Bloomberg News

Northrop May Feel Squeeze of Postal Service Cost Cuts

September 06, 2011

(Corrects mail volume carried by FedEx in 11th paragraph.)

Sept. 6 (Bloomberg) -- The U.S. Postal Service, which spends about $15 billion a year on products and services, is pressing its more than 20,000 suppliers for $1 billion a year in cost cuts as it faces possible insolvency as soon as Sept. 30.

Postmaster General Patrick Donahoe on Sept. 15 is scheduled to announce a plan to eliminate mail processing facilities and cut transportation and equipment costs. Donahoe is slated to testify today before the Senate Homeland Security and Governmental Affairs Committee, which is probing proposals to prevent a postal shutdown.

“It’s becoming more competitive to do work for us and it’s going to have to be done at slimmer margins from a standpoint of our supplier base,” Chief Financial Officer Joseph Corbett said in an interview. Corbett said he wants to cut at least $1 billion a year from supplier spending.

The cost-cutting has implications for many of the largest Postal Service contractors, said David Hendel, a Husch Blackwell LLP partner who specializes in postal contracting. He compiles a list of top service contractors from documents obtained through the Freedom of Information Act.

Companies at risk of losing postal revenue range from Northrop Grumman Corp. and Siemens AG, which supply sorting equipment including barcode readers; to FedEx Corp., the largest contractor; to closely held trucking company Pat Salmon & Sons, which doesn’t list any business line on its website other than hauling mail.

‘Stark Reality’

The Postal Service’s mail volume has declined 20 percent since peaking at 213 billion pieces in 2006. It has said it may lose $9 billion in the fiscal year ending Sept. 30 and run out of money by that date to make all payments required by law.

The service has asked Congress to let it delay a $5.5 billion payment for future retiree health benefits and shift what it says are overpayments to federal pension funds to cover that payment. It wants to end Saturday mail delivery, cut 220,000 jobs by 2015 and close 3,700 post offices.

Corbett is continuing an initiative he started after becoming financial chief in 2009 by sending a letter to suppliers explaining the “stark reality” of postal finances and asking for “significant price reductions on both existing and future work.”

The service is bidding contracts for services from transportation to custodial work, renegotiating existing contracts “wherever it makes good business sense,” simplifying its requirements to suppliers and lowering use of consumable products, Douglas Glair, the service’s manager of supply chain management strategies, said in an e-mail.

FedEx Tops List

FedEx, which operates the world’s largest cargo airline, is the largest Postal Service supplier, receiving $1.4 billion in the 2010 fiscal year, according to Hendel’s list. Hendel has compiled the list annually since 2001.

FedEx’s postal revenue is more than twice the $495 million of No. 2 Northrop Grumman Corp., according to the list. Most of FedEx’s postal revenue comes from a seven-year, $1 billion-a- year contract to fly about 4 million pounds of mail per day until 2013, an agreement the service negotiated “from a position of extreme weakness,” Hendel said.

FedEx’s mail volume will decrease after the contract runs out as the service moves more mail on the ground, Corbett said. The service will continue to use FedEx to transport priority mail and some first-class mail, he said.

FedEx receives about 3.5 percent of its revenue from the Postal Service, based on Hendel’s listed amount as a percentage of the company’s last-reported annual revenue. The company, based in Memphis, Tennessee, declined to comment on whether it’s under Postal Service pressure to cut costs.

“FedEx values its alliance relationship with USPS, both as a supplier and a customer,” Maury Donahue, a FedEx spokeswoman, said in an e-mail.

One-Way Pay

From 2009 to 2010, the service cut transportation expenses $148 million, or 2.5 percent, and non-transportation supplier expenses by $60 million to $9.2 billion, or 12 percent of its operating expenses, according to a regulatory filing.

In a 2009 letter from transportation contract managers to trucking suppliers, the service proposed rate reductions, a request it called “extreme” while also saying contracts without rate reductions may not be renewed.

The Postal Service is asking trucking suppliers that have to make round-trips to haul mail to be paid for only the half the journey when the truck is full of mail, rather than for round-trip mileage, Hendel said. “If the contractor will not agree to this, the Postal Service is threatening to terminate their contract,” he said.

Equipment Freeze

In a plan the service circulated to lawmakers in August, it said it wants to cut its more than 500 mail processing facilities down to fewer than 200. It didn’t say how much money it expects to save.

Among other things, the service “will not be buying mail processing equipment, period,” Sue Brennan, a Postal Service spokeswoman, said in an e-mail.

Munich-based Siemens AG, the service’s fifth largest supplier in its 2010 fiscal year with $135 million in revenue according to Hendel’s data, is taking notice.

“We’re affected by their budget and their spending,” Daryl Dulaney, chief executive officer of the Siemens Industry division, said in an interview at Bloomberg’s Washington office. “It causes us to react and adjust.”

Randy Belote, a spokesman for Northrop Grumman, based in Falls Church, Virginia, declined to comment.

Cheaper Ads

The Postal Service’s advertising spending increased 40 percent as the service promoted its profitable package-delivery businesses. Most of the increase went to advertise flat-rate boxes through a campaign created by Campbell-Ewald, making it the eighth largest USPS supplier according to Hendel.

Jim Palmer, chief client officer for the advertising agency based in Warren, Michigan, said they understand the Postal Service’s requests for cost-cutting. He declined to discuss what cuts the service has requested.

“When the Postal Service comes to us, we do our absolute best to react to their situation,” he said in an interview. “As their business has ebbed and flowed, and it’s no secret that there are some challenging times, we react in kind.”

While some of the Postal Service’s suppliers have diversified businesses, others are more dependent on the mail revenue for their livelihoods, Hendel said.

One is Pat Salmon & Sons, the fourth-largest contractor with $143 million in revenue. The company was founded in 1946 to move mail in Arkansas and has more than 100 postal contracts and moves mail in 26 states, according to its website.

“We wouldn’t be interested in commenting at all,” said a man at the company’s headquarters in North Little Rock, Arkansas, who didn’t identify himself before he hung up.

The Postal Service may have a hard time squeezing more savings out of suppliers, Hendel said.

“About the only thing left is for USPS to reduce the services and goods that USPS buys, or relax contract requirements and specifications so that the cost of performance is less,” he said.

--Editors: Bernard Kohn, Andrea Snyder

To contact the reporter on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus