Review of Royal Mail's short-run marginality (horrible title but it will have an impact on all of us)

[TrueBlueTerrier]

http://stakeholders.ofcom.org.uk/binari ... C%20report" onclick="window.open(this.href);return false;

Executive summary

Ofcom commissioned Analysys Mason and PLCWW to undertake a review of Royal Mail’s shortrun cost marginality. The review has focused on Royal Mail’s current approach for measuring marginality, based on industrial engineering measurements, and has assessed whether the approach should be updated and whether it captures the full range of marginality issues. The review is based on Royal Mail’s 2014 model suite, which used industrial engineering parameters from 2012.

Royal Mail updated its measurements in 2015. In the current methodology for estimating short-run marginality (expressed in terms of cost-volume elasticities or CVEs), industrial engineers record the time taken to undertake activities in the Processing and Delivery pipeline segments. Each activity is classified as fixed or variable depending on the type of costs incurred.1 By adding up the time from all the fixed and variable activities in a pipeline segment, Royal Mail can determine the short-run marginality of its frontline work force.

Our review shows that the classification of fixed and variable activities is reasonable.

The planning values (PVs) and CVEs for Outdoor Delivery need to be updated to reflect the current delivery methods and the bundling of unaddressed items (known within Royal Mail as door-to-door or D2D items). We estimate that updating the mix of delivery methods would result
in a materially lower marginality of [] blended across Delivery Indoor and Delivery Outdoor (down from []), and [] for Delivery Outdoor only (down from []).

We have also identified that Collections pipeline activities are modelled using analogous Processing and Delivery CVEs. We consider that this is inappropriate, because Collections activities are believed to have a much lower marginality than both Processing and Delivery activities (we estimate []% for collections compared to the []% which is the result of the application of the Processing and Delivery CVEs). We identified a similar issue with Local Distribution activities.

We have found that various bottom-up assumptions related to Processing could be refined to match the current work plan and machine configurations, but due to the large number of model inputs these refinements would not have a significant impact on the resultant PVs and CVEs.

The various PV and CVE factors are fed into the Business Plan, where they are used to calculate the short-run marginality-related change to frontline costs.2 The current CVE method considers pipeline overheads to be short-run fixed costs. We agree that pipeline overheads do not vary with
short-term volume changes and therefore support this approach.

1 Note: some activities may be either fixed or variable, depending on where they occur in the process, e.g. clear downs occur during process work (variable) and again when a despatch is made (fixed).

2 In the Business Plan, frontline costs can also vary every year depending on two additional factors: []

By assessing all of the pipeline areas, we have reached our estimates and calculations for revised CVEs. At a headline level, the overall marginality is the same ([]). However, as indicated above, this comparison of the overall marginality hides various differences for particular pipeline segments – some (such as []) are lower, while some are higher (e.g. []).

We have compared gross hours with (CVE-related) standard hours. In both Processing and Delivery we conclude that there is a material, unreconciled gap between the effort required to undertake the measured volume-based fixed and variable activities, and the amount of staff resources in the business. We think that this gap is explained to some extent by the hourly, daily and seasonal variation of mail volumes, which leads to short-run fixed costs arising from changes
in staffing to meet the varying flows of mail, and inevitably there are periods of less-than maximal working. The industrial engineering (IE) approach is not able to capture these effects, and we conclude that the marginality in processing is currently overstated by the IE-based mechanism, and should be lower.

3 Issues related to staffing and efficiency may also have an influence on the unreconciled gap, but are not within the scope of the present review.


The analysis above has revealed a number of insights into what might be causing the difference, and shows the benefit of performing such a reconciliation. The size of the difference between gross and standard hours highlights the need to ensure that the PVs are based on up-to-date IEbased measurements. We recommend that Ofcom asks Royal Mail to undertake its own reconciliation, and also suggest that Ofcom should continue to closely follow any updates that
Royal Mail makes to its IE-based inputs.

Finally, we have expanded our analysis to consider the differences between zones. The major differences are between Urban and Rural zones, while the differences between different types of urban zones (London, Urban and Suburban) are small. Urban zones have a much lower marginality than rural, mainly due to the number of deliveries to firms within urban areas, which have a particularly low marginality.

[DB1100]

This years winner of goobledook goes to Royal mail,will they publish this report in plain English I wonder.

[TrueBlueTerrier]

To be fair to them it's actually a regulators report - Ofcom.