well as in the bill to the taxpayer.
The Postal Service would unquestionably resist such a move, for financial self-sufficiency has become almost an article of religious faith among its top executives. But on Capitol Hill doubts are beginning to be voiced about the wisdom of loading the full charges onto mail users, particularly as the likelihood of a 9-cent, 10-cent, and, before many years, a 15-cent first-class stamp becomes increasingly evident. The topic is of even greater concern to business than to individual users, because the great preponderance of mail is business mail.
The debate over who pays how much is likely to be prolonged and impassioned, but the argument for increased subsidy is a compelling one. While the Postal Service should be run in a businesslike fashion, it is clearly not a business. If it were a private corporation, it could reduce costs by lopping off a lot of unprofitable operations, closing out many delivery routes and post offices, perhaps ending all weekend services, or just concentrating on delivering mail in densely populated urban areas. The Postal Service has none of these options. It remains what it has always been–a public service–and hence has a reasonable claim on the public treasury.
The sudden decline in service last winter at least cleared the air. No one who has looked into the intricately related causes of the breakdown will go on expecting the Postal Service to achieve both stable costs and improved service through some management miracle. But as the essentially political question of subsidies versus user fees is argued out in the Congress, there is every reason to hope that the system will begin to realize some modest and continuing increases in efficiency–along with service somewhat better than it has been lately.
More dramatic breakthroughs are just not to be expected in the vast communication web that the Postal Service manages. In size and intricacy it is surpassed only by the Bell Telephone System. With nearly 700,000 employees and an annual budget of over $9.8 billion, the Postal Service moves more than 87 billion pieces of mail a year-over 287 million pieces each delivery day. The system contains 31,686 post offices, ranging in size from one corner of Seward’s general store in Menemsha, on Martha’s Vineyard in Massachusetts, to Chicago’s main post office, the biggest in the world, whose 21,000 employees; working on nine floors of a huge loft building, receive, sort, and dispatch 15 million pieces of mail a day. Mail travels over a complex network of 15,000 contract truck routes, 8,000 commercial air flights, 169 air-taxi routes, and 154 passenger and freight trains. Inevitably, it is a system prone to breakdown through a foul-up in transportation, a sudden overload of volume at one point, a shortage of manpower at another–or managerial error.
The system was vulnerable and erratic long before the Postal Service was created, though that fact tends to be overlooked in the recent spate of criticism. The old Post Office Department operated within constraints that doomed it to defeat. It was legally required to break even on most of its operations, yet its rates were fixed through the interplay of congressional politics. It had no control over pay scales or fringe benefits, which were also set by Congress. Its revenues went to the Treasury, and like other government departments it was dependent on annual appropriations, which kept it starved for capital funds while its deficit continued to mount. For years it could afford only meager infusions of new machinery for handling mail, and many of its ancient facilities are grievously dilapidated. Klassen maintains that 11,000 of the system’s post offices and other installations are “inadequate.” Armies of postal employees still work in conditions that recall the sweatshop era.
The Postal Reorganization Act of 1970 introduced a rational rate-making procedure, empowered the Postal Service to raise its own capital funds through bond issues, and also mandated collective bargaining. There is a good deal more promotion on merit than ever before, and the political appointment of postmasters has been abolished. Partly because the service was inaugurated with a substantial rate increase (from 6 cents to 8 cents for a first-class stamp), the postal deficit was reduced in its first fiscal year from $2.3 billion to $1.5 billion.
In its first two years, the Postal Service has completed some promising improvements in administrative structure. The system has been divided into five regions and eighty-five districts, each of which is expected to exercise initiative in administering national policy. For the first time, postmasters have budgets and are expected to meet them. And from the start, the service has spent heavily on advanced equipment for handling the mails. In decisions that preceded the breakdown last winter, however, Klassen demanded more from his improved system than it was ready and able to give.
The speedy sort
To understand what went wrong, one must enter the arcane world of mail processing. There are essentially six steps in the movement of letters and packages: collection, culling, canceling, sorting, transportation, and delivery. After the mail is collected and brought to the post office, it usually goes through one or more culling operations–letter-size envelopes are separated from large envelopes and parcels as the mail stream moves along broad conveyer belts. Letters and postcards then go through facer-cancelers, which position the envelopes properly and cancel the stamps at an average rate of 22,500 envelopes an hour.
