Freight Payment: What stage are you in?
There are four distinct stages in the evolution of freight payment to “freight settlement”. This article explains why the latter is important and how shippers use transportation data and management systems in each stage.
For some years, data-hungry shippers have leaned on their carriers and third-party logistics (3PL) partners to provide more than just a correct invoice. “It’s about the data,” say many leading logistics managers.
Freight transactions are unique in that they generate many fields of data useful for analysis, such as shipping location, date and time, actual destination, weights and volume patterns. Shippers use this information to help support sales and operations planning (S&OP) that forecasts production, purchasing and logistics operations. Further, accurate history means better requests for proposals (RFPs) from shippers for logistics providers.
In 40 years in the industry, I’ve witnessed four distinct stages in the evolution of freight payment to what I call “freight settlement.” In freight settlement, the shipper pays for and receives the service promised and all associated data in a usable format. While I hope my colleagues are in stage four, I have met quite a few still in each of the stages one through three.
In stage one, freight invoice in paper form is sent to the shipper for payment. Transportation data on freight bills is used directly, only by accounts payable, to match-pay freight bills by checking accrued amounts and shipper order numbers.
The shipper’s transportation clerk receives the invoice and verifies that the invoice is indeed for a shipment that they requested, and the amount was per the tariff or contract. The reviewer keeps no record as the invoice will be stored by accounts payable. Accounts payable would pay the approved bill, and the only data recorded is the order number and the associated freight charges.
The paper freight bill would be filed by month incurred. In stage one, there has emerged a post-audit service that collects the paper freight bills and manually reviews them looking for overcharges and duplicates.
These firms charge on a percent of recovered funds. Post-audit firms have been financially successful because historic error rates have been 1% for truck and rail and up to 10% for ocean. Those who need planning information had to manually assemble the history of transactions by combing through carrier reports and paper freight bills.
In stage two, shippers try reducing overpayments through pre-audit and payment service firms and still use post-audit firms to check on the pre-audit firms.
Initially there was some reluctance by pre- and post-auditors to produce summary reports, as auditors did not want shippers to have too much detailed history from which to glean patterns that would enable better operations. Improved operations would reduce the incidence of claims against carriers, thus reducing the need for auditors.
The development of distribution network models increased demand for blocks of data for six to 12 months for modeling and RFPs. For shippers in stage one or two, it was not unusual that 80% of the cost for a new distribution network analysis (e.g. locating a new warehouse) was in manually digging out and scrubbing shipment data from various sources.
In stage three, several things happen. Shippers use sophisticated transportation management systems (TMS) to accurately predetermine freight charges and to capture data needed for later analysis as transactions occur.
In addition to time, place and volume, delivery performance and turn down rates became visible to shippers and carriers. Some shippers are able to start “autopay” where the carrier is paid from the accrual determined by the TMS and a freight bill no longer drives the payment process.
Of course, this is not ideal. The shipper incurs the cost of upkeep on the billing system of record and the carrier still must do their internal work.
In stage four, carriers got the message that shippers valued operational details to be transmitted with freight invoices and, additionally, with monthly digital summaries.
Shippers are drawn to carriers and 3PLs that can provide detailed data and actionable information-and an audit trail. Once the carriers can convince the shipper’s financial team that they had a transparent auditable system the shipper can rely on-think airline passenger tickets-the carrier’s system is available for both transactions and historical analysis. This can become a blockchain ledger component.
Shippers of all sizes should be reviewing their freight payment process. If you’re not getting routine data automatically with each paperless freight transaction, you’re doing freight payment and not freight settlement. What stage are you in?
This article was written by Peter Moore from Logistics Management and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to email@example.com.