Selection criteria for remail, pricing quality and selecting suppliers
M.J. Schot
Rijksuniversiteit Groningen
Supervisors:
E. Nivorozkhin F. Quix
Preface ... 3
Summary... 4
1. Company outline ... 6
2. Research boundaries... 8
3. Problem Statement ... 9
3.1 Conceptual model ... 10
4. What can be regarded as the Product G concept ... 12
4.1 What is remail ... 12
4.2 Internal process ... 14
4.3 Cost structure of Company A Product G ... 14
5. What is the current situation of the market?... 16
5.1 Belgium ... 16
5.2 Legislation ... 18
5.2.1 Remuneration... 18
5.2.2 REIMS... 19
5.2.3 ETOE... 20
5.3 Expectations... 21
6. What are the relevant selection criteria for (potential) customers?... 23
6.1 Using airline industry segmenting theory ... 23
6.2 Adopting airline pricing techniques to the mail industry ... 25
6.3 Adapting the performance objectives ... 26
6.4 Identifying selection criteria... 27
7.1 The need for segmenting ... 28
7.2 The Company A customer segments ... 29
8. How can the suppliers be valued with respect to meeting customer needs? ... 32
8.1 Rating the suppliers... 32
9. How can added value be achieved? ... 34
9.1 The rating of the customers segments... 34
9.2 The current routings ... 36
9.4 Making the match... 37
9.5 Comparing with the current routings ... 39
Conclusion ... 41
Literature... 43
Preface
With the start of the academic year of 2003-2004, a good friend and I decided that we should speed up our studies, and get into the fast lane. After that year we both reached our goal of being able to leave Groningen for an internship, after getting some 65 points. That concerns good old-fashioned points, not some new fangled European Credits, which made a mess of my score list.
Moving away from Groningen meant a new phase in my life, which would consist of getting up early and being in public transport for a good part of the day.
Securing an internship with COMPANY B, an office building I can see from my house in The Hague, would fit the bill nicely. They, however, had other plans.
I would go to Company A, a joint venture active in the remail business, based in Amsterdam. In the past months I was introduced to the mysterious world of REIMS, ABB, ABC, ITL’s, IC-DC arbitrage gaps, and the ever-important 2nd margin. Company A proved to be a truly international firm, with colleges from all over the world. This also led to a thesis in English, which fit nicely with a Russian supervisor, and the Brits, South-Africans, Belgians, Americans, Germans, Indonesians, Asians, and a handful other nationalities surrounding me every day.
I must admit that I really liked to write this thesis, I have enjoyed a very good time at Company A. Before I set of restoring my 1966 Land Rover for the next three months, I would like to give a big thank you to the people at Company A, and especially Wouter, Loek, Rolf, Rocco, Mel, Colin, Rinke, Wendy and Olaf, who always were prepared to give feedback and discussion.
Maarten Schot
The Hague, 29th April 2005
Summary
The goal of this thesis is:
Finding a possible better fit between customers and the products supplied by Company A within the Product G concept.
First of all, it is necessary to describe the ‘Product G concept’. This consists of a postal process called remail, which basically is the sending of mail
originating from country ‘A’, via the postal operator of country ‘ B’ , to country
‘C’, while the normal routing would be mail from country ‘A’, would go to the postal operator of country ‘C’ directly, without any intermediaries. The
advantage of remail consists of tariff distortions among the various countries, and also the different rating systems as stated by the Universal Postal Union, the United Nations body governing mail.
This system consists of complex routings using some 150 different postal operators, some private but the most consisting of public companies. This thesis deals with the Belgian market, for which Company A has some 50 different operators or suppliers as they are known. The main question of this thesis is:
How can added value be created by implementing a model in which the criteria of customer segments and the characteristics of products, as supplied by subcontractors, are aligned, within the Product G concept of Company A.
Company A, up until now, distinguishes its customers solely on the business they are in, as in ‘leather industry’ or ‘chemicals’. They distinguish the other side of their business, the suppliers, only on price, always looking for the cheapest option. Within this thesis, the customers are segmented based on their postal needs and wishes, which are relevant to Company A, because as opposed to whether the companies produce milk or paint, they both send out invoices and internal newsletters. The ground breaking research done by Borenstein & Rose, based on airline pricing, bears a striking resemblance to the mail business. Therefore, some of this research can be used for
describing the mail industry Company A is in.
Based on this idea, the criteria of choice for customers were identified, after which the customer segments could be identified using these criteria. These criteria are based on the performance dimensions as identified by Slack et al, but they are adapted to the needs of Company A. Putting the two together makes the differences in customer needs visible and tangible. Then, the contracts were coupled to the criteria of choice, which made the differences between them visible as well. It also places emphasis on more than just price, as the customers do not choose on price alone. By combining the customer segments, based on what customers want, and the suppliers, based on the service they offer, Company A can provide a better combination between the two, leading to added value. Company A has chosen to be a quality supplier, so it should adjust its processes to match that.
By not focusing on price alone anymore, but taking quality, customer relation and operational interface into the equation, Company A can do away with the greater part of the distinction in mail size. For if it chooses the overall ‘best’
supplier, the price difference over a different size is no justification for
lowering the quality. Therefore, if a supplier is the ‘best’ option, it is so in every size. This can lead to a simplification of the routing matrix, and could do away with quality differences experienced by customers when they sent out
different mail sizes, which could be delivered by different suppliers in the current situation.
