oversight

What's Driving Postal Transportation Costs?

Published by the United States Postal Service, Office of Inspector General on 2019-03-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

TABLE OF CONTENTS                   EXECUTIVE SUMMARY                            OBSERVATIONS   APPENDICES


                    Office of Inspector General | United States Postal Service
                    RARC Report
                    What’s Driving Postal
                    Transportation Costs?
                    Report Number RARC-WP-19-002 | March 18, 2019
   TABLE OF CONTENTS                                                      EXECUTIVE SUMMARY                                                                OBSERVATIONS         APPENDICES

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Table of Contents

        Cover
        Executive Summary....................................................................................................................................... 1
        Observations..................................................................................................................................................... 3
           Introduction................................................................................................................................................... 3
           Overview of Postal Transportation..................................................................................................... 3
                 Understanding How Mail Moves Through the Postal System........................................... 5
                 Understanding How Postal Transportation Serves the Postal Network...................... 7
                 The Relationship Between Mail Volume and Postal Transportation Costs................. 10
           How Much of the Increase in Transportation Costs was Due to Changes in
           Volume and Rising Input Costs?.......................................................................................................... 11
                 Ground Transportation...................................................................................................................... 13
                 Air Transportation................................................................................................................................ 15
           Conclusion..................................................................................................................................................... 16
        Appendices....................................................................................................................................................... 17
           Appendix A: Description of 10-Year Analysis of Transportation Costs.............................. 18
           Appendix B: Management’s Comments........................................................................................... 25
        Contact Information...................................................................................................................................... 27




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Executive Summary
Postal transportation costs have risen about 18 percent over the past 10 years.1
This happened despite the overall decline of 26 percent of mail volume and the
relaxation of First-Class Mail service standards, which was expected to lead
to significant savings. According to the Postal Service, the increase in postal
                                                                                                                  Highlights
transportation costs is being driven by the large growth in parcel volume and                                     We wanted to get a better understanding of how much of the
higher driver wages. While the Postal Service’s explanation may have some                                         increase in transportation costs over the last 10 years was due to:
merit, it does not fully explain the increase in transportation costs over the past                               (1) the changing mail volume, including the changing mail mix; and
10 years.                                                                                                         (2) the increase in transportation-related input costs, including fuel
                                                                                                                  prices and driver wages.
It is true that an increase in parcel volume could put upward pressure on
transportation costs. Parcels are larger and heavier than letters and flats.                                      Our analysis estimates that 61 percent of the cost increase over
Therefore, a parcel will cost more to transport than a letter or flat traveling                                   the last 10 years was due to the change in mail mix and rising
the same distance. However, some parcels receive little to no transportation                                      transportation-related input costs.
because they are entered into the postal network at the destination post office.2                                 This leaves 39 percent of the increase, approximately $418 million,
Furthermore, any increase in transportation costs resulting from the growth in                                    that warrants further explanation.
parcels will be partially offset by transportation savings stemming from the decline
in letters and flats.                                                                                             Our analysis allowed us to identify the area with the largest cost
                                                                                                                  increase unexplained by volume and input costs — contracted
It is also true that most costs increase over time due to inflation, and                                          highway transportation designed to serve the Postal Service’s mail
transportation costs likely faced upward pressure due to higher contractor                                        processing centers that sort expedited mail and single-piece letters
wages caused by the trucker shortage. However, it is unclear how much of the                                      and flats.
transportation cost increase over the past 10 years was due to these inflationary
factors.

As the Postal Service continues to manage its transportation network in response                          deserve further explanation. This identification is only the first step toward gaining
to these changes, it may be helpful to better understand what is truly driving                            a deeper understanding of transportation costs and may point the way toward
transportation costs. To shed light on this, we estimated how much transportation                         actions that could help to contain future costs.
costs should have been expected to increase over the past 10 years as a result
of: (1) the change in volume, encompassing both the decline in letter and flat mail                       Our analysis found the following:
and the increase in parcel volume; and (2) the general increase in transportation-
                                                                                                          ■■ The change in transported volume, including the change in the mail mix, likely
related input costs across the country, including the impact of things such as
                                                                                                             accounts for 15 percent ($157 million) of the increase in transportation costs
fuel costs and driver wages. By isolating the impact of these two factors, we can
                                                                                                             over the last 10 years.
identify transportation costs that are increasing beyond what is expected and thus

1	 This estimate is from our analysis, which uses a two-year base that compares the average costs from FY 2008 and FY 2009 to the average costs from FY 2016 and FY 2017.
2	 Parcels dropped at the destination post office make up            percent of all parcels.

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■■ The overall increase in transportation-related input costs, including fuel cost                  Our analysis allowed us to identify the transportation components with the largest
   and rising trucker wages, likely accounts for another 46 percent ($490 million)                  cost increase that cannot be explained solely by volume and transportation-
   of the cost increase over the last 10 years.                                                     related input costs. This is highway contracted transportation that is designed to
                                                                                                    serve the Postal Service’s mail processing facilities that sort expedited mail and
■■ This means that 39 percent of the cost increase over the last 10 years, or
                                                                                                    single-piece letters and flats. Some of this increase is likely explained by changes
   $418 million, likely occurred for reasons other than the change in volume and
                                                                                                    in how transportation was managed as a result of network realignment, including
   input costs. This does not mean that the 39-percent increases are necessarily
                                                                                                    the shift of some Priority Mail from air transportation to ground transportation.
   reasonable or unreasonable. It simply means that we cannot tell from this
                                                                                                    However, the magnitude of the increase hints that there may be more going on.
   analysis. Additional studies may be warranted.
                                                                                                    Therefore, this may be an area where additional analysis of the decomposition
■■ While these numbers represent the overall changes in transportation                              of costs or future audits are warranted. A better understanding of what is driving
   costs, the results varied widely by the type of transportation. In fact, some                    these costs could help the Postal Service find ways to contain them in the future.
   components had costs that either declined during the 10-year period or had
   a cost increase that was less than expected in response to the change in
   volume and input costs.

                                                        Ten Year Change
                                                       FY 2008 – FY 2017*

                                                $ Millions                   Percent

 Volume and Mail Mix Effect                         $ 157                       15%

 Transportation-Input Cost Effect                  $ 490                        46%

 Unexplained (Other)                               $ 418                        39%

 Total                                            $ 1,065                     100.0%

*Difference between the average cost in fiscal year (FY) 2008 and FY 2009 and the average cost in
FY 2016 and FY 2017.




