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Freight Payment Cost Analysis

How much does it cost to pay a freight bill?

To benchmark a clients’ internal freight payables costs against CTS’ outsourcing fees, clients’ frequently ask CTS to define the functional components of processing and paying a freight invoice. To each component, a clients’ own productivity standards, labor rates, and allocation methodologies are assigned.

The attached report identifies these detailed invoice processing activities by the following six cost categories:

• Direct Labor Costs
• Indirect Labor Costs
• Equipment Costs
• Postage and Supplies Costs
• Administrative and Overhead Costs
• Other Costs

As a quick and simple benchmark, however, we refer clients’ to the April 1996 issue of Controller Magazine. 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…”

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 client … 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 CTS 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 IMOA’S ( Institute of Management and Administration ) “Managing Accounts Payable” publication. In its May 1997 Payables Benchmarking Survey, MAP notes:
Freight Payment Cost Analysis

“ 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 $50.00 … When the numbers were rerun , eliminating all who had entered $50.00 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. CTS’ per-bill fee for Pre-audit, Rating, Accounting, Payment, Report Generation, and Information Services is generally 10 to 15% of this benchmark cost.

In December 1994, 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.

Freight Payables Cost Components

Direct Labor Costs

1.Incoming Mail Processing

• Receive and open envelopes.
• Date stamp all incoming invoices.
• Sort and distribute invoices.

2. 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.
• Establish invoice batch totals.

3. Pre-auditing
• Pre-audit invoices.
• Adjust invoices ( key adjustment reasons, and amounts).

4. Data Entry Processing
• Key / key-verify payables data elements.
• Key extended data elements for transportation management reporting.
• Edit and validate key data elements.

Freight Payment Cost Analysis

• Research and reconcile exceptions; adjust batch totals for:
- Edit and validation errors
- Duplicate, past due, and balance due invoices.

5. Rate Database Maintenance
• Interpret, key, and validate rates.
• Maintain rate database.
• Maintain tariff library.

Indirect Labor Costs

1. Checks and Report Control Processing

• Sort checks and remittance advices.
• Insert checks and remittance advices in envelopes; apply postage.
• Sort, package and send paid invoices and check remittance copies to clients’.
• File control reports.
• Balance and distribute other weekly and monthly payables reports.
• Balance and distribute other transportation management reports.

2. Exception Item Processing

• Process and return duplicate invoices.
• Process and return previously paid past due invoices.
• Process other miscellaneous returns.

3. Customer Service
• Support invoice status inquiries.
• Furnish carrier proof of payment

4. Other Support Processing

• Reconcile paid and issued checks.
• Maintain Carrier File – adds, changes, and deletes.
• Maintain other validation files.

Equipment Costs

1. Data Processing Hardware
• CPU, terminals, disk, and printers for on line and batch payables processing.

2. Telecommunications – Voice, Data, Fax.

3. Postage Metering Equipment

Postage and Supplies Costs

1. Postage and Envelopes
• Checks
• Returns to Carriers
• Carrier and field location correspondence

2. Check and Remittance Stock

3. Miscellaneous Forms and Supplies

Administrative and Overhead Costs

1. Supervisory Overhead – all operational departments

2. Systems / Programming Support
• Systems Modifications
• Systems Enhancements
• Systems Documentation

3. Software depreciation

4. Personnel Training

5. Occupancy Expense
• Property lease / depreciation
• Furniture / fixtures
• Utilities, taxes, insurance

Other Costs

1. Bank Fees – Paid Checks
2. Lock Box Fees
3. Wire Transfer Fees
4. Telecommunication Charges – between carriers, corporate, and field locations.

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