The next wave of cost reduction in postal operations

Niels Erik Larsen, PA Consulting
World Mail Review November 2008 1      The first wave of improvements

Postal operators are continuously looking for ways to reduce operating costs to maintain competitiveness.  Most postal organisations have already consolidated processing facilities into larger units to create automation islands for the processes that support traditional postal services.  Although further benefits will be seen as automation continues to expand into new areas (further improving the productivity of labour intensive and costly operations) it is becoming increasingly difficult to maintain the same pace of improvement. The big question is: “What is then going to fuel the next wave of cost reduction in posts?”

The answer lies in the philosophy of Lean thinking. Here the benefits come from radical steps and continuous improvement waves, as illustrated in Figure 1

Figure 1: Typical Lean Iteration Course

Postal businesses can certainly benefit from traditional Lean implementations, but our intention with this article is to explain how the mindset behind Lean can help to identify further cost saving initiatives. Facility consolidations and process automation can be viewed as the “first wave Kaikaku”. The time has now come to perfect production capability through continuous improvements – “first wave Kaizen”.

2      Perfecting current operations – an example from transportation

It is our experience that the majority of the benefits should come from improving cross process boundaries.  The value stream map in Figure 2 clearly illustrates that transportation plays a key role in the mail exchange between the various mail sorting processes.

Figure 2: Schematic Postal Value Stream Map

However, transportation is primarily a process that serves the needs of other processes and named internal customers (red arrows on the figure). Throughout the value chain, it is the internal customers that define the product offerings, time windows, service commitments etc. that determine how transport must fulfil transportation. Transportation has no tradition, nor authority ,to change those requirements.

It is not normal practice for postal organisations to present internal customers with visible bills for the services provided. Lack of standards for what is included in basic services makes it difficult to invoice extra services as they are requested. Hence internal customers do not comprehend the consequences of the requirements they impose on transportation, and the business regime makes it impossible for transportation to realise significant savings on its own.

A typical symptom seen is a fixed transport schedule used day by day throughout the year. This happens although the mail volumes to be processed may easily vary by 40% (excluding the Christmas peak where extraordinary measures are put into place). Since the transport network is designed to meet the peak load, poor utilisation of  transport routes is inevitable.

Figure 3 shows typical transport route utilisation figures depending on the transport process carried out. The figures are indicative and may vary depending on geography and country specific conditions.

Figure 3: Indicative Transport Route Utilisations

The low utilisation figures provide significant improvement potential. Our work within the industry shows that it is possible to realise more than half of the improvement potential without compromising the services provided to customers. This corresponds to 10-15% savings of the total transportation costs within the organisation. Existing ways of transport operation cannot be tuned sufficiently: it is necessary to implement new transport paradigms targeted at the root causes of collection, linehaul or distribution transportation. Several levers should be considered in developing the new paradigms.

Some of the important onesare:

• 1 Going from a time based regime to a capacity based regime, where transports depart when the vehicles are fully loaded and not at a specific time.
• 2 Variance on vehicle loading should be concentrated on fewer dynamically scheduled vehicles.
• 3 Challenge established traditions and constraints.
• 4 Define an intensive system, where basic services are defined and extra services are invoiced as they are requested.
• 5 Decouple transportation from mail processing as far as possible, in order to make the network less sensitive to everyday disruptions. This reduces the need for expensive extraordinary transportations.

3      The Second wave of improvements

The second wave of improvements should focus on using means that challenge the accepted boundaries to create a step change in cost reductions once more.

Each postal organisation has its own challenges and considerations; therefore we recommend the following work steps in the creation of the second wave of step change improvements:

• Understand the drivers that generate the costs throughout the postal value chain.
• Challenge whether those drivers are meeting real customer needs. In particular, focus should be on product specifications and other boundary conditions that hinder significant improvements.
• Develop solutions focused on reducing costs and meeting real expressed customer needs, for instance delivery of second class mail every second day to save delivery costs. Another example is creation of price models that encourage predictive customer behaviour and times of posting that utilise production equipment outside peak times. A third example is to utilise the mail printing process to order the letters in a sequence that can remove costly postal sorting processes.

4      Modeling take risk out

There is of course uncertainty involved in introducing new paradigms and ways of operating. Do they meet expectations?  What are the side effects? How to tune in operational parameters? These are questions that evidently need to be asked.

We recommend using simulation to test and mature solutions, particularly when the entire network is affected. Simulation will accelerate and add confidence to decision making. It improves the match between the network structures, product portfolio, technology, transportation etc. Tools like the Postal Network Planner (PNP) can establish a nationwide overview of the cause and effect relationships in a complex postal system from collection to delivery through processing and transportation.

Author Biography

NIELS ERIK LARSEN joined PA’s Decision Science practice as a Managing Consultant in 2003. Since 1989 he has specialised in logistics and supply chain development and performance improvement. He has experience across industries such as postal, aviation, manufacturing and transportation – adding his specialist competence in modeling and simulation techniques, typically helping clients to obtain well proven and optimised solutions as well as significant operational savings

Niels Erik has been working for many of the world’s leading postal organisations over the past 15 years, and is now regarded as an authority on postal supply chain and logistics. His work includes assignments scoped to analyse and develop postal network infrastructure for posts in the US, Canada, Germany, Norway, Denmark, Ireland and Belgium. His work also includes decision support for postal clients concerning design of letter and parcel facilities and a wide range of technology automation, facility consolidation and process improvements and performance metrics.
His email address is [email protected].