Since a well-run logistics and supply chain operation is critical to business profitability, there are continual pressures to drive down costs and find ways to operate more efficiently and effectively.
One best practice many well-run companies use in response to this pressure is to audit freight bills to make certain they are being charged the appropriate rate. But if you think a freight bill audit is all you need to eliminate shipping-related errors that can impact your bottom line, think again.
If your company is like most, you have specific routing guidelines your vendors must use to select a shipment method and carrier. But auditing your freight invoices won't tell you whether your vendors complied with your routing instructions in the first place. If they routinely fail to do so, you may have a costly problem.
Industry estimates show inaccurate freight bills add an average of .02 percent to a typical company's annual freight costs. But vendors who fail to comply with established routing guidelines can have twice the financial impact-an average of .04 percent. If you work in a large enterprise with an annual freight spend of $200m, for example, that can amount to an $800,000 annual drain on your bottom line.
Know, though, that these industry estimates are just that-estimates. There are many real-world examples from some of the world's largest and most respected companies where multimillion-dollar mistakes were uncovered.
Most often these mistakes are the result of process breakdowns. They can happen whether you ask your vendor to refer to a routing guide you've provided or send them to your own online system that selects the lowest-cost carrier for a given shipment. If you aren't regularly auditing to determine whether your vendors are complying with the instructions you've provided, you are clearly running the risk of inflated freight bills that place your company's hard-earned profits at risk.
Here are a few of the most common-and costly-sources of errors that can impact your bottom line.
Failure to combine shipments
Most companies require vendors to ship merchandise traveling to the same destination on a single trailer. If instead your vendor overlooks your instructions and ships on multiple trailers, you'll end up paying a significantly higher freight bill. An audit conducted for a regional chain of department stores showed 133 of its vendors made this mistake in a single year.
Failure to create a single bill of lading
Even if your vendors comply with instructions to ship a full trailer, the benefit is lost unless there is a single bill of lading for less than truckload shipments. That's precisely what happened to a leading manufacturing company. The firm's shipments were typically small in volume, so its routing guide instructed vendors to combine multiple purchase orders onto a single, LTL trailer.
An audit showed many suppliers simply failed to follow instructions. Not only did the company lose volume discounts, but most of its small-volume shipments fell under the carrier's minimum rate. Having to pay the guaranteed minimum for each bill of lading was costing the company millions annually in excess freight charges.
Selecting the wrong carrier or shipment method
To achieve the most advantageous rates, most companies require vendors to use specific shipment methods and carriers. But mistakes can happen and vendors can make the wrong judgment call.
For example, a manufacturer in India-worried that a massive production delay would result in the loss of an order with a large, U.S.-based retailer-decided to ship the merchandise by air to the retailer's nearly 500 distribution centers and stores. The shipment was sent collect rather than being paid by the manufacturer, costing the retailer more than $200,000 in incremental charges over a three-month time frame.
A national chain of discount stores found itself with an even more costly problem. The company created an online routing guide vendors used to enter details about each shipment and determine how each should be handled. Unfortunately, the way some vendors chose to enter shipment information caused volumes to be calculated based on how each package would be loaded, rather than on its precise size and weight. As a result, 18-wheelers were being sent to pick up 10-pound packages. It was a $3m-a-year mistake that took significant time and effort to unravel.
Sending prepaid shipments via freight collect
If a vendor is supplying merchandise to multiple departments within your firm, they may have a number of purchase orders governing that activity. Some may require shipments to be prepaid, while other orders may specify that merchandise should be sent "freight collect." That makes it easy for mistakes to happen.
One national retailer had a policy of providing vendors with an account number to be used to ship all small packages collect. Certain departments, though, wrote orders to the same vendors requesting prepaid shipping. With the account number in hand, many vendors sent ALL packages freight collect. An audit of the retailer's operations uncovered $1.5m in excess charges.
The same problem can crop up with back orders. One large U.S. firm discovered $15m in excess charges in a single year from vendors who mistakenly sent back-ordered merchandise freight collect.
There are several best practices your company can adopt to help prevent such costly mistakes and recover lost revenues.
Automate your records
The single most important step you can take is to automate your records. Unless you do so, it can be virtually impossible to dig through mountains of paper to find problems. So automate your routing guide and purchase orders and require that all freight bills and vendor invoices be submitted electronically if possible.
With electronic data in hand, software can be developed based on your unique business rules to determine whether vendors have complied with your instructions. You can compare what you specified, what the vendor did and what you paid for - allowing you to identify the gaps. You also will have an electronic "paper trail" that can help you recover what you've overpaid and restore revenues to your bottom line.
Automate your routing guide to make it Web-accessible
While a paper version of your routing guide is acceptable, best-in-class companies are creating Web-accessible programs vendors can use to enter information on each shipment and receive specific routing instructions. By taking control of the process, you'll remove the guesswork and can reduce or eliminate many of the most common and costly errors. Just proceed with care and caution in developing your software. Making errors at the programming stage can result in systemic issues that are hard to uncover.
Routinely review and update your routing guide
It is critical that you routinely review and update your routing guide-especially in light of soaring fuel costs. If, for example, you have a blanket rule that instructs a vendor to ship orders of less than 20 packages or 200 pounds by small package carrier, you may discover upon analysis that the most cost-effective breakpoint has changed. So whether you do it yourself or hire a service to help you, take a thorough look at your routing guide on a regular basis to see if updates should be made.
Keep in mind that knowledge is power. So whether you decide to audit your own operations or to hire an outside firm to do so, take a thorough look at whether vendors are complying with your shipping instructions. If an audit uncovers costly errors, you'll have the information you need to recover lost revenues and to make a potentially significant contribution to the profitability of your company's operations.
Know, too, that most vendors expect freight claims and are responsive when presented with evidence that a mistake has been made. If you handle the situation with a measure of care, you can maintain a positive relationship with your vendors while returning revenues to your bottom line.
Jeremy Dotson is a freight compliance specialist with APEX Analytix, a provider of accounts payable software for error prevention and fraud detection, recovery audit services, and procure-to-pay compliance solutions. Visit www.apexanalytix.com.
Six best practices for vendor routing guides
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