Your Freight Audit Practices Could Be Subverting Your Logistics Improvements
Your worst nightmare has come true. You are the national logistics manager of a manufacturing company. The freight audit and payment company you use to audit and pay thousands of freight invoices just filed for Chapter 7 bankruptcy. In their filing, the firm listed some $35 million owed to you. That was your cash—POOF! Gone! That was supposed to go toward paying your freight carriers for their services.
Now, to ensure your unpaid carriers will still haul your freight, you must pay them directly for the past-due bills. Essentially, you have to pay the invoices twice—once to the bankrupt freight payment firm, and again directly to the carriers. Your company’s quarterly earnings release subsequently must disclose a “special charge” for unanticipated transportation expenses. Your company’s earnings will miss for the quarter and drive the stock down.
It’s a risk that presents a real danger for a company’s financial performance. Not to mention delivering and getting goods to your customers on-time while keeping your carriers happy. All because a third party hired to manage the complex process of accurately checking, validating, and paying your freight bills, failed. Spectacularly.
The freight audit and payment industry is an anachronism of the past. And it’s time for its antiquated practices to change. Here are three things your freight audit provider is not telling you:
1. Traditional Freight Audit And Payment Providers Have No Incentive To Reduce Your Freight Spend
The traditional freight audit process is a highly manual and labor-intensive process. Most shippers don’t have the personnel to conduct internal audits of the freight invoices. In fact, these audit and payment solutions exist to reduce a shipper’s overhead in processing logistics invoices. For a nominal fee, the firm will audit freight bills for errors. For instance, a typical firm promises 3-5% in cost savings.
To deliver ROI to the shipper, the freight audit and payment provider must maintain low transaction rates. Meanwhile, to remain profitable, they must reduce their processing overhead and the number of invoices to process. Therefore, they institute a rate tolerance that ignores invoices with overages within a predefined range.
However, these rate tolerances represent real costs. A three or five-dollar rate tolerance adds up in a hurry. For a large volume shipper, for example, that tolerance multiplied over thousands of invoices in a month translates to millions of dollars every year in wasted freight spend.
Traditional freight audit and payment companies have ZERO incentive to reduce overall spend by truly fixing billing issues. They want—nay, NEED—to find errors. Instead of identifying a common cause, invoices are seen as “exceptions” (fail to pass the audit and exceed the rate tolerance) and addressed as individual problems.
Here are the typical three causes for billing errors:
- An error in the process
- Errors made by one party
- A rule not clearly defined
Solving the real problem should correct all future invoices and improve cash flow. However, fixing the root cause would justify the audit firm out of existence!
The firm typically works from discount schedules established in the rate agreement and ignores the carrier rate bases. Therefore, they are unaware of any increases in freight rates and do not alert the shipper.
More importantly, these firms do not have mechanisms in place to analyze trends. If they offer any data, it’s completely disconnected from the shipment order records, which renders the shipper unable to provide any context from which to make decisions. As a result, any analyses performed must be conducted by hand or with intense IT resources to cobble the data together. You can’t improve your freight costs without understanding the greater context!
Thus, the benefits of auditing for errant invoices are limited. A shipper’s costs may continue to increase despite 100% of the invoices passing the audit. On top of that, if you’re using the disconnected invoice data to forecast annual budgets, you are incorrectly estimating the amount, and must continuously explain monthly variances to your finance team.
2. A Traditional Freight Payment Service Can Increase Your Risk
In addition to the freight audit, the company may offer outsourced freight payment services. On top of the nominal fee they collect for the audit, they make more money—REAL money—on the float. They establish terms with the shipper and the carrier, with as much time in between as possible. In this way, they can earn interest. The greater the payment volume, the greater the earned interest potential for the audit firm.
Typically, the traditional freight payment solution means payment delays to your carriers. Delays impact your shipping practices. For example, the carrier may lower your service priority to serve a competitor that pays invoices promptly or may extend less favorable payment terms. Naturally, this puts a strain on the relationship with your carriers—and your supply chain.
Find this insightful?
Get more delivered to your inbox.
This practice is extremely under-regulated. Sure, the freight audit firm will store your money in a bank. That’s how they earn their interest. But what they do with your money in the interim poses a risk to the shipper. SOC 1 compliance is insufficient for the operational and integrity controls of the money. They do not regulate these firms in the same manner as a bank nor are they FDIC insured. As a result, abuses can go undetected, leaving you with little recourse and a large freight bill if the company becomes insolvent.
