The Evolutionary Network Development (END) is the Postal Service’s network redesign strategy. The END initiative is to migrate to a flexible network that increases operational efficiency, reduces costs, and improves consistency of service. This future network will have Regional Distribution Centers, Local Processing Centers, and Destinating Processing Centers. Significant changes are also taking place in the mail processing operations at the network level. Some examples of processing changes are:

New automated equipment that is being developed will sequence flats (large envelopes, magazines, and publications) in delivery order. This will eliminate manual sorting and thereby achieve savings. The Postal Service plans to field test this equipment in April 2006 with deployment scheduled to begin early in 2008.

Other new equipment has been developed to further automate the parcel process and eliminate manual keying of addresses. These machines are currently being deployed in large plants to replace small parcel sorting machines.

Elimination of some outdated and labor-intensive mail bag sorting machines will increase efficiency in plants. Mail in trays is more efficient and easier to process.

The Postal Service is also making network infrastructure changes to improve efficiency and service, as well as reduce costs. Examples include:

• Closing over 50 annexes that are temporary plants used for mail processing when space is limited.

• Closing over 38 Remote Encoding Centers that assign barcodes to mail pieces from out-of-town locations.

• Converting BMCs that process and distribute bulk Standard Mail and parcels to Regional Distribution Centers to address redundancies in the network.

• Converting Priority Mail Processing Centers that process only Priority Mail, to Logistics and Distribution Centers that process multiple types of mail.

The Postal Service and the OIG will continue working together to identify opportunities to improve operations and reduce costs. Some of the near-term challenges for the Postal Service in making END a reality include continuing to:

• Transition to a new infrastructure that focuses on processing mail based on shape.

• Streamline the processing network by implementing Area Mail Processing proposals.

• Streamline the transportation network, including the Surface Transfer Centers (formerly called the Hub and Spoke Program) and AMCs.

• Develop and deploy various types of new mail processing equipment.

• Perform an analysis of trailer requirements and lease versus buy decisions to optimize vehicle management prior to the possible extension of the National Trailer Lease in 2006.

Cost Control

In 2002, we developed a methodology to evaluate the efficiency of the Postal Service’s mail processing operations. During this reporting period, we identified opportunities to improve operations by reducing more than 300,000 workhours in four mail processing facilities.

We recommended that the Postal Service:

Improve efficiency and consolidate the network by reducing 202,000 work hours at the Canton P&DF. This work hour reduction could produce a cost avoidance of approximately $64 million in labor savings over 10 years.

Improve efficiency of operations at the Los Angeles International Service Center by reducing 85,000 work hours, producing a cost avoidance of $26 million over 10 years.

Improve efficiency of the Airmail Records Units at the Los Angeles and San Francisco International Service Centers by reducing 13,207 work hours, producing a monetary impact of about $4.4 million over 10 years.

The Postal Service spends more than $2.6 billion annually for contracted highway transportation to move mail across nationwide highway networks. A major component of the Postal Service’s highway transportation network is the BMC network. It services the nation’s 21 BMCs and other processing facilities. The BMC network transports magazines, advertising, and merchandise shipped by major mailers, such as publishers, catalog companies, and on-line retailers.

We signed a pilot Value Proposition agreement with the Vice President of Network Operations Management (NOM) in April 2005. Under this agreement, we committed to completing four audits on BMC highway transportation routes. We examined about 600 surface transportation contracts covering more than 5,400 surface trips, issued four value proposition reports, recommended elimination of more than 140 scheduled surface trips, and identified potential savings exceeding $14 million.

The Postal Service agreed with close to 99 percent of all trip reduction, elimination, or consolidation proposals. Our Value Proposition efforts helped Postal Service management to optimize its surface network that resulted in savings. We will continue our work under this agreement in FY 2006.

Dating back to September 2004, we issued 10 audit reports under our national audit project covering BMC Highway Transportation Routes. Working with Postal Service headquarters, area, and plant transportation officials, we identified 351 bulk mail transportation trip eliminations, consolidations or modifications — potentially resulting in savings of more than $36 million over the life of the contracts. The Postal Service eliminated or modified most of these 351 trips without negatively affecting service or operational flexibility.

