Understanding the problem with Freight Invoices
In continuation of our last blog expounding upon the small problems with ad-hoc shipments our discussion today is going to revolve around the process of paying freight invoices. As anyone in accounts payable or receivable knows, it’s difficult paying for anything in business. You have to negotiate a price, agree to terms, manage changes in scope throughout the manufacturing process, receive the goods in your ERP system, and then ensure the invoiced amount matches the price you negotiated. The complexity added when paying for shipping is that those “changes in scope” are realized at an inconvenient time: after a shipment is picked up. Sure there are a few things that can be agreed upon before shipping: whether a delivery needs to happen after working hours, if a fork lift is needed, the fuel surcharge, etc. But there are a host of other potential issues that come up during shipping. And you can’t just tell the shipping company “nope, not paying that, send the shipment back.” You can’t just return a shipment like you can return a product and get your money back.
How does Freight Pay Work
An individual company could have thousands of different negotiated rates. For example, they might have a small parcel rate for a 5lb package from Zone 1 in Canada to Australia and a bulk freight rate of $3.27 per kg with a $.64 fuel surcharge from Bonn, Switzerland Direct to their Omaha, Nebraska hub. Each origin/destination, weight break, surcharge, etc. is negotiated between the customer and the shipping company at varying levels of intensity. But once the negotiation is complete, these rates need to be loaded into either an internal or external rate auditing system. When a shipping company submits an invoice for a shipment any deviation from the agreed upon pricing is marked as an exception and visually approved or rejected by someone within your organization. These exceptions can number in the hundreds every single day. The point is this: freight pay auditing is tougher than you’d think.
How it Relates to Ad-Hoc Shipping
The very definition of ad-hoc shipping is that you don’t have a normal shipment, with standard delivery surcharges, and a negotiated rate on file. What this means is that every shipment needs to be manually audited against the quote you received from your shipping company or your manufacturer. For the most part, what this causes is a scenario where the invoices are just loosely audited. “If it looks like it is in the ballpark, it’s probably ok.” But these shipments are especially difficult for shipping companies to invoice and often come with paying for surcharges that were not negotiated prior to the goods being shipped.
The key to effectively managing this process is a clear system for formalizing the agreed upon bid, recording any agreed upon scope changes, and comparing those costs to the invoice on a line item basis in one central module. For ad-hoc shipments, most ERP or TMS systems don’t provide this level of auditing and the manual alternative costs time and/or money. One executive I recently spoke with surveyed their organization on the topic and reported 20% of employees reported material issues with the amount of tactical time they spend on administrative work. Having the right freight rate auditing module for ad-hoc projects removes the tactical and allows employees to purely focus on reducing costs on the goods they are purchasing.