Turning Invoices Into Intelligence
Don't let bankruptcies in the freight payment industry overshadow the potential power of turning freight invoices into actionable information.
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A well-known food company last year outsourced payment of its freight bills to a third-party payer (3PP). Everything was going great—until the freight payer suddenly filed for bankruptcy, leaving the food company holding the bag for nearly one million dollars in unpaid freight bills.
A major chemical company's third-party payer managed freight rate data and paid hundreds of millions of dollars a year in freight bills, according to Derek Gittoes, vice president of product solutions for G-Log, a supplier of logistics and transportation software headquartered in Shelton, Conn. When the 3PP went under, the chemical company lost critical information as well as money.
Yes, significant losses stemming from such bankruptcies have shone a spotlight on freight audit and payment in recent months. But the bankruptcies shouldn't overshadow the potential power of an effective freight audit and payment process. Smart companies increasingly recognize freight payment as a critical issue because of a high error rate and labor intensity, says Gerald McNerney, senior research analyst for AMR Research, Boston.
Auditing freight bills has an almost immediate payoff. Peter Schmidt, director of logistics planning for Fuji Photo Film U.S.A. Inc., Elmsford, N.Y., reports that his company would conservatively see an increase in transportation expenditures of three to six percent for accessorial charges alone without having such an audit.
That's just one of the many benefits of freight audit and payment—especially when it's automated. "Think of one of the most mundane but necessary processes that needs to be completed to effectively manage your operations," McNerney wrote in an AMR Research report on Transportation Management Systems (TMS). "It is not surprising that 65 percent of TMS users ranked financial settlement automation as a priority. Automating freight payments allows for improved fund management and better utilization of staff—just what your CFO wants to hear."
In addition to streamlining the process and eliminating errors, automating freight payment can lead to paying carriers more quickly. "Timely and accurate payment is an important benchmark for carriers in annual contract negotiations and can save shippers as much as three percent of their freight rate," McNerney says.
"Cash flow turnaround helps foster the relationship with your carriers," notes Schmidt. In addition, the detailed account coding made possible by an effective freight audit and payment system ensures that freight costs are allocated properly. That's particularly important for a company like Fuji, which has six divisions.
But that's not all. Freight invoices and freight auditing yield a motherlode of information that, handled correctly, can enable you to cut costs while improving transportation processes.
Unfortunately, "most shippers are not taking advantage of freight audit and payment as an optimization tool," according to Scott Nemeth, account manager, Ryder System Inc., Miami, Fla.
In fact, "there's a ton of room for improvement in the way companies leverage freight audit and payment," says Rodger Mullen, president, Schneider Logistics Inc., an international lead logistics provider based in Green Bay, Wisc.
It goes along with the way people think about logistics, he says. "We think about material flow and the flow of operating information that goes along with it—then we think about the financial flow." Taking advantage of the intelligence that's inherent in the financial flow is a process still in its infancy, Mullen says.
Getting Carriers Their Due
While the impact of freight audit and payment goes beyond compensating carriers, it is the cornerstone of the process. "The fundamental objective of freight payment is to make sure that the service providers who execute shipments are paid the amount due to them for the work they actually perform," Gittoes explains. "It sounds simple—but it's not easy to execute."
He describes the three components of an effective freight audit and payment system:
1. A powerful rating engine. The rating engine enables shippers or their designees to calculate the cost of a shipment in advance. The rated shipment enables the system to compare the invoice amount to the proper cost for the shipment.
To perform this type of analysis, the rating engine "has to be able to store all the rate contracts a company might have with all its service providers," Gittoes says. "It then has to determine all the costs associated with that shipment—such as base costs, discounts, accessorial charges, special services, and non-transportation charges such as insurance and documentation."
2. Shipment visibility. The freight audit system needs to link planned and actual shipments, Gittoes says. "You may know what the planned shipment was supposed to look like, but the shipment that was actually executed may be very different."
Delays, penalties, rerouting, reclassification, and unexpected accessorial charges can all affect the invoice, requiring that the shipment be re-rated. That's why visibility of actual shipments is critical, Gittoes explains. He cites the case of one company that found 85 percent of its shipments were changed in some way.
If you don't know the details of the actual shipment, you may be paying invoices that don't correspond to the work you thought was being performed.
