Lower Your Freight Spend by Auditing
05/24/2016
Phillip Riback - Vice President for Development
You have just finished a lovely dinner with a friend. The bill comes to the table, it’s twice what you expected and you don’t recognize any of the food listed, except for that flambéed dessert you saw at the next table. Or an appetizer you never ordered is on the bill. Or two glasses of wine when you only had one. At this point, most of us would call the server and explain the discrepancy, typically engendering an apology, correction of the check and if you’re lucky, a complimentary dessert or after-dinner drink. No hard feelings. Everyone makes mistakes. At least now with modern POS systems, we don’t see the arithmetic errors as well.
Now imagine that your company has a $100,000 weekly freight bill. The Traffic Manager negotiates with the carriers and sets up routing guides. The warehouse doesn’t know the rates, but uses the shipping guides (more or less) and sends out the shipments. Then the bills come to Accounts Payable. One group takes care of the general ledger coding and passes it on to the payment people. They don’t know what was shipped, don’t know the rates and couldn’t apply them if they wanted to. So the only person who knows what the charge should be never sees the bill.
Why do we accept this for a $100,000 corporate freight bill when we wouldn’t for a $50 meal? The bottom line is that we shouldn’t and we don’t have to, but at a minimum it takes coordination of functions and optimally entails consolidation of functions for efficiency and accuracy.
As I have noted previously, everyone makes invoicing mistakes. The more complicated the invoice, the greater the likelihood for error and freight invoices are among the most complicated. There are 7 steps where invoicing usually goes wrong for an LTL freight bill, all of which can be audited.
- wrong shipment
- misapplication of terms
- wrong weight or freight class
- misapplication of FAK
- misapplication of floor/discount
- accessorial fees
- fuel surcharge
Wrong Shipment – Currently, this is quite rare. In this situation, Shipper A is charged for Shipper B’s shipment. This can be controlled for with outbound shipments by matching freight bills to a shipment accrual file. Inbound shipments are more problematic. The optimal method is an inbound shipment routing system which adds to the accrual file. Matching can also be performed against order files and delivery receipts.
Misapplication of Terms – We see this with some frequency. A shipment is designated as collect, yet the carrier bills it to the shipper. They always know the shipper’s account number. Whereas they should have used the consignee’s account, someone missed the terms, or couldn’t find the consignee’s account information.
Wrong Weight or Freight Class – This is usually an innocent entry error on the part of the carrier, but can be expensive for you if not caught. Someone familiar with your freight may notice right away that you have no products of that freight class. That is not going to happen when AP doesn’t understand freight. More likely, however, you will need to cross-check with your accrual file to verify weight and class.
Misapplication of FAK – A less common error, but can be very costly when it occurs. Your FAK may cover classes 55-100 at 50, but your class 100 freight gets charged at actual class. People in the AP department without a freight background have absolutely no idea what this means and will miss this error almost every time.
Misapplication of Floor/Discount – These are at least a little easier for people without a freight background to understand. The Absolute Minimum Charge says exactly what it means. And most people would love to get a 75% or greater discount when they buy anything else. As long as they know what the floors and discounts are according to the contracts, they should be able to catch these errors, but still hope that the base rate is correct.
Accessorial Fees – Most of these are fairly straightforward, even to those not familiar with freight. The usual errors are when a charge is applied which has been waived by the carrier in the shipper’s contract.
Fuel Surcharge – Most AP systems are not concerned with the weekly average diesel price and have no place to store it. Without this information, they cannot properly audit the fuel surcharge.
Duplicate Billing – Carriers like to be paid quickly, and should be paid within 15 days of invoicing according to the US Department of Transportation. As a result, they send a second bill within a couple of weeks. Especially if your AP system ages bills, you will receive a lot of duplicate bills. Most AP systems will pick this up but each time they come in, they must be entered into the system accurately to catch.
Balance Due Billing – Having found the errors on the original bill, your AP department cuts back the payment accordingly. But the carrier doesn’t always agree especially if there is no explanation as to why the invoice was paid less than the full amount. So they send the balance-due bill. This creates a problem for many AP systems as they cannot handle two invoices with the same identifiers. Of course if a different Pro number than the original is used to enter into the system, then it is no longer evident why the original bill was short-paid. Freight audit and payment systems are designed for this inevitability whereas many AP systems cannot handle them.
In Summary:
By carefully auditing your freight bills for accuracy and proper application of rates, discounts and accessorial fees, you are likely to save 1-2% on your freight bills. To do this properly, your audit should be performed by someone who understands freight in general, understands your company’s freight and shipment patterns in specific, and the proper application of rates. This can be done well by a dedicated individual in your own corporation or should be outsourced to a company that specializes in freight audit and payment. You probably won’t end up with a complimentary dessert, but you will be saving time and money.
6/21/2016 - Negotiate With Your Carriers for Freight Savings
4/19/2016 - How Using a Little Data Can Add Up To Big Savings