The transportation network is dynamic and fluid, and transportation requirements continually change. This was especially evident immediately after Hurricanes Katrina and Rita in August and September 2005, respectively, when all Postal Service areas were reassessing the transportation needs of the affected areas, redirecting transportation to locations such as Houston, and quickly implementing changes in surface transportation service. We will continue to work with the Postal Service to assess its changing transportation needs.

Controlling delivery costs is critical for the Postal Service because mail delivery requires a significant infrastructure investment, especially as delivery points increase each year with population growth.

Delivery operations are the Postal Service’s largest cost center, making up 42 percent of the total labor hours in the FY 2006 Field Operating Budget. These are hours that the city and rural letter carriers expend casing mail in the office and delivering mail on routes. Salaries and benefits for city carriers are budgeted at more than $16 billion, which represents 34 percent of the Postal Service’s salaries and benefits in the FY 2006 Field Operating Budget.

In FY 2004, the Postal Service began implementing early morning standard operating procedures (AMSOP), designed to assist the managers and postmasters in making better business decisions for city delivery operations (for example, estimating work hours accurately). The Vice President of Delivery & Retail established a goal of 100 percent implementation of AMSOP in FY 2005 at all facilities using the Delivery Operations Information System (DOIS) that was deployed in 2002.

At the end of FY 2005, 100 percent of the DOIS facilities (6,198) have implemented AMSOP. DOIS provides delivery supervisors and managers with data (such as workload status reports and carrier performance information) to improve daily delivery operational performance.

The system also allows the supervisors and managers to determine the number of work hours required to deliver the mail on daily carrier routes. Managed Service Points (MSP), a part of DOIS, is a computerized tool designed to monitor consistency of delivery time and enhance street management.

Beginning in FY 2005, AMSOP was enhanced with standard delivery management practices called the Lean Enterprise. This new initiative will establish standard practices for managing all delivery and retail functions at the unit level and oversight responsibilities at each tier of management above the unit level. A key component of this standardization is identifying the “vital few” delivery units— those units with the largest opportunity for improvement that require specific management actions. In those units the AMSOP, rural delivery standard operating procedures, and customer service reviews will serve as tools to aid senior management in identifying problems and developing suitable remedies.

One of our initial Value Proposition Agreements is with the Vice President of Delivery & Retail to assess management of City Letter Carrier Operations. During this reporting period, we expanded our ongoing assessment of city letter carrier operations to the Pacific and Great Lakes Areas.

We assessed the management of city letter carrier operations in the Santa Ana, San Diego, and Chicago Districts in 18 delivery facilities (six per district).

These audits showed that management can improve operations by adequately reviewing the daily mail volumes and data in DOIS when determining daily work hours for each carrier’s route to maintain efficiency and cost, using the MSP information, and documenting carriers’ unauthorized overtime occurrences.

Our audits determined that delivery unit supervisors and managers in these three districts did not adequately match work hours with workload (mail volume). We identified almost 216,000 unjustified work hours in these three districts valued at about $5.5 million total in unrecoverable costs for five-month periods in 2004 and 2005. We are continuing to review city letter carrier operations in the Great Lakes

Area, and plan to conduct additional audits in delivery operations to assist the Postal Service in reducing the cost of delivery.

The Postal Service supports its delivery network with a vehicle fleet of about 212,000 vehicles. The fleet travels 1.19 billion miles each year to an increasing number of delivery points. It also has a vehicle management infrastructure designed to ensure operational readiness, safety, and reliability. Approximately 188,000 of its vehicles are used for mail delivery and collections.

In addition to these vehicles, the Postal Service augments its delivery fleet with leased vehicles obtained through local commercial sources or the General Services Administration (GSA). In 2004, the Postal Service spent $564 million on delivery vehicles ($184 million for vehicle purchasing, $48 million for leasing, and $332 million for parts and maintenance). We assessed the utilization of GSA-leased vehicles used in support of delivery operations, and determined that management needs to more effectively use Postal Service-owned delivery vehicles.