To answer the main question, if Company A can distinguish its suppliers on more criteria than price alone, it can answer the needs of its clientele in a better way, which will lead to added value. Stepping away from the price-only based approach, and making the tacit knowledge of the other aspects of a certain supplier visible, will lead to a better combination of supplier and customer. Also, the simplification of the sorting process will lead to lower costs.
Matching all customer needs might be more expensive than matching only on price, but will lead to more customer satisfaction, therefore, added value.
1. Company outline
Company A is the brand name of Company J Mail N.V. and is a joint venture between COMPANY B N.V, the Netherlands, with a 51% share, and Z Post and Company C plc, with both a 24, 5% share.
The Z branch of the company is owned by Company J mail N.V and Z Post, both with a 50% share. The company head office is based in Amsterdam, and regional head offices are based in Brussels, New York and Z. Company A as a whole employs 1.250 people.
The company operates in the 4 billion international cross-border business to business mail market. It operates in 60 countries, using offices in 31. The total processed volume last year were 32 million items, consisting of 521 million kilos.
Company A is mainly active in the remail business which is the export of international mail to be entered into the mails of a foreign postal
administration. The era of modern remail began in the late fifties, and a competitive global market for remail developed in the eighties. Remail has been supplemented and partly replaced by a new service for international mail, i.e. direct entry mail, in recent years. Traditional remail is mail originating in a country ‘A’, posted in a country ‘B’, for delivery in a country ‘C’. Direct entry mail is mail originating in a country ‘A’ posted directly in a country ‘B’. By doing so, the mail operator in country ‘A’ is not used, and often the mail is treated as domestic mail in country ‘B’, and not as the international mail is actually is. This provides lower tariffs.
In recent years, PPOs1 underwent large changes. Due to the liberalisation the market has changed substantially. Many PPOs have evolved from being government agencies to become a listed corporation or even a corporation
1 Public Postal Operator. The national government owned postal company. Some are being privatised, or already are privatised, such as COMPANY B.
Americas 260 million items
9 million kilos
Europe 230 million items
18 million kilos
Asia & Pacific 33.4 million items
4.8 million kilos Total volume
521 million items 32 million kilos
under governmental and private partnership. At the same time PPOs have extended their business to foreign countries following the example set by private remailing companies like DHL and COMPANY I. European PPOs have followed these examples and purchased numerous private (re) mailing
companies to establish themselves in foreign markets.
The main competitors on the international mail market fall in three principal categories.
- The aforementioned PPOs. Bound to Universal Service Obligations2
under UPU3-rules and conditions. They have the infrastructure for collection, sorting, transport and distribution, and are linked through international transport
- Integrators, which provide faster service for selected business
customers and specific market segments. They have infrastructure for collection, sorting and distribution, mostly with some elements
subcontracted.
- Brokers/consolidators. They try to offer more price-efficient service for selected business customers, and subcontract collection, sorting, transport and distribution, sometimes with own elements of sorting and transportation.
Company A can be categorised as an integrator. As for Company A, after numerous very profitable years in the remail business, the competition has now caught up, leading to diminishing profits. Company A’s primary sources of revenue are:
- The marketing of its own products and services through ABC routings, the “Product G” business.
- Carrying out activities on behalf of its shareholders.
These comprise managing the export revenues of Z Post, and
‘Sales Agency Agreements’ on behalf of COMPANY B Post (“Red”) and Company C (“Blue”)
2 The obligation to deliver mail to every address in the country.
3 UPU : The United Nations body concerned with international mail
2. Research boundaries
Every research project should be limited, because otherwise it would prove too extensive and laborious, or it will become too broad and vague, and thus it will be not possible to provide answers to the research questions. This
research is limited to Company A Company J (Belgium) N.V. Company A has numerous ‘country organisations’, legal entities within their own. Belgium was chosen because it reflects the various products as sold by Company A and as it is located in Brussels, a two hour journey from Amsterdam.
This research has taken place within the Finance Organisation of the
Corporate Headquarters, in Amsterdam. Furthermore, this research is limited to the ‘Product G’ concept. This is the internal name for all remail activities, which is the core business of the company. After a few very profitable years, when Company A was virtually the only company in its niche, the company is now being overtaken by its own success, in the form of competition on its own game. Within Company A, a big ongoing project named Product G Recovery is taking place, and this research project fitted well within that project.
Also, Product G is by far the most interesting process within Company A, because of its complex nature, and because the other products are products of COMPANY B and Company C, for which Company A acts as an agent.
Due to the complex nature of the business, and the fact that research on the subject is virtually nonexistent, a fairly large amount of research has been done on describing the processes of ABC Remail.
This thesis is subject to certain limitations, which are defined as follows:
- The research takes place at Company J Mail N.V, commonly known as ‘Company A’, in Amsterdam
- The research takes six months to complete, from October 2004 until March 2005
- The strategy of Company A at the moment of research is taken for granted
- Regarding Company A as a company, the research will look into the Belgian entity and market, and to the biggest five export partners of Belgium
- Regarding Company A as a company, the research will only look into the Product G product.
- The research will take the current (2005) legislation as a given factor.
- For data regarding pricing and other figures such as sold items, the results form the 3rd quarter of 2004 will be used, because they can be trusted not to be altered any more.