3. Invoice processing. Once a carrier's invoices are matched to actual shipments, the next step is checking that the amounts on the invoice correspond to the work performed and the appropriate rate terms.
"If the invoice amount matches what you believe the costs should be, given your contract and governing contract rate," Gittoes says, the service provider should be paid once the appropriate approvals are obtained.
"Ideally, the steps of matching invoices, checking tolerances, getting approvals, and pushing a voucher out the end should be lights out, with people involved in the process only when an exception is identified," he says.
The In-House Approach
Companies that choose to manage freight payment in-house "at least want to improve the process as much as they can," AMR's McNerney notes. "They're coming at it through the TMS space, building their functionality around the approval and audit process.
Automation makes it easier for the internal payment process to take place." Today's TMS generates much of the data that's required to streamline the freight audit and payment process.
For example, Bozzuto's Inc., a wholesale distributor of food and household products located in Cheshire, Conn., uses a hosted collaborative logistics application to process invoices for inbound freight.
Currently less than one quarter of the company's inbound shipments are hauled via Bozzuto's private fleet, with the balance of inbound volume shipped prepaid. Under its new inbound logistics program, Bozzuto's is transitioning from handling virtually no freight bills to processing between 10,000 and 12,000 inbound shipments a year. (Bozzuto's private fleet makes customer deliveries.)
Bozzuto's looked at three types of solutions for managing its inbound logistics program, including freight payment, according to Joe Callahan, the company's vice president of transportation. These options included working with a third-party, using a PC-based system in conjunction with a third-party system, and using a web-based system to facilitate direct payment.
The company opted for Elogex's web-based system to tender and process inbound loads, and audit freight bills and match them against agreed-upon rates and contracts. Elogex transmits a flat file of problem-free invoices to Bozzuto's accounts payable department. Exceptions are resolved by Bozzuto's staff before payment.
Taking It Outside
"The freight payment industry started in the mid-1950s," explains Joe Lombardo, director of transportation for Nestle USA, headquartered in Glendale, Calif. "Banks got into freight payment as part of their cash management services. There was slow growth through the 1950s, 1960s, and 1970s. Then came transportation deregulation, along with an explosion of information and carriers, and it became more complex for companies to do their own freight payment."
As a result, companies increasingly turned to third parties. According to the seventh annual 3PL study sponsored by Caps Gemini Ernst & Young, Georgia Tech, and Ryder System Inc., 48 percent of North American respondents outsource their freight bill auditing and payment.
Nestle is one of those companies. It found that keeping freight audit and payment in-house was unrealistic as its business grew more complex.
"We're in every mode of transportation, and are very complex shippers," Lombardo says. Nestle USA has the bulk of its freight bills audited and paid by Cass Information Systems Inc., a third-party payer and bank holding company headquartered in St. Louis. Cass performs a pre-audit and pays the bills; Nestle funds them weekly.
Outsourcing to Cass enables Nestle "to get the controls and the fiduciary responsibility of a bank. Cass knows how to handle large sums of money," Lombardo says. In addition, Nestle's 3PP "gives customer support to our carriers. I don't have to have a staff of people talking to carriers about freight payment." Finally, Cass's costs for cutting a check are lower than what they would be in-house, according to Lombardo.
NCR Corporation also outsources its domestic freight audit and payment activities, reports Neil B. Carlton, manager of freight audit and payment services for the Dayton, Ohio-based company. NCR works with Data2Logistics, a Fort Meyers, Fla., third-party payer formed earlier this year through the merger of Wescara Freight Technologies and the Logistics Group of CorPay Solutions.
"We're sole source when it comes to freight audit and payment," Carlton explains. To ensure that it continues to get the best value from its third-party payer, NCR bids the work out every three years. The process begins with a Request for Information (RFI), followed by presentations from potential vendors. Next is a formal Request for Proposal (RFP) issued to a short list of vendors.
"It's a very documented, stringent, and intensive process that uses a value-weighted approach," Carlton notes. "While it can be tedious, it's also a good learning exercise, with a lot of checks and balances."
NCR organizes its freight payment process at two levels: strategic and operational. Carlton manages the relationship with Data2Logistics at the strategic level. Freight audit and payment coordinators have operational responsibility for different accounts, organized by business unit.