The next process—sorting–is crucial. To minimize handling costs, the goal is to sort the mail as few times as possible, both before it is shipped to its destination and after it arrives there. Until the advent of machines, which came into common use around 1970, all sorting was done by hand, with a clerk placing each letter in a pigeonhole in the case in front of him; the number of pigeonholes worked by each clerk, most commonly seventy-seven, is limited by the reach of the human arm.
Today about 40 percent of all letter mail is sorted mechanically. The basic machine is the LSM/ZMT (letter-sorting machine Zip-mail translator), which is manned by twelve operators, sitting at keyboards and tapping out sorting directions as the letters are whisked before them and then dropped into 277 sorting bins. The Postal Service also uses some twenty computer-operated Optical Character Readers attached to letter-sorting machines (see the pictures on pages 96 and 97).
Massing on Los Angeles
Traditionally, a good deal of sorting was done at post offices of origin. But under the Managed Mail program, instituted nationally in 1970 and considerably refined since, mail traveling long distances gets only the most rudimentary sorting at points of origin, and is then sent, generally by air, to the sixty-three State Distribution Centers around the country. Thus mail going from the eastern seaboard to California is no longer sorted for several different cities, but is separated into lots that are “massed” on San Francisco and Los Angeles. In those cities further sorting for each half of the state is done by machine. The system is designed to reduce the number of sorts at each point of origin without increasing their number at destination. Hence the saving in cost.
In 1971 another centralized system, called Area Mail Processing, became generally operative to lighten the load on smaller post offices. “Associate” post offices with modest volume send their mail to one of 336 Area Mail Processing Centers, to be canceled, sorted, and dispatched. Local mail (except that deposited in a special drop at the post office) also goes to the AMPC for processing and is trucked back to the associate post office before daybreak. The round trip may be fifty or 100 miles or more, but the expense of the round-trip journey is more than offset by the saving from machine sorting.
Beginning last December, the flow of mail was badly disrupted because of the job freeze, the nondelivery of sorting equipment, and the faulty design of some aspects of both the Managed Mail and Area Mail Processing programs. Difficulties with air transportation further compounded the mischief.
Due to the job freeze, postal facilities around the country frequently lacked the manpower to sort mail for the proper State Distribution Centers. Some of the SDC’s, in turn, were understaffed. Thus letter mail coming into New York State was supposed to be split between New York City and Buffalo. Many undermanned offices simply “dumped” (the term used by the Postal Service) all New York State mail on New York City. The New York post office was unable to move the load expeditiously, since it had lost 5,000 employees through attrition and had not received its second Advanced Optical Character Reader, which was supposed to be operational last autumn. (The machine was not installed until June.) So the New York post office backed up, disrupting service all over the metropolitan area and throughout the country, for the jam slowed up mail originating in New York as well.
Philadelphia had a different problem. Long-haul letter mail is supposed to arrive by air at 8 :00 or 9:00 A.M. and be sorted during the daylight hours on LSM’s that would otherwise be underutilized; the mail is then delivered by carrier the next day. But the airlines had canceled many late-night flights, and there was exceptionally bad flying weather last winter as well. A tremendous volume of Managed Mail arrived at Philadelphia–as at other large post offices–around 4 :00 P.M., when the LSM’s had to be used for local mail. Hence the Managed Mail was worked the following morning, a full day late. Edward V. Dorsey, then the Eastern Regional Postmaster General (he now holds the same job in the New York Metropolitan Region), decided not to worry about cost and put clerks to work around the clock, sorting the mail by hand.
Some Area Mail Processing Centers got clogged up because of faulty planning. In California, the San Diego AMPC was forced to give the sorting job back to three associate offices, because equipment did not arrive on time and management had miscalculated the work load. Until mid-1972 the bulk of mail processing in Delaware was divided between Wilmington and Dover. Then everything was centralized in Wilmington, which soon became overloaded, causing extraordinary delays. Last February, for example, only 37 percent of first-class mail from New York was delivered in Delaware the second day after it was postmarked. Finally, in April, the load was again split with Dover, and delivery times improved.
