Sept. 24 2013 02:37 PM

This year we witnessed another turbulent time in the freight audit and payment service sector. A reprise of a situation from a decade ago when two companies collapsed. Fraud, embezzlement, bankruptcy, and lawsuits. This has all the trappings of another great John Grisham thriller. Or, in the words of baseball legend Yogi Berra, “It’s déjà vu all over again.” With tens, if not hundreds, of millions of dollars at stake this is unfortunately no laughing matter. Particularly for those companies affected by the latest situation.

Before you run for cover and turn off the lights on a decision to outsource audit and payment services, let’s look at the current state of the market and some common sense steps you can take. Steps that will do two things. First, to help you mitigate risk through your service provider selection process. Second, so you can have access to well-audited transportation data — an accurate and comprehensive data set that will allow you to improve budget forecasts, optimization and execution, and provide you a competitive advantage.

Where We Are Today

From all the published industry reports that come out each year, there are a handful that stand out. One of them is American Shipper’s annual report on freight settlement and payment. This year’s report, “Transportation Payment Benchmark Study: Making Dollars and Sense” provides some interesting survey insights.

In one of their reported figures, the survey showed that 26% of the respondents outsourced domestic audit, while only 22% outsourced payment. For international services the percentage of companies who outsourced was even lower. That’s interesting when we consider the higher level of complexity involved with international shipping. The implication here is that the vast majority of companies are handling audit and payment in-house.

Companies who pursue an in-house audit and payment option do so through one of these options: their ERP or financials reporting system, a module to their TMS, a legacy in-house system, or, the popular deployment options of using spreadsheets or doing no auditing at all.

Those options certainly provide a safe harbor for a company’s treasury. They may also be a more costly way of doing business and lead to less effective transportation execution decisions.

Case in point. A second figure from the survey pertained to the cost of processing and paying a freight invoice. (As readers of PARCEL, note that these are freight invoice costs. The transaction cost for small parcel invoices at the transactional level will be less expensive.)

Method of Processing                Cost for Domestic                    Cost for International
Outsourced                                         $3.33                                        $6.24
In-house Systems                               $5.23                                         $7.89
In-house Manual                                  $11.05                                       $15.18

Other industry sources have quoted the cost of internally processing and paying a freight bill to be in a range from $10 to as much as $50.

Outsourcing Decision Safeguards

In lieu of the bankruptcies and court cases, much has been written this spring and summer regarding steps you can take to better protect your business when choosing to outsource your freight audit and payment program.

Increase your due diligence on a provider’s financial condition. Insist on audited financial reports and statements. Respect the confidentiality of the service providers. As a logistician, these reports should go directly to a qualified financial analyst in your organization for review. Team up with Finance so they provide you with a professional assessment of financial condition, liquidity, and strength of the provider.

Expand the scope of references. A standard question I see on all Requests for Proposal is for three client references of similar size and scope to their organization. No problem. Why not investigate with the carriers how promptly and accurately they are paid from the provider? When you attend industry conferences or attend association events, are the providers also participating? Reputable providers don’t hide, they are involved and often lead. More importantly, when you participate, you will be able to ask others what they think and share the experiences they have had with these suppliers.

Insist on a bill payment process that provides a system of checks and balances. Some of the key steps include:
• Recognition of authorized carriers — verification of carriers who are to be paid
• Distinct and secure accounts that prevent comingling of funds
• Limited access to the account — consider a single person for administrative access and a select few with read-only access
• Separate individuals involved in receipt and disbursement of funds

Include language in your audit & payment agreement that covers what will happen with your funds, the timing of those transactions, separate accounts so there is no comingling of your cash with another of their clients, corresponding transaction and disbursement reports.

Proper due diligence in light of this year’s events cannot be overstated. You can execute a sound sourcing program to identify and mitigate potential risk in order to take advantage of the cost savings potential that exists. Not to be missed is a key quote from the authors of the previously mentioned survey, “The payment process is increasingly more than ensuring bills are paid accurately and on-time. The information generated from the process is valuable in and of itself.” 

Let’s turn our focus to that value and the impact that well audited invoice data can have on your supply chain and logistics planning.

Where to From Here?

From the Chief Supply Chain Officer, to the Vice President, the Divisional Manager, and Transportation Planner; everyone is drowning in a sea of data and in dire need of a lifeboat of information.

In their book Competing on Analytics: The New Science of Winning, Thomas Davenport and Jeanne Harris wrote that companies need help interpreting and using data. The implementation of systems has now arrived at a place where companies have accumulated a tremendous amount of information and that the next step is to figure out what to do with it. Being blunt, a smart human still needs to interpret the data.

But before you can interpret the data, you need to ensure the data set is clean, accurate and comprehensive. You start by pulling freight information from a variety of carriers, in various paper or electronic formats, some of which may require translation mapping in order to download into a current in-house system. You want the database to include inbound and outbound, domestic, and international, all freight terms, and all modes of shipping. Let’s add in another layer of complexity as you look to match your shipment authorization or manifest against the carrier invoice file. You have, as Davenport and Harris may say, successfully accumulated a tremendous amount of information! Now, all you need to do is figure out what to do with it. Then, interpret it.

This is where the true value of an audit & payment program comes into play. The quality of the data is so much better. Coming back to the beginning of the article, it will help you to improve budget forecasts, optimization and execution, and provide you a competitive advantage. Some examples:

General Rate Increase Study: No need to rely on announced averages. You will have comprehensive database with accurate costs at the individual shipment level. You can apply the newly published rates by every zone and weight break to your shipment distribution data and identify exactly what your cost increase going into next year will be. No averages, no guesses, no random samples. A precise cost impact on which you can set your budget.

Network Design Project: Whether you are looking to bring offshore production back to North America or trying to determine where to locate a new distribution center here in the states, the result from your modeling is predicated on the quality of your data. Your transportation costs are baked into your network design. Getting this exercise right is of paramount importance and could have the biggest cost impact on your organization.

“What if…” Analysis: You have a special promotion coming up and you want to know what it would cost to upgrade your standard deferred service to an expedited service level. You see a potential competitive advantage to win market share. Yes, we all know that expedited will be a more costly method of shipping. But if you can’t trust the accuracy of your current data, the negative impact on margins will be multiplied.

For some, this has been an unsettling year in the audit & payment industry. For all, being open to finding sources of cost savings in a slow growth economy, mitigating risk through improved sourcing practices, and increasing data quality to efficiently run your supply chain and compete in today’s marketplace is crucial.

Doug Kahl is a Vice President with enVista, a comprehensive supply chain consulting and leading transportation services management organization. Doug can be reached at, 602.334.6233, or visit enVista at the PARCEL Forum, Booth #516 in Chicago, October