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Future Applications of Dynamic Delivery Cost Model

Introduction

Last year, the Postal Service announced plans to discontinue the delivery of letter and 

flat mail on Saturdays, while retaining Saturday delivery of parcels. To better understand the 

potential effects of this change, the Commission requested proposals to analyze the resultant 

effects on the Postal Service’s operations and finances. The Postal Service subsequently 

postponed changes in delivery frequency until a later date. However, one of the proposals 

the Commission received, the Swiss Economics proposal, presented a new method of 

modeling delivery costs that would provide an analytical tool to support a variety of 

Commission legal responsibilities.

One of the benefits of this new approach is that the Swiss Economics model is flexible; 

it can be adapted for use in a variety of applications to provide insight into the likely effects of 

various factors on carrier street times. Because the model appears useful in carrying out 

several of the Commission’s responsibilities, it merits closer examination despite the Postal 

Service’s decision to maintain Saturday mail delivery at this time. 

For example, the model has the potential to improve the Commission’s annual estimate 

of the cost of the universal service obligation (USO) and the value of the monopoly. Section 

3651(b) of title 39 requires an estimate of the costs incurred by the Postal Service for, among 

other things, other public services or activities which would not otherwise have been provided 

by the Postal Service but for the requirements of law. The Commission interprets this 

requirement to include the estimated cost of delivering six days a week. The delivery model 

provides a new method for evaluating the impact of delivery frequency on costs and may 

prove useful in refining the Commission’s annual estimate of these costs. 

Second, the model could improve the Commission’s estimates of the value of the letter 

and mailbox monopolies. The current method of determining the value of the two monopolies

estimates the potential loss of contribution from volume lost to “cream skimming” by a 

hypothetical competitor. The determination of the cost of delivering to different geographic 

areas, for purposes of this estimate, can be substantially improved using the Swiss 

Economics model, by utilizing data specific to each route and each delivery day. 

Thirdly, the model and underlying data may also be used to evaluate economies of 

scale, density and scope in delivery, both for current and forecast circumstances. 
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Finally, the model may be useful in evaluating the fixity (volume variability) of delivery 

costs across a range of potential volumes and cost structures. Understanding this key aspect 

of the behavior of delivery costs could facilitate development of estimates of both long-run 

and short-run marginal costs, both of which are critical inputs into pricing and network design 

decisions.

This remainder of this document provides background on current cost methodologies,

explains how the Swiss Economics model differs from the existing methodology of attributing 

carrier costs to postal products and how those differences may lead to an improved 

understanding of how carrier costs are likely to respond to changed operational 

circumstances, and identifies other applications of the model.

Background

The Postal Reorganization Act (PRA) of 1970 established the requirement that each 

subclass of mail bear the direct and indirect costs attributable to that subclass of mail. The 

Postal Service produces annually its Cost and Revenue Analysis Report (CRA), which shows

whether the revenue from each type of mail is greater than the costs directly and indirectly

attributable to that type of mail during a given fiscal year. Since 1970, the methodologies for 

calculating postal costs have evolved, but the primary purpose continues to be the attribution 

of costs to mail classes and products. Most of the cost methodologies currently in use were 

developed or refined with public input during PRA-type omnibus rate cases.

In FY 2006, the Postal Accountability and Enhancement Act (PAEA) replaced the PRA.

The PAEA fundamentally changed the way the Postal Service sets rates by imposing an 

inflation-based cap on the price of market dominant products and attributable cost floor on the 

prices of each competitive product. The PAEA also mandated that the Commission conduct 

an annual compliance determination to assess, among other things, whether rates complied 

with applicable postal law and whether service standards were met in the previous fiscal year. 

By imposing a 90-day review period for the compliance determination, the PAEA limits the 

opportunity to develop or refine cost methodologies during these reviews. The PAEA also 

shifted the responsibility for prescribing cost methodologies from the Postal Service to the 

Commission.1

Participants in Commission proceedings have raised questions about how costing 

 

1See 39 U.S.C. § 3652(a)(1) and (e)(2).
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information can serve new purposes and how cost distribution methodologies can be 

improved. The methodologies developed over the past 45 years have been focused on 

assigning costs to products based on causal relationships. Where there has been a need to 

develop forecasts of costs, a “roll-forward” process was used.