Since that February meeting of district managers in Washington, when Klassen trumpeted the new emphasis on service, a number of changes have been put into effect, some of them costly. Twenty thousand new workers were hired in February and March. The Postal Service increased its use of air-taxi routes that carry mail exclusively. It has also begun to negotiate with the airlines for guaranteed space to carry first-class mail. Currently, airmail travels on committed space, whereas first-class mail is flown on the cheaper “space available” basis. When the planes are flying full, first-class mailbags are often left behind.
One of the most significant changes, involving increased labor costs, has been to cut back temporarily on the overburdened Managed Mail program. Instead of shipping all long-haul mail to State Distribution Centers, some of which cannot handle the full load, more sorting is now taking place on a selective basis in areas of origin. Post offices in Ohio, for example, are now sorting all letter mail bound for New York State, New Jersey, and Pennsylvania down to the first three digits of the Zip code. This mail then bypasses the SDC and goes directly to its destined communities. The New York region makes a similar Zip-code sort for the states of Ohio, Illinois, and Michigan.
A spotty recovery
Another innovation–the use of colored tags on mail pouches–is so simple that one wonders why it had not been thought of before. Until March, mail pouches were usually worked in the order of their arrival, rather than according to delivery priorities. Now a colored tag, affixed in the dispatching office, tells the receiving office what day the service’s timetable calls for the mail to be delivered.
The drive to speed the mails has had a marked impact, though the system still falls short of all its service standards. By the end of March, the national average for next-day delivery of local mail was back up to 94 percent, where it had stood in November, and in April the figure finally reached 95 percent–the performance rate the Postal Service regards as satisfactory. Many parts of the country, however, recovered at a slower pace. The New York region, which had slumped to a low of 52 percent in January, was back only to 89 percent in the first fortnight in April and to 91 percent in the last two weeks of May.
Airmail continues to lag badly. The service is committed to next-day delivery to specified cities within 600 miles (and sometimes beyond) if the mail is deposited by 4 :00 P.M. in specially marked collection boxes; all other cities in the continental U.S. are supposed to be reached on the second day. These goals are far from being met. In the two weeks prior to last Christmas, the service’s performance rate nationally fell to 48 percent, and rose no higher than the 70’s during April and May; the New York and Eastern regions have consistently done even worse.
Although it is still off target, the service comes closer to fulfilling its standards for nonlocal first-class mail. (These are in-house standards, rather than public commitments.) Such mail is supposed to be delivered within 600 miles in two days, and beyond 600 miles in three days. In May the service’s second-day score for the nation as a whole was 88 percent, up from 53 percent last December, and the third-day score was 89 percent. The figures mask wide sectional variations. Thus, in March, only 72 percent of first-class mail from Philadelphia was getting to Connecticut the second day, but 93 percent was making it to Ohio.
There is no all-embracing explanation of why–despite modifications to the Managed Mail program, despite increased manpower and airlift capacity–the airmail and second- and third-day standards are not being met. Such unexpected factors as a surge of volume in one location or excessive absenteeism on a particular shift may make it impossible to meet dispatch times for all the mail that should move that night; the same hazards can occur at the receiving end. And it is worth remembering that even when the Postal Service meets its standards, as it hopes to do during fiscal 1974, a lot of mail will still be delayed. For a 95 percent performance rate leaves 5 percent of the mail behind schedule. In fiscal 1972, 5 percent of all first-class mail meant 2.45 billion letters!
Competition from United Parcel
Parcel post and bulk third-class mail can be even more frustrating to customers. Typically, it now takes an average of about three days to deliver a package locally (up to 300 miles) and two weeks cross-country. By contrast, United Parcel Service has standards of next-day delivery for parcels traveling up to 150 miles (three days up to 1,500 miles) and claims that it meets these goals about 98 percent of the time.
In general, however, bulk mailers complain less about delivery time than inconsistency of service. If they knew how long delivery would take, they could time their mailings accordingly. Last year the Postal Service set up a computer study of the time it took for parcels to go from St. Louis to Denver. The spread was between six and twenty-nine days. Such erratic performance results in part from inadequate bulk-mail facilities, originally designed for much smaller volume. Bulk mail also has a low priority, and is often shunted aside. Not surprisingly, United Parcel has now captured about half the nation’s parcel-post business. Private postal services have also found a market, handling the door-to-door distribution of advertising matter that would otherwise go third class.