Letter Carrier Models

City and rural carriers’ compensation systems are collectively bargained between the Postal Service and their associated unions. The Postal Service contracts with private individuals or firms for box delivery highway contract routes (HCR).

We examined issues pertaining to the city and rural carrier models. City carriers’ workweek is 40 hours per week, eight hours per day. Overtime is paid in the event city carriers work beyond eight hours in a day and 40 hours in a week, at 150 percent of the carrier’s regular rate and at 200 percent beyond 10 hours on their scheduled work day or beyond 8 hours on their non-scheduled work day.

Evaluated compensation is the basis for compensating rural carriers. This compensation is based on a route review that includes mail counts, route miles, evaluated time as determined by the office, and the route standard time. Evaluated compensation is generally based on rural carriers assigned to evaluated routes totaling 35 hours or more.

On evaluated routes, there is an incentive to complete the routes more efficiently; hourly routes do not have incentives to be efficient. Because city letter carriers are compensated hourly, there is little incentive for them to deliver the mail quickly; in fact, this compensation method could encourage slower delivery because of overtime compensation.

The Postal Service has two methods at its disposal to achieve this lower cost — convert some existing city routes to rural routes or establish new growth as Conversion from city to rural routes presents the Postal Service with a challenging union and labor relations issue.

Specifically, all changes to routes must be in accordance with applicable provisions of the city and rural letter carrier national labor agreements. Currently, the Postal Service has about 200 grievances relating to the conversion of deliveries from city service to rural delivery service.

Arbitration has generally been favorable to the unions. However, the obstacles that exist in converting city to rural routes do not exist for new growth delivery service.

Nationwide, the Postal Service maintains approximately 30,000 vending machines (27,000 self-service postal centers and 3,000 other types of vending equipment) that generate more than $1.9 billion in revenue. The OIG assessed the vending program and recommended that area and district officials improve the program’s effectiveness and efficiency by relocating equipment that does not meet minimum revenue requirements, and possibly reduce maintenance and repair costs by discontinuing the use of obsolete equipment.

The OIG is also assessing the APC deployment strategy. The Postal Service deployed 2,500 APCs in FY 2004, in an effort to move simple transactions to Post Office lobbies and create a new low-cost alternative to the postal counter. The Postal Service invested more than $95 million in the deployment. As of March 2005, these APCs have generated more than $169 million in revenue for the Postal Service. The Postal Service has plans for a second phase of the APC program project during FY 2005.

City Letter Carrier Operations

Controlling delivery costs is necessary as the Postal Service continues to experience increases in delivery points (addresses) each year. There is an expectation that delivery point growth will continue to increase annually as the population grows. Higher revenue-contribution mail volume, such as First-Class Mail, has continued to decline as the public increases its use of alternative means of messaging, although overall revenue has increased slightly due to volume increases in other mail classes.

Delivery operations accounted for 45 percent of the Postal Service’s total labor hours in the FY 2005 field operating budget. These are hours city and rural letter carriers spend casing mail in the office and delivering mail on routes.

In FY 2005, salaries and benefits for city carriers are budgeted at more than $16 billion, with a budget performance goal of reducing city delivery workhours by 4.5 million. The Postal Service is making efforts to improve delivery efficiency with standardization of city delivery operations, in order to manage delivery workhours. In FY 2004, the Postal Service began implementing AM Standard Operating Procedures (AM SOP). These new morning management procedures assist managers and postmasters in making better business decisions for city delivery operations (e.g., more accurately estimating daily workhours needed).

The Postal Service and its associated unions use collective bargaining and compensation models on reach agreement to city and rural letter carriers’ compensation. Compensation for box delivery highway contract route (HCR), or contract carriers, is established via the contract the Postal Service enters into with private individuals or firms. The OIG will examine issues pertaining to these three letter carrier models to determine whether lower cost alternatives exist.

