Roberta J. Duffy
Roberta J. Duffy is editor of Inside Supply Management®.
March 2006, Inside Supply Management® Vol. 17, No. 3, page 30
It's obviously come a long way since the Pony Express, but what the U.S. Postal Service supply chain team has delivered in the last five years is nothing short of incredible. It has captured $2.1 billion in savings through major initiatives and — most importantly — kept its internal clients excited about change.
Before you can fully appreciate any story about the U.S. Postal Service (USPS), you need to understand the unique environment in which it operates. If you think you've got some challenges, consider the following:
- You have $70 billion in revenues and operate in a highly competitive marketplace.
- You are a government agency, so you have certain restrictions, such as an independent third-party (the Postal Rate Commission) that must review pricing; however, you also have a business charter that says you must provide universal service. Whereas a commercial firm could close a nonperforming location or choose not to pursue low-yield customers, you don't have that option.
- You're limited in how nimble you can be compared to commercial competitors. For example, many firms added immediate "fuel surcharges" to deliveries during the gas crunch. Price changes on your end require 16 months of review and bureaucracy.
- You do try to implement best-in-class supply management practices, but must contend with even more push-back than the average company. For example, a simple exercise in supply base rationalization, where you've legitimately chosen to stop using a supplier for valid business reasons, could yield a phone call from that district's congressman.
- Some of your costs, such as retirement and health benefit costs for postal employees and retirees, are legislatively mandated.
- Unlike many private-sector companies and unlike the federal government, you have fully funded your pension obligations.
Essentially, what we're describing here is an ocean liner that must operate in a world of speedboats. That's what makes the USPS story so inspiring.
When ISM interviewed Keith Strange, then vice president of supply management of the USPS back in 2003, he talked about a transformation process they were just embarking upon. The Transformation Plan 2002 called for $1 billion cost savings in the supply chain area over five years. Strange and his team thought that it was a stretch at that time, but began to devise a strategy. They significantly restructured through the creation of category management centers, established category strategies for most of their spend and integrated suppliers more fully into business processes. But throughout it all, they knew they had to have internal clients engaged and excited about the changes. So, in addition to the $2.1 billion (yes, more than double its goal) the USPS ended up saving, it has navigated a course of smooth sailing.
Keeping the Customer Satisfied
"We knew we were going from giving good services and negotiating good prices to delivering more value and lowering total overall costs; we just had to make sure everyone else understood that as well," says Strange. He says the clients can be excited about change if it's presented in the proper manner. Belts provide a perfect example. The sourcing team's analysis revealed that USPS was using several different kinds of high-tech flat power transmission and conveyor belting to meet the same form, fit and function requirements. In some cases, the only distinguishing characteristic was the color of the belt. End users were convinced, anecdotally, that one belt was better than another, even though the performance data suggested otherwise. One of the goals of this initiative was to standardize materials to leverage spend and reduce inventory costs. But the team also had to contend with the prospect of maverick buying based on perceived differences in quality. So, for this first round of strategic sourcing, the team decided to provide end users with options so they would still have some input into the materials they would use. "The perception of choice is deeply rooted in our culture and we had to respect that in order to get buy-in," says Craig Partridge, manager of SCM strategies. "Our plan is to increase standardization in subsequent rounds of sourcing to get even more cost out of product and inventory," adds Dave Page, manager of the MTE & spares category management center, "but we've learned that an incremental approach to change sometimes produces the best long-term supply chain results at the Postal Service."
Any veteran supply manager will tell you that one of the best ways to gain enthusiasm (or at the least compliance) from internal units is to have a success story or testimonial to help your case. If one area sees that supply management's involvement or initiative ultimately made life better, it's more likely to be open to ideas as well. To publicize such stories, internal communication tools are put to use as part of supply management's overall enterprise communications strategy. One of these tools, USPS NewsLink, circulates electronically to nearly 200,000 postal employees. Supply management works with the communication professionals to showcase, for example, the triumph of a "field recall" initiative to help maintenance stockrooms around the country manage excess inventories. A cross-functional team created an automated system to recall excess slow-moving, high-cost spare parts for mail processing equipment from the field when the stock is low at the material distribution center (MDC) in Topeka, Kansas. When these extra parts are identified, field sites get an e-mail requesting they return what spares they can to the MDC. There's a new electronic form to authorize parts returns, and automated e-mails confirm receipt of the items and thank sites for helping out. Since the program started in April 2005, more than $806,000 worth of spare parts has been returned to the MDC.
The important aspect when describing these accomplishments is to give the clients top billing. It might be a supply chain concept, but it's the clients who help change the way we do business and deserve a lot of the credit. "We've been very careful not to communicate everything as a supply management initiative. These are Postal Service initiatives," says Strange.
Borrowing another tip from annals of marketing, the supply management team found itself a notable spokesman: In this case, it was CEO and Postmaster General John E. Potter. Supply management created a video in which Potter appears praising the solid work that's been achieved and encouraging additional supply chain initiatives. The video played nationwide on the closed circuit TV network at USPS. "It's a real balance," says Strange. "You need to have a clear communication strategy that constantly keeps your campaign alive, but you can't overdo it."
Of course, what helps (and what must be in place for any firm trying to reach goals or gain support) is to have endeavors aligned with the enterprise-wide objectives. It was no surprise to anyone in the Postal Service that the organization was under tremendous pressure to turn finances around and stay competitive in the market. After 9/11, the anthrax attacks and rising commodity prices, the big picture is quite clear. As such, supply management has always tied its undertakings back to costs. "When we tackle costs, we demonstrate our value," say Strange. When clients hear that their efforts will help in reducing costs, it's easier for them to get on board because they know the challenge. "And then it's great for us to be able to communicate that cross-functional teamwork is what made it happen."
Another factor that builds respect is having credible measures for performance. The Postal Services measures supply chain impact in terms of both cost savings and cost avoidance. However, rather than just self-reporting, the results are scored by the controller and periodically reviewed by the Inspector General. One example of the rigor of the process is that a recent review suggested improvements in the statistical weighing of items in a market basket used to assess cost reductions on a strategically sound office supplies contract. As a result, reported cost reductions were reduced and the process improved for the future. While the task is thorough and can be unforgiving, it's worth it. "There is definitely rigor in the process, but that's good; I'd rather be understated than overstated when it comes to results," said Strange. Internal clients, too, then can hang their hats on these savings, or cost avoidances, knowing they've been validated.
And while customers were seeing the effects of supply management's good work, it was also getting the attention of someone else very important, the aforementioned Postmaster General and USPS CEO Potter. It was he who introduced the enterprise-wide Transformation Plan 2002 that would bring organizational changes and modernization to virtually every aspect of the business. When Potter accepted the Kachina Award, bestowed by CAPS: Center for Strategic Supply Research for 2005 Chief Executive Officer of the Year, he recognized the USPS supply team, and in particular its smooth change management acumen. "We were successful because of the people and the confidence they gave to the organization that it would get the quality products and services it needed," he said.
The success of the Transformation Plan in 2002 has led to the new Transformation Plan 2006-2010. Among other initiatives detailed in the plan, there is a strategy to expand standardization and process control by focusing on major cost drivers, especially delivery operations. The supply management team (Strange has recently retired from his post) will have their work cut out for them, but one thing appears to be certain: Whatever changes are implemented will generate value for all those on board. All hands on deck can look forward to processes that meet the enterprise wide goals and keep the customer satisfied.
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