Advances in technology will continue to improve efficiency in manufacturing and distribution with more emphasis in sustainable value-added specialization. The transportation of certain products, such as chemicals, often requires a high degree of industry specialization that includes adequate training, proper auditing and accurate payment of the freight bill. Overcharges, improper handling, duplicate payments, delayed payments, incorrect freight accruals, inadequate reporting detail and deteriorating carrier relationships - both local and overseas - are just some of the challenges faced by companies as they manage their freight payment process. Failure to fully utilize the latest technology in handling and processing freight bills can have a significantly adverse impact on operating working capital and carrier relationships.
While some shippers manage their own freight payment activities, administrative and financial costs average about $11.04 per invoice, according to an Ernst & Young study. By comparison, a freight payment outsource can do it for less than half while offering value-added services. Many companies choose to outsource freight audit and payment services to reduce internal costs and concentrate on core competences. But cost alone should not be the only driver for outsourcing freight payment. A third-party outsource should also possess industry knowledge, the latest technology, proper training and the ability to deliver the cost-savings projections.
Banks were the first to offer freight audit and payment services when the transportation industry was heavily regulated about a half century ago. Motor carrier bills had to be paid within seven days and rail within five days. Companies shipping goods contracted these services to ensure prompt invoice processing.
After deregulation of the transportation industry in 1980, using bank freight payment services to meet tight deadlines was no longer necessary. Third-party logistics providers also entered the market offering specialized industry knowledge and web-based transportation management systems (TMS) to support freight audit and payment. However, many corporations continue to contract banks for freight audit and payment, either out of habit or under the illusion that financial institutions are more stable than other companies.
The current economic crises have exposed banks' vulnerabilities. According to U.S. Government figures, since the start of the financial crisis in 2007, there have been 230 bank failures, with assets totaling a staggering $605.3bn and deposits totaling $421.7bn. In 2009, there were 140 bank failures with assets totaling $170.9bn. The five largest bank failures included BankUnited with $12.8bn in assets, Colonial Bank with $25bn in assets, Guaranty Bank with $13bn in assets, United Commercial Bank with $11.2bn in assets, and AmTrust Bank with $12bn in assets.
Many banks did offer freight payment services at a seemingly low cost per invoice transaction because of anticipated interest income from "float." Unfortunately, with interest rates at a historical low, banks are looking at ways to mask their true cost like charging for multiple tendering. 3PL performance, as the true value of a service provider, comes from their quality of audit, procurement expertise, state-of-the-art technology and established relationships with transportation carriers.
Accurate Pre-Audit Reduces Expensive Exceptions
Freight audit is necessary to validate the accuracy of freight bills prior to payment. The process that banks and 3PLs use to audit invoices varies widely. Banks use the same approach when handling and processing bills for different industries: "If A equals B, pay. If not, reject and return back to the company." Verification techniques are often limited to spot checking transactions, looking for duplicates and manually validating rates. Because of the bank's inability to resolve issues related to bill validity, such as carrier rates and accessorial charges, a constant stream of freight bills are rejected. Flagged invoices result in a high number of exceptions, that, ultimately, cause higher processing costs, slower vendor payments and more work for shippers in resolving problems.
Some 3PLs utilize web-based technology systems that provide real-time management resolution instead of the antiquated method that most banks are still using. When an invoice is flagged for a discrepancy, such as a carrier fuel overcharge, the bank must send it back to the customer for clarification as it does not have the information to verify the new cost. The shipper must, then, take the time to identify the source of the problem, make the appropriate contacts and get the information back to the bank to process the invoice. In the meantime, when a carrier re-bills the shipper for that shipment as a balance due before the exception is resolved, the bank will process the new invoice and charge the customer for entering it into the system. So, if the same invoice is sent two, three or even four times during the course of an exception resolution, the bank will process them as new transactions each time and charge the customer accordingly. Now, the bank's quoted transaction fee suddenly doubles or triples for one invoice. With exceptions running as high as 20 percent to 25 percent, customers may find that they are not receiving the expected savings.
3PLs typically charge once to process an invoice. Exceptions are low (under 5 percent) as 3PLs utilize a combination of advanced, multi-relational databases and web-based technology that automatically verifies invoices using a broader base of checkmarks than banks. This robust pre-audit process ensures bills meet shipper's contract terms in addition to verifying carrier rates and identifying accessorial charges such as detention, fuel surcharges and storage fees.
With a TMS as part of the customer's supply chain management solution, the 3PL can access information to resolve nearly 95 percent of all issues associated with flagged invoices, without getting the customer involved with problem resolutions. For example, if an accessorial charge appears on an invoice as a result of a shipper's delay in loading product on time, the 3PL can go into the TMS and track the entire order to identify the source of the discrepancy and confirm it with the shipper. Banks do not have access to this type of information.
3PLs will even work with core carriers to educate them on how to provide information in the right formats to reduce exceptions, avoid payment delays and shorten payment cycles. For times when exceptions cannot be readily resolved, a collaborative exception resolution capability via network interface affords real-time electronic communications to shippers and carriers instead of faxes and emails. Unlike banks, 3PLs remain in the resolution process the whole time, reminding customers or carriers if they don't hear back on exceptions.
Possessing specific industry knowledge, 3PLs also better understand data and can readily identify, with the help of the TMS, discrepancies other than those related to billing such as route guide compliance, materials not being handled according to shipper requirements, or carriers not certified or who do not comply with regulations pertaining to the transport of certain materials. Customers are contacted and advised on how to handle these issues. Because of their business expertise and relationships in transportation, 3PLs can even outline solutions and recommend carriers qualified to transport specific products on the best routes.
Greater Access to Data
Unlike banks where value-added information is typically limited, TMS capabilities offered by 3PLs enable the integration of data throughout the entire supply chain cycle. Users gain visibility to freight status, invoices, routing guides, carrier information and more. As technology works on an automated, always-current environment, companies have access to relevant information on a real-time basis from many devices, including mobile device applications such as iPhones.
With statistical tools that manipulate transaction data, both 3PLs and shippers can generate detailed customized reports for different departments on freight operations, including carrier rates, on-time performance, volume by carrier, freight summaries by charge type, by lane/mode/consignee, etc. Using these reports, logistics departments can analyze vendor performance and make better purchasing and shipping decisions.
The TMS also enables companies to work in a paperless environment where documents and data can be transmitted, accepted and exchanged between companies, 3PLs and vendors in a variety of electronic formats such as EDI and XML. In addition to reducing labor costs and the chance of human error associated with manual data entry, electronic communications reduce risk of lost paperwork, ensure confidentiality and support faster data processing as information is coded for immediate acceptance into the system.
Rather than being just an account with a bank, companies find that they establish long-term working relationships with 3PLs. By taking advantage of the procurement expertise, industry knowledge and TMS technology offered by 3PLs, shippers involved with the transportation of products both domestically and abroad find that they can significantly reduce the costs of freight bill settlement while improving the quality and control of their freight processes.
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