USPS Product Cost Workshop

1. USPS Product Cost Workshop August 16, 2011

2. Welcome • There have been criticisms of current costing system • We have developed a costing systems review team • Gathering feedback from external customers • Gathering feedback from internal customers • Will examine feasibility of suggestions • Purpose - To develop recommendations to improve cost reporting so that it will provide management the right tools to manage the business – both in terms of making decisions about operational changes and in making product and pricing decisions.

3. Meeting Overview Today’s Agenda • Welcome • Project Overview • Overview of Cost Systems • Expectations and Comments (Large Group Session) • Break-out Sessions • Reports from Break out Sessions • Closing Remarks

4. Project Owner: Tim O’Reilly  Project Manager: Jennifer Bradley  Lean Six Sigma Master BlackBelt: Izzy Sanchez  Project Management Support: Jessica Powell  Project Team Karen Key (Products)  Josen Punnoose Products) Tom Henry (Operations)  Myles Perkes (Cost Systems)  Naline Hampton (Cost Studies)  Greg Dawson (Pricing)  Marc Smith (CRA)  Haley Eubanks (International)  Barry Burns, (International)  Jim Crawford (International) Jay Huntington (International) Michael Goldman (IT)  Robert Raines (IMB)  Brian Code (Retail) Introduce Team

5. Project Overview • Interviewed External Stakeholders – Complete • Interviewing Internal Stakeholders – In Progress • External Focus Group - Today • Feasibility Analysis of Recommendations • Recommendation of next steps – End of October

6. Purpose of Today’s Meeting • To clarify and define customer needs • To gain insights into the prioritization of needs of our customers • Feedback from this meeting is one set of inputs into developing recommendations • External stakeholder interviews and internal stakeholder interviews are other two • Lean Six Sigma Tools will be used to dissect Voice of the Customer • Lean Six Sigma Tool was used to take input from interviews and develop break out session topics

7. Dissecting the Voice of the Customer Offsite Focus Group Topic 1 Topic 2 From over 850 items captured directly during the 1:1 interviews Affinity diagram session completed to 103 distinct Customer Needs in 18 Categorical topics Topic 3 Topic 4

8. Project Overview – What we have heard Need to completely rethink Cost system • Don’t overhaul Entire System • Need for Bottom Up Costing Bottom up cost model is not panacea IOCS is obsolete IOCS works, consider expanding Overall, cost avoidance models do good job Need to get rid of cost avoidance models Using the IMB scans as much as possible Not clear IMB tells you a lot about what is going on More than ever, accuracy and precision of costing data is important today Can’t manage what you can’t measure

9. Break Out Session Topics • Understanding Bottom Up Costing • Specifically define bottom up costing. • What are the risks/costs/benefits of using? • Data Source Discussion (IMB, IOCS, etc) • Discuss if and when IOCS sampling should be replaced by another data source (ex. IMB). • What are the risks/costs/benefits? • Workshare Model Discussion • What should be measured / included in the cost avoidance estimates • What are the risks/cost/benefits • Cost Data Discussion • Is there cost information that USPS does not either currently produce or provide, that you believe you need? • What are the risks/costs/benefits?

10. Break-Out Session Overview • Four Rooms – Room are assigned • Within each room, will further break down into four groups. • Each room has the same four topics • Participants will rotate through topics; Moderator will signal when to change • Discussion led by participants • Participants vote on most important points – vote done by stickers • Report out to main group

11. Costing System Overview What do we mean, we say costing system? • The costs used to develop our products • Both the methodology and data used to develop these costs • Includes how the costs are reported – both frequency and level of detail

12. Costing System Overview Cost and Revenue Analysis Report (CRA) • Produces costs by product • Methodology overview • Obtain total accrued costs • Estimates attributable costs • Distributes Attributable Costs to Products using Distribution Keys • In-Office Sampling System (IOCS), Transportation Accounting System (TRACs), City Carrier Costing System (CCS) • Produced Annually • Reports Data on a National Level • Does not have a line item for every level of workshare

13. Costing System Overview Workshare Cost Models • Provide additional granularity beyond CRA • Uses modeling to estimate specific cost savings associated with specific workshare activities • Most models tie back to the CRA with adjustment factors • Most focus on cost avoidance estimates, not bottom up cost

14. Costing System Overview Costing for Contract Pricing • Costing begins with national average unit cost for most similar product • Adjustments made for partner-specific characteristics when possible • Costs for parts of postal network bypassed are removed from national average unit cost • Costs for additional activities not ordinarily part of national average unit cost are added in • Partner’s mail mix (shape, weight, cube, haul, degree of dropship) incorporated into the unit cost considerations

15. Cost System Overview • The Current Cost System has undergone various types of reviews and audits. • PRC Annual Compliance Determination • Ernst & Young (for revenue and volume) • OIG audits regularly, as required by PAEA • GAO audits, as requested • Reviewed by customers and competitors • Never failed audit • PRC has found compliance

16. Cost System Overview - Level of Accuracy • Statistical Significance of the Sampling System • First-Class Mail and Standard: ± 1% • Periodicals and Priority Mail: ± 2% • Package Services and Express Mail: ± 3% • Parcel Select and Parcel Return: ± 4% • International: ± 5% • What Does this Mean ?

17. Cost System Overview • Current System…. • Is trusted and approved by PRC • Ties back to general ledger and operation costs • Reflects what actually happened, not “ideal cost” • Adapts to product and operation changes • Limitations • Limited to national focus • Only provides annual reporting • Lack of product data at finer detail levels • Less precise measurement of low-volume products (special studies required) • Some dated special studies • Cause of product cost changes are not readily apparent • PRC regulates costing methodology changes • No estimate of short-run marginal cost

18. Expectations/Feedback • Follow-up • Report out highlights to MTAC on Thursday, August 18th • We will send a summary of feedback to you by end of next week • We will share recommendations and justification with you in early November • Your Expectations / Feedback

19. Rules of Conduct • Feel free to voice your opinion, but let others speak • Please do rotate through each of the topics. • Please keep to your assigned break out room. • If you need help, seek out the moderator.

20. Break Out Sessions • Break Out Room Assignments are on Name Tag • Questions?

21. Next Steps • Report out highlights to MTAC on Thursday, August 18th • We will send a summary of feedback to you by end of next week • We will share recommendations and justification with you in early November