Product Redesign Update Mailers Technical Advisory Committee May 16, 2002

PRODUCT REDESIGN Overview: Purpose & Objective Process & Timeline Major Redesign “Themes” Major Ideas for Each Product Agenda

PRODUCT REDESIGN Changing Customer Needs and Capabilities Prepare for Future USPS Operating Environment Increasing Physical and Electronic Competition Why Product Redesign Now

PRODUCT REDESIGN Products That Meet Customer Needs Products That Reduce Combined USPS and Customer Costs Products That Fit Future USPS Operations Prices That Generate Growth in Volume and Contribution What We Want To Accomplish

Process And Timeline Year 0123 PRODUCT REDESIGN Develop & Refine Proposals Proposals May ’02 May ’01 May ’03 May ’04 Cost & Market Research PrepareFiling PRC Hearings Implementation

PRODUCT REDESIGN Joint USPS/Industry Process Throughout Steering Committee: Strategic Focus – Broad Industry Representation Workgroups: Develop & Refine Proposals – For Each Mail Class and Multi-product Issue – First-Class, Standard, Periodicals, Bound Printed Matter, Parcels (All Classes), and Address Quality Process

PRODUCT REDESIGN Provide a Process that Allows All USPS and Customers’ Views to be Considered Equally and Fairly Steering Committee: Operating Principle

PRODUCT REDESIGN Five Broad Goals: Flexible Cost-Based Presort, Preparation and Entry Define Additional Worksharing Opportunities Improve USPS Value (Price and Service) to Customers Incentivize Mailing Practices Which Drive Costs Out of the Total System Prices and Products That Generate Growth in Volume and Contribution Steering Committee Guidance to Workgroups

Major Redesign Themes

PRODUCT REDESIGN Recognize Different Mailer Capabilities Retail – Households & Other Single-Piece Mailers Commercial (Bulk-Entered Mail) – Mail-Intensive Customers – Moderate Users Major Redesign Themes

PRODUCT REDESIGN For All Commercial Products: “One Size Fits All” Preparation Requirements No Longer Adequate – Presort Levels – Containerization – Entry Requirements – Address Quality Major Redesign Themes

PRODUCT REDESIGN Permits, Mailings, & Volume by Customer Size Permits Mailings (millions) Volume ________ Commercial Standard200,0004,900,00072,000 Annual Volume <10 K 10K - 50 K 50 K - 250K K 750 K Mil Mil Mil Mil > 100 Mil 120,000 42,000 20,000 8,000 5,400 2,600 1, , , , , , , , ,000 70, ,300 3,500 7,400 11,000 17,000 19,000 11,000

PRODUCT REDESIGN Permits, Mailings, & Volume by Customer Size AnnualMailings VolumePer YearPiecesPostagePiecesPostage 4< 10 K , K141, ,0005, K363, ,00023, K5,5001,100400,00090, K Mil1509,0002,0001,400,000260, Mil28015,0003,0004,300,000800, Mil40034,0006,00013,000,0002,400, Mil70061,00010,00045,000,0007,000,000 > 100 Mil900162,00025,000150,000,00024,000,000 Average Per Customer Per MailingPer Year Commercial Standard Customers

PRODUCT REDESIGN New Preparation Options: Minimal Preparation – Mailers Who Find Current Requirements More Trouble Than They’re Worth – Pay the USPS to Do More of the Work More Complex Options – Mail-Intensive Customers – Opportunities to Do More than Today – Increased Flexibility Major Redesign Themes

Address Quality

PRODUCT REDESIGN Physical Address Accuracy Move Update Address Presentation on Mail Piece Three Elements of Address Quality

PRODUCT REDESIGN Delivery Point Validated (DPV) Address: –Confirmed to be both correct and complete ZIP+4 Coded Address: –Confirmed to be within a valid range (blockface) of addresses 5-Digit Coded Address: –Confirmed to be within the correct 5-Digit ZIP Code area Physical Address Accuracy: Three Levels

PRODUCT REDESIGN Pr ing Process : –NCOA, FASTforward for MLOCR, and FASTforward Mailing List Correction (MLC) Post-Mailing Process : –Address Change Service Exceptional Addressing : –“Or Current Resident” Move Update Methods Note: Retain Existing “Alternate” Move Update Methods

