Who Said Freight Audit and Payment was Dead?

Several years ago, as transportation management systems (TMS) software vendors introduced enhanced freight audit and payment capabilities, many analysts – including me – predicted that shippers would bring this outsourced process back in house. But to paraphrase Mark Twain, the news of freight audit and payment’s death has been greatly exaggerated – in fact, demand for this service continues to grow. So, where did we go wrong with our prediction?

That was my opening question to Doug Kahl and Dominic McGough from enVista in a recent episode of Talking Logistics. Here’s part of Doug’s response:

If you look at the transportation life cycle and divide it into three buckets — planning, execution, and settlement — TMS platforms today have certainly enhanced the planning and execution processes, and some would say that they address freight audit and payment too…But after a shipment is executed — whether it’s a package, a pallet, a truckload, a container on an ocean vessel — as it starts moving from origin to destination, the carriers start making adjustments, they start applying their accessorials, and there are more accessorials today than in the past. And these charges are often not captured in the TMS, and so when you account for them and start auditing and confirming the accuracy of all these charges, you start getting into the validity of a solid freight audit and payment program.

In addition, you have to consider the value-added capabilities of a good system, such as GL coding and allocation. While TMS are great at shipment planning, optimization, and execution, when you get into the financials and GL allocation, that’s not really a core competency of a TMS.

Also, most companies have multiple systems and processes. Many ship parcels one way, execute truckload another, and when you [take into account] multiple divisions and add in the complexities of global trade management, you now have to try to reconcile a number of disparate data sources, and you need to have the expertise to gather, consolidate, and harmonize all that data, and again, that’s probably not something that’s in the wheelhouse of a TMS, but it’s a core competency of any solid freight audit and payment system.

So, my apologies to you and the other pundits, but you may have underestimated the difficulties that some companies face when trying to implement an enterprise-wide transportation system, and probably overestimated the benefits of a one-size-fits-all approach.

I conceded that my prediction fell short of expectations, but nonetheless, some shippers have implemented a TMS and brought freight audit and payment back in house. From my experience, they were predominantly (or almost exclusively) truckload shippers, where the rating, audit, and payment process is much more straightforward than with less-than-truckload, parcel, and ocean shipping. So I asked Doug and Dominic: What makes those other modes more complex? Is that complexity another reason why shippers, especially those with relatively large LTL and parcel operations, continue to outsource the process? Doug answered first:

Complexity certainly plays into it…Let me give you a domestic example. Let’s take a small parcel shipment. You start with the base rate and subtract your discounts. Now you also need to consider the applicable accessorial charges, of which there are dozens of them. Then you can’t forget to apply the fuel surcharge, and make sure you properly account for which accessorial charges the fuel surcharge applies to from those that it does not. Keep in mind that the fuel surcharge is going to change periodically and you need to keep your system updated. So trying to rate a shipment is a difficult enough task for a carrier, let alone shippers who lack the tools or the capacity to accurately account and confirm for that type of rating.

Dominic then added an international perspective:

An international transaction can have FOB charges related to the shipment, port-to-port or airport-to-airport charges, arrival port charges, and the charges from the port of arrival to the final delivery point. In addition, you have duty and tax invoices. So you end up with the complexity of a single shipment having four or five or even six related invoices that are not duplicates but are associated with the landed cost of that shipment.

Because of disparate ERP systems, a lot of clients are looking for a global voice that tells them what the cost of transactions are, and to do that they’re using freight audit and pay to manage the large amounts of data that are associated with running a global operation that by necessity has different ERP systems in maybe 10-20 different locations around the world and maybe 10-15 different financial systems that were built to report to the local fiscal requirements of the country they operate in, not necessarily on a global platform.

What’s different about the freight audit and payment process today compared to 10 years ago? In other words, how have customer expectations changed? Watch the short clip below for their answer:

As Dominic said, “The customer expectation now is that they require more information from the freight bill than they ever did…Traditionally, processing a freight bill was pretty simple, now we’re talking about the data mining that we capture on an individual freight bill becoming part of the process. The actual auditing of the bill is part of what we do, but the data mining is becoming equally as important in how we manage customer expectations. Ten years ago that wasn’t quite the driver as it is now.” Simply put, freight audit and payment is the source of rich data for transportation business intelligence and analytics.

I encourage you to watch the rest of the episode to gain additional insights on this topic, including questions shippers should ask themselves to assess whether their freight audit and payment process, whether they’re doing it in-house or outsourcing it, is best in class or needs improvement. After watching, post a comment and share your perspective on this topic!

Note: enVista is a Talking Logistics sponsor.

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