FSS Is Saving Big Bucks, USPS Claims

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The troubled Flats Sequencing System is saving hundreds of millions of dollars annually, according to a U.S. Postal Service claim.

Based on information USPS filed recently in a lawsuit, the agency’s $1.3 billion FSS investment will pay for itself after barely three full years of operation.

“The Postal Service saves approximately $325,408 for each month of operation of each FSS machine,” USPS said in response to a lawsuit filed against it by the key FSS vendor, Northrop Grumman. “This is the monthly amount the Postal Service would have to pay employees to manually sort flats to delivery point sequence if the Postal Service did not use the FSS machine, minus the additional cost of operating the FSS machine.”

FSS was supposed to revolutionize the sorting of difficult-to-handle flat pieces like catalogs, magazines, and large envelopes. Mailers hoped the efficiency gains from automating mail sortation that was done by letter carriers would reduce pressure on the Postal Service to increase postal rates for flat mail, but now they fear that FSS isn't paying off. (See FSS Is Increasing USPS's Costs, Expert Says and FSS Machines Running Far Slower Than Planned.)

Because the 100 FSS machines were deployed an average of 12 months later than required by contract, USPS claims Northrop Grumman owes it $393.7 million for lost savings. USPS is seeking an additional $17 million from Northrop for other alleged breaches of contract, such as a lack of spare parts, error-plagued maintenance handbooks, and failure to honor warranty claims.

The USPS filing also denies Northrop Grumman claims that USPS “improperly wrested design control” over the machines from Northrop and thereby caused the delayed implementation and other problems. (For more on Northrop’s claims, see Flats Litigation System: USPS and Vendor Battling It Out Over Huge FSS Machines.)

High rate of return
If the Postal Service’s numbers are accurate, the money it invested in the football-field-sized machines will have a hefty 27% “internal rate of return” if the machines last for only 10 years.

But extensive cost estimates like this rely on assumptions and judgment calls. Because the context of the lawsuit gives USPS the incentive to make the FSS savings seem as large as possible, its estimate begs a few questions:

• Does the net savings of $325,000 per month represent a best-case scenario -- for example, a machine that runs well with no major hiccups -- or is it truly an average for all machines in all months?
• Postal officials stated recently that only 60% of flat mail in FSS zones was being sorted on FSS machines. Is the $325,000 estimate based only on the best-utilized machines or also on the machines that are underperforming their intended capacity?
• As Dead Tree Edition reported in September, FSS machines’ “erratic performance sometimes results in carriers spending just as much time preparing the mail, or even more” and last winter “led to many carriers delivering mail after dark – definitely not a high-productivity environment.” Do the USPS savings estimates include the cost of such downstream disruptions?
• Mailers, especially magazine publishers, report many customer complaints about the “Flats Shredding System” damaging mail. Is the Postal Service factoring in the lost revenue from those customers not renewing or switching to digital media? (If your answer is “Yes”, contact me about a really sweet deal on a bridge I can sell you.)
• Postal officials have recently reported improved FSS operations, especially in regard to machine reliability. Does that mean the monthly savings per machine will be even greater than $325,000?
• Now that the Postal Service has had such a major falling out with the contractor it relied on for such key functions as documentation, training, and modifications, how long will it be able to operate the massive machines effectively on its own?