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Managing Freight Payment: No Time to Slack Off

In the end, all outsourcing relationships are founded on trust. You can write a contract that drills down to the smallest details, but at some point you have to rely on the integrity of your partner. And when that trust is violated, the consequences can be severe.

Take the world of freight payment and auditing. Two major players in the business, Trendset Information Systems and TransVantage Solutions, Inc., filed for bankruptcy protection last year. Each was accused of embezzling millions of dollars of their clients’ funds. Company principals were charged with diverting money for their personal enrichment, improperly commingling accounts and failing to pay carriers. Shippers were left on the hook, owing huge amounts to their carriers and logistics providers.

No surprise, then, that financial responsibility tops the list of shippers’ concerns today, when they’re dealing with freight-payment vendors. The vast majority of providers is, of course, honest, and handles funds scrupulously. But shippers need to be vigilant in their dealings with prospective partners.

“It’s very important for shippers to be cognizant of the financial controls that a provider has before making a decision,” says Rick Erickson, freight solutions manager with U.S. Bank Corporate Payment Systems.

Never mind that freight payment is a mature industry – one of the first, in fact, to promote the outsourcing of supply-chain and logistics services. Or that a given provider might have a lengthy track record. TransVantage was founded way back in 1964, and was accused of mishandling clients’ funds for nearly 20 years. “You can’t just look at how long someone’s been in business to make that judgment,” says Erickson.

The payment sector consists of two types of entities: banks and non-bank providers. Given his affiliation with U.S. Bank, Erickson understandably favors the former. He claims that the non-bank side has an issue with float – the use of freight funds between the time they are tendered by the shipper and paid to the carrier. The resulting investment opportunities greatly increase risk, he says. Still, there are plenty of non-bank providers who act with integrity, transferring money in line with the shipper’s strict instructions.

Erickson thinks that banks also have an edge because they can also supplement the payment function with trade-finance services. “We’re looking at the financial as well as the fiscal supply chain,” he says. “It’s about more than just the movement of funds.” In the months and years following the Great Recession, however, many banks stopped lending altogether, especially to small and medium-sized businesses. As a result, those companies were forced to look elsewhere for financing.

Who’s a good candidate for a freight-payment service? Just about any size and type of business. U.S. Bank focuses on large and mid-sized customers, but smaller entities can still benefit from the use of an expert middleman – provided that it’s trustworthy, competent and properly managed.

The business itself has changed little in recent years. The cost to shippers and means of payment have remained steady, according to the 2013 Freight Payment Benchmark Study, conducted by American Shipper in partnership with the Council of Supply Chain Management Professionals and Retail Industry Leaders Association. What’s different today is that larger shippers are hoarding cash and delaying payment to carriers. The number of shippers paying 30 to 45 days past the invoice date rose by about half from 2011 to 2012, the benchmark study said, while those paying in fewer than 30 days “slipped noticeably.”

The trend creates a dilemma for carriers, many of whom are operating on thin margins and can’t wait for long periods of time to get paid. Erickson says banks can step in with financing that accelerates payment to carriers, while extending terms for the shipper by 60 to 90 days. The option is attracting greater interest from customers in their dealings with all types of vendors, he says.

What all shippers are seeking, says Erickson, is “the single point of truth.” Shippers and carriers alike want one system that can process and pay all their transactions, providing global visibility along the way. Clean data is an essential precursor to deploying new tools for business intelligence and analytics.

“You have to ensure that you are auditing 100 percent of the transactions and are focused on the accuracy of the process,” Erickson says. But that’s an ideal goal that isn’t always achieved in practice. The American Shipper survey found that just half of the market reviews each invoice in some way – let alone the 15 or so crucial elements that make up each one. What’s more, “a large proportion of respondents failed to see consistent improvement in their auditing processes,” the study said.

Erickson urges companies to practice due diligence in selecting a payment-services partner. “Shippers have to understand that they’re putting their freight funds in the hands of a third party, and what that means.” While more companies than ever before are asking the right questions, many continue to let the freight-payment function slide – both in terms of selecting a service provider, and following up with adequate oversight. After all, the only thing that’s at stake is your money.

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