3PP or 3PL?
Once a company decides to outsource its freight audit and payment activities, it then needs to decide whether it wants to work with a third- party payer or a third-party logistics provider. The optimum decision will hinge on an individual company's strategy.
Take Fuji Photo Film U.S.A. Inc., which ships imaging, information, and document products from a distribution network made up of six primary distribution centers and a replenishment DC. Fuji is a very thin headcount company, according to Peter Schmidt.
"We constantly evaluate core competencies, and whether to in-source or outsource," Schmidt says. The company made the decision five years ago to outsource freight payment to its third-party logistics provider—Ryder Logistics, which performs a range of logistics services for Fuji.
"We're with Ryder because of the shared resource concept," Schmidt explains. "We find using shared resources in the transportation/logistics world to be very advantageous, especially from the technology side."
Schmidt feels there is greater value in working with a 3PL, rather than a 3PP. "A lot of audit, pay, and match companies that handle things on a commodity basis don't understand our carrier strategy, and what we want to be doing three to five years from now," he says.
If the third party doesn't have logistics expertise, "it's more an accounting commodity than an ability to handle the competencies you want to outsource."
More than Paying Bills
The savings that can be achieved through the freight auditing process are just a portion of the potential savings, says Ryder's Scott Nemeth. Significant money can be saved through modal and carrier optimization made possible by the information freight auditing and payment generates.
"Processing freight bills is not just about making sure your carriers are paid on time," notes Schneider Logistics' Rodger Mullen. "It's about being able to gain an understanding of your transportation costs, then accurately allocating those costs to individual products or product lines."
Data2Logistics, for example, considers itself to be an information gathering house. "We gather the information, format it, and present it to our clients so that it becomes actionable information. If you just pay the bills, and don't use the information, you only get half a service," explains Daniel P. Ryan, president and CEO of Data2Logistics.
Freight information visibility enables logistics professionals to use detailed transportation data to reengineer their network, Mullen says. "Let's say you ship out of Memphis into the panhandle of Florida. With robust reporting, you have the ability to look at all those shipments, to understand how much weight is going out and via what modes," which can lead to improved decision-making.
"A lot of logistics information comes from freight payment," notes Joe Lombardo. Cass Information Services, Nestle's third-party payer, sends information dumps to the food giant, which uses an internal system to massage the information. "We look at it to see where our costs are and to identify trends, then use the information for strategic and tactical decisions," he says.
Reports from its 3PL enable Fuji to analyze carrier usage, such as contract vs. non-contract and primary vs. secondary. "If we're continuously using a second carrier in a lane, a flag will go up," he says, which enables Fuji to identify the cause. "We don't look at small blips on the radar screen, but it's invaluable when we start to see significant clicks."
Freight cost allocation that's a byproduct of freight payment "allows for a further barrage of reports that gives us the ability to look at consolidation and pooling opportunities," Schmidt says. Shipment data helps Fuji review the effectiveness of its network supply strategy and demonstrate the cost impact of shipping from a secondary rather than the primary distribution center.
"To turn data into information, and invoices into intelligence, providers have to invest in technology to provide robust reports," Rodger Mullen says. "Unless companies have invested in technology specifically designed around the freight payment process—not just putting data into a spreadsheet—they're not going to get the results they want."
Selecting a Provider
"Pick a financially reputable, strong partner," advises Joe Lombardo. "If they're not financially stable, walk away." Robert V. Delaney, vice president of Cass Information Systems, agrees. "If fully audited financial statements—balance sheet, income statement, and statement of cash flow—are not available, avoid further investigation," he advises.
"You can get better information on a publicly held company," notes 3PL consultant Cliff Lynch. "But public vs. private isn't the key. If the provider wants your business, it needs to find a way to satisfy you that it is financially stable." In the past, privately held companies may not have had to divulge detailed financial data, but those days are over, he says.
And while some companies may have provided banking information in the past, "that's not always an absolute indicator of financial health," Lynch warns.
"A number of companies have made their money off the float," or the interest earned on freight payment funds transferred by the shipper to the provider, Lynch explains. "Companies could put that money in overnight commercial paper, and get maybe six percent interest. Many freight payment companies priced their services on the fact that they would get the interest off this float." Thanks to today's low interest rates, however, that pricing model is unraveling.
