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Why Does Postal Management Allow  Non-Compatible Disk Mailers Claim Automated Rates? [Mail:]

April 15, 2008

Todd Butler

Published in Mail: The Journal of Communication Distribution
(April 2008)
Was it Favoritism, Ignorance or Something Else?
The OIG has issued a report (MS-AR-08-001) dealing with Permit Reply mail. More specifically the report deals with an unnamed (redacted) customer whose DVD mail pieces are not compatible with postal processing equipment. The OIG found that due to the customer’s floppy edge design, postal operations people have been culling these non-machinable pieces for manual processing. The intent of the diversion from the automated mail stream was to prevent jams, rejects, breakage, miss-sorted mail and damage to postal equipment. The national news media, including an article in the New York Times (12/06/07), identified the unnamed customer as the Postal Service’s largest DVD mailer, Netflix Inc. [The complete OIG’s report is posted on ekeytechnologies.com.]
Much of the talk in the national media has been about the affect changes recommended by the OIG’s report will have on Netflix’s bottom line. There has been no commentary on why upper postal management has obstructed attempts over the last six years to correct this problem. The OIG says that the cost of manual processing  this customer’s DVD mail will be more than $30 million per year, with an additional lost opportunity cost (not collecting the non-machinable surcharge) of more than $65 million per year ($0.17 x 1.6 million pieces per day). 
Postal management has known since 2002 that the Netflix mailer and similar designs were not compatible with their processing equipment. Postal engineers tested the Netflix design that year and found it to be non-machinable. According to the OIG’s report, two weeks after the engineers failed the Netflix piece for automation, postal headquarters overruled the engineers telling Netflix it could claim automated letter rates and in addition would not have to pay the non-machinable surcharge.
Many similar mail piece designs have been tested since 2002. All were deemed to be non-machinable.  The disk industry soon found that Netflix would be the only postal customer authorized to use the floppy edge design, claim automated letter rates and not have to pay the non-machinable surcharge. All other disk mailers have been forced to receive approval from the postal engineers for their designs or pay the surcharge. [Two rejection letters with pictures are posted on ekeytechnologies.com.]
If there were any lingering doubts about the incompatibility of this design with postal processing equipment they should have been eliminated in 2005 when the USPS hired an outside consultant to study DVD mail. According to the OIG report, the consultant found that 77% of one large customer’s mail pieces were manually processed due to its floppy edge design.
Steve Swasey, a Netflix spokesman, was quoted in a New York Times article (12/06/07) as saying “If the specifications of the post office were to change, we would change the mailer as necessary…” So if Netflix was/is willing to change their mail piece design, why has postal management prevented the necessary changes to the DMM specifications?
Since Netflix knows their mail piece is not compatible with postal processing equipment, why have they stuck so doggedly to this non-machinable design?
For other companies in the DVD rental industry the answer to the second question is simple. The current design allows Netflix to claim the lowest postage rates and in 2005, 77% of the Netflix pieces were ordered culled for manual processing.  The only thing better for a disk rental company, would be for the Postal Service to manually process 100% of their mailers. For the rental industry, the more manual processing their pieces receive the less breakage they experience.  Lower breakage rates deliver greater profitability.
There is a blogger (manuelsweb.com) who has charted a reduction in his broken/non-playable disks received from Netflix from 5.7% in 2005 down to 1.6% broken/non-playable disks in 2007. This 4.1% reduction seems to correlate with the nationwide implementation of postal management’s directives instructing employees to pull Netflix mailers from the automated mail stream.  If manual processing were to reduce breakage by just 3% instead of 4.1%, the savings to Netflix would be substantial. Assuming a disk replacement cost of $10.00 and assuming Netflix mails 1.6 million pieces a day, the reduction in breakage could be saving Netflix more than $115 million per year.
In February 2006, Blockbuster sent a letter to the USPS operations group requesting immediate manual culling of inbound mail pieces for Blockbuster Online. The letter talked about the “…persistent damage to mailer contents and longer mail duration rates as judged against comparable [Netflix] mailings...” The letter was forwarded to marketing at postal headquarters. A national account representative responded to Blockbuster that no one was getting special treatment in the form of manual processing. Since manual processing was being provided to Netflix, Blockbuster seems to have been forced into a substantial ($115 million?) competitive disadvantage through postal favoritism. The job of the Postal Service is to deliver the mail, not pick winners and losers in the market place.
In their response to the OIG’s report postal management expressed concerns about “…the possible negative impact on affected customers if a change in mailing standards results in a substantial price increase.”  It isn’t “customers” postal management appears to be worried about but just one customer. Upper management wasn’t too worried about the consequences for flat mailers during the last rate case with its rules and classification changes. Nor were they concerned about the $30 million a year in manual processing costs generated by one customer being buried in the numbers used to calculate the new automation rates. Since implementation of the rate case in May, all First Class mail customers are paying higher postage rates to cover the costs incurred by a non-compatible DVD mail piece design. 
Why has upper management prevented changes to the DMM specifications that would mandate automation compatibility? Is the relationship between management and Netflix the result of simple favoritism or something else? Should the rules be applied equally to all customers? These are questions the Board of Governors needs to answer. Let’s hope they’re more diligent in their responsibilities and more thorough in their obligations to treat all postal customers equally… than their current management team has been.
Todd Butler
Butler Mailing Services
 [An article from 2005 on this subject, Turf Wars and the New Mail at the Postal Service can also be found on this site .]

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