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Observations
Introduction                                                                                                      To get a better understanding of what is driving transportation costs, we worked
                                                                                                                  with Professor Michael Bradley, an expert in postal economics, to perform a
Over the last decade, domestic transportation costs have been increasing.3
                                                                                                                  quantitative analysis of transportation costs over the 10-year period from fiscal
While costs generally increase over time in response to inflationary pressures,
                                                                                                                  year (FY) 2008 to FY 2017. This analysis was designed to estimate how much
there were other factors during the last 10 years that should have put downward
                                                                                                                  of the increase in transportation costs is due to two things: (1) the change in
pressure on postal transportation costs. First, over the last 10 years mail volume
                                                                                                                  mail volume, including both the decline in letter and flat mail and the increase in
declined by 26 percent, and, holding all else equal, transportation costs would
                                                                                                                  parcels; and (2) the increase in the costs of transportation-related inputs across
be expected to decline as fewer pieces of mail needed transportation.4 Second,
                                                                                                                  the country, including cost pressures that arise from things like fuel prices and
during this same time, the Postal Service reduced the First-Class service
                                                                                                                  the increase in wages due to the trucker shortage. By isolating these factors, we
standards and predicted that this change would result in transportation cost
                                                                                                                  can then identify the areas where transportation costs have increased for reasons
savings.5 According to the
                                                                                                                  other than these two factors and, therefore, warrant further examination.
Postal Service, transportation
costs rose in response to the
                                    	 An increase in parcels may
                                                                                                                  Postal transportation is a complex system comprised of numerous components,
increase in parcel volume and          put some upward pressure                                                   each providing transportation to specific types of postal facilities and carrying a
rising truck driver wages.6 While                                                                                 different mix of mail products. While overall transportation costs have risen over
the Postal Service’s argument
                                       on transportation costs;
                                                                                                                  the past 10 years, the cost trends of the individual transportation components are
may have some merit, it likely         however, this increase will be                                             quite different, with some increasing and others declining over the same time.
does not fully explain the                                                                                        Therefore, to better understand where costs have increased more or less than
increase in costs.
                                       mitigated by the decline in
                                                                                                                  expected, we conducted our analysis at the transportation component level. For
                                                  letters and flats and the fact                                  this reason, some general knowledge about postal transportation is helpful to
An increase in parcels may
                                         that some parcels receive                                                understand our results.
put some upward pressure on
transportation costs; however,
                                         little to no transportation.                                             Overview of Postal Transportation
this increase will be mitigated
                                                                                                                  In FY 2017, the Postal Service’s domestic transportation costs totaled $7.3 billion,
by the decline in letters and
                                                                                                                  making up about 10 percent of the Postal Service’s total costs. Postal transportation
flats and the fact that many parcels are dropped at the destination post office and
                                                                                                                  is composed of an air network and a ground network, with ground transportation
receive little to no transportation. Furthermore, while most costs increase over
                                                                                                                  making up two-thirds of the Postal Service’s total domestic transportation costs in
time due to inflationary factors — such as the increase in trucker wages due to
                                                                                                                  FY 2017 (see Figure 1).
the driver shortage — it is not obvious how much of the increase in transportation
costs was due to this upward cost pressure.
3	 For the purpose of this paper, the last decade refers to fiscal year (FY) 2008 to FY 2017. There was a decline in overall transportation costs between FY 2008 and FY 2009, but they have steadily increased since FY
   2009. While this paper focuses on the change from FY 2008 to FY 2017, we note that in FY 2018 transportation costs continued to increase. According to the Postal Service, transportation costs increased from FY
   2017 to FY 2018 by $623 million, or 8.6 percent, and the main reasons for this increase were higher air volumes, increasing fuel costs (both jet and diesel), and higher unit costs per mile for third-party contractors. U.S.
   Postal Service, 2018 Report on Form 10-K, https://about.usps.com/who-we-are/financials/10k-reports/fy2018.pdf, p. 18.
4	 U.S. Postal Service, Cost and Revenue Analysis, FY 2008 and FY 2017, https://about.usps.com/who-we-are/financials/welcome.htm.
5	 For discussion of whether the Postal Service achieved its expected savings from the operational window change, see U.S. Postal Service Office of Inspector General, Operational Window Change Savings, Report No.
   NO-AR-19-001, October 15, 2018, https://www.uspsoig.gov/sites/default/files/document-library-files/2018/NO-AR-19-001.pdf, p. 12.
6	Ibid.
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Figure 1: FY 2017 Transportation Costs




                                                                                  $7.3 Billion
                                                                                                                                                                  FedEx Day
                                                                                                                                                                  $1.7 B, 23.5%
                                Contracted
                                  Highway
                                $4.1 B, 55.5%                                                                                                                     FedEx Night
                                                                                                                                                                  $0.06 B, 0.8%
                          Postal-Owned
                                Vehicles                                         GROUND                                     AIR                                   UPS
                                 $0.7 B, 9.7%
                                                                               66.1%                               33.9%                                          $0.2 B, 2.2%

                                          Water                                                                                                                   Commercial
                              $0.02 B, 0.3%                                                                                                                       Passenger Air
                                                                                                                                                                  $0.2 B, 2.9%
                                              Rail
                              $0.04 B, 0.6%                                                                                                                       Commercial
                                                                                                                                                                  USPS Scheduled
                                                                                                                                                                  $0.3 B, 4.6%




Note: Numbers may not add up due to rounding.
Source: OIG analysis of FY17 Cost Segment and Component Report.


Ground transportation consists of: (1) contracted highway transportation, truck transportation supplied by external contractors; (2) postal-owned vehicles,
transportation supplied by postal employees using postal-owned trucks; (3) water transportation; and (4) rail transportation.

Contracted highway is by far the largest transportation component, making up 55 percent of domestic transportation costs in FY 2017. Postal-owned vehicles provided
9.7 percent of domestic transportation costs in FY 2017. The Postal Service only uses a minimal amount of rail and water transportation.7 Rail transportation is used
7	 The merits of moving mail via rail transportation are discussed in U.S. Postal Service Office of Inspector General, Strategic Advantages of Moving Mail by Rail, Report No. RARC-WP-12-013, July 16, 2012, https://www.
   uspsoig.gov/sites/default/files/document-library-files/2015/rarc-wp-12-013_0.pdf.

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solely for the movement of empty equipment, and a small amount of water                                                                                                                     this paper, we assume that
transportation is used when necessary. Since the Postal Service only uses small                                     	 Postal transportation is                                              both functions occur in one
amounts of rail and water, and these components are used for fairly unique                                                                                                                  building, and we use the term
purposes, we focused our analysis of ground transportation on contracted                                              designed to move different                                            “post office” for simplicity.
highway and postal-owned vehicles.                                                                                    types of mail between the                              Sectional Center Facilities
As shown in Figure 1, in FY 2017, air transportation made up around one-third                                         various types of postal facilities                     (SCFs) or Processing
of domestic transportation costs for the Postal Service. The air network includes                                                                                            and Distribution Centers
contracts with FedEx, UPS, and commercial airlines. The FedEx contract has
                                                                                                                      within the postal network.                             (P&DCs) are often referred to
two parts — one providing transportation at night and one during the day when                                                                                                as “mail processing facilities.”
FedEx planes would otherwise remain empty. As shown in Figure 1, the FedEx                                          While the nomenclature can be confusing, the term SCF is used when a P&DC
day portion is by far the largest component of air transportation, making up 23.5                                   provides the function of sorting the mail to the destination post offices within its
percent of total domestic transportation costs in FY 2017. The Postal Service also                                  designated 3-digit service area.10 Most P&DCs provide the functionality of an
has two types of contracts with commercial airlines. The first category puts mail                                   SCF, but there are some P&DCs that do not sort mail directly to a post office.
on existing commercial passenger flights, and the second type provides service                                      For the purpose of this paper, we shall refer to both SCFs and P&DCs as SCFs.
to certain geographic areas where the existing flight schedules do not provide                                      These types of facilities are responsible for sorting expedited mail like First-
adequate coverage, such as Hawaii and Alaska.8                                                                      Class Mail and Priority Mail. In addition, these facilities are where containerized
                                                                                                                    Marketing Mail and Periodicals are broken down and the individual letters and
Understanding How Mail Moves Through the Postal System                                                              flats are sorted along with single-piece First-Class Mail letters and flats. These
Postal transportation is designed to move different types of mail between the                                       facilities can also be used to transfer containerized mail from one truck to another.
various types of postal facilities within the postal network. While the postal
network is a complex system, we provide a simplified explanation of the network                                     The third main type of postal facility is called a Network Distribution Center
to better illustrate how postal transportation is managed.                                                          (NDC). These facilities primarily process non-expedited parcels, Periodicals, and
                                                                                                                    containerized bulk mail, such as Marketing Mail in trays, bundles, or sacks. In
Overall, there are three main types of mail facilities.9 Post offices are facilities                                addition to sortation, these facilities are also used to consolidate less-than-full
where mail is entered (at windows or blue collection boxes) and where mail can                                      containers and trucks of non-expedited mail.11
be picked up by customers (at the window or Post Office Boxes). Delivery units
or carrier stations are where carriers prepare the mail for delivery. While in most                                 To illustrate how mail moves through the postal network, Figure 2 shows a
cases these functions occur in the same building, there are some post offices that                                  simplified mail processing diagram for end-to-end mail. The top part of the
do not house carrier operations. The reverse is also true. There are some postal                                    diagram shows how expedited mail, such as First-Class Mail, Priority Mail, and
facilities that house carrier operations but are not post offices. For the purpose of                               Priority Mail Express, travels through the network. The bottom half illustrates

8	 For the first type of contract with commercial airlines, the Postal Service is dependent on the schedules of existing commercial flights. The second type of contract is designed to meet the Postal Service’s specific
    needs, so the contracts specify the origin, destination, and schedule that are necessary to fulfill those needs.
9	 While there are additional types of facilities, such as annexes and facilities designed to handle international mail, these are the three main types needed to understand the transportation components.
10	 The 3-digit service areas are defined by the first three digits of the ZIP Code. There are also mail processing facilities that provide similar functions but are smaller in scale. These are referred to as processing and
    distribution facilities. U.S. Postal Service, Glossary of Postal Terms, Publication 32, July 2013, http://about.usps.com/publications/pub32.pdf, pp. 183 and 201.
11	 These facilities were formerly referred to as Bulk Mail Centers (BMCs). Ibid, p. 143.

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the mail flow for non-expedited mail such as Marketing Mail, Periodicals, and non-expedited parcels.12 As can be seen in Figure 2, various types of transportation
are needed to move the mail through the postal network. Transportation is needed between the SCFs and their respective post offices, as well as between the SCFs
themselves. Furthermore, transportation is needed between the individual NDCs, as well as between the NDCs and the SCFs they serve.