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In adjusting its network to respond to mail volume declines, the Postal Service has 

undertaken aggressive operational changes aimed at reducing costs. Consequently, there is 

an increased need for costing methodologies that can analyze not just what costs have been, 

but how costs will be affected by these changes in volume and operations. The dynamic 

delivery model detailed in the report by Swiss Economics will be useful to postal stakeholders

and the Commission in understanding the true impact of Postal Service network and 

operational changes.

As detailed below, this delivery costing model can be used to help evaluate the attributable 

costs generated using the current accepted and approved methodology. The delivery costing 

model, which follows methods similar to those used by the Postal Service to design delivery 

routes, 3can also be adapted to estimate the impact of potential delivery operational changes, 

including frequency of delivery and method of delivery.

By comparing the current delivery costing methodology with some of the analytically 

advanced and operationally flexible costing methodologies developed by a wide section of 

postal stakeholders,

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this document provides context for the potential applications of the 

Swiss Economics model.

Current City Delivery Cost Methodology

As discussed above, the Postal Service produces the CRA each fiscal year. To support 

the CRA, the Postal Service produces an annual Cost Segments and Component Report. 

That report shows the total operating costs of the Postal Service divided into 18 segments. 

These segments reflect separate types of employees like postmasters and clerks, and nonemployee expenses like transportation and other supplies and services. The Postal Service 

uses its general account ledger to determine the total amount of costs for each segment that 

 

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In some instances, adjustments were made to account for operational changes between the base year and the 

year being forecast, but these adjustments were typically developed outside of the models used to attribute 

costs rather than by modifying the models to reflect the operational changes.

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This was most recently done using the JARAP model/method.

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E.g., Mail Processing Network Rationalization and Delivery Unit Optimization were informed to some degree by 

advanced costing models, which help managers make efficient operational decisions by minimizing costs of 

network locations or route structures.
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accrue in each fiscal year.

For City Delivery there are two cost segments, Segment 6, in office carrier costs, and 

Segment 7, city carrier street delivery costs. While Segment 6 costs are almost entirely 

driven by volume, Segment 7 costs exhibit a substantial degree of fixity. The behavior of 

carrier street costs are influenced by many factors, and given the geographic diversity among 

routes, daily and seasonal fluctuations in delivery volumes, and the continuous daily route 

adjustments and less-frequent route redesigns, estimating the effect of volume on these costs 

requires substantial effort. 

The existing model relies upon a two-week sample of time spent by the carrier 

performing various activities. The time study was completed in 2004. While the results from 

the time study have not been updated in the past ten years, the annual cost allocation model 

reflects actual city carrier volume delivered each year. This model has been vetted and 

refined through input from postal stakeholders and approved by the Postal Regulatory 

Commission for use in determining the attributable cost by product.

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 It relies on an 

assumption that the relationship between volume and cost is fixed at the level of variability 

determined by regression analysis of the data from the sample.

The model provides a reasonable means of attributing carrier street costs to mail 

shapes, but it is somewhat limited in its application beyond this purpose. It reflects the 

operational reality of the time when the data were collected and since collecting all of the data 

necessary to update the inputs is costly and time consuming, rapid changes in operations can 

potentially outpace the updates.6 Moreover, the model is not designed to analyze the 

potential impact of alternative assumptions about possible changes in operations such as

changing the location of delivery points or the current six-day delivery structure. 

Opportunity to Apply Modern Techniques

The Postal Service and stakeholders have increasingly looked to data driven solutions 

to postal issues. To date, these data driven techniques have primarily been applied to facility 

location issues. The Postal Service used its LogicNet Plus Mail Processing facility location 

 

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The econometric model estimates mail variability by shape, which is used to determine attributable costs by 

shape. Volume-based distribution keys, then allocate attributable shape costs to products.