3. The Audit Process Can be Automated
The freight audit process is notoriously manual, often requiring full teams to manage the exceptions and vouchers for payment. Rate tolerances serve a purpose here, too. Shippers encounter the same labor problem auditors do. They institute rate tolerances with the firm to offset the costly personnel required to mitigate the time to process the volume of transactions.
However, new solutions have emerged, built on flexible, fast-to-implement, cloud-based software platforms. It’s not an “audit” play. Instead, these technology providers focus on streamlined data cleansing, matching, and processing. Data-driven business rules and strategies enhance continuous business process improvement.
This new value proposition is all about reducing overall transportation spend. This technological approach provides a foundational method and cultural imperative to look deeply at the freight audit and pay process, and fundamentally change how it’s done.
You may also be interested in…
Technology to the Rescue
Technology providers don’t have a room full of people manually auditing freight bills. Instead, they deploy a handful of data quality and rate analysts, backed by powerful, sophisticated process algorithms. These analysts constantly monitor information flow, identifying, and correcting anomalies in real-time. Advanced algorithms improve data accuracy, making carrier selection, and sourcing strategies more effective. As a result, these providers prevent the introduction of errors in the first place.
Technology-driven solutions ensure data is accurate and validated by deploying deep data cleansing and sophisticated matching functions. These systems manage exceptions by finding the root cause, correcting, measuring, and validating to ensure the exceptions do not recur. These solutions accomplish this by addressing process errors, identifying human errors, and clarifying business rules.
Streamlined carrier payments eliminate the vast majority of exceptions. Reducing time-to-payment will naturally improve shipper-carrier relationships, positioning your business to become a preferred “Shipper-of-Choice.”
Integrated Data Informs Decisions
The resulting dataset empowers operations and logistics managers to create truly strategic transportation decisions. Intimately connected to the TMS, technology delivers additional data to inform their decisions. Connecting all aspects of the freight shipment—weight, cube, description, carrier, transit time, BL, DR, and other items—with real-time financial data, enables them to optimize carriers, modes, lanes, and more.
Moreover, they provide advanced analytics, augmented KPIs, and real-time dashboards to provide detailed business intelligence, including:
- Lost savings: a measure of the added cost a company is paying from making the wrong routing or carrier selection decision, or not following established rules and business criteria.
- Potential savings: a dynamic analysis identifying possible changes to routing and selection strategies that result in immediate savings. These strategies might involve adjusting business rules and process criteria to take advantage of market conditions, changes in freight flow and profile, or changes in carrier networks, which make some lanes more attractive than others.
- Actual savings: a post-invoice evaluation that shows savings from a newly optimized sourcing strategy, outlining a freight savings comparison against the old.
Because these systems combine expert analytical resources with powerful software tools, legacy practices do not encumber them. Incentives improve with these systems, as they improve payment accuracy, reduce freight costs, and prevent errors before they become costly mistakes. Technology-driven solutions are rewriting the script for success in the freight audit and pay game.
The 3 Real Questions You Need To Answer In Your Freight Audit And Payment Strategy
All companies seek a competitive advantage. As disruptive technologies proliferate, supply chain digitalization initiatives require companies to reevaluate operating models and technologies. However, before the technology is adopted, the goals must be stated.
Freight audit services are no exception and the considerations are many. To maintain focus, we recommend focusing on these three questions:
- Risk: How do I reduce and mitigate risk, and the impact of ineffective, inaccurate or improper freight tendering, audit, and pay practices?
- Relationships: How do I maximize the relationships with my carriers so that my processes and strategies not only achieve my goals but help them operate better?
- Optimization: How do I consistently measure, analyze, and understand to make course or strategy corrections? How do I continually optimize my transportation spend, and proactively identify and correct errors or anomalies, BEFORE they appear on a freight bill?
Ultimately, the goal is empowering shippers to take control of their freight spend themselves in a more thoughtful, proactive, and efficient manner than ever before. By leveraging data strategies every company needs, such as real-time intelligence, insights, and KPI’s, every shipment tender is to the right carrier at the correct rate, you won’t waste freight spend.
Discover how you can improve your cost-savings initiatives.
Eliminate errors, omissions, and exceptions in your freight tracking & payment data causing non-value-added manual work.