Figure 2: End-to-End Diagram of Postal Network

                               Simplified Diagram of How End-to-End Mail Travels Through the Postal Network



                            Expedited Products




                 ORIGIN                          ORIGIN                            ORIGIN                    DESTINATION       DESTINATION   DESTINATION
                Post Office                           SCF                             NDC                           NDC              SCF         Post Office




                           Non-Expedited Products

Source: OIG analysis.



In reality, the flow of mail is much more complicated. Some mail originates and destinates within the same service area, and this mail would have a much more limited
mail flow. For example, a First-Class Mail letter that is entered at a post office within the same service area as its destination may only travel from the originating post
office to an SCF for sortation, and then from the SCF to the destination post office. In addition, mail can be entered along various parts of the network. While some

12	 Examples of non-expedited parcels include Standard Post, Parcel Select, Media Mail, and Bound Printed Matter.

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is entered as shown in the diagram and traverses a long way in the network,                                      ■■ Inter-SCF transportation is transportation between SCFs. The length of
other mail is entered closer to its destination, such as at the destination NDC,                                    these routes can vary substantially depending on the distance between
destination SCF, or even at the destination post office. Moreover, in some cases                                    facilities.14
mail travels through several mail processing facilities — either for additional
                                                                                                                 ■■ Intra-SCF transportation provides transportation between SCFs and the post
sortation or for the purpose of consolidating mail into containers — before it
                                                                                                                    offices within their service areas. There is also some intra-SCF transportation
reaches its destination.13 These things do not change the types of transportation
                                                                                                                    that is used to deliver mail to customers.
needed, but they do add to the complexity of managing postal transportation.
The location where mail is entered and how far it travels will affect the need for                               Figure 3 illustrates where along the network inter-SCF and intra-SCF
transportation capacity on the various transportation legs.                                                      transportation provide links between postal facilities.

Understanding How Postal Transportation Serves the Postal                                                        The second type of highway transportation serves NDCs and their service areas.
Network                                                                                                          Since it provides transportation to the NDCs, it primarily carries Periodicals,
Ground transportation is designed to move non-expedited mail, as well as                                         Marketing Mail, and non-expedited parcels. The names of the components within
expedited mail when it can do so and still get the expedited mail to its destination                             this type of transportation have similar naming conventions to the SCF-related
in time to meet its service requirements. As mentioned above, our paper focuses                                  transportation.
on the two largest components of ground transportation, contracted highway and                                   ■■ Inter-NDC transportation refers to the transportation between NDCs. Since
postal-owned vehicles.
                                                                                                                    NDCs are spread out across the country, these routes can be quite long.15
Contracted highway transportation is designed around meeting the needs of the                                    ■■ Intra-NDC transportation provides transportation between NDCs and the
two types of sorting facilities — SCFs and NDCs. The first type of contracted                                       SCFs they serve.
highway transportation is used to provide service either: (1) between different
SCFs; or (2) between an individual SCF and the post offices within its service                                   Figure 4 shows the simplified diagram illustrating where inter-NDC and intra-NDC
area. This part of the purchased highway transportation network is designed to                                   transportation is used to move mail between postal facilities.
move expedited mail like First-Class Mail, Priority Mail, and Priority Mail Express.
                                                                                                                 Ground transportation also includes postal-owned vehicle transportation,
Therefore, while it is also used to transport non-expedited mail, the arrival and
                                                                                                                 which is supplied using postal employees and postal-owned trucks. This type
departure schedules are designed to ensure that the expedited mail reaches its
                                                                                                                 of transportation covers mostly short distances, with most trips being less than
destination within its service standards. Adherence to these more demanding
                                                                                                                 50 miles. Postal-owned vehicles move mail between nearby mail processing
service standards may result in trucks leaving facilities at a predesignated time
                                                                                                                 facilities, to and from airports, and to post offices, as well as occasionally pick up
regardless of how full the truck is at the moment of departure.
                                                                                                                 mail from mailers’ plants.16
The names of the transportation components within this category describe the
relationship of the facilities they serve.
13	   When and where that occurs is beyond the scope of this paper.
14	   Inter-SCF is composed of three subcomponents. The average length of the routes covered by these three subcomponents ranges from 90 to 525 miles.
15	   The average length is about 825 miles.
16	   The postal-owned vehicle cost component also captures some costs associated with using postal employees to “spot” or stage trailers at mail processing facilities. This means the drivers help move trucks as needed to
      and from the docks for loading and unloading.

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Figure 3: Inter-SCF and Intra-SCF Transportation
                                         Simplified Diagram of Inter-SCF and Intra-SCF Transportation
                         Intra-SCF                                                                          Intra-SCF




                 ORIGIN                  ORIGIN                ORIGIN        DESTINATION       DESTINATION      DESTINATION
                Post Office                   SCF                NDC                NDC               SCF          Post Office



                                                                        Inter-SCF
Source: OIG analysis.


Figure 4: Inter-NDC and Intra-NDC Transportation

                                        Simplified Diagram of Inter-NDC and Intra-NDC Transportation
                                                                        Inter-NDC




                 ORIGIN                  ORIGIN                ORIGIN        DESTINATION       DESTINATION      DESTINATION
                Post Office                   SCF                NDC                NDC               SCF          Post Office



                                                     Intra-NDC                            Intra-NDC
Source: OIG analysis.

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Air transportation is generally used to move mail that has expedited service requirements, such as First-Class Mail, Priority Mail, and Priority Mail Express, when
ground transportation may not be quick enough to ensure this mail will meet its service requirements. In addition, air transportation provides service to hard-to-reach
areas, such as transportation within Alaska and to and within Hawaii.

Figure 5 shows the simplified diagram, this time illustrating how mail travels through the postal network, with the addition of showing what type of mail is the primary
type of mail served by the transportation components.

Figure 5: Overview of Postal Transportation

                                              Simplified Diagram of How Mail Uses Postal Transportation


                                                                                                              E    When needed to make service




                        Intra-SCF or POV                                               Inter-SCF                                                   Intra-SCF or POV
                              E    NE                                                            E                                                              E   NE




                 ORIGIN                  ORIGIN                           ORIGIN                      DESTINATION                     DESTINATION                   DESTINATION
                Post Office                    SCF                            NDC                              NDC                             SCF                       Post Office
                                                              NE                                 NE                              NE


                                                       Intra-NDC                        Inter-NDC                         Intra-NDC

                                                                                            LEGEND
                                              Primarily handles expedited mail (Priority Mail,             Primarily handles non-expedited mail
                                        E     Priority Mail Express, and First-Class Mail)            NE   (Standard, Periodicals, and non-expedited parcels)



Source: OIG analysis.

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The Relationship Between Mail Volume and Postal Transportation                                                    While changes in cubic feet
Costs                                                                                                             and weight can correspond to          	 As parcels replace letters
                                                                                                                  changes in the overall number
In general, one might expect transportation costs to decrease as the overall                                                                              and flats on transportation,
                                                                                                                  of mailpieces, this relationship
number of pieces of mail declines. However, as we discuss below, the relationship
between volume and transportation costs is a bit more complicated.
                                                                                                                  does not always hold, especially        the change in the number of
                                                                                                                  when there is a change in mail
                                                                                                                                                          mailpieces transported alone
Not All Mail Receives the Same Amount of Transportation                                                           mix. As the volume of parcels
When considering the impact of a volume change on costs, it is important to
                                                                                                                  grows and the volume of letters         is not an accurate indicator
                                                                                                                  declines, the average size
note that not all mail receives the same amount of transportation. In general,                                                                            of how much transportation
                                                                                                                  and weight of a piece of mail
the longer the distance a mailpiece travels, the more transportation costs it
incurs. As such, a mailpiece traveling from one coast to the other will incur more
                                                                                                                  increases. For example, a single        costs should change.
                                                                                                                  five-pound Priority Mail parcel
transportation costs than a similar mailpiece traveling only from Washington, DC,
                                                                                                                  weighs about the same as 80
to New York City.
                                                                                                                  one-ounce First-Class Mail letters.19 The same concept holds for cubic feet, as
For some products, such as destination-entered Parcel Select, the Postal Service                                  one parcel could take up the same amount of cubic foot space as a tray or sack
provides rate incentives to induce mailers to enter the mail close to its destination.                            of letters. Therefore, as parcels replace letters and flats on transportation, the
The closer the mail is entered to its destination, the less it needs to be                                        change in the number of transported mailpieces alone is not an accurate indicator
transported, and therefore the lower transportation costs it incurs. Some mail is                                 of how much transportation costs should change. Furthermore, since most of the
even entered at the destination post office, where it would be expected to receive                                transportation costs are based on cubic feet, a shift from smaller to larger parcels
little to no transportation at all.17 Holding all else equal, a shift toward more                                 will also increase transportation costs, even if the overall average weight of the
mail that needs to be transported only a short distance should result in lower                                    parcel does not change.
transportation costs. This is especially relevant as parcel growth includes many
                                                                                                                  Costs Do Not Move in
parcels that are dropped close to their destination.                                                                                                              	 While the Postal Service can
                                                                                                                  Lockstep with Volume
It’s Really About Size and Weight                                                                                 A decrease in mail volume,
                                                                                                                                                                    adjust routes and change
Changes in the sheer number of mailpieces transported is not the sole or even                                     especially insofar as it translates               the number of trucks along
primary driver of transportation costs — what really matters is the size and                                      into a fall in cubic feet or weight,
weight of the mailpieces. For example, since ground transportation is based on                                    should clearly result in lower
                                                                                                                                                                    a route, there may be
the space taken up in a truck, the main driver of costs for all ground components                                 costs, other things being equal.                  some trips that cannot be
discussed in this paper is cubic feet or cubic foot miles.18 In addition, the larger                              However, there is generally no
part of air transportation costs, those costs associated with the FedEx day                                       expectation that costs change
                                                                                                                                                                    eliminated without putting
contract, is also based on cubic feet. The remaining air contracts are based on                                   in direct proportion to a change                   the network in jeopardy.
pounds.                                                                                                           in volume. An exception is air