3. Problem Statement
Based on these boundaries, a problem statement emerges. This will be divided into an objective, the main research question and sub-questions.
Objective:
Finding a possible better fit between customers and the products supplied by Company A within the Product G concept.
In order to fulfil this objective, a main research question needs to be answered.
How can the added value be created by implementing a model in which the criteria of customer segments and the characteristics of products, as supplied by subcontractors, are aligned, within the Product G concept of Company A.
Broken down into sub-questions, this will be:
• What can be regarded as the Product G concept
This will describe remail as a whole, and then going into further detail, describing the remail process relevant to Company A.
• What is the current situation of the market?
Looking into the Belgian mail market, and into international rules and regulations concerning remail.
• What are the relevant selection criteria for (potential) customers?
Finding and defining the criteria on which customers found their choices concerning mail suppliers.
• Which customer segments can be defined as relevant for Company A?
Defining the customer segments, based on the needs relevant to the mail business
• How can the suppliers be valued with respect to meeting customer needs?
Measuring more than the price alone, and valuing other aspects of the service provided by these suppliers.
• How can added value be achieved
Can added value be gained by making a match between the suppliers and the customer segments?
3.1 Conceptual model
Basically the customer demand side and the supply side in the Product G business will be coupled in an optimal situation, as in this conceptual model.
Fig. 1 Conceptual model
For this model, the customer needs are taken as a central starting point. Their needs, i.e. the criteria based on which they choose their supplier, must be fulfilled. As selection criteria will be identified, they need to be rated.
The rating of criteria will be done according to professional judgement of the sales persons involved. Because this thesis is limited to Belgium, it is wise not to base conclusions on a single country’s needs, the goal of the thesis is to provide a model on which Company A can base numerous individual country models. Company A should sample-test the customer selection criteria scores.
The selection criteria are based on extensive study of relevant literature, which will be extensively explained in chapter 6 and are commonly acknowledged in the business. Regarding the other half of the model, the supply side, the suppliers are ranked using the same selection criteria. The rating of these suppliers is done in accordance with the commercial and operations departments, based on their professional judgement.
Customer demand Suppliers
Identifying business processes, selection criteria, rating
Identifying suppliers, selection criteria,
rating
Combination
Added Value?
The combination of the service provided by the suppliers and customers needs will lead to added value, as customer needs are met by Company A.
This could lead to higher premiums, and the possibility of higher profitability.
This combination will provide an easy and standardised way to provide customers with the right routing and service level they expect. Optimisation can be realised in different ways. First, potential misfits will be shown, for instance when a customer is getting a higher service level than he needs, and when this higher service level comes with a lower margin, and then there is something to be gained. Also, customers who are served better with their new supplier will probably provide more revenue.
4. What can be regarded as the Product G concept
This chapter will describe remail as a whole, and then going into further detail, describing the remail process relevant to Company A.
4.1 What is remail
The core business of Company A is called ‘Product G’, which consists of ABC and ABB mail. ABC occurs when a customer, based in a country A posts mail in a country B (either directly or through an agent) for delivery in a country C, hence ABC. ABB occurs when a customer, based in a country A posts mail in a country B for delivery in a country B, but country B is not necessarily
adjacent to country A.
Four factors are recognised as the reason for the emergence of the remail business in the 1970’s
1. The unsuitability of the terminal dues system
The low level of compensation4 paid to some countries for lightweight items led some postal operators, together with remail firms to try to attract international mail as well as domestic mail. On the other hand, terminal dues for heavy items translated into higher revenues for the receiving postal operator than it would receive under domestic tariffs.
2. Low quality of service and high international postage rates
To accelerate delivery of their mail, some large customers had their mail shipped directly to the country of destination for mailing, thereby taking advantage of domestic rates much lower than those for
international mail.
3. Services ill-suited for big customers
Big customers wanting a postal service with greater added value were already turning to remailers, which collected items directly from the client and could even handle mail production, addressing, and packaging. Already at that time, by using magnetic tapes or
teleprinting, mail items could be produced directly in the country where the remailing was taking place.
4. Tariff distortions among countries
The wide spread between different countries’ tariffs resulted in mail being sent from those countries with the lowest domestic rates.
Remailers proceeded in three different ways:
- Mail from country A destined for country B was sent from country C
- Mail from country A for addressees in country A was mailed from country B
- Mail from country A for addressees in country B dropped off directly by the remailing company for delivery inside country B, so the mail is treated as domestic mail instead of international.
4 As the biggest part of the overall cost are incurred in the delivery of mail, countries compensate each other for the delivery of mail from abroad.
ABC remail can take the form of
- ABC physical remail. Mail produced in country A and transported abroad (to country B) and then re-entered as international mail to country C under country B’s indicia.
- ABC electronic remail (also known as non-physical remail) – mail not printed in country A, but instead possibly prepared (designed and stored in electronic format) in country A, then printed in country B and posted to country C under country B’s indicia.
- ABC virtual remail.
o Mail produced in country A with the international indicia of country B and then routed from country A to country C, or o Mail produced in country C with the international indicia of
country B, but entered into country C’s international mail stream without ever crossing the border.
ABB remail can take two forms:
- Outbound ABB. In the outbound mode, a remailer (or consolidator) transports mail origin A to a foreign country B and injects that into country B’s domestic delivery system. Such mail bypasses country A’s postal service, and in general would serve to reduce the contribution made by outbound international mail, since outbound letter post more than covers its volume-variable costs.