A significant continuing cost for the Postal Service is compensation for injured workers. Due to the size of their bargaining unit workforce, the Postal Service is the largest participant in the Department of Labor’s (DOL) Office of Workers’ Compensation Programs (OWCP) in 2004, representing about 30  percent of the total federal workforce that participated. The Postal Service was also the largest payor to OWCP, with approximately $830 million in payments for the same year.

The OIG examined a contract between the Postal Service and a preferred provider organization supplying injury compensation medical bill review services. The review determined and verified the cost savings claimed and realized by the Postal Service. The Postal Service realized $2.2 million in cost savings due to the contractor’s billing reviews from March 2001 through July 2004. Although the cost savings was not the annual $30 million the Postal Service anticipated, they are working with DOL and the contractor to improve the program.

The Postal Service reported that, as part of the END initiative, it closed more than 50 facilities and annexes; closed 38 remote encoding centers; and consolidated some distribution operations.

The Postal Service operates more than 34,000 geographically dispersed facilities. Specifically, it owns more than 8,800 facilities; leases more than 25,400 facilities (at a rental cost of approximately $946 million per year); and occupies space in approximately 425 General Services Administration/federal facilities. The Postal Service has identified opportunities to reduce costs or maximize the return on property, including standardization of building design, post-occupancy evaluations of recently built facilities, and proactive leasing programs. It has also developed a new prioritization system to

To successfully carry out its longstanding mission of providing affordable, universal service, the Postal Service relies on its 807,000 career and non-career employees. Employees satisfaction with their work environment is imperative to maximizing performance in an increasingly competitive environment. Consequently, the Postal Service strives to maintain a workforce that is effective, diverse, highly motivated, and recognized for individual and group accomplishments.

Troubled Worksites. The Postal Service has taken a number of steps to improve the work environment for its employees. The Workplace Environment Improvement Advisory Committee, which includes representatives of employee unions, management associations, labor relations, and human resources, has identified “troubled worksites” based on established criteria. These worksites may be susceptible to threatening or other undesirable behavior as a result of individual or systemic problems. The number of troubled Postal Service worksites was reduced from 39 in 2002 to eight in 2004 as a result of proactive intervention and resolution of workplace issues.

The OIG conducted six audits during this reporting period due to complaints of hostile work environments at Postal Service worksites. The OIG found that hostile work environments did not exist at these sites; however, some employees experienced events that they perceived as hostile. The OIG also found that Postal Service management quickly responded to employee complaints and took the steps necessary to improve the environment, including providing training and stand-up talks for employees and removing supervisors who acted inappropriately.

The Postal Service manages contracts with commitment values totaling more than $25 billion annually. The Postal Service issued over 39,000 contract actions with commitment values exceeding $6.8 billion during FY 2004 and has, over the years, implemented the supply chain management philosophy to maximize the effectiveness and efficiency of these expenditures.

The Postal Service’s challenge in this area is controlling and reducing costs while maintaining efficient acquisition practices with effective controls to prevent fraud, waste, and mismanagement. The Postal

Service expanded the use of supply chain management business practices to meet the Transformation Plan goal of continuing to implement and institutionalize supply chain management. For example, it established several strategic partnerships and expanded the use of web-based ordering to help achieve its planned cost reductions. However, it must continue to enforce measures that reduce the risk of loss and ensure that it receives the best possible value from its purchases.

For example, the OIG identified opportunities to improve the program management of APC acquisition. Specifically, the Postal Service agreed with recommendations to develop and document future APC requirements; prepare schedules and cost estimates for planned upgrades not already on contract; complete site security reviews; and ensure contractor employees obtain appropriate security clearances. Additionally, the Postal Service agreed to coordinate the site selection process for future APCs with all affected stakeholders and to submit quarterly Decision Analysis Report (DAR) compliance reports that fully communicate missing APC functionality and operational concept changes.

The OIG plans to expand program management reviews to include software acquisitions and will also determine whether the Postal Service is properly planning for, and using, contract types that can help reduce overall operating costs.

Additionally, due to congressional interest, the OIG is reviewing the efficiency of the Postal Service’s use of a national office supply contract.