17	 It may receive some transportation as there is a subcomponent of the intra-SCF transportation component that is used to deliver mail to the customer. For this one subcomponent, this mail will incur costs that fall in the
    Postal Service’s transportation components. But most of the mail dropped at the destination post office will incur only delivery costs.
18	 U.S. Postal Service, Summary Description of Costs by Segments and Components, FY 2009, p. 14-6.
19	 Five pounds equals 80 ounces (5 x 16 ounces = 80).

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transportation, where costs will increase in direct proportion to volume, since the                              50-percent measure means that if volume declines by 10 percent, costs would
Postal Service pays for the amount of mail it gives the contractor.20                                            only decline by half that amount.22

However, the story is different when it comes to ground transportation. There may                                How Much of the Increase in Transportation Costs was
be limitations to how much the Postal Service can vary its ground transportation                                 Due to Changes in Volume and Rising Input Costs?
in response to changes in volume. Some short-term, small fluctuations in volume
                                                                                                                 In this section, we discuss the results of our decomposition of transportation
may not result in any change to overall transportation costs. For example, on
                                                                                                                 costs. For this analysis, we focus on the eight main transportation cost
any given day, a truck might need to leave a postal facility during a specified time
                                                                                                                 components.23 Note that this analysis estimates the change using a “two-year
frame and cannot wait to be filled up completely. If there were a small increase in
                                                                                                                 base.” This means that instead of looking at the actual change that occurred
volume along this route, this might simply result in filling the truck up more. The
                                                                                                                 between FY 2008 and FY 2017, we looked at the change that occurred between
opposite might also hold true — a small, short-term decline in volume along an
                                                                                                                 the average cost in FY 2008 and FY 2009 and the average cost in FY 2016 and
existing route might simply result in a less-full truck.
                                                                                                                 FY 2017. This was done to avoid any anomalies that might have occurred in a
However, over a longer period the Postal Service can better align its planned                                    single year at either the beginning or end of the 10-year timeframe.24 For a more
transportation capacity to accommodate volume shifts, arranging for more (or                                     detailed technical explanation of this assumption and the rest of the analysis,
fewer) trucks or trips by the same truck. That being said, there still may be some                               please see Appendix A.
limits to the Postal Service’s flexibility. For example, in order to meet service
                                                                                                                 This analysis takes each of the transportation components and decomposes the
standards, trucks must leave and arrive at postal facilities during certain windows
                                                                                                                 change in costs into three parts:
of time, and these times must be aligned with mail processing operating windows.
A late arrival of a truck can lead to significant delays later in the mail processing                            ■■ The cost change expected to occur as a result of the change in
and transportation flow. While the Postal Service can adjust routes and change                                      transported volume. This estimate takes into consideration the change
the number of trucks along a route, there may be some trips that cannot be                                          in mail mix in addition to the overall change in volume.25 This is done by
eliminated without putting the network in jeopardy. Hence, over any given period,                                   separately estimating volume growth for each of the relevant product groups.26
there will be trips (or trucks) that can be eliminated and some that cannot.                                        For example, Parcel Select is adjusted to remove parcels that are dropped
                                                                                                                    at a destination post office, as changes in the removed volume will have a
The Postal Service measures how much ground transportation costs vary on
                                                                                                                    minimal impact on transportation costs.27 This estimate will not include any
average with volume over a longer time period, and the measure ranges from
                                                                                                                    cost changes associated with the Postal Service making a change to what
around 50 to 80 percent.21 To give an example of what this measure means, a
                                                                                                                    transportation it uses for its products. For example, it will not include the
                                                                                                                    change in cost associated with shifting mail from air to ground transportation.
20	 There are minimum requirements on the FedEx and UPS contracts, but it is our understanding that these requirements are met most of the time.
21	 These are the variabilities for contracted highway transportation and postal-owned vehicles. U.S. Postal Service, “Library Reference USPS-FY17-32, FY 2017 CRA “B” Workpapers (Public Version),” Postal Regulatory
    Commission Docket No. ACR2017, https://www.prc.gov/dockets/doclist/ACR2017/Library-References?page=2. Data are found in spreadsheet CS14-Public-FY17.xlsx.
22	 This phenomenon is similar to other aspects of the postal network. For instance, a reduction in delivered volume indicates the direction of the change in delivery costs, but the magnitude of the cost reduction will be
    inhibited by the lost scale advantages as volume falls. The story is essentially the same in the transportation component.
23	 We did not include FedEx night in our quantitative analysis because it is a relatively small component, and the necessary detailed data to perform this analysis were not available. In addition, we did not include the
    various commercial air contracts that serve small geographic areas due to their relatively small size and the complexity of dealing with the small, individual components (for example, Hawaii and Alaska).
24	 For example, total domestic transportation costs were much higher in FY 2008 than in FY 2009. If we did not use a two-year base, the actual cost increase over the last 10 years would be understated.
25	 The analysis also takes into consideration the variabilities that were discussed above. See Appendix A for a complete discussion.
26	 In some cases, this was a “product” as defined by the Postal Service. Other times it was a group of products or a subgroup of products. For a more detailed description, see Appendix A.
27	 Since there were numerous changes to the product lines over the last 10 years, the first step of this analysis is to redefine the products to reflect what they would have been in FY 2008. For a more detailed explanation,
    see Appendix A.

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■■ The cost change expected to occur due to the change in the relevant                                          Table 1: Decomposition of Transportation Cost Changes FY 2008 to FY 2017
   transportation-related input costs. To calculate this estimate, we employ
                                                                                                                                                               Change from FY 2008 to FY 2017 (2-Year Base)
   the most relevant transportation-related producer price index (PPI) for each                                                                                                $ Millions*
   individual cost component.28 This allows us to estimate how much costs
                                                                                                                                                                                Volume         Input Cost
   should have changed in response to the inflationary cost pressures in the
                                                                                                                                                                Actual          Effect           Effect        Residual
   transportation market, including things such as changing fuel prices and                                                                                    % Change        % Change        % Change        % Change
   increases in driver wages.29
                                                                                                                 Air Transportation
■■ The residual costs, which represent the change in costs that cannot be                                                                                         $25.3          ($34.8)          $29.2           $30.9
                                                                                                                 Commercial Air
   explained by the changes in volume and transportation-related inputs.                                                                                          15.4%          (21.2%)          17.8%           18.8%
   These are calculated simply as the actual cost change minus the expected                                                                                      $236.7          $193.3           $267.1        ($223.8)
   cost changes resulting from shifts in volume and transportation-related input                                 FedEx Day Turn
                                                                                                                                                                  15.7%          12.9%            17.8%          (14.9%)
   costs. A negative residual represents an area where the change in costs is
                                                                                                                                                                  $81.1           ($14.1)         $12.6            $82.7
   lower than expected. A positive residual represents an area where something                                   UPS
                                                                                                                                                                 114.3%          (19.9%)          17.8%           116.4%
   happened to raise the costs beyond what is expected. The latter are areas
                                                                                                                 Highway Transportation
   that may be of concern and most worthy of further study.
                                                                                                                 Inter-SCF
                                                                                                                                                                 $434.2          ($41.3)          $77.2          $398.4
Table 1 displays the results of our analysis. Overall, the total nominal costs                                   Transportation between mail
                                                                                                                                                                 45.0%           (4.3%)           8.0%            41.3%
for the eight transportation components included in our analysis increased by                                    processing facilities
18 percent — $1 billion over the last 10 years. Of the total change in costs,                                    Intra-SCF
                                                                                                                                                                 $324.3           $73.1           $22.4          $228.8
almost 15 percent of this increase, or $157 million, is expected in response to                                  Transportation between mail processing
                                                                                                                                                                 22.8%            5.1%             1.6%           16.1%
the change in mail volume, including both the decline in letters and flats and the                               facilities and their post offices