Bulk-mail delivery, especially parcel post, has a good chance of improving substantially in the next couple of years. The Postal Service is investing over $950 million in a new network of facilities consisting of twenty-one bulk-mail centers and twelve auxiliary centers, strategically situated around the country so that 95 percent of local parcels can be delivered within two days. Elapsed time for coast-to-coast delivery is expected to be reduced to seven days. The bulk-mail centers, the first of which will be operational shortly in Jersey City, are huge, one-story sorting factories-complex arrangements of conveyer belts, chutes, and operator-controlled mechanical sorting equipment, so designed that a parcel can move through the center in as little as two hours and be loaded onto an outbound truck. The system is supposed to be fully operational by mid-1975.
On the drawing boards is a far more ambitious plan to revolutionize the processing of letter mail. At a cost of nearly $4 billion, the system would replace the State Distribution Centers and Area Mail Processing Centers with 181 Preferential Mail Centers equipped for electronic sorting. In the form proposed by the Postal Service’s Mail Processing Group, the system involves the use of a bar code–a series of tiny vertical lines and half lines representing the name and address–imprinted on each envelope. An experimental installation has been in operation for some time in Cincinnati, processing about 15 percent of the mail. Some incoming letters, such as return envelopes for bill payments, already have the bar code printed on. Otherwise, encoding machines are used to type a bar code on each envelope, after which a bar-code reader rapidly sorts the mail.
Harold F. Faught, the departing Senior Assistant Postmaster General for Mail Processing, is enthusiastic about the bar-code method, but Klassen has not yet bought the system. He prefers to wait to be sure that the bulk-mail network is operating properly before committing himself to a vast new expenditure. Meantime, an alternative method of electronic sorting–the read-sort system–is being evaluated. An Advanced Optical Character Reader, already installed in New York, can read all four lines of a typewritten envelope, sorting almost as quickly and just as finely as the bar-code reader–right down to the carrier route. On the other hand, it cannot handle addresses written in script. A vigorous debate goes on amongst the experts over which approach is more economical.
Either system would reduce costs considerably. But six years will be required to install the Preferential Mail System once plans are approved, and so it probably could not be completely operational until 1981. In the meantime, the Postal Service will have to soldier on with its present technology, which will be able only to moderate, not completely offset, the rise in labor costs. In the last three years, productivity has risen at an annual rate of about 3.5 percent, but this spurt followed a long period of very modest increases.
The greatest gains have come from all those innovations in mail processing, which employed 250,000 clerks and mail handlers at the end of fiscal,’1972. Their productivity increased 4.2 percent in fiscal 1971 and 4.8 percent the following year. City letter carriers, who numbered 175,000, showed gains of 1.9 percent and 3.1 percent in the same period. But it is doubtful that either clerks or carriers can continue to increase their productivity at present rates–one reason being that the Postal Service’s gain is often the customer’s loss.
Let the customers walk
Mail users with long memories know that they have already given up quite a lot through the years in the name of postal economy. Before 1950, when Postmaster General Jesse Donaldson went on a cost-cutting campaign, Americans could open their mail at the breakfast table, favored as they were by two and in some places three deliveries a day to residences, as well as five to businesses. The once-a-day residential delivery dates back to Donaldson, and a majority of neighborhoods now have only one collection a day. The most common pattern of delivery to businesses now is twice daily, but a number of places (including San Francisco, remarkably) only get one delivery. In most of the newer residential areas, houses must have curb-line boxes to accommodate motorized delivery, and “cluster boxes”–sixteen lockboxes on a stanchion for sixteen homes–are being tried experimentally in twelve communities. The idea is to make the customer walk rather than the postman.
From the customer’s point of view, even the letter-sorting machines have their drawbacks. Since operators get only a second to depress the keys, the error rate often runs 4 to 5 percent. Missorted letters may take quite lengthy detours, though for truly puzzling delays the machines still can’t match such traditional errors as losing a letter in the bottom of a mailbag that has not been completely shaken out. (It should be added that statistics on the speed of the mails show no long-term pattern of decline, although the Postal Service’s sampling techniques do not measure how much longer letters now sit in collection boxes, or any delays before postmarking.)