- Inbound ABB. For inbound ABB, the remailer or foreign postal
administration directly (country B) injects foreign origin mail into country A. Since country A’s domestic rates are designed to cover costs, from country A’s perspective, ABB merely provides foreign mailers the same access to domestic rates that country A’s local customers have.
A more specified description is necessary to understand the total picture of the complexity of the processes within the company. When a customer and Company A agree on doing business, the customers’ mail is picked up. “Pick up” is step one in the process and this is mostly done by COMPANY I. Then, the mail is trunked, destined for different mailing centres. After trunking, the mail is dispatched to a ‘CSC’, where the mail is weighed and counted, under
‘revenue protection’. This phase is intended to check whether the customer is sending what he says he is sending. Then, a ‘rough’ sorting takes place. After the ‘rough’ sorting, the mail goes to a ‘TaNaT’, sometimes in the same
building, sometimes through ‘line haul’, i.e. transport. In the TaNaT, an abbreviation of COMPANY I, the ‘fine’ sorting takes place, and the mail is made ready for the different postal contracts. Not every PPO or Hand Delivery5 firm has the same requirements regarding supplied mail. After the TaNaT, the mail is handed over to the supplier, who is responsible for the rest of the routing.
5 A commercial mail operators who targets specific segments of the market
4.2 Internal process
The internal process of matching the customer with a supplier is interesting but complicated. First, the ‘Operations’ department comb the postal world for interesting, i.e. cheap deals. They feed all these contracts, 160 were in use as of Q3 of 2004, into a big database, dubbed the ‘routing matrix’.
When a customer requests a price for his mail, the sales department assesses this request, regarding the price and service level, relates it to a type of mail service within the routing matrix, and transfers this information to yet another department, the commercial department. This department, armed with the information on the customers, specifies the routing and contracts used, computes the cost, and relays it back, with a mark-up, to the sales department.
They, in turn, know this mark up, and within the bandwidth between cost and the mark-up, can negotiate with the customer on price. The only distinctions made are on price and on assessment of the required service level, with the routing matrix in mind. This service level is not measured or systematically structured, but relies on the sales person’s judgement.
Fig.3 Process description
4.3 Cost structure of Company A Product G
Measuring profitability of a certain mail route is difficult and complex, because of the changing conditions, number of items, weight and turbulent
environment. Within Company A, a team of professionals called the Business Line Review team, BLR, monitor the business by laboriously checking
business profitability during a fixed period. This is also made difficult because of allocating cost is a complex task, because it is not always clear exactly where costs are incurred. The fact that this team consists of three people constantly monitoring the business indicates that it is not a simple task.
Normally, around 80% of the total costs consist of postage cost. This is a very large percentage, but for a given supplier the postage is more or less a fixed value, as third party access 6gives the competition access to the same discounts the PPOs give to their customers. With postage stable, the company has to be very careful with costs such as overhead, as they can press the company out of competition. So from the 20% margin that rests from the revenue minus postage, the company must pay all expenses and stay cheaper than the PPO which services it uses. Because of the tough competition, price wars are a viable option. In the long term, losses can not be sustained by a company such as Company A, which lack the full scale
backing of a large PPO.
With the upcoming liberalisation of the postal market in mind, some large PPOs try to ‘buy’ market share through their international branches. They compete with ever lower prices, pricing competition out of the market. They can do that by offering services below the actual cost, a method which can only be used by companies with very deep pockets, i.e. large amounts of money. In the past, this behaviour has taken the form of cross-subsidizing.
The German PPO was accused of cross-subsidizing its North-American DHL company, and was found guilty by the European Commission, a decision which forced the company to form a new legal entity for DHL7.
Because Company A is not backed up in such a way that it can sustain losses very long, the company tries to get out of the commodity part of the market, where it can charge extra for a premium service.
6 http://www.europa.eu.int/eur-lex/en/dat/2003/c_094/c_09420030423en00030011.pdf.
7 Geddes, R. Anticompetitive behaviour in postal services, Stanford, 2004
5. What is the current situation of the market?
Looking into the Belgian mail market, and into international rules and regulations concerning remail.
5.1 Belgium
For this research project, Belgium is taken as an example because it covers all the activities Company A has to offer in Europe. Therefore, it can be used as a good example for other countries. This research project is within the scope of the Product G Recovery project, designed to make the once very profitable core business of the company healthy again.
Belgium is orientated towards exporting goods and services, with a total value of 225.500 mln exported in 20038, of which 173.500 stayed within the EU.
The country imported a total value of 207.600 mln, of which 152.000 mln intra EU. The primary trade partners (export-wise) are Germany, France, The Netherlands, Great Britain and Italy.
Im- & Export
35.5%
10.6%
42.5%
11.4%
Intra EU Export Extra EU Export Intra EU Import Extra EU Import
Fig.4
Belgium has one of the most open economies in the world. Foreign trade and investment is very important to the economic development of Belgium. It used to be mainly focussed on industry, but in the last 25 years Belgium became a service-economy, with 71, 6% of the GNP in that sector. Industry, however, still plays an important role, but most of the production is exported. The growth of the industry is an important driver of the service economy, as it creates new demand for services primarily in the information technology sector.