increase in parcels. While this result might seem counterintuitive given that overall                            Inter-NDC                                      ($26.4)         ($75.6)           $30.6           $18.7
volume declined, it is being driven by the growth of parcel products. In addition,                               Transportation between NDCs                    (6.9%)          (19.8%)           8.0%            4.9%
a little over 46 percent of the increase in costs, or $490 million, can be expected                              Intra-NDC
                                                                                                                                                                ($66.3)          ($32.4)          $29.2          ($63.1)
to have occurred as a result of the overall increase in transportation-related input                             Transportation between NDCs and
                                                                                                                                                                (18.2%)          (8.9%)           8.0%           (17.3%)
costs. This leaves 39 percent of the cost change, or $418 million, that needs                                    facilities in their service area
additional explanation and thus warrants further study.                                                                                                           $56.1           $88.5           $21.7          ($54.1)
                                                                                                                 Postal-Owned Vehicles
                                                                                                                                                                  4.1%            6.4%            1.6%           (3.9%)
Looking at the analysis for each of the eight individual components shows that
there are large differences in where these unexplained costs occurred. As can be                                                                               $1,065.0          $156.5          $490.0          $418.5
                                                                                                                 Total
seen in Table 1, while some components had a relatively large residual — indicating                                                                             18.1%             2.7%            8.3%            7.1%
areas that most warrant further explanation and study — others had a negative                                    Percent of Cost Change                                          14.7%           46.0%            39.3%
residual. We discuss the analysis of the components in more detail below.                                       *Numbers in parenthesis in table represent negative numbers.
                                                                                                                Source: OIG analysis.

28	 For intra-SCF and postal-owned vehicles, we used the producer price index (PPI) for local general freight trucking. For intra-NDC, inter-NDC, and inter-SCF, we used the long-distance truckload general freight trucking
    PPI. Finally, for all the air contracts, we used the scheduled freight air transportation PPI.
29	 Since producer price indexes reflect a multitude of different factors, in some cases the changes in factors counteract each other. For example, an increase in prices due to trucker wages could be partially offset by a
    decline in fuel costs.

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Ground Transportation                                                                                          transportation-related input costs is for the long-distance categories — inter-SCF,
                                                                                                               intra-NDC, and inter-NDC. This increase likely reflects an increase in wages due
What the Analysis Tells Us
                                                                                                               to the nationwide trucker shortage.33
Since the mix of mail varies by transportation component, the impact of volume
changes differs among components. For the ground components that provide                                       What Else Happened?
local transportation — intra-SCF                                                                               There are two components in ground transportation where the residual category
and postal-owned vehicles —           	 Perhaps intra-NDC is an                                                is negative — postal-owned vehicles and intra-NDC transportation. These
costs were expected to increase                                                                                represent areas where costs declined more than expected due to the change
in response to the change in mail        area where there are some                                             in volume and transportation-related input costs. During the 10‑year period we
and parcel volume. Specifically, the     lessons learned on how the                                            analyzed, the Postal Service started using more contracted transportation for
expected increase occurs due to                                                                                work that was previously done by postal employees. This likely explains part of
the growth in ground parcels and         Postal Service managed                                                the decline in costs in postal-owned vehicles. However, a postal union was able
Priority Mail. This result occurs
              30
                                         transportation in response                                            to negotiate the return of some of this work to Postal Service employees.34
because a fairly large portion of
ground parcels is still entered          to a volume decline.                                                  The negative residual cost for intra-NDC possibly reflects the reduction in the
upstream from the destination post                                                                             number of mail processing plants, as it is possible that with fewer SCFs, the
office and, therefore, receives local                                                                          Postal Service needed less transportation between the NDCs and SCFs.35 In
transportation. For these two transportation cost components, the cost increase                                fact, in the 10-year period in our analysis, contracted miles in the intra-NDC
from parcel growth was not offset by the decline in letters and flats.                                         component declined by 35 percent. Perhaps this is also an area where the
                                                                                                               Postal Service can look for lessons learned in efficiently managing the volume
On the other hand, for the longer distance ground transportation — inter-SCF,                                  decline and apply these lessons to other components.
inter-NDC, and intra-NDC — we would expect a cost decrease in response to
the volume change. For inter-SCF, this decrease was driven by the decline in                                   The two areas that most
First-Class Mail. For both types of NDC transportation, the decrease was driven                                warrant further study involve the
by the decline in non-expedited parcels that were not entered at a destination                                 transportation managed around                     	 The two areas that most
postal facility.31 While there has been a growth in parcels overall, there has been                            the SCFs. Both inter-SCF and
                                                                                                                                                                   warrant further study
a decline in end-to-end non-expedited parcels.32                                                               intra-SCF transportation had a
                                                                                                               relatively large positive residual —                involve the transportation
The predicted impact of the transportation-related input costs also varies by                                  accounting for almost 41 percent
component, depending on what type of freight transportation the component                                                                                          managed around SCFs.
                                                                                                               of the cost increase for inter-SCF
most closely resembles. The largest predicted increase due to the change in                                    transportation and 16 percent for
30	 Professor Bradley’s analysis as described in Appendix A.
31	Ibid.
32	 These include parcels that used to travel as Parcel Post, as well as Bound Printed Matter and Media Mail.
33	 “Drivers Wanted: Why the Trucking Shortage is Costing You,” Fortune, August 1, 2018, http://fortune.com/2018/08/01/drivers-wanted-trucking-shortage/.
34	 American Postal Workers Union, “New Contractual Agreements in the MVS Craft,” http://www.apwu.org/news/deptdiv-news-article/new-contractual-agreements-mvs-craft.
35	 The Postal Service announced its plan to align its network in 2011. The purpose of network realignment was to align the Postal Service’s network processing capacity with its declining mail volume through equipment
    and plant consolidations and operational changes. The first phase of the network realignment involved consolidating 141 mail processing facilities. U.S. Postal Service Office of Inspector General, Mail Processing and
    Transportation Operational Changes, Report No. NO-AR-16-009, https://www.uspsoig.gov/sites/default/files/document-library-files/2016/NO-AR-16-009.pdf, p. 7. The Postal Service initially said that network realignment
    overall led to transportation savings in ground transportation. U.S. Postal Service, “Direct Testimony Of Cheryl D. Martin On Behalf Of The United States Postal Service (USPS-T-6),” Postal Regulatory Commission
    Docket No. N2012-1, https://www.prc.gov/docs/78/78323/USPS-T-6_Martin_testimony.pdf, p. 9.

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intra-SCF. This means that we need to consider what else could have caused                                          increase is a recent phenomenon, with miles increasing by 42 percent over the
these costs to rise, beyond the changes in volume and transportation-related                                        last five years (FY 2013 to FY 2017).37 According to the Postal Service, some of
input costs.                                                                                                        this growth may be explained by the need to add more trucks after the network
                                                                                                                    realignment in 2012.
Taking a closer look at these two SCF-related transportation components, both
had relatively stable capacity utilizations over the 10-year period. As shown                                       Figure 6: Capacity Utilization
in Figure 6, while there has been some fluctuation in the average capacity
utilization from year to year, the fluctuations have been relatively small — no                                         INTER-SCF AND INTRA-SCF CAPACITY
more than a 6-percent change. Furthermore, for both components the overall                                              UTILIZATION FY 2008 TO FY 2017
capacity utilization has returned to its starting point over the 10-year period. This                                   Contrary to what the Postal Service predicted, capacity utilization did not
contrasts with what the Postal Service predicted would happen in response to                                            increase as a result of network realignment. Instead, it has remained relatively
the relaxation of First-Class Mail service standards and network realignment. It                                        stable over the past 10 years for both inter-SCF and intra-SCF transportation.
expected capacity utilization to increase, at least for inter-SCF transportation, as
the reduction in service standards should have given trucks more time to fill up                                        60%
with mail before they had to be sent to the next postal facility.36 In a discussion                                                                                               Inter-SCF

with Postal Service management, they stated that capacity utilization may not                                            50%
have declined as much as expected because, in some instances, letter and flat
mail has different critical departure times than parcels. In these instances, the                                       40%
Postal Service cannot combine both types of mail on one leg of transportation,                                                                                                    Intra-SCF
and instead will need two separate trucks.
                                                                                                                         30%