The Postal Service says that it has not counted on any new sacrifices from the customers in budgeting a 3.7 percent increase in productivity during fiscal 1974. Thereafter it is unwilling to hazard any public, guesses about productivity because it does not know the ‘kind of mechanization it will ultimately adopt. Management and the four postal unions are currently negotiating a new collective-bargaining agreement to succeed the two-year contract that expires on July 20. Even if the total additional cost of the package is kept within the Cost of Living Council’s 6.2 percent guideline, postal rates will have to rise by early next year if only to cover the gap between the increased labor bill and the expected gain in productivity.
The experts were wrong
Thereafter, a steady progression of price increases can be predicted. The Postal Service cannot project their extent, because of such unknown variables as labor costs and the volume of mail. Over the long term, volume has increased by about 2.5 percent annually. The experts long believed that the demand for postal services was inelastic, an assumption that was destroyed by the figures for fiscal 1972, the year following the last rate increase. Volume increased a mere 0.2 percent, and the amount of first-class mail actually declined. Volume rebounded this past fiscal year, but there is now some apprehension among the planners that future price increases might substantially cut the annual increase in volume, thereby reducing revenues. No one really knows.
Meantime, two controversies over rates proceed in Washington. Under the Postal Reorganization Act, second- and third-class commercial mailers, with some exceptions, were entitled to a five-year phasing-in period before they had to pay their full rate schedule. The Postal Service was also entitled to a subsidy each year to make up for the lost revenue. In fiscal 1972 and 1973, the service asked for a total appropriation of $422 million for third-class “revenue forgone.” The Office of Management and Budget refused to approve the requests, the third-class mailers had to pay the full tariff, and the matter is now the subject of litigation as well as strenuous lobbying.
The second-class mailers are also seeking relief from Congress. In 1972 second-class rates were raised an average of 127 percent over the five-year phasing-in period. The magazine industry claimed that this whopping increase could capsize a number of modest-size publications and place an unconscionable burden on even the strongest. The publishers attacked the cost-ascertainment system of the Postal Service, but even if that argument were sustained (the details are highly technical) only a moderate amount of relief would have been provided. The more significant claim was that the huge postal increase was an unintended threat to freedom of the press.
Once the phasing-in period is over, the only subsidy provided by the Postal Reorganization Act is one to cover such services as rural delivery and Mom and Pop post offices, which cannot conceivably pay for themselves. But Congress has been sympathetic to the case made by the publishers, and there is some chance that legislation will pass to extend the phasing-in period to ten years and perhaps providing additional relief, especially to small publications.
“To bind the nation together”
There are cogent arguments against a permanent, general subsidy, which do not relate to the controversies over second- and third-class rates. Subsidies can lead to slack management. Moreover, most mail is generated by business firms. Back in 1968, the Kappel Commission reported that only 14 percent of all mail was “household-to-household communication.” Household-to-business mail (such as payment of bills) would of course raise the percentage. Nonetheless, business mail clearly accounts for the great bulk of all mail.
Opponents of subsidy argue that business should not be helped at the expense of the taxpayer. “Why should a $12,000-a-year blue-collar worker pay a subsidy for the Bank of America,” asks Murray Comarow, Senior Assistant Postmaster General for Customer Services. There is only one reply: in the absence of subsidy, business will pass on postal increases, like other costs, in the form of higher prices. Indeed, consumer price increases that reflect rising postal costs can be seen as a form of regressive taxation, which would be more costly to that blue-collar worker.
In the act setting up the Postal Service, Congress imposed on it “the obligation to provide postal services to bind the nation together through the personal, educational, literary, and business correspondence of the people.” Moreover, said Congress, “the costs of establishing and maintaining the Postal Service shall not be apportioned to impair the over-all value of such service to the people.” No one can arbitrarily set a figure at which postal rates begin to impair the value of postal service, but clearly there is a point–which may vary with different classes of mail–at which the financial burden should be shared by the entire community. There is no panacea that will keep the bill from rising.
