Tag: Costs

Guest Post: Postal Service Life Cycle Decline

Prof. Howard Weiss shares his insights with our readers monthly.

As discussed in Chapter 2, when a product or service is in the decline stage of its life cycle, cost control is critical. Currently, demand for postal services is in the decline stage in many, if not most, countries. The decline is due to two main factors.

 Digital communication has greatly reduced the number of letters being sent. In the U.S., first class mail volume has dropped to 20% of what it was in 1997. Similarly, Canada Post reported a decline from 5.5 billion letters delivered annually 2 decades ago to only 2 billion today.
 Parcel delivery—once a potential growth area—has increasingly been dominated by private competitors such as UPS, FedEx, and Amazon, which can operate flexibly without the regulatory obligations imposed on government-run postal services.

As a result, national postal authorities are incurring substantial financial losses: $9.5 billion in the U.S., $1 billion in Canada, and $427 million in the UK. There are several ways to cut costs, and different countries are taking different approaches:

Job cuts The most obvious way to reduce costs is to reduce the number of employees. The U.S.P.S. has announced plans to eliminate 10,000 positions, largely through voluntary retirement incentives, while Deutsche Post in Germany anticipates cutting 8,000 jobs.

Close facilities The U.S. is considering closing some of its 31,000 post offices when their leases expire. Canada is going to close some mostly rural post offices. On the other hand, a new law in Germany requires the postal service to not close any of its current facilities.

Rural delivery
In the U.S., Canada and England the postal authorities are required to provide universal service to all addresses and for facilities to be open 6 days a week. In Germany the expectation is 5 days per week. Universal service is costly as it requires more time to deliver mail to rural areas than to urban areas.

Door to door delivery  Canada has transitioned many households from door-to-door delivery to centralized community mailboxes, a shift projected to save $300 million annually. A majority of Canadians already receive their mail through community, apartment or rural mailboxes.

Extended delivery times In some countries the required time to deliver mail may be increased. In Germany the expected time is now 3 days rather than the former 2 days. In all countries delivery of mail could be delayed by a day or more.

Classroom discussion questions:
1. What else can you suggest to save money?
2. Is it reasonable to expect the post office to deliver to very rural addresses?

Guest Post: Electricity Power Lines and Operations Decisions

Prof. Howard Weiss survived the recent hurricane that hit Florida and shares his thoughts about losing power.

The two recent hurricanes, Helene and Milton, have devastated power lines in many places but especially in Florida and N. Carolina. Florida Power estimates that underground lines fared 12 times better than lines that were overhead during the hurricanes.

There are two situations utilities face, depending on whether it is a new installation or a change from aboveground to underground. In either case there are several OM factors that are discussed in your textbook that are relevant when deciding whether to use overhead lines are below ground lines.

Fixed costs In general, underground lines require trenches and manholes which are more expensive to build than erecting pylons/poles for overhead wires. Also, underground wires require special insulation. The cost of installation can vary depending on the locality. Underground lines cost 5-10 times as much as aboveground lines–$1.5 to $3 million per mile compared with $285,000 to $800,000 per mile for above ground lines.

The first overhead lines and poles were built in 1844 and at that time underground lines were tried but they failed.

Variable costs The major variable costs are for maintenance and repair. Underground lines are more difficult to maintain or repair. The major direct cost to consumers is the cost of being without electricity. Ultimately all of the costs will be borne by the consumers.

Capacity Above ground cables have roughly 6 times as much capacity as underground lines.

Reliability While below ground lines are not 100% reliable, they are more reliable than overhead lines. Above ground power lines can be felled by wind, ice storms, falling trees and damaged by squirrels. Below ground power lines can be washed away or corroded along coastal areas due to storm surges. In Winter Park, Florida, where 80% of lines are underground, 98% of customers had power during Hurricane Milton.

Lifespan Aboveground lines have twice the lifetime, 70 years, compared with belowground lines.

Risks Aboveground lines can spark and cause fires. Pacific Gas & Electric paid $55 million after its power lines started a destructive brush fire. Also, sometimes power needs to be shut off to prevent any fires.

Aesthetics Clearly, belowground lines lead to a more pleasing appearance than overhead lines.

Classroom Discussion Questions
1. Does your community have underground or overhead wires or both?
2. What analysis could be done to make the decision between overhead or underground lines?