The market for daily and administrative mail, dominated by The Post, the Belgian PPO, is diminishing, due to technological changes. The Belgian Post
8 www.statbel.fgov.be
believes the total volumes will decrease by 8% in 2007. In contrast to the Dutch market, where more than 95 % of all mail is business orientated, in Belgium this is only 85 %.9
Due to liberalisation of the mail business in Belgium in 2007, the market will be exposed to increased competition.
As for the market share, it is very difficult to obtain trustworthy figures. The different postal organisations are very secretive, and most of the competition of Company A are also closed partnerships, and therefore not obliged to publish an annual report. The Belgian Post, the former monopolist and the biggest competitor on the market, however, is. Most of the data comes from its website10. The Belgian Post reports that 10 % of its revenue is made in the international mail market, and that they have a 60% market share. Almost all profit is made in the outbound sector of this market, as due to the very nature of the market, arbitrage gaps are in the disadvantage of the receiving country.
As the revenue of the Belgian Post in 2003 was 1.9 billion, we can estimate that the total market is approximately 321, 5 mln. In 2003, Company A’s revenue in Belgium was 12, 8 mln, leading to a market share of
approximately 4%.
Belgian Post recognises Deutsche Post, Company A, Chronopost and Direct Link as their biggest competitors. Company A Belgium’s revenue 2003 was 16, 07 mln11; Belgian International Post’s (BIP) revenue was 192, 912 mln.
Market share 2003
60.0%
4.0%
36.0%
BIP Spring Others
Fig.5 Market share
As the liberalisation of the postal markets is due for 2007, a shift in market share is expected, mostly away from the PPOs. When this happens, the market for ‘petit13’ mail will be open to everyone, but in Western Europe the
9 Pt.nl.bpg.post.be
10 http://www.post.be/site/nl/index.html
11 Internal income statement
12 Belgian Post Annual Report
13 Minimum dimensions 90mm x 140 mm, Maximum dimensions 165 mm x 245 mm, Thickness 5 mm, item weight up to 100 gram.
tariffs will be the same for every company, under the REIMS III Level 3 Access Agreement. Also, the terminal dues system is moving the
remuneration14 rates toward 80% of the domestic rate, which will probably lead to a move from ABC options to ABB and Hand Delivery.
5.2 Legislation
The postal world is fairly regulated, by numerous organisations, treaties, agreements and laws. This chapter will describe the various bodies which deal with the postal matters around the world. The regulations concerning mail are very complicated, and going into some detail is necessary.
5.2.1 Remuneration
At the time of the founding of the UPU15, the notion that Postal Operators did not share the money received for items posted to foreign countries was commonly accepted, because, as it was said, “a gentleman always writes back”, i.e. the volumes of mail were roughly equivalent and balanced out over the long run. This idea was valid until other categories of mail than letters, such as newspapers, parcels and magazines became more widespread and common after the First World War. Large streams of mail began to flow one- way, leading to imbalances in remuneration.
The need arose for a system regulating these imbalances. In 1999, the UPU16 adopted a two-tiered system for determining terminal dues paid to UPU Postal Administrations that became effective January 1, 2001. The tiers are
distinguished based on whether a country is classified as ‘Industrialized’ or
‘Developing’. This system also saw the introduction of the so-called Quality of Service improvement Fund, or QSF. This made a connection between the postage paid and the quality of service. These self-imposed price barriers skim the legal boundaries as laid by the European Commission, and sometimes, as will be explained later, cross them.
Developing countries continue to pay the prior UPU17 flat rate per kilogram for mail between each other and to industrialized countries except as provided under special criteria.
For industrialized countries to developing countries,terminal dues were set at a flat rate per kg, though a 7.5 percent surcharge to finance the QSF has been added. In the case of shipments with large numbers of items, the receiving operator in a developing country may request supplementary compensation. These different rates, and the rather outdated division into either IC or DC countries leads to some interesting arbitrage possibilities regarding remail, which will be explained later, and which form one of the main arteries of Company A.
14 The remuneration tariffs will be explained in chapter 5
15 Universal Postal Union, an United Nations body
16 http://www.state.gov/p/io/rls/rpt/2003/25052.htm
17 UPU 2-tier system as per 1999
5.2.2 REIMS
Because the PPOs were beginning to look like a cartel, fixing the
remuneration for each other, the European Commission felt it needed to regulate the remuneration system. Due to the concern of postal
administrations with increasing competition the European Commission issued a rapport on the EC’s postal sector, and proposed a policy framework for the postal services. In about the same time, the EC issued competition rules to facilitate gradual and controlled liberalisation of the postal markets. The European PPOs, united in CEPT (Conference Européenne des Postes et Telecommunications) decided upon the new TD system, and by doing so
‘fixed’ prices. This caused the International Express Carriers Conference (IECC) to complain to the European Commission stating these new rules stating that the new system infringed Community competition rules (articles 85 and 86 of the EEC Treaty). The IECC also protested concerning the
implementation of article 23 (currently article 43) of the Universal Postal Convention regarding the usage of ETOE’s.