PRODUCT REDESIGN More Complete Address Presentation to Enhance the “Last Mile of Delivery” Print on Mailpiece ALL Address Elements Used To Generate the Barcode Print Carrier Route Number on Flats and Parcels Even When Not Mailed at Carrier Route Rates Address Presentation

PRODUCT REDESIGN Possible Address Quality Discount Matrix

The Big Ideas… Product by Product

Shape-Based Rates Present Rate Structure: Weight-Based A Rate for the First-Ounce, plus 23¢ Over $4 Billion From Additional-Ounce Rate, Mostly from Flats and Parcels PRODUCT REDESIGN: FIRST-CLASS Trying to Make One Rate Do Three Jobs –Reflect Costs of Weight Per Se –Reflect Costs of Changes in Shape-Mix –Reflect Value of Sending Heavier Items

First-Class Costs by Weight and Shape PRODUCT REDESIGN: FIRST-CLASS Single-Piece Unit Costs (Smoothed) $0.00 $0.50 $1.00 $ < = = == = = = = >13 Letters Flats Parcels

Shape-Based Rates A Possible Shape-Based Rate Structure: PRODUCT REDESIGN: FIRST-CLASS Different Rates for Different Shapes –Rates for Parcels Higher Than for Flats –For Both Shapes, Rates Start High –Letter Rates: Apply Only Up to 3 Ounces For Each Shape, Fewer Weight Steps –Flats and Parcels: One or Two Steps –Letters: First-Ounce Rate, Plus: –Single-Piece: One Rate for Next 2 Ounces? –Workshare: Half-Ounce Increments?

Drop Shipment Strong Industry Interest –Need Improved Service to 3-Day Areas –Distributed Printing Is Becoming Easier Reduce Combined-Cost of Transportation? –Mailers Consolidate With Existing SCF Dropship Volume in Other Classes –Distributed Printing Eliminates Transportation USPS Concerns –Earlier Market Research: Limited Cost Saving –Broad Policy Issues PRODUCT REDESIGN: FIRST-CLASS

Standard Mail

Cost-Based Rates Heightened Awareness of Importance of Identifying Costs for More Components –Bundle and Container Handlings –Address Quality Elements Underlying Theme: Provide Direct Incentives for Mailers to Create More Efficient Mail Provide Flexibility to Meet Individual Mailers’ Needs and Capabilities PRODUCT REDESIGN: STANDARD MAIL

PRODUCT REDESIGN Mail Processing Costs: Piece, Bundle, & Container FY 2000 Flats Mail Processing Costs: Standard Regular Container- Handling 17% Bundle- Handling 22% Piece- Handling 57% Other 4%

PRODUCT REDESIGN Mail Processing Costs: Piece, Bundle, & Container Flats MP Cost Increases: FY2000 > FY 2003 Components of 10.8% Standard Regular Increase Piece- Handling 2.7% Container- Handling 3.5% Other 0.7% Bundle- Handling 3.9%

PRODUCT REDESIGN Standard Flats: Pieces vs. Bundles 5-Digit Auto Flats: 5.7 Billion Pieces in 252 Million Bundles –23 Pieces / Bundle On Average One-Third of Pieces in: – 136 Million Smaller Bundles, – 72 Million Medium Bundles, and – 44 Million Larger Bundles Piece Rates Cover Bundle-Handling Costs –Each Piece Pays Same Amount –If Bundle Cost = 46¢, Each Piece Pays 2¢

PRODUCT REDESIGN Standard Flats: Pieces vs. Bundles 5-Digit Auto Flats by Bundle Size $38 M $63 M 1.9 Billion Pieces Bundles <= 20 Pcs $38 M $33 M 1.9 Billion Pieces Bundles 20 to 31 $38 M $20 M 1.9 Billion Pieces Bundles >= 31 Pcs 2 cents / piece 46 cents / bundle

Stripped-Down Commercial First-Class –Ancillary Services Not Included in Rate –Move Update Not Required Buy-Up Service for Standard Mailers –Buy Down for First-Class Mailers Does Not Create an Additional USPS Mailstream PRODUCT REDESIGN: STANDARD MAIL First-Class Lite