Given this stability, and the fact that our analysis already accounts for the rising
cost of trucker wages, this might mean one or two things are happening.                                                  20%

One, the Postal Service has increased the number of transportation miles
within the SCF components — by either increasing the number of trucks or                                                 10%

the miles traveled by each truck. Two, there is something specific about postal
transportation that is driving the costs up by more than the average transportation                                       0%
                                                                                                                               2008      2009      2010      2011      2012       2013     2014      2015       2016      2017
costs across the country.
                                                                                                                        Source: OIG analysis of TRACS data..
Using postal data, we were able to gain some insight into what was driving these
costs. For inter-SCF, the large residual is likely caused by a 22-percent increase
in the number of contracted miles during the 10-year period in our analysis. This


36	 In her testimony, Cheryl Martin stated that capacity utilization should increase for inter-SCF transportation. While she expected transportation savings for intra-SCF transportation, she did not explicitly state if this would
    be due to increased capacity utilization. See U.S. Postal Service, “Direct Testimony Of Cheryl D. Martin On Behalf Of The United States Postal Service (USPS-T-6),” Postal Regulatory Commission Docket No. N2012-1,
    https://www.prc.gov/docs/78/78323/USPS-T-6_Martin_testimony.pdf, pp. 9, 12, and 14.
37	 Miles in the inter-SCF component declined 5 percent from FY 2017 to FY 2018.

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On the other hand, intra-SCF had only a 4-percent increase in miles over the                                   Air Transportation
10-year period but had a larger than expected increase in the cost per mile.38 In
                                                                                                               What the Analysis Tells Us
discussions with postal management, they stated that the PPI used in the OIG’s
model may not fully represent the significant cost increases actually experienced                              Both UPS and commercial air had costs that would have been expected to
for local highway transportation.                                                                              decline as a result of a change in volume, while FedEx Day was expected to
                                                                                                               increase. This is being driven by the fact that historically the majority of mail on
The Postal Service has maintained that part of the increase in ground                                          both UPS and commercial air was First-Class Mail (which has declined), and the
transportation costs was due to the changes to the operating window and                                        majority of mail on FedEx Day Turn was Priority Mail (which has increased). Our
service standards, as well as the resulting move of some Priority Mail from air to                             analysis predicts that the overall change in transportation-related input costs for
ground.39 However, given the magnitude of the unexplained cost increase and the                                air transportation accounts for almost 18 percent of the cost change over the last
stable utilization rates, there may be an opportunity for the Postal Service to look                           10 years.
for ways to better manage these transportation components to lower costs in the
future.                                                                                                        What Else Happened?
                                                                                                               Costs did not increase as much as expected due to volume and transportation-
The Postal Service has already begun to take a close look at these costs through
                                                                                                               related input costs for the FedEx Day Turn contract. The opposite was found for
two programs, but it is not yet clear whether either program has been or will
                                                                                                               the UPS and commercial air contracts — costs increased more than expected.
be successful. The goal of the first initiative, Highway Contract Route (HCR)
                                                                                                               There are two things that could help explain these results. First, as mentioned
Optimization (formerly called Zero Base HCR) is to identify transportation with
                                                                                                               above, some Priority Mail was moved from air to ground transportation. Second,
low utilization rates and to reduce duplicative trips.40 However, a recent OIG audit
                                                                                                               the Postal Service said that it attempts to manage its air transportation to optimize
found that the cost savings from this program are questionable, and it likely did
                                                                                                               its use. According to Postal Service management, part of Postal Service’s
not result in any cost savings in FY 2017.41 Postal management informed us that
                                                                                                               past reliance on FedEx was due to the security requirements inherent with
this program is still ongoing.
                                                                                                               commercial airline flights. However, they said that as the Transportation Security
In addition, the Postal Service has started to roll out Dynamic Routing                                        Administration has expanded its screening operations in certain geographic
Optimization (DRO), a new system to manage its contracted highway and                                          locations, the Postal Service has been able to move more Priority Mail to lower-
postal-owned vehicle transportation. Under DRO, the Postal Service will plan its                               cost commercial flights.
transportation routes each week to align with forecasted mail volume. The OIG
has not yet assessed the effectiveness of this program.42

38	 Postal management stated that some of the increase that may not be captured in the OIG’s analysis is due to the growth in parcel volume, which has resulted in more transportation needed to pick up parcels from large
    e-commerce companies. This is due both to the overall increase in parcel volume and the addition of delivering parcels on Sundays.
39	 U.S. Postal Service Office of Inspector General, Fuel Consumption and Cost Risk Mitigation, Report No. NL-AR-17-004, https://www.uspsoig.gov/sites/default/files/document-library-files/2017/NL-AR-17-004.pdf, p. 9.
    The network realignment also caused some First-Class Mail to shift from ground to air, as the change in operating windows allow for less time for First-Class Mail with a three-day service standard to be transported
    between facilities. U.S. Postal Service Office of Inspector General, Mail Processing Transportation and Operational Changes, Report No. NO-AR-16-009, https://www.uspsoig.gov/sites/default/files/document-library-
    files/2016/NO-AR-16-009.pdf, p. 22. However, it appears that the shift of Priority Mail from air to ground more than offset the shift of First-Class Mail from ground to air.
40	 U.S. Postal Service Office of Inspector General, Management and Oversight of Highway Contract Routes, September 30, 2016, Report No. NL-AR-16-006, https://www.uspsoig.gov/sites/default/files/document-library-
    files/2016/NL-AR-16-006.pdf, p. 10.
41	 U.S. Postal Service Office of Inspector General, Highway Contract Route Optimization Initiative Savings Calculation Methodology and Accuracy, Report No. NL-AR-19-002, January 30, 2019, https://www.uspsoig.gov/
    sites/default/files/document-library-files/2018/NL-AR-19-002.pdf.
42	 In a meeting with Postal Service management, they acknowledged that DRO is behind schedule, but stated that they expect the program to meet its predicted savings.

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Conclusion                                                                              As the Postal Service continues to manage its transportation network in response
                                                                                        to these changes, it may be helpful to better understand what is truly driving
As overall mail volume has continued to decline, and transportation costs have
                                                                                        transportation costs. Our analysis attempts to shed light on this by estimating
continued to increase, it is critical to understand that there is much more to the
                                                                                        how much of the 10-year change in transportation costs is expected in response
story than a simple comparison of those two trendlines. Parcel volume has been
                                                                                        to the change in mail volume, including the growth in parcels, and the change
rapidly growing, which could have a significant impact on transportation costs,
                                                                                        in transportation-related input costs. By doing so, we can isolate where costs
including where and what type of transportation is needed in response to where
                                                                                        have risen more than expected. This identification is the first step toward gaining
the growth in parcels continues to occur. While expedited parcels will need more
                                                                                        a deeper understanding of transportation costs and may point the way toward
expensive transportation, parcels that are entered into the postal network close
                                                                                        actions that could help to contain future costs. This is especially relevant for
to their destination will need little to no transportation. In addition, many factors
                                                                                        transportation components with the greatest relative cost increases not explained
affecting the transportation and shipping industries at large will continue to have
                                                                                        by changes in volume or input costs — namely, inter-SCF and intra-SCF
an impact on postal transportation costs.
                                                                                        transportation. This is an area where further decomposition of costs or future
                                                                                        audit work might be warranted in order to determine why cost increases are
                                                                                        higher than expected.




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Appendices
Click on the appendix title below to
navigate to the section content.