This led to an agreement called REIMS, which link TDs to domestic mail tariffs in the country of destination and to the quality of service provided by the PPO that delivers the mail. According to the Agreement, these different tariffs are converted, on the basis of a standard structure, into so-called linear tariffs for the purpose of calculating TDs. The REIMS agreement divides tariffs into 4 different levels:
• Level 1: Priority mail items presented in mixed bags (which may contain letters, flats and packets), TDs for such items will ultimately be 80 % of domestic tariffs excluding VAT
• Level 2: The receiving PPO may offer rebates on the Level 1
remuneration on the basis of work sharing/preparation of mail (e. g. by pre-sorting mail according to format or destination). The same
discounts must be offered to all sending PPOs when equal conditions are met.
• Level 3: All the parties are obliged to grant each other access to the
‘generally available domestic rates’ (such as bulk rates for direct mail, printed matter or periodicals) in the country of delivery. This
remuneration level (which will normally be lower than the other levels) is of particular importance for a significant volume of cross-border business mail.
• Non-priority mail: To mail designated as ‘non-priority’ TDs will be applied that are 10 % less than the TDs for Level 1 mail.
Among these different tariffs, the Level 3 access is by far the most interesting for Company A. On the one hand, it will probably provide an advantage, in the sense that PPOs cannot favour certain international mail companies any more. On the other hand, this will put all the tariffs out in the open, so Company A cannot play the arbitrage game any longer.
The REIMS agreement is for Western European countries, but it is thought that these degrees of openness and quality demands will lead to duplication of these rules under the UPU flag. This will put an end to ABC remail, as everyone can consolidate quantities of mail, and Company A will no longer have an advantage there. Also, customers would be able to ‘see’ these bulk prices as well, and easily calculate the added value of a remail company.
5.2.3 ETOE
ETOEs, or Extraterrestrial Offices of Exchange, have been established in the recent years, mainly as a result of the UPU decision to discriminate between mail sent by Industrialized and Developing Countries. ETOE’s are a result of companies who exploit the arbitrage possibilities between the remuneration systems for these countries. There are two kind of ETOE, namely the ones established by a DC, which can exploit the differences between IC and DC TDs, and ETOEs established by IC, which therefore do not have USO’s18 in which they operate. To not have these USO brings along considerable cost advantages. The definition 19used here of an ETOE is:
An exchange office established by a postal operator within the territory of another country.
An important addition to this is that this postal operator need not necessarily be a PPO.
Officially, the company opening an ETOE notifies the UPU, and will obtain an official code by which other postal operators can identify the mail as coming from an ETOE. Many companies from industrialized countries have
established ETOEs in for instance the United States, such as Deutsche Post, La Poste, Swiss Post, and Company A. More recent, postal operators from developing countries have opened ETOEs. Their ETOEs may be located in another country only in name. These ETOEs are usually operated by consolidators, who ‘lease’ the right to use the country’s indicia and UPU documentation rights. These consolidators thus ‘pretend’ to be a DC, and this way can claim the kilo-only rate. This form of arbitrage leads to a way of direct entry into the country of destination, without having to pay the originating postal operator.
18 Universal Service Obligations, see Memorandum on Postal USO, www.UPU.int.
19 Leong & Bahar, ETOEs, Arbitrageurs or vehicles of change in postal liberalization? 2004
The system can perhaps be clarified by an example:
In this system, a country such as Malta is classified as a Developing Country, so it pays a flat kilo rate. Therefore, if Malta would set up an ETOE in for example, Belgium, companies who would like to send mail to Belgium, would be better of if they would send it through Malta Post, because they pay the Belgian Post for delivering per kilo, and not per kilo and item, which they normally would have.
As said before, sometimes mail is not even routed through Malta, but a Maltese postal computer, placed at the receiving country, ‘pretends’ the mail went through Malta.
However, recently, more and more PPOs are discovering the dangers of these DC ETOEs. Some countries refused to handle what they dubbed
‘illegal’ ETOE mail. During the 2004 Bucharest Conference20, the UPU decided upon ETOEs. The deemed them legitimate and authorized, but also restrained their use. If a receiving country finds that ETOE mail is not
originating from the country whose indicia is used, i.e. mostly DC ETOE mail, than it is allowed to charge the difference back to the sender.
The receiving country is allowed to charge the difference between the DC tariffs and either the normal TD or 80% of the country’s domestic tariff, depending on which is higher. This makes the whole operation very
unprofitable, and effectively bans ETOEs from countries who have discovered the use of DC ETOEs by IC postal operators. It is however, not illegal, as per art 43 of the UPU Bucharest Conference. It is known that some countries are stricter than others, for instance Germany has a special team in its
international mail sorting centre, whose sole task it is to look out for these kinds of anomalies. ETOEs are still in use, and some are very profitable, but the DC ETOEs are growing scarce.
5.3 Expectations
It is widely believed among the postal operators that the Terminal Dues among Industrialized Countries will eventually rise to 80 % of the domestic tariff, the same as the goal within REIMS’ countries. This figure of 80 % is based on ‘real’ costs, and incorporates a quality of service improvement scheme. As said, more or less 80 % of the cost of delivering international mail are made in the receiving country, and with the postal market liberalising, and hence the PPOs as well, the need arises for a better and more market based costing structure. Therefore it is expected that the remuneration will lead to 80% of domestic tariff. This will decrease the margin within remailers operate, and therefore will decrease the amount of ABC remail. The focus will probably change to direct entry mail, or ABB remail.
The price difference between IC and DC can make otherwise illogical routing the cheapest option. Operators can negotiate different prices for cross-border
20 UPU 23rd conference, resolution no. 48
mail, dependent on bulk, and thereby consolidating large quantities of mail.
