In recent years, rising freight costs and data complexities have been ever-increasing areas of concern for companies that rely on the estimated $250 billion global Freight Forwarding industry. While we’ve seen some relief in the price of oil in the past several months, prices have steadily risen since 2004 (see chart below), and the cost of freight being largely dependent upon the cost of transportation has been creeping up and up in kind. But the challenges for companies that incur freight charges in their invoices do not stop there. Yes, fuel costs have generally been on the rise – but with such high prices, any fluctuations (of which there are many) mean that freight quotes are riddled with complexities that all parties within a supply chain must contend with.
10 Year Historic Trend for Crude Oil
There is extremely low visibility when it comes to forecasting future freight costs, and freight cost verification in itself is vulnerable to process and human errors. It is not an unusual occurrence that, due to insufficient freight audit processes that have not been able to accurately detail freight charges across the supply chain, organizations have overpaid for services that they did not incur, and suppliers have not been paid for services they’ve rendered.
The Complexities of Freight Audit
Freight is undeniably an extremely complex payable, and something that cannot be managed at all effectively without specialized processes and tools. To begin with, forwarder freight rates are normally maintained in numerous spreadsheets, and each freight forwarder that an organization deals with will usually have a different freight rate format for each customer. Organizations must calculate freight rates manually, and, if the customer has literally hundreds of shipments a month as is most often the case, this task becomes almost impossibly challenging to complete with any certainty of being accurate. It is the unfortunate case that many organizations simply do not have the processing or manpower to calculate all the freight invoices that they are issued, and, as a result, they may often find themselves having to resort to random sampling of invoices to check if the sample invoice is billed correctly.
So, aside from the sheer volume, what is it that makes freight invoices so complex? Well, freight invoices, like most other complex payables, are normally characterized by:
- High error rate – freight invoices are notorious for containing overcharges and errors.
- High complexity – freight invoices contain multiple charge items and other supporting documentation.
- Complex contracts – charges are tied to contracts that are often complex and vary from invoice to invoice, which increase the difficulty of the audit process.
- High value content – freight invoices contain important data that, when converted into actionable business intelligence, can be extraordinarily valuable.
- Special requirements for specialized processes – the high complexity of freight bills means that highly specialized systems are required that can be configured to meet an organization’s accounting, audit, and business intelligence needs.
- Disconnected payment process – traditional (static) payment processors (banks, cards, etc.) are unable to comprehend variability in payment terms based on freight data, and while invoices may change multiple times, the payment remains static, creating over or under payments on a recurring basis.
While it is true that some larger corporations do have the in-house manpower and resources to handle and perform freight audits themselves, the lengthy and tedious efforts required still often result in the process being much more expensive than what an outsource vendor could provide for the service.
Research conducted by inboundlogistics.com found that freight costs can make up to 10% of an organization’s expenditure. As a consequence of these rising costs, more and more organizations are becoming proactive in controlling their spend, and are outsourcing the freight auditing process to freight audit specialists.
Freight auditing is a very important, though often misunderstood and certainly under-optimized part of the supply chain. Cost cutting should be and is a motivator, especially in the current state of the economy, and when overcharges are continuously being ‘smuggled’ into freight bills, a better freight bill auditing process is an opportunity to provide significant cost savings, higher visibility, and release more valuable business intelligence across the supply chain. While elements of freight audit and payments are automated, the entire system is not automated end-to-end, and the payment process is entirely disconnected.
How Freight Bill Audit and Payment Currently Works
“To begin the auditing process, a freight bill payment company receives its clients’ freight bills directly from carriers. When the bills are received, either via electronic data interchange (EDI) or manually, they are entered into the contractor’s system, providing immediate visibility. Once the bills are entered, they are audited for accuracy. Auditors verify the bills’ validity, mileage, duplicate payments, accessorial charges, and use of correct tariffs. After auditing, the charges are coded and reconciled, and the bills are paid.” (inboundlogistics.com)
This flow above is ideal if everything goes as expected (promised) in the purchasing and delivery process. However, 30-40% of the time, this is not the case. Frozen goods thaw, vegetables expire and must be re-routed, shipping windows are missed, detention charges may occur, overweight trucks are fined, shrinkage or breakage happens during shipment, or any one of hundreds of variables change that necessitate a change in the price or the cost of the goods along the way. Where does this get comprehended in the process? It is nearly impossible today with existing static payment processes.
The disconnect that exists between the physical flow and the financial flow (as above) means that literally billions of dollars are lost due to the inability to connect logistics systems with payment flows.
Freight Audit Models
Presently there are three models of freight audit that are in common use today. These are:
- Manual matching – in-house staff manually process invoices and conduct audits, with the cost of errors and unrecovered charges being unavoidably absorbed by the company.
- Software matching – bought software is paid for, licensed and installed, and then managed in-house using expensive internal resources.
- Outsourcing – Fees are paid to a third party firm, invoices are sent to them for auditing.
Dynamic Payments and Freight Auditing
The first two models listed above are definitely intact, but becoming less the norm due to excessive cost and delays. Outsourcing, as in option three, is the most widely used and preferred method today, and the one that releases the most significant business information. However, regardless of the model, in all three cases, the financial flow is handled via a separate traditional ‘static’ payments provider such as banks, credit cards, or related services – and long after delivery is made. This means that any dynamic change in the logistics or related variables cannot be carried through to the static payment process. This is where the losses stack up.
Static payments mean that when discrepancies occur after an invoice has been issued, time, resources, and money are all wasted in the inevitable disputes that follow between buyer and supplier or forwarder. With all variables fixed throughout the transaction lifecycle, nothing can change without generating significant costs – so when freight costs fluctuate due to dipping or hiking oil prices, late delivery, damaged goods or what have you, there is nothing that can be done at the time to account for this.
What is required is a dynamic payment – a payment system that can be integrated into the audit system and comprehend and adapt to changes to the data or variables related to the physical flow. A payment system that would trigger the right payment to the right company at the right time and with the right data – every time.
The end-to-end process of freight audit and payment is ripe for disruption. The physical supply chain and audit systems have been largely optimized and automated over the past twenty years, but the traditional financial supply chain has simply not kept pace. The Traxpay Dynamic Payment solution addresses the gap by bringing banking, data, and B2B trade into a single solution – to account for fluctuations in freight costs as they happen – while keeping all parties and systems synchronized at every step of the way. As businesses the world over look to do business in a faster, safer, smarter way, the integration of the physical supply chain and financial supply chain has never been more important. Traxpay is pleased to be at the right place at the right time – and backed by global leaders in banking, FinTech, and big data – ready to help with the right solution.