          Appendix A: Description of 10-Year Analysis of Transportation Costs.............................. 18
          Appendix B: Management’s Comments........................................................................................... 25




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Appendix A: Description of 10-Year Analysis of Transportation Costs
This appendix describes Professor Bradley’s analysis of the change in               Step 1: Calculate the Expected Change in Costs in
transportation costs over the last 10 years. The purpose of this analysis was       Response to the Change in Volume (Including Change in
to decompose the actual change in costs into three factors: (1) the change in       Mail Mix) Over the 10-Year Period
volume, including the change in mail mix; (2) the change in the transportation-
                                                                                    This step takes into consideration the different growth rates (including declines) of
related input costs; and (3) the residual that represents areas where additional
                                                                                    individual products over the 10-year period. Looking at individual product growth
explanation or study are needed. For example, if the analysis found that for a
                                                                                    rates was necessary because not all mail affects transportation costs in the same
given transportation component 85 percent of the increase in transportation costs
                                                                                    way. For example, holding all else equal, mail that is larger and heavier costs
were due to volume and transportation-related input cost changes, this would
                                                                                    more to transport than mail that is smaller and lighter. Therefore, an increase in
leave a residual 15 percent of transportation cost changes which merits further
                                                                                    larger and heavier mail will have a substantially greater effect on transportation
inspection.
                                                                                    costs than a similar increase in smaller, lighter mail. This is especially important
The analysis looked at how much costs have changed over a 10-year period,           given the continued growth in the volume of parcels, which tends to be larger
from fiscal years (FY) 2008 to 2017. The analysis uses a “two-year base” method     and heavier than letters and flats. In addition, holding all else equal, mail that
to avoid the results being skewed by any abnormal or temporary changes in one       is entered into the mail stream further away from its destination will incur more
year at the beginning or end of our selected 10-year period. Under this method,     transportation, and therefore more transportation costs, than mail that is entered
the average costs for FY 2008 and FY 2009 are compared against the average          closer to its destination. This is relevant because a portion of the growth in parcel
costs for FY 2016 and FY 2017. The percentage difference between those two          volume is dropped close to its destination.
averages therefore provides the change in the transportation costs over the full
                                                                                    Step 1a: For Each of the Eight Transportation Components,
10-year period.
                                                                                    Estimate the Percent of Costs That Are Used by Each Mail
The analysis was done for each of the eight main transportation components          Product
separately (components are listed in Table 2 below) to gain a better                This step uses postal data to estimate the proportion of each product in each of
understanding of where transportation costs are increasing more — or less           the eight transportation components for the beginning of the 10-year period.43
— than expected based on the volume and transportation-related input cost           Table 2 displays these data. These data represent the average share of each
changes. This breakdown into components was necessary because the change            product during FY 2008.
in mail volume and transportation-related input costs will have different effects
on the individual components. Decomposing the cost changes of the individual
components allows us to identify which transportation components are the most
problematic in terms of unexplained costs.




43	 Professor Bradley used data from the CRA B Workpapers, CS/14.

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Table 2: Products’ Share of Transportation Components’ Costs

                                                                                                                                 Market Dominant              First-Class
                                       First-Class Mail        Marketing Mail            Periodicals         Parcel Post                                                            Priority Mail        Parcel Select
                                                                                                                                 Package Services             Packages

 Inter-SCF Highway                           41.9%                    9.1%                  7.9%                 2.3%                     2.1%               Confidential          Confidential           Confidential

 Intra-SCF Highway                          24.2%                    21.6%                  10.0%                6.7%                    5.2%                Confidential          Confidential           Confidential

 Inter-NDC Highway                           7.8%                    28.4%                  9.3%                 29.7%                   14.7%               Confidential          Confidential           Confidential

 Intra-NDC Highway                           7.8%                    30.1%                  6.4%                 22.5%                   16.3%               Confidential          Confidential           Confidential

 Commercial Air                              81.0%                   2.3%                    1.9%                 0.1%                   0.3%                Confidential          Confidential           Confidential

 FedEx Day                                   21.0%                   0.9%                   0.7%                 0.6%                    0.6%                Confidential          Confidential           Confidential

 UPS                                        79.9%                    2.5%                    1.8%                 0.1%                   0.3%                Confidential          Confidential           Confidential

 Postal-Owned Vehicles                      24.9%                    21.3%                  10.3%                6.6%                    5.5%                Confidential          Confidential           Confidential

Source: Professor Bradley’s analytical memos to OIG.



Step 1b: Construct Relevant Product Volume Series for the 10-Year                                              Another example of why this step was necessary is how we handled Parcel
Period                                                                                                         Select. While all of Parcel Select is dropshipped (entered at a specific postal
                                                                                                               facility in order to receive a dropship discount), the portion of Parcel Select that is
Since there have been significant changes in product lines between FY 2008 and
                                                                                                               dropped at the destination post office will have little to no impact on transportation
FY 2017, the next step was to construct consistent product groupings over the
                                                                                                               costs. Therefore, we created a volume series that captures Parcel Select that
10-year period.44 A simple example is how we handled Parcel Post. Most of the
                                                                                                               does not include the volume that is dropped at the destination post office.
volume that was market dominant Parcel Post in FY 2008 was transferred to the
competitive products category and renamed Standard Post in FY 2013.45 It was                                   Step 1c: Estimate Growth Rates for Each Product
then renamed again in FY 2017 to its current name, Retail Ground.46 To account
                                                                                                               The next step was to use the volume series constructed in step 1b to calculate
for these changes, we created a volume series from FY 2008 to FY 2017 for
                                                                                                               the growth rates for each product over the 10-year time frame. As mentioned
combined Parcel Post that aggregates the volumes from Parcel Post, Standard
                                                                                                               above, the growth rate is measured using a two-year base. In other words, it is
Post, and Retail Ground across the 10-year period.
44	 The source of the detailed volume data was the Postal Service’s billing determinants. The billing determinants are filed each quarter by the Postal Service and show detailed volume and revenue information below the
    product level.
45	 Postal Regulatory Commission, Order No. 1411, Order Conditionally Granting Request to Transfer Parcel Post to the Competitive Product List, Docket No. MC2012-13, July 19, 2012, www.prc.gov/docs/83/83756/
    Order_No_1411.pdf and Order No. 1536, Order Approving Changes in Rates of General Applicability for Competitive Products, Docket No. CP2013-3, November 8, 2012, https://www.prc.gov/docs/85/85608/
    Order_1536.pdf.
46	 U.S. Postal Service, “Notice and Order Concerning Change in Rates of General Applicability for Competitive Products,” Postal Regulatory Commission Docket No. CP2016-9, October 19, 2015, https://www.prc.gov/
    docs/93/93584/Order%20No.%202767.pdf, p.3.

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the change in volume between the average product volume in FY 2008 and FY                                          Step 1d: Calculate the Overall Volume Growth Rate for Each of the
2009 and the average product volume in FY 2016 and FY 2017. Table 3 below                                          Eight Transportation Components
shows the calculation for Periodicals.
                                                                                                                   This step combines the information from steps 1a and 1c to calculate an estimate
Table 3: Growth Rate for Periodicals Using a Two-Year Base                                                         of volume growth for each of the eight transportation components.47 This was
                                                                                                                   calculated using the following methodology. The proportion of each product within
                               Actual Volume                   2-Year Average                                      a cost component (from step 1a) is multiplied by the growth rate from this product
                                                                                                                   (from step 1c). The overall volume growth for each cost component is the sum
 FY 2008                              8.6 B
                                                                      8.3 B                                        of all the calculations for each product within the component. Figure 7 shows an
 FY 2009                              8.0 B                                                                        example of how the equation would work for a theoretical cost component with
 FY 2016                              5.6 B                                                                        three products.
                                                                      5.5 B
 FY 2017                              5.3 B

                    Growth Rate = (5.5 – 8.3) / 8.3 = -34%

Source: OIG analysis.



Figure 7: Example Equation for Overall Volume Growth of a Cost Component




  Overall Volume                             Proportion                      Volume                         Proportion                     Volume                         Proportion                      Volume
                                            of Product A                   Growth of                       of Product B                  Growth of                       of Product C                   Growth of
  Growth for Cost                             FY 2008                      Product A                         FY 2008                     Product B                         FY 2008                      Product C
   Component                                  (Step 1a)                     (Step 1c)                        (Step 1a)                    (Step 1c)                        (Step 1a)                     (Step 1c)

                                                                  A                                                              B                                                             C


Source: OIG Analysis.




47	 While we refer to this calculation as the volume growth in the transportation component, it reflects the estimated growth in the relevant cost driver — either pounds or cubic feet. This is the relevant estimate of “volume”
    for transportation costs.

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Figure 8 illustrates how this calculation was performed for intra-SCF transportation. While actual data cannot be shown due to commercial sensitivity, this figure helps
illuminate how we factored in the changes in product lines. For example, both Parcel Post and First-Class Mail packages have growth rates that reflect the combined
volume series. In addition, as discussed above, we used the growth rate for non-destination delivery unit (DDU) Parcel Select (Parcel Select not dropped at the
destination post office), since parcels dropped at the destination post office receive little to no transportation.