Under the newest treaty, rates will be equal for all operators within the REIMS region, so price differences for delivering mail in a certain country cease to exist, when using ABC.
Arbitraging the different rates, and routing quantities of mail throughout the world, has been the core business of ‘remailers’, gaining maximum profit of the differences in terminal dues.
Also, the liberalisation of the postal markets is in progress, leading to the rise of alternative postal operators, for example SANDD in The Netherlands. They deliver mail, mostly around city centres, and sometimes have no countrywide network. In most cases they are cheaper than the PPOs, because of the lack of such a network. This form of delivery is called Hand Delivery. This is also an option of finding the cheapest route for mail.
It is thought that the worldwide Terminal Dues rates for IC will eventually rise to REIMS level, i.e. 80% of domestic rates. This will lead to margin erosion in an already tough market. Also, there is reason to believe that not all the options in the Company A network are profitable. Managing all the different contracts is expensive, and certain volumes have to be made before a
contract is profitable. For now, some contracts are not in use, or are used very rarely. However, they can not be dismissed without further ado, as they might reach customer expectations other than price, which at the moment is the only criterion. Therefore, they need to be carefully examined before decisions about dismissal are made.
As for now, Company A is deciding on their future strategy. Quality is a main issue, mail is a commodity market, and quality must at be at a high level to stand out among competitors, as price competition is not an option for
Company A, for reasons of large overhead costs and the fact that the ‘parents' do not want to pay for a price war, and sustaining heavy losses while hoping to gain some market share. In its new business plan, Company A has
expressed the wish that it wants to be a quality supplier, so more emphasis is placed on meeting customer’ expectations.
6. What are the relevant selection criteria for (potential) customers?
Finding and defining the criteria on which customers found their choices concerning mail suppliers.
6.1 Using airline industry segmenting theory
To meet a customer’s expectations, these expectations must be clearly identified so they can be captured in a model as demands. Therefore, selection criteria must be identified, on which a potential customer selects a mail service provider.
The international remail market has reached the “decline” stage. Doyle21 describes this as a stage where the market is dominated by a few large companies (i.e. La Poste, Deutsche Post, USPS, COMPANY B, Swiss Post), and where product designs are more or less standardised, and competition tries to distinguish themselves by emphasising price.
However, maintaining a dependable supply is very important, and one of the operation’s main concerns. A dependable supply is seen as qualifying criteria, and low prices are order-winners. The products have been commoditised.
However, the legislation changes as described before shed new light on this situation. Due to the liberalisation and regulation the international postal market will probably see another growth stage, where new competitors will enter the market, and an availability of quality services will very likely be an order winner, and price will be a qualifying factor. Both in a growth scenario and in a decline scenario, cost and dependability are the most important factors.
Mail is a commodity product, and most of the mail service providers,
Company A included, compete mostly on price. It is important to distinguish more selection criteria, to be able to match customer demands with specific contracts, searched out for that customer demand. In the current situation, there are many contracts without relevance to customer demands, but still requiring attention and money.
In the international mail business, it is very well possible that mail items travel to the same destination, sometimes in the same line-haul, but for a different price. This can be due to consolidation of mail, bulk contracts, terminal dues arbitrage gaps or other reasons. Customers are paying different prices for more or less the same service or product22.
21 Doyle, P. 1976, Quarterly review of marketing, The realities of the product life cycle.
22 Kons, 1999, Park Place Economist, Understanding the chaos of airline pricing
This phenomenon is also seen in the passenger airline industry23, as described by Borenstein and Rose. Passengers sat next to each other may well pay totally different prices for their ticket. In contrast to the remail business, the airline industry is well documented and described. It turns out that airline passengers are prepared to pay different prices, depending on a number of factors. Airlines started identifying customers on their different needs for travel, when deregulation of the industry took place in the 1960’s.
The government barriers to entry were taken away, allowing low cost airlines to enter the markets and compete with the existing airlines. This is another strong parallel with the mail industry. This led to disappearing profit margins for the major airlines. Deregulation lead to an environment where charging a single price would not allow profitability. Identifying this made it necessary to segment their passengers on each flight, according to each one’s willingness to pay. Using their extensive computer reservation systems, airlines could identify their passengers and the routes they used. The companies used price discrimination to ‘steal’ consumer surplus, maximizing the price a customer paid, allowing them to make profit despite the fierce competition.
The segments were made, bearing in mind that every passenger has a different reason to travel, leading to variation in price elasticity. It is irrelevant in which industry a passenger works, but the purpose of his travel is. If a certain customer hears, on a Monday, he has to travel from Paris to London the next day; he is willing to pay a surplus, if he can be sure that he will fly the next day. Someone who wants to fly the same route, but does not care when he flies, will not be willing to pay the same amount the former customer does.
The price of the ticket does not fall into only two categories, but gradually rises, along with the amount of ‘service’ on offer. Using their extensive databases, airlines are able to predict customer segment needs, and adjust their offerings. Roughly, two types of operator emerged, the low cost airlines (LCA) and the premium service providers. While the LCA's focus on the lowest possible price, the premium service airlines try to provide every customer need, often through extensive customer loyalty programmes, in which extra services are gradually incorporated, i.e. the longer a client stays with the company, the more services he or she is offered.