Combining Classes of Mail Mailers combine classes in Bundles and Containers (e.g., With Periodicals Flats) Improve Presort Densities, Reduce Sacks Improve Drop Shipment Opportunities USPS Processes Fewer Mailstreams Processing Efficiencies Potential Service Improvements Coordinate with Network Integration and Alignment (NIA) Strong USPS Operations Support PRODUCT REDESIGN: STANDARD MAIL

New Growth Opportunities Reduced Rates for Prospect Mailings Peak and Off-Peak Pricing Volume Incentives Strong Industry Support Across Classes USPS Focus on Innovative Pricing –Some May Work Best as Negotiated Service Agreements (NSAs) PRODUCT REDESIGN: STANDARD MAIL

Periodicals

Three Big Ideas Cost-Based and Rules-Based Pricing Service-Related Pricing and Processing Separate Pricing for Forwarding PRODUCT REDESIGN: PERIODICALS

Cost-Based Pricing Like Standard, Would Motivate Most Efficient Preparation –Addressing, Packaging, Containerization and Entry Separate Bundle and Container Handling Costs From Piece Handling Costs –Encourage Fewer Bundles and Containers Would Provide Direct Incentives for Co-palletization and Co-mailing Would Provide Flexibility to Tailor Mail Prep to Service Needs and Productions Costs PRODUCT REDESIGN: PERIODICALS

Rules-Based Pricing Limit Exposure of Smaller Circulation Publications Likely From Totally Cost- Based Pricing –For Mailers Unable to Create Most Efficient Mail Due to Lack of Mail Volume or Density Similar to Current Structure, but Would Prohibit Most Inefficient Preparation –E.g., No 6-piece Sacks Under Rules-Based Rates Pushed up Somewhat From Current Structure Due to De-averaging –Hope to Limit by Prohibiting Worst Practices PRODUCT REDESIGN: PERIODICALS

Service-Related Pricing and Processing Possible Approaches Allow Mailers to Combine Standard and Periodicals Mailings In the Production Process or at Consolidation Facilities Allow USPS to Process Periodicals and Standard Mail Together at Destination Facilities Create 2 Flats Mailstreams Instead of 3 –“Time-sensitive” With First Class; Less Frequently Issued Titles With Standard, OR –Combine All Periodicals with Standard PRODUCT REDESIGN: PERIODICALS

Separate Price for Forwarding Currently, forwarding Periodicals appears to be free –The cost is embedded in the base price Remove forwarding cost from base price –Charge for each piece forwarded –Reward Reductions in Number of Pieces Forwarded ACS Would Be a Requirement –Keep Fee Collection at a Reasonable Cost PRODUCT REDESIGN: PERIODICALS

Parcels

Split Parcels Into Commercial & Retail Identify Differences in Costs and Service Between Parcels Entered by Commercial Shippers and at Retail Retail: Simpler Options and Convenience –Prepaid Boxes in Several Sizes Commercial: Cost-Based Pricing –Small vs. Large Parcels –New Category for Small Parcels PRODUCT REDESIGN: PARCELS

Service Standards Set Delivery Standards That Meet Customer Needs and Achieve Them Consistently –Realistic Priority Mail Standards for 98% On- Time Delivery at Reasonable Cost –Critical for USPS to Grow Market Share Re-examine Entry Points and Service Standards if Necessary PRODUCT REDESIGN: PARCELS

Returns Reverse DDU/DBMC Returns Service Mailer or Consolidator Picks up Bulk Returns at DDUs or DBMCs USPS Scans Delivery Confirmation Barcode at DDU or DBMC –Creates Reverse Manifest –Provides Customer Return Information to Mailer PRODUCT REDESIGN: PARCELS / BPM

Summary of Big Ideas Differentiate Between Commercial and Retail Entered Mail Offer Simple Preparation Options for Small Volume Commercial Mailings Create Incentives for More Efficient Mail Preparation Through Cost-Based Pricing Recognize Levels of Address Quality PRODUCT REDESIGN

Summary of Big Ideas (Continued) First-Class Lite First-Class Drop Shipment Create Efficiencies Through Fewer Flats Mailstreams Create New Returns Services For Parcels/Bound Printed Matter PRODUCT REDESIGN

Next Phase Market Research and Costing Assess Value and Significance of Opportunities Identified By Work Groups Quantify Potential Costs, Savings, Prices –Need Some Real Numbers to Determine Benefit to USPS & Industry PRODUCT REDESIGN