Figure 8: Calculation of Intra-SCF Overall Volume Growth Rate

                       Proportion of Intra-SCF Trasportation in FY 2008               Growth in Volume Over 10-year Period (FY 2008 - FY 2017)


                                                  The Share of First-Class Mail         The Growth in First-Class Mail
                                                                                        Letters and Flats


                                                  The Share of Marketing Mail           The Growth in Marketing Mail



                                                  The Share of Periodicals              The Growth in Periodicals


                                                                                        The Growth in Combined
                                                  The Share of Parcel Post
                                                                                        Parcel Post


                                                  The Share of Package Services         The Growth in Package Services



                                                  The Share of First-Class Packages     The Growth in Combined
                                                                                        First-Class Packages


                                                  The Share of Priority Mail            The Growth in Priority Mail



                                                  The Share of Parcel Select            The Growth in Non-DDU
                                                                                        Parcel Select



                                                  Overall Volume Growth Rate for Intra-SCF Transportation
Source: Professor Bradley’s analytical memos to OIG.

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Table 4 shows the estimated overall volume growth rates for each of the eight                                 from nearly 50 percent to a little over 80 percent. The variabilities are multiplied
transportation components.                                                                                    by the overall volume growth rates to calculate the expected change in costs in
                                                                                                              response to a change in volume. The results are shown in Table 5.
Table 4: Overall Volume Growth Rates (Two-Year Base)
                                                                                                              Table 5: Expected Change in Costs in Response to Volume Change
                                                    Overall Volume Growth Rates
            Component
                                                          (Two-Year Base)                                                                                                               Expected
                                                                                                                                            Overall Volume                           Change in Costs
 Inter-SCF Highway                                                  -5.9%
                                                                                                                                            Growth Rates              Volume         in Response to
 Intra-SCF Highway                                                  10.3%                                                                  (Two-Year Base)           Variability     Volume Change
                                                                                                                     Component                    [1]                   [2]           [3] = [1] x [2]
 Inter-NDC Highway                                                  -24.7%
                                                                                                               Inter-SCF Highway                   -5.9%               73.2%              -4.3%
 Intra-NDC Highway                                                  -11.9%
                                                                                                               Intra-SCF Highway                   10.3%               49.7%               5.1%
 Postal-Owned Vehicles                                              10.6%
                                                                                                               Inter-NDC Highway                  -24.7%               80.3%              -19.8%
 Commercial Air                                                     -21.2%

 FedEx Day Turn                                                     12.9%                                      Intra-NDC Highway                   -11.9%              74.8%              -8.9%

 UPS                                                                -19.9%                                     Postal-Owned Vehicles               10.6%               60.4%              6.4%

Source: Professor Bradley’s analytical memos to OIG.                                                           Commercial Air                     -21.2%              100.0%              -21.2%

                                                                                                               FedEx Day Turn                      12.9%              100.0%              12.9%
Step 1e: Estimate the Expected Change in Cost in Response to
the Change in Volume                                                                                           UPS                                -19.9%              100.0%              -19.9%
The final step in estimating the expected effect of volume changes on                                         Source: Professor Bradley’s analytical memos to OIG.
transportation costs was to account for the variability, which is a measure of the
amount by which costs vary with volume.48 For example, if a transportation cost                               Step 2: Calculation of the Growth in Transportation-Related Input
component has a variability of 100, costs would rise or fall in direct proportion                             Costs
with volume. On the other hand, if a transportation cost component has a
                                                                                                              Step 2 is the calculation of the growth in transportation-related input costs over
variability of 80 percent, then a 10-percent increase in volume would only be
                                                                                                              the 10-year period of our analysis. Since the vast majority of transportation is
expected to increase costs by 8 percent.
                                                                                                              purchased from third-party companies, the Postal Service’s transportation costs
The variabilities differ by transportation cost component. For air transportation,                            reflect the prices that providers charge. To best capture how these prices will
the variabilities are 100 percent, as the Postal Service only pays for the                                    change, along with the broader cost movements in other inputs like labor, we use
transportation capacity it uses. For ground transportation, the variabilities range                           the relevant producer price indexes (PPIs) for transportation as our measures

48	 The variabilities are estimated by the Postal Service and approved by the Postal Regulatory Commission.

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of Postal Service input costs. This method allows us to capture how much costs          NDC, we use the PPI for “general freight trucking, long-distance truckload” to
should have changed in response to cost pressures in the transportation market,         estimate the change in input costs for these two transportation components. For
including factors such as fluctuations in fuel prices and the increasing wages of       all air transportation components, we used the PPI for scheduled air freight.
long-haul truck drivers. Table 6 displays the PPIs we used for each transportation
component.                                                                              Step 3: Decomposing the Total Impact of Changes in Volume and
                                                                                        Transportation-Related Input Costs on Transportation Costs
Table 6: Producer Price Indexes Used in Analysis                                        The final part of the analysis was to subtract the results from steps 1 and 2 above
                                                                                        from the actual change in costs over the last 10 years. The leftover amount
                                         PPI                     Associated
     Producer Price                                                                     of each cost change — or “residual” — represents changes that cannot be
                                 Change Over 10 Years          Transportation
      Index Name                                                                        explained by changes in volume and transportation-related input costs.
                                    (2-Year Base)               Component

 General Freight                                                   Intra-SCF            Table 7 shows this decomposition. Column 1 shows the actual change that
                                            1.6%
 Trucking - Local                                           Postal-Owned Vehicles       occurred in each transportation component between FY 2008 and FY 2017 (using
                                                                                        a two-year base). Column 2 displays the expected change in costs in response to
 General Freight                                                 Intra-NDC
                                                                                        the volume change — this includes both the percentages as calculated in Table 5
 Trucking - Long-                           8.0%                 Inter-NDC
                                                                                        above and the corresponding dollar value.
 Distance Truckload (TL)                                          Inter-SCF
                                                                                        Column 3 shows the expected change in costs in response to the overall change
                                                                 FedEx Day
 Scheduled Freight Air                                                                  in transportation-related input costs, as calculated in Table 6 above (both the
                                            17.8%                   UPS
 Transportation                                                                         percentage and corresponding volumes are shown). Column 4 displays the sum
                                                               Commercial Air
                                                                                        of columns 2 and 3. It represents the total effect of volume and transportation-
Source: Professor Bradley’s analytical memos to OIG.                                    related input costs on each of the transportation components’ costs.

                                                                                        Column 5 represents the residual, the portion of the total change in each
Since both intra-SCF and postal-owned vehicles are primarily short-haul, local          transportation component that cannot be explained by the changes in volume and
transportation, we use the PPI for local freight transportation to reflect the change   transportation-related input costs. It was calculated by subtracting column 4 from
in input costs. For the longer-haul transportation, inter-SCF, inter-NDC, and intra-    column 1.




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Table 7: Decomposition of Cost Changes Over 10-Year Period from FY2008 – FY2017 ($ Millions and Percent Change)*

                                                              Change Due     Change Due          Change Due to Volume
                                     Actual Change             to Volume    to Input Costs          and Input Costs      Residual
       Component                           [1]                     [2]            [3]                     [4]           [5]=[1]-[4]
                                           $434.2                ($41.3)        $77.2                   $35.9             $398.4
 Inter-SCF Highway
                                           45.0%                 (4.3%)         8.0%                    3.7%               41.3%

                                           $324.3                 $73.1         $22.4                   $95.5             $228.8
 Intra-SCF Highway
                                           22.8%                  5.1%           1.6%                   6.7%               16.1%

                                           ($26.4)               ($75.6)        $30.6                   ($45.0)            $18.7
 Inter-NDC Highway
                                           (6.9%)                (19.8%)        8.0%                    (11.8%)            4.9%

                                           ($66.3)               ($32.4)        $29.2                   ($3.2)            ($63.1)
 Intra-NDC Highway
                                           (18.2%)               (8.9%)         8.0%                    (0.9%)            (17.3%)

                                            $56.1                $88.5          $21.7                   $110.2            ($54.1)
 Postal-owned Vehicle
                                            4.1%                 6.4%           1.6%                    8.0%              (3.9%)

                                            $25.3                ($34.8)        $29.2                   ($5.6)            $30.9
 Commercial Air
                                            15.4%                (21.2%)        17.8%                   (3.4%)            18.8%

                                           $236.7                $193.3         $267.1                  $460.4           ($223.8)
 FedEx Day Turn
                                            15.7%                12.9%          17.8%                   30.6%             (14.9%)

                                            $81.1                 ($14.1)       $12.6                    ($1.5)             82.7
 UPS
                                           114.3%                (19.9%)        17.8%                   (2.2%)            116.4%
Source: Professor Bradley’s analytical memos to OIG.
*Numbers in parenthesis represent negative numbers.




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Appendix B:
Management’s
Comments




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