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PREFACE
To benchmark their internal freight payables costs against Cass' outsourcing fees, companies frequently ask Cass to define the functional components of processing and paying a freight invoice. To each component, a company's own productivity standards, labor rates, and allocation methodologies are assigned.
The following identifies these detailed invoice processing activities by six cost categories:
- Direct Labor Costs
- Indirect Labor Costs
- Equipment Costs
- Postage and Supplies
Costs
- Administrative and
Overhead Costs
- Other Costs
In "Cutting the Fat from Accounts Payable", authors Tad Leahy and Ivy McLemore report:
"Typically, the accounts payable process represents the greatest opportunity for improvement in the accounting function . . . The stakes are high: The average company processes 190,000 vendor invoices per $1 billion of revenue, pays each employee $36,705 per year in salary and benefits …"
During the 90's, The Hackett Group and the American Institute of Certified Public Accountants co-sponsored a benchmarking study of key corporate financial functions. Four hundred companies, including over 100 major US corporations, participated in this study. In this same article, Leahy and McLemore interviewed Mark Krueger, Vice President of The Hackett Group, a consulting firm in Hudson, Ohio. According to Krueger, "The average company … processes 11,100 invoices per person per year."
The math is straightforward: $36,705/11,100 = $3.31. That is, direct labor cost alone for payables processing averages $3.31 per invoice. For Cass, direct labor represents 30% of fully allocated payables costs when indirect labor, equipment, postage, supplies, administration, overhead, and other cost components are considered. (See attached.) We believe this ratio holds for other companies as well. Applying this 30% factor then to the $3.31 direct labor cost above, yields a fully allocated average payables cost of $11.03 per invoice.
This average invoice payables cost is closely validated by IOMA's (Institute of Management and Administration) "Managing Accounts Payable" publication. In its late 90's Payables Benchmarking Survey, MAP notes:
"On average, it costs an accounts payable department $16.54 to process a vendor payment . . . These figures may seem a little high. However, over 7% of the companies responding reported a check-processing cost of over $50 … When the numbers were rerun, eliminating all who had entered $50 or higher, the average dropped to $10.55 for vendor payments …"
In summary, your cost just to pay an invoice is probably $10.50 - $11.00.
FREIGHT PAYABLES COST COMPONENTS
DIRECT LABOR COSTS
- Incoming Mail Processing
Receive and open envelopes
Sort and distribute
invoices
- Pre-Data Entry Processing
Verify invoice liability (valid billing names/locations)
Assign general ledger codes
Calculate allocations for multi GL-coded invoices
Assign carrier codes
Assign optional accessorial charge codes
Assign optional microfilm index numbers
Establish
invoice batch totals
- Data Entry Processing
Key/key-verify payables data elements
Key extended data elements for transportation management reporting
Edit and validate key data elements
Research and reconcile exceptions; adjust batch totals for:
Edit and validation errors
Duplicate, past
due, and balance due invoices
- Pre-auditing
Pre-audit invoices
Adjust invoices (key adjustment
reasons, tariff authorities, and amounts)
- Rate Database Maintenance
Interpret, key, and validate rates
Maintain rate database
Maintain tariff library
INDIRECT LABOR COSTS
- Checks and Report Control Processing
Balance daily control reports and distribute
Sort checks and remittance advices
Insert checks and remittance advices in envelopes; apply postage
Sort and file paid invoices and check remittance copies
File control reports
Balance and distribute other weekly and monthly payables reports
Balance and distribute other
transportation management reports
- Exception Item Processing
Process and return duplicate invoices
Process and return previously paid past due invoices
Process other miscellaneous returns
- Microfilming/Imaging
Microfilm/image and index invoices
Microfilm/image issued checks and remittance advices
Microfilm/image
paid checks from bank (front and back for carrier
endorsement)
- Customer Service
Support invoice status inquiries
Furnish carrier proof of payment
Furnish invoice microfilm/image retrieval
Furnish check
microfilm/image retrieval - issued and/or paid checks
- Other Support Processing
Reconcile paid and issued checks
Maintain Carrier File - adds, changes, and deletes
Maintain other validation files
EQUIPMENT COSTS
- Data Processing Hardware
CPU, terminals, disk, and
printers for on-line and batch payables processing
- Telecommunications -
Voice, Data, Fax
- Postage Metering
Equipment
- Microfilming/Imaging
Equipment
- Microfilm/Microfiche Readers
POSTAGE AND SUPPLIES COSTS
- Postage and Envelopes
Checks
Returns to carriers
Carrier and field location
correspondence
- Check and Remittance
Stock
- Microfilm Cartridges
- Miscellaneous Forms and Supplies
ADMINISTRATIVE AND OVERHEAD COSTS
- Supervisory Overhead
- all operational departments
- Systems/Programming Support
Systems Modifications
Systems Enhancements
Systems Documentation
- Software
Depreciation
- Personnel Training
- Occupancy Expense
Property lease/depreciation
Furniture/fixtures
Utilities, taxes, and insurance
OTHER COSTS
- Bank Fees - Paid
Checks
- Lock Box Fees
- Telecommunications Charges - between carriers, corporate, and field locations
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