Perform a rigorous due diligence, and look hard at potential providers' financial practices, such as how they make their money As part of your due diligence, call potential providers' customers and the carriers they pay, Ryan advises. "Carriers know the providers that pay them fairly and promptly. Carriers are the first to see when there's a process failure."
Who Will Do the Work?
Also dig deep to find out who will actually perform the audit and payment process. While some 3PLs have gained the capability through acquisition—both Ryder and Schneider Logistics, for example, have acquired freight audit and payment companies—"3PLs typically don't have the capability of providing the kind of information that a freight audit and payment provider has," says Cliff Lynch.
As a result, "the 3PL may not actually do the work. If you're going to have a third party pay your bills, you're better off dealing directly with the organization doing the paying," he says.
NCR's Neil Carlton advises that shippers have a well-outlined process and requirements document that spells out their expectations. "Make your decision based on how well the provider will be able to meet those requirements, and look through the glitz," he says.
Freight payment will continue moving to the Internet, observers predict. But that's not all they expect to happen in the future.
Other key developments include:
Different arrangements with providers. The recent spate of freight payment provider bankruptcies will cause shippers to be more careful. "There will be a push for customer-controlled disbursement accounts," Carlton says. With these accounts, the customer—not the freight payment provider—owns the account, and the provider disburses payments on the shipper's behalf.
Rodger Mullen predicts that shippers will increasingly move toward a service model, rather than entering into relationships that allow the provider to benefit from the float.
"Give the float option careful consideration," Lynch advises. "A good freight audit and payment company will give you the option of paying carriers with the float. They charge you more without the float, but you keep your own money."
Industry consolidation. Freight audit and payment "is getting to be a tough way to make a living," Lynch observes. Mullen anticipates that the business will continue to consolidate. "There are perhaps three large providers, and another two or three that are medium-sized, then a lot of cottage industry" companies.
"More shippers will want to go to providers with a professional financial system and robust financial controls and processes," he says. This shift will contribute to continued consolidation among third parties.
A move into the middle market. While the industry has traditionally focused on high-volume shippers with high-dollar cost transactions, Carlton thinks that freight payment companies will begin offering similar services to mid-sized companies.
Expanding abroad. Expect U.S. freight audit and payment companies to develop international capabilities. "We're going to see an increased push," Carlton says. "Customers are prodding freight audit and payment companies to take their business internationally."
NCR began transitioning to an outsourced model for freight audit and payment in Europe about 18 months ago.
The market appears to be ripe. According to the Cap Gemini Ernst & Young, Georgia Tech, and Ryder Systems Inc. 3PL study, only 11 percent of respondents outsourced their activities in Europe—less than one quarter of that in the United States. That's likely to change, as companies such as Cass, Data2Logistics, and Schneider enhance their European capabilities.
Auto-pay. "A key area that companies are exploring is an auto-pay environment," reports G-Log's Derek Gittoes. "If a rating engine can provide the cost of a shipment based on contract terms, and the details of the shipment, why do companies need to wait for carriers to send an invoice?"
Rather than wait to receive, match, and approve invoices, companies are considering calculating the amount due on a specific shipment and pushing it out to carriers for approval. If everything matches up, the system pays the carrier electronically, either immediately or at a pre-determined time.
In addition to eliminating the need for carriers to issue invoices, "the ability to automate the process and eliminate the exceptions of invoices that don't match or are out of tolerance will streamline the payment process," Gittoes notes.
Auto-Pay on the Way?
Invoiceless freight payment may enable companies to perform freight audit and payment in-house rather than outsourcing it, notes Todd Buelow, product manager, Elogex, Charlotte, N.C. "It can also allow you to take advantage of the payment float, and there's no administrative cost for handling the invoice coming in." Other benefits include eliminating audit tolerances and the potential of duplicate freight bill payment.
While auto-pay has generated a lot of interest, it's not yet well established. "Not too many freight audit and payment companies are doing invoiceless transactions," notes NCR's Neil Carlton. "I just did an RFP exercise with seven different freight audit and payment companies. Only one was doing invoiceless transactions, and that was in a small way."
That may change significantly in the next year or two as companies continue to seek ways to squeeze dollars out of their transportation process.