Is Working Capital on Your Logistics Dashboard?.Connect
Transportation management system (TMS) technology helps companies to manage a host of performance metrics – including working capital.
The link between freight transportation and this financial metric might not be obvious, but working capital is a key measure of a company’s efficiency and a number of the logistics metrics that are monitored by TMS solutions impact its performance.
Working capital is basically the difference between current assets and current liabilities. Companies can gain competitive advantage by managing the metric more effectively than their rivals.
The latest annual working capital survey carried out by consulting firm REL, a division of the Hackett Group Inc., indicates that working capital performance levels need to be drastically improved.
The survey looked at the financials of 1,000 of the largest public companies in the U.S. during 2015. “Overall working capital performance continued to degrade, reaching [the] poorest performance levels since the 2008 financial crisis,” states REL.
Working capital performance includes collections, payables, and inventory. According to the REL analysis: “Top performers in REL 1000 (companies in the upper quartile in their industry) are now seven times faster at converting working capital into cash than the typical companies. These companies collect from customers more than two weeks faster, pay suppliers more than two weeks slower, and hold less than half the inventory.” REL estimates that the opportunity for improving the financial metric is worth more than $1 trillion.
Although logistics teams do not have primary responsibility for overseeing working capital, a number of activities that impinge on this metric’s performance do come under the logistics umbrella. And TMS solutions often play a central role in monitoring and analyzing these activities.
Inventory management is one example. Excessive inventory volumes lock up working capital and hurt the company’s performance on this measure. Ensuring that product is delivered on time and moved as cost-effectively as possible is an important component of a robust inventory management strategy.
Managing payables is another related function handled by logistics. Take, for example, situations where a TMS provider acts as a third-party payment service. The intermediary manages shipper payments to carriers and makes sure that these transactions comply with the shipper’s terms. In addition, the TMS can become a central hub for payments information, and provide detailed analytics that highlight areas where payment processes can be streamlined (for more on this see the Connect post How to Profit from the Third-Party Payment Option).
Logistics plays a part in the management of collections, another component of working capital. Companies don’t get paid for product that is not delivered to the customer, or can pay penalties when deliveries are consistently late. As well as being responsible for efficient distribution, logistics teams can provide valuable data on when and how product is delivered.
Logistics teams and the TMS technology they use are not in the front line of working capital management – but they can make a significant contribution to this effort.
By doing so, logistics professionals help companies to compete more effectively. For example, as the REL study observes: “In the entire survey group, inventory performance worsened significantly, and was the largest factor in the overall working capital deterioration.”
Moreover, the role of logistics could become much more important. The REL study points out that in the context of their working capital performance, many companies have been lulled into a false sense of security by low interest rates. When rates eventually rise, this weakness will be exposed and companies will need to pay more attention to how they manage this important financial metric.
To learn more about how TMS technology can impact your business beyond logistics, read our blog post ‘TMS: It’s Not Just for Logistics Anymore.’