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The Postal Service is currently developing an update to the FY 2004 input data. By utilizing data that are 

already collected for other purposes, the time and expense of future updates would be reduced. Nevertheless, 

there remain at least two required inputs that would still require separate data collection efforts (parcel delivery, 

and collection of mail at delivery points). Docket No. RM2011-3, Priorities for Future Data Collection and 

Analytical Work Relating to Periodic Reporting, November 18, 2010.
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model as a starting point to identify potential savings for the recent Mail Processing Network 

Rationalization Initiative.7 That model represented an evolutionary step forward from an 

earlier Postal Service model,8as well as a white paper greenfield model developed by the 

USPS OIG.9 To rationalize the delivery facility network, the Postal Service implemented 

Delivery Unit Optimization, which followed modeling work by the USPS OIG.10

The delivery model developed by Swiss Economics follows in the framework of 

previous data-driven models. A major difference is that it is an operational model, rather than

a facility model. Facility models start with the current network, and evaluate the potential for 

efficiency improvements by rationalizing or optimizing the number and location of facilities. In 

contrast, this delivery model focuses on changes in operations, and not changes in facility 

location. This approach matches the methods used by the Postal Service to design city 

carrier routes.11

Potential Applications

The structure of the Swiss Economics model allows for cost-driving inputs to be altered 

to reflect alternative scenarios to estimate the financial impact of the changes. In this way, it 

can be used for “what-if” analysis that can provide insight into other potential changes to 

delivery operations. Potential changes such as reducing delivery frequency or converting 

deliveries from residents’ doors into curbline or clusterbox deliveries lend themselves to this 

type of analysis. In addition, the value of the letter and mailbox monopolies is estimated 

based on analysis of the volume that could be profitably captured by a hypothetical competitor 

to the Postal Service. Analysis of each of these issues requires an estimate of what the cost 

of delivery would be if the number of and distance between delivery points were different from 

the status quo.

Given input data on how much volume is to be delivered, and to which addresses, the 

model determines the shortest route and estimates its cost. For example, to estimate the 

potential savings from converting a route to clusterbox delivery (where each box serves 20 

addresses) the model could be modified to assume that the volume destined for each group 

 

7 Docket No. N2012-1, Mail Processing Network Rationalization Service Changes, 22011, Responses of the 

United States Postal Service to City of New Orleans Interrogatory CNO/USPS-2, March 15, 2012.

8 Docket No. N2006-1, Evolutionary Network Development Services Changes, Advisory Opinion Concerning a 

Proposed Change in the Nature of Postal Services, December 19, 2006, at 16-17.

9 OIG USPS White Paper, Report No. RARC-WP-14-005, Greenfield Costing Methodology: An Opportunity to 

Deliver Transformative Change, January 7, 2014.

10 OIG USPS, Delivery Unit Optimization Initiative Audit Report, Report No. MS-AR-13-001, December 6, 2012; A 

Framework for Delivery Network Optimization RARC-WP-12-015, September 10, 2012.

11 Foundation for the Future, 2010 Performance Report and 2011 Performance Plan, at 30.
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of 20 addresses (1-20, 21-30, etc.) is delivered to the first address in the group. 

Similarly, the model may be applicable to refining the methodology used to estimate 

the value of the Postal Service’s monopolies. The value of the monopoly is estimated based 

on contribution that would be lost by the Postal Service if a hypothetical competitor captured 

mail volume on routes where it could profitably deliver mail at prices less than or equal to the 

Postal Service’s prices. This requires assumptions about the fixed and variable cost of 

delivery for each route. Currently, in the absence of route-specific costs, it is assumed that 

the total cost of each route is the same, as is the average variable cost per piece.12 The 

Swiss Economics model may allow improvement on these assumptions in two ways: the total 

delivery costs are specific for each individual route; and, because contestable volume may 

not be sent to all addresses on a route, the model can reflect the potential for an entrant to 

incur fewer fixed costs as a result of lower coverage.

Commission Invites Comments on the Swiss Economics Model

The Commission is hopeful that thoughtful consideration of this model will encourage 

postal stakeholders and innovators to suggest improvements and develop additional uses for 

this model. 

 

12 The analysis does distinguish between the average total cost of business and residential routes, and also 

between the average variable cost for different categories of mail. Nevertheless, these averages are applied to 

all routes of a type and all pieces of a category.