Written by Tim Dennis – Solution Consultant, Precision Software
With the ever increasing volume and complexity of shipments moving globally across multiple modes and types of carriers, most companies think it’s easy to just outsource the auditing and payment of those pesky invoices to third party freight and parcel invoice auditing providers.
“Shippers spend an average of 54 percent of total logistics expenditures on transportation, according to The State of Logistics Outsourcing in 2010, an annual report produced by CapGemini, the Georgia Institute of Technology and Panalpina. Considering the enormities of those costs, shippers have much to gain by ensuring their freight invoices are accurate and paid on time.” – Inbound Logistics, Sept 15, 2011.
Why do companies choose to outsource? It’s simple. Conventional wisdom states that when you devote your own resources and labor to audit your parcel and freight bills, you’re taking away precious resources that could be spent on your core business. And whether you recover overpaid freight charges or not, you still have to pay your employees to audit a paid freight bill one by one by one.
How does third party freight and parcel invoice auditing work? The process is pretty straightforward:
- Your company sends freight and parcel invoices from the past 180 days to your freight auditor
- Invoices and bills are compared with pricing agreements to identify errors
- If no discrepancy exists, payment is authorized
- If discrepancy exists, your provider works to resolve the issues
- If you are overcharged, a claim is filed on your behalf
- When payment is made, your company receives a check
According to the 18th Annual Third Party Logistics Study of 2014, shippers reduced logistics costs by 11%, inventory costs by 6% and fixed logistics costs by 23% on average.
Sounds pretty good right? However, have you taken a moment to truly consider what you are giving up when you hand over control of your freight and parcel invoicing and payment processes?
The “Down Sides”
According to Mark Solomon, Executive Editor for the News division at DCVelocity, article discussing the transportation report,
“Each day, thousands of audit and payment firms process millions of transactions for billions of dollars in freight bills. Most of these go off without a hitch. The carrier cuts an invoice, the freight charges are reviewed for accuracy, legitimate discrepancies are addressed and usually resolved and the audit firm pays the carrier with the funds the shipper has entrusted to it. But when that trust is broken due to malfeasance rather than incompetence or oversight, the consequences can be devastating.”
Within the article, Solomon goes on to point out the following specific examples:
“In a span of less than 30 days this spring, two audit and payment firms with a combined 80 years in business and that handled an estimated $20 billion to $25 billion in annual freight spending filed for bankruptcy protection. The firm’s, Greenville, S.C.-based Trendset Information Systems and Branchburg, N.J.-based TransVantage Solutions Inc., shared two characteristics: Both are accused of diverting or embezzling more than a combined $100 million in shippers’ funds that were due their carriers. And both companies, as well as the monies that vanished with them, aren’t coming back.”
“According to documents, TransVantage listed about $71.2 million in assets against $41 million in liabilities. But $71 million of that asset base is pegged to what is seen as a highly dubious claim against its largest creditor, industrial giant Johnson Controls Inc. (JCI). JCI, for its part, sued TransVantage, saying it was defrauded to the tune of $17 million over a multiyear period.”
“Multinational companies are complex creatures with many moving parts. As a result, it is simple for an already-outsourced process like freight auditing and payment to fall through the cracks. It took Johnson Controls more than 17 years to uncover the TransVantage scam.”
“For the dozens, perhaps hundreds, of affected shippers, the legal ramifications are unclear. The freight audit and payment sector is not a regulated entity like insurance.”
“Freight charges often represent up to 10 percent of a company’s total expenses. While cost savings depend on the nature of the industry, typical savings on rate overcharges and duplicate payments alone can range from 1.5 to five percent.” – Inbound Logistics, Brian Scott, Vice President of Global Sales for CTSI-Global.
Rate overcharges and duplicate payments are common but do not represent the whole picture. Costs for shipments that are billed to the incorrect account and accessorial charges that you didn’t expect or authorize (e.g. Saturday delivery) or that were incorrectly calculated (e.g. fuel surcharges). These types of invalid invoices and invalid/incorrect charges on invoices can represent a significant sum.
Typically, the best freight and parcel invoice audit and payment companies work on a contingency basis, so there are no costs unless overpaid/invalid charges are found. What you may not realize is that what you are paying is likely a significant amount aimed directly at your bottom line.
We hear you when you say, “But it’s easy and convenient and doesn’t cost as much as doing it ourselves and we get really great data for reporting.” What you may not fully understand is how technology has changed and how simple this can be to do in-house through intelligent automation.
Different third party freight auditing companies provide different services, from cost breakdown to reporting. For example, you may be getting line item G/L and Sub G/L cost allocation for what your actual costs are. If you are, that’s great! Though there are some things to think about:
- Does your provider know your rules for how you allocate costs?
- How easy is it to communicate and effect a change to your rules to your provider?
- How do you validate the change has been made correctly?
- Discrepancy Resolution
From a labor perspective, your third party freight-auditing vendor does the heavy lifting for you when it comes to resolving discrepancies on your invoices. They not only identify discrepancies, but also perform issue resolution on your behalf. You will work with your provider to predetermine the course of action to take on different types of discrepancies for those issues where manual intervention is required (e.g. invoice amount is higher than rated amount by more than n%). In essence, there is no additional labor cost to you.
