USPS OIG Report: Management of Postal Zones

Objective

Our objective was to evaluate the accuracy of Postal Service “zone”-based postage rates. These rates apply to select mail products including Priority Mail, Bound Printed Matter, Parcel Select, First Class Package Service, and Periodicals. The total volume of competitive and market dominant mail that included zone pricing was 10.1 billion of the 142.4 billion pieces (7 percent) in fiscal year 2019.

The Postal Service considers a variety of factors when setting the price of an individual mailing including the mail class, weight, and distance. When calculating distance, the Postal Service uses the mileage between its starting (originating) and ending (destinating) mail processing facilities, which are the 195 Sectional Center Facilities (SCF) throughout the country. For example, a mailpiece originating from Byron, IL (Zone Improvement Plan (ZIP) Code 61010) and destined to Frederick, MD (ZIP Code 21701) will be processed by and priced in accordance with the servicing SCF. In this example, these SCF locations are 64 and 45 miles away from the respective post offices.

The Postal Service has a complex methodology for determining the distances used in its zone pricing, utilizing mileage calculations based on the geospatial coordinates (latitude and longitude) of each SCF. The Postal Service makes two distance calculations for each potential originating and destinating SCF “pair” and selects the lesser mileage of each calculation to represent the “final” distance between the two SCFs.

The Postal Service currently uses 10 zones in its postage pricing: one local zone, eight other domestic zones (Zones 1 to 8), and one zone for special cases, such as mailings to the Republic of Palau and the Federated States of Micronesia (Zone 9). Each zone has defined distances based on the mileage between the originating and destinating SCFs—for example Zone 2 encompasses distances of 51-150 miles, while Zone 3 encompasses distances of 151-300 miles. The larger the “zone” number (and thus the farther a piece must travel), the higher the price charged to the mailer.

To assist mailers in the preparation of mailing labels and to ensure accurate mail routing/processing, the Postal Service publishes labeling lists. The labeling list titled L005 3-Digit ZIP Code Prefix Groups – SCF Sortation, known more commonly as “L005”, associates each of the 915 3-digit ZIP Code prefixes to the 195 SCFs for mail processing.

We issued an interim report on June 24, 2019, that identified an issue related to incorrect postage rates charged for mail entered at the Palatine, IL SCF.

Findings

The Postal Service did not always charge the correct postage rates for mail subject to zone pricing. We found incorrect postage rates for mail sent between 21,570 ZIP pairs (2.6 percent of the 836,310 ZIP pairs). These pricing inaccuracies resulted from the following errors attributed to 38 of the 195 (19 percent) SCFs:

  • Thirty-seven SCFs had incorrect geospatial coordinates in the computer program used to calculate zones. We verified the coordinates on record using the Postal Service’s methodology and found the coordinates were incorrect and did not reflect the current locations of these SCFs.
  • One SCF was assigned the wrong 3-digit ZIP Code on the labeling list, resulting in the use of incorrect coordinates when calculating postage for mail going to and from this ZIP Code.

These conditions occurred because the Postal Service did not have applicable policies or procedures for periodically reviewing, updating, and monitoring SCF coordinates for newly built or leased facilities. From 1965 through 2009, the Postal Service moved mail processing for specific 3-digit mail to 36 newly owned facilities and one leased facility. However, when operations were transferred to the new facilities, the Postal Service did not update the coordinates to reflect the change in location.

We estimated the Postal Service undercharged $17.3 million in postage for 27.2 million mailpieces and overcharged $5.5 million for 10.7 million mailpieces from January 27, 2019, (date of annual price change) through December 31, 2019. Unless corrective action is taken to update the geospatial coordinates, labeling list, and applicable policies and procedures, revenue for zone priced mailings will continue to be at risk.

In addition, the Postal Service’s current methodology for calculating distance – by being linked to the mail processing SCFs – may have been suitable in the past but may no longer be appropriate. Of note, this methodology does not always factor the distance mail travels (and corresponding cost) and may result in unintended zone impacts based on changes in mail processing operations.

In a recent example, the Postal Service moved the mail processing of mixed drop shipments entered at the Fairbanks, AK General Mail Facility to the Anchorage Processing and Distribution Center in 2016. Because this mail is now processed at the Anchorage facility, the zone pricing chart reflects as if the mail were accepted in Anchorage, when in fact it was accepted in Fairbanks, about 259 miles away. As a result, zoned mail from Fairbanks to Anchorage is now charged a Zone 1 rate, whereas it was a Zone 3 before the change. The Postal Service will receive $1.05 less for each 5-pound priority mail parcel mailed from Fairbanks to Anchorage because of the zone change.

The Postal Service can take advantage of current technologies (such as GIS) to more accurately analyze and manage spatial data, which includes developing methodologies that 1) more accurately reflect the true distance between where a mailpiece is accepted and delivered and 2) can be more easily updated as mail processing operations change moving forward. Evaluating these alternative methodologies for determining distances could lead to a more accurate reflection of costs.

Recommendations

We recommend the Vice President, Enterprise Analytics:

  • Immediately correct the coordinates for SCFs used in zone price calculations and update the Zone Matrix and labeling list with applicable changes.
  • Develop policies and procedures for periodically reviewing, updating, and monitoring SCFs coordinates used in zone pricing.

We recommend the Vice President, Enterprise Analytics, in coordination with the Vice President, Pricing & Costing:

  • Evaluate alternative methodologies for determining zone mileage, which could include calculating distance between the originating 5-digit ZIP code to the designating 5-digit ZIP code, to more accurately reflect the distance the mailpieces travel.

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Source: USPS Office of Inspector General

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