Top 4 Productivity KPIs for the Supply Chain Back Office
When I was HubTran’s VP of 3PL and Broker, I wrote this article for MercuryGate . MercuryGate is a tremendous TMS and was a wonderful partner for HubTran.
If you aren’t automating processes in your back office, you are wasting your company’s money and becoming less competitive in a fiercely competitive marketplace. According to Supply Chain Brain , “[The supply chain back office] is where one finds a huge swath of white collar employees, none of them touching, making, or moving any goods, yet engaged in a myriad of administrative support functions without which no supply chain could ever function…By some estimates, 15% to 20% of all employees in the supply chain are in the back office.”
There is a massive opportunity to reduce costs, improve efficiency and increase business profitability by making the supply chain back office more efficient and automated. The back office is so universally inefficient that nearly all executives struggle with determining where they should start improving. To that end, it’s important to understand the top four key performance indicators (KPIs) to track and maximize the efficiency, productivity and profitability of your back office.
As back-office productivity experts, we at HubTran work with our customers to understand where they are in their efficiency journey while revealing quantifiable metrics on how they can improve their productivity. Here are the top 4 questions we ask to ensure our customers maximize their productivity efforts and profitability.
1. Back Office Cost
What Does Your Back-Office Cost?
Add up the salary costs of your back-office team as well as the hardware and software required to support them. Be sure to include the back-office time spent by other functions. Are dispatchers getting involved in hunting down paperwork? Is your carrier relations staff resolving payment issues with your truckers? Their time represents real cost as well as opportunity cost (time spent not growing your business).
Here is an example. Let’s say you have 4 employees on your back-office team. They work 40 hours / week and are each paid a fully-loaded $20/hour. Your weekly back-office personnel cost is $3,200 ($20 * 40 *4).
It’s very common for these folks to interact with other functions to troubleshoot issues. Let’s say that happens on 500 loads in a typical week and each of these interactions takes 15 minutes from an operations person. That’s another $2500 (500 * 0.25 * $20), In this example, you are spending $5,700/week ($300K per year) in personnel costs on your back office. Interestingly a good 40% of this is hidden cost – work that operations people do to help resolve discrepancies and fix back-office problems.
2. Loads Per Back-Office Person Per Day
How Many Loads Does Each Person In Your Back Office Process Per Day?
The industry average is 75. But 3PLs that have invested in making their back offices more efficient process over 300 invoices per person per day.
It’s easy to calculate this metric to see how you are doing compared to your competition. Determine how many loads you ship in a day and divide that number by the number of accounts receivable and accounts payable people you have: (Loads Per Day / Number of AP + AR people). If you are close 75 — the industry average — you need to automate. If your team is processing 300 invoices per person per day, you’re doing OK.
3. Rework
How Many Customer Invoices Get Returned Because They’re Incorrect Or Incomplete? How Many Carrier Payments Aren’t Correct?
Your back-office personnel manage a lot of data – ensuring that carrier invoice amounts are correct, remit-to information is accurate, customer-required references are in documents. It’s easy to get something wrong.
Capturing your documentation rework percentage can be difficult if you don’t have processes in place to track this. But you can always do a spot check – count the number of loads you process over the next week that require rework. How many times did your team incorrectly pay a carrier? How many customer invoices were refused because you didn’t provide the correct supporting documents? Capture everything that wasn’t 100% accurate. Divide that by the total number of loads, and you will have an approximate number of this efficiency killer.
Processing 75,000 loads per year turns into 90,000 – with none of the profit – when your team is reworking 20% of your loads. Robotic Process Automation (RPA) will dramatically reduce the amount of rework your team does on an annual basis because human errors will be eliminated, and real errors won’t be missed.
4. Days To Cash
How Many Days Does It Take To Get Paid After A Load Has Been Delivered?
The cost of money is real, but many 3PLs don’t seem to realize this. Fortunately, this is an easy metric to capture with massive upside ramifications when you improve it.
First figure out how long on average it takes to issue an invoice after you’ve delivered the load. For example, if it takes 8 days from the time you deliver a load to when you send out your bill to a customer, and your average invoice amount is $1,600, you are financing $1.05 on each load ((8/365)$1,6003%). If you handle 75,000 loads per year, those 8 days cost your company $79K. In this example, every day of reduced time to bill is worth $10K per year.
Second, track your average DSO (days sales outstanding), which is the amount of time it takes to get paid once you’ve sent out the invoice. You may not be able to fully control all your customers payables terms but you can ensure they receive perfect invoices, every time. What happens if you invoice an incorrect amount or don’t provide a customer with required documentation when you send the invoice? They will send it back to you and withhold payment until you correct the issue. This rework is a killer.
Brokers need effective back offices to ensure they can bill fast and bill accurately. If your processes aren’t tight, you are adding precious days to your cash cycle and needless cost to your business.
In Summary
Start Tracking The Right Data To Maximize Supply Chain Back Office Processes Today The supply chain back office is often overlooked because the staff is behind the scenes. However, the back office represents a great opportunity to improve labor productivity, deploy automation to reduce waste, accelerate your cash cycle and increase your overall profitability.
Robotic Process Automation (RPA), Optical Character Recognition (OCR), Machine Learning (ML) and Artificial Intelligence are tools that you should employ to ensure your back office is as efficient as possible. Thankfully, services exist that take the complexity out of deploying these technologies.
Kickstart your back-office improvements by looking at what technology and cloud-based systems can do to benefit your company’s back office processes.