If you choose to deploy a freight bill audit and pay solution, your staff would work to perform issue resolution. While you may still predetermine the course of action to take on different types of discrepancies, your staff would need to resolve the issues. Where freight bill audit and pay solutions outshine third party freight auditing vendors is that you maintain control over the resolution of the issues. Typically, freight bill audit and pay solutions do make it easy for you to resolve discrepancies in multiple ways:
- Workgroup/user security controls what each group or user can see and do within the solution
- Payment authorizations can be configured and controlled at the workgroup and/or user level
- Tolerance values may be configured on a percentage or currency value at multiple levels including at the line haul, accessorial and total charge levels
- While you may need to expend labor to resolve discrepancies with a freight bill audit and payment solution, typically over time the volume of discrepancies decreases dramatically as you work with your configuration of tolerance values, your carriers and your carrier rate structures.
Where is the data?
Typically, third party freight auditing vendors receive a file of your shipments and receive invoices from the carriers. They then match, audit, resolve and pay the “authorized” invoices and/or return an “authorized for payment” file back to you. They can generate reports for you (e.g. cost breakdowns by G/L and sub-G/L account so that you can see the fully laden cost of your shipments by line item or perhaps even carrier scorecards).
That all sounds really fantastic until you sit down and really consider what information is important to your specific organization. What do you do if you want to customize a report? What if you need to report on additional data elements for the transaction beyond what the third party freight auditing vendor has? Do you have them create and format data so that you can populate your data warehouse and run you own reports against it? How much are they charging you for that? How long does that take?
This is where a freight bill audit and pay solution may be a better answer for your company. You will have all of the shipping data, all of the freight invoices, all of the resolution details, all of the audit trail (including who authorized what and when) and the “authorized payment” file. Quite simply, more data gives you more options and visibility. Your freight bill audit and pay solution likely has reporting capabilities and/or a data structure that supports ETL to your data warehouse. Another ancillary benefit is that your information resides with you and is not in the hands of a third party. Simply put, you will have custody and control of your data to report on as you see fit.
The “Up Side”
Many companies don’t realize that what they’ve grown accustomed to over the past several years is changing. For many companies, the risk, cost and control of auditing freight and parcel invoices needs to be in-house.
According to the results of the annual 2016 Transportation Payment study, conducted by American Shipper:
- Companies using a freight auditing system are likely to pay less for their freight invoice handling.
- When looking at the responsibility of freight invoice handling, more than 75% of larger firms consider freight audit and payment a responsibility of the Transportation/Logistics Department. Larger shippers approach freight payment in a different way, compared to other forms of payables. Smaller companies are more likely to handle freight invoices in a centralized process, with the Finance Department playing a significant larger role.
- As earlier stated, the size of a company has almost a direct influence on the approach towards freight audit and payment. Because technology is utterly relevant, it makes sense to highlight how best in class companies differ from laggards. Less than 25% of the involved professionals in the survey indicated the use of a pure manual process (no usage technology at all for transportation payment).
- Breaking down the remainder of technology users, there are some notable results. 3PL’s are making more use of an embedded freight audit and pay function inside their transportation management system (TMS) than shippers.
- 15% of the companies (surveyed) are using an outsourced FAP.
A strong freight bill audit and payment solution is an important element in an organization’s transportation management process. Benchmark your organization’s current freight bill audit and payment solution with the following list of must haves. A world-class solution should offer the following:
- Capability to reduce unnecessary charges with accessorial identification
- Address correction function to keep you in front of address corrections to avoid additional charges
- Connectivity, to your carriers, your AP and logistics systems. Ideally, you would want your freight and parcel invoicing system to electronically communicate
- Globally enabled automation to simplify the auditing for all of your invoices, regardless of carrier, mode, geography, language or currency
- Complete visibility into your transportation operations with in depth reporting
- Affordability. The solution needs to be affordable to obtain, implement, staff and run
PRECISION Freight Bill Audit & Pay (FBAP)
Freight bill audit and pay solutions provide the supply chain analytics and expertise to give shippers an edge. In the past, many companies outsourced their freight bill audit and payment. By moving this function in-house, companies gain more visibility and control into the extensive reporting capabilities available. The ability to see the whole picture can help you identify consolidation opportunities, cut unnecessary freight costs by making smarter transportation decisions.
A freight audit is an integral part of managing supply chain costs and provides an analytical, financial review of invoiced costs versus supplier agreements. This may result in a logistics savings of four to seven percent! Companies that process a high volume of freight transportation bills/invoices without auditing them for accuracy are likely overpaying a significant amount of money without knowing it.
PRECISION Freight Bill Audit & Pay automates the process of approving freight bills received from carriers and identifying discrepancies between anticipated carrier freight costs and the actual costs received within the carrier invoices. This will not only help your organization avoid overpayment and improve your transportation and logistics performance, but can save you significant labor and human error costs.
Precision’s dedicated team of solutions consultants have decades of experience and are available to assist you in examining your current processes, leveraging industry best practices and can provide a roadmap to help you achieve your objectives in a timely, cost efficient and comprehensive manner.