USPS to Cut $5 Billion in Spending to ‘Avoid Running Out of Cash’
On the heels of a $6.5 billion net loss in 2023, the United States Postal Service (USPS) is taking drastic measures to reverse its fortunes, anticipating to cut $5 billion in operating expenses through the end of 2025.
In a Jan. 10 letter to the Biden administration and Congress, Postmaster General Louis DeJoy said the government agency will need to implement the cost-cutting measures to “avoid running out of cash over the next several years.”
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The company is already in the fourth year of its 10-year “Delivering for America” turnaround plan unveiled in 2021. But despite the investment, there hasn’t been much turning around.
While USPS initially expected to break even by fiscal 2023 under the strategy, losses have still amounted to $18.8 billion in the first three years of the plan.
“The USPS is a perplexing problem to fix and to even say that it can be fixed is a stretch,” said Dr. Tom Goldsby, professor and Haslam Chair of Logistics at the University of Tennessee. In particular, he noted the inherent disadvantages it has compared to its private peers like UPS, FedEx and Amazon, all of whom “can say ‘no’ to a customer and employ selectivity.”
Additionally, USPS “cannot price stamps for cross-town mailing at one price and cross-country mailing from Key West to a remote location in Alaska at a different price,” Goldsby said.
Despite the disadvantages, Goldsby told Sourcing Journal the USPS “business model and operations can certainly be improved.”
At the very least, USPS appears to be minimizing future damages. DeJoy said the Postal Service reduced initially projected losses through 2030 from more than $160 billion to less than $60 billion.
“While we have already achieved historic reductions, they are simply not enough to make us financially sustainable,” DeJoy said in the letter. “The alternative is that we will run out of cash, therefore making our financial condition, again, a problem for the Congress to address. My continued goal is to not let that happen.”
DeJoy laid out four near-term goals to cut costs, as well as two other objectives designed to generate a new $5 billion in revenue.
The courier plans to cut $1.5 billion in costs through regionalized transportation—aggregating volume in fewer facilities, cutting underutilized trips and shifting more air volume to ground. To help reduce the underutilized trips, $1 billion will be freed up via route optimization.
DeJoy said USPS would reduce another $1.5 billion in processing and distribution costs, namely by insourcing prior outsourced operations, reorganizing operation plans and adding more sortation equipment.
The final $1 billion in cuts will come from retail and delivery costs, including “right-sizing work hours” and accelerating the implementation of more sorting and delivery centers (S&DCs). These are large facilities that consolidate the operations of letter carriers and mail handlers under one roof. USPS plans to have 100 of them operating by the end of 2024, and over 400 S&DCs in the next three years.
“For the sake of operational efficiency and effectiveness, I like the ideas of consolidating and bringing the distribution network into the 21st century,” said Goldsby, who noted that the shift mirrors the “hub-and-spoke” method of peers like UPS, FedEx and Amazon.
But he did give a warning: “Those facilities will come with their own fixed-cost obligations along with the legacy compensation costs that are not going away. So, while service stands to benefit, it’s not obvious how the bottom line will be favorably affected.”
DeJoy said USPS cut 28 million hours in 2023, saving $1.8 billion. According to Jason Miller, interim chairperson for the department of supply chain management at Michigan State University, this is in line with wider Bureau of Labor Statistics (BLS) data that cites the decline in average weekly hours industrywide.
In the courier and messenger sector, Miller said work hours are “historically low, suggesting payrolls are a bit large relative to current demand levels.”
“Speaking of current demand levels, two ways to measure this are based on aggregate weekly hours worked, which for November 2023 were down 7 percent from November 2021,” Miller told Sourcing Journal. “An alternative strategy is to examine inflation-adjusted revenue for this sector, which as of Q3 2023 was down 12 percent from Q3 2021.”
On the other side, USPS said it aims to grow package revenue by $3 billion, further amplifying competition with UPS, FedEx and Amazon. DeJoy didn’t elaborate on the plan, other than saying the agency would introduce “new reliable and affordable products” aligned with its business model.
The company also said it aimed to recover $2 billion in revenue by raising prices on mail products to counteract what it called 15 years of a “defective pricing model.” Last month, USPS raised the price of a first-class stamp from 66 cents to 68 cents. Under DeJoy’s tenure, the courier has raised its stamp prices each January and July.
DeJoy noted in his letter that two major forces outside the Postal Service’s control led to 2023’s loss: $2.6 billion higher-than-expected inflation and $3 billion in additional payments into Civil Service Retirement System (CSRS) benefits, which covers most postal employees hired before 1984.
Goldsby called the firm’s overweight burden of wages and benefits “mind-boggling.”
“There is no private operation that would come close to having 70 percent of total expense or, even, operating expense tied to compensation and pension obligations,” Goldsby said. “That’s a massive cinder block on earnings.”
The cuts come as the government agency has been encountering problems in the Houston area, where multiple residents raised concerns of delivery delays out of two distribution centers in nearby Texas municipalities, North Houston and Missouri City. In some cases, the delays have been reported to be weeks long.
Congressman Al Green (D-Texas) said in a Tuesday press release that the agency’s high output package sorters that were intended to replace the less-efficient automated parcel bundle sorters in the North Houston sorting facility encountered setbacks due to poor planning. Additionally, an over-reliance on ground transportation coupled with staffing shortages post-Christmas contributed to delays, he said.
Green noted in the release that USPS addressed the delays by bringing in 30 additional employees.
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