23 Borenstein,S. & Rose, N., 1994, Journal of political economics, Competition and Price dispersion in the US Airline Industry
6.2 Adopting airline pricing techniques to the mail industry
As can be seen, airlines realised that ‘price’ was not the only selection criteria used by its clientele. The upcoming price-fighters made it clear that all those criteria which were to that date ‘included’ in the service provided by the major airlines, and which were more or less invisible, and not selectable, were in fact variables and not always favoured by customers. By identifying these criteria, and making them optional instead of compulsory, the competition was able to offer a much broader spectrum of services, and thus, lower pricing24. Doing so, the price fighters made, among others, ‘quality’ a selectable criterion, instead of a constant.
The mail market is also subject to a liberalisation process, which will culminate in a full liberalisation in 2007. The market is also dominated by large publicly owned enterprises, with customers paying different tariffs for mail travelling the same distance. This strikes resemblance to the on goings in the liberalisation of the airline industry, which, as mentioned before, is well documented as opposed to the remail business.
Facing the insight that price is not all-important, brings a great change to the back office side of Company A. The whole ‘routing matrix’ is based on finding the lowest price, but leaves criteria such as reliability or image more or less out of the equation. Quality is only fed into the system by the personal choice of an operations person, who pre selects a routing, which is then further detailed by the commercial department. For Company A to meet customer needs, it is vital that this price driven focus changes into a more broad perspective.
Selection criteria form the basis on which a customer decides which supplier it will use. Some criteria can be based on perception, some on measurable,
‘hard’ facts. These criteria should also be used to identify customer needs.
Some criteria are ‘qualifying or market entry’ to the client; some are ‘order- winning25’. The difference between these factors is very important, to prevent wrong focus. A firm must differentiate between
1. market entry/qualifying criteria
These may not be the major determinants of success, but are
important in another way. They are those aspects of competitiveness where the performance has to be above a particular level, just to be even considered by the customer. Performance below this level disqualifies the company from being considered by customers.
2. order-winning criteria
Those criteria which directly and significantly contribute to winning business. They are regarded by customers as key reasons for
purchasing the product. Raising performance in an order-winning factor will either result in more business or improve the chances in doing so.
24 Rosato, D. 2004 Ebsco Host, The truth about flying cheap
25 Hill, T. (1993) Manufacturing strategy(2nd edition), Macmillan
In order to adapt to customer needs, the ‘right’ criteria are very important.
Slack26 identifies five performance objectives, which should be met in order to be competitive. Slack identifies Cost, Dependability, Quality, Speed and Flexibility. So far, cost is identified as leading in the current business
approach of Company A. According to a recent mail user study27, price is the biggest driver of mail volumes. However, quality of service is more important in driving profitable mail volumes, which is a worthwhile addition. The notion that price is not the only criterion of importance is backed up by research done in France28.
6.3 Adapting the performance objectives
The performance objectives, as stated by Slack, can be adapted to suit the needs of this business. In order to adapt the performance criteria, it is
necessary to define them. Dependability, regarding the mail business, comes down to delivery reliability, which means a guaranteed percentage of mail delivered, before a certain date. Regarding Speed, for mail operators this is seen as transit time reliability, the guaranteed percentage of mail delivered between certain begin- and end time. Both these criteria have a lot to do with the quality of service, as delivering mail, all mail, before a certain period of time is recognised as the core business of postal operators around the world.
That is what they do. Quality is therefore incorporated in the both kinds of reliability.
In order to distinguish them from the competition, Company A offers flexibility in all four different meanings, identified by Slack. The product/service sense of the word by offering different products and services, mix flexibility, by offering a wide range of products, as well as volume, because customers can send every volume they should wish, and delivery flexibility. Company A offers premium, i.e. quick, and economy services. In order to define this as customer selection criteria, flexibility is captured in the customer relation and the operational interface. The operational interface is the way the company offers to integrate with customers’ operations and/or administration, the available extras and the ease of use of the products on offers. Customer relation is seen as the customer contact, but it also incorporates the
reputation of the supplier, and the brand image of Company A, and therefore is a quality criterion as well.
26 Slack, N.et al, (2001) Operations Management (3rd edition), Prentice Hall
27 Postal Solutions, 2003, What is driving direct mail
28 Postal Solutions, Juli 2003, Utilisateurs de direct mailm, etude France
6.4 Identifying selection criteria
Concluding, the performance criteria used by Slack can be adapted to the specific needs of Company A, and five selection criteria can be used to model the customer needs:
- Transit time reliability: the guaranteed percentage of mail delivered between certain begin- and end time.
- Delivery reliability: the guaranteed percentage of mail delivered, before a certain date.
- Rate: Total cost involved in the postal process, including cost occurring in the pre postal process
- Customer relation: The reputation of the supplier, and the personal and pro-active attitude of customer contacts
- Operational interface: The flexibility to integrate with customer processes, available extra’s, ease of use
Both reliability and rate will be the most important criteria, however, it can be argued that they are, in some cases, order qualifying, and not order winning.
A certain ‘basic’ quality level is certainly needed.
Having identified the selection criteria customers use to pick their postal supplier, they can be used to specify the types of customer, and potential customer to Company A.
In order to model the Product G business, it is important to step out of the current model of only selecting and offering on price, but to structure the way quality is included in offerings to customers.
