Auditing invoices in logistics is not sexy, but it offers a key to many challenges. In this article, I dive into this somewhat obscure niche.
What is freight auditing?
So what is freight auditing? It’s simply the conceptual term for various processes performed to ensure that shippers are paying their logistics providers the right amount of money. Why does this industry even exist? Should not carriers just send accurate invoices? Yes, they should, but it’s not always that simple for many different reasons. Let us just say that there is a lack of standardization of data in logistics, systems are often outdated, and data can change over time and not be communicated, and last but not least, pricing in logistics can have many different components.
Logistics pricing and invoicing
So what are the different components that make pricing and invoicing in logistics so difficult? Yes, this is where it gets interesting, and this is where logistics really differs from other industries. First of all, you have freight itself, which can be charged in many different ways: per pound or per kilogram, by chargeable weight (using weight conversion), per loading meter, per shipment, per pallet, per container… Of course, it depends on the type of transport. Then it can be a minimum charge plus weight classes, a different price per kg depending on the weight. The way these brackets are interlocked also affects the tariff, so it is necessary to calculate the weight differences.
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In road haulage, there is a fuel surcharge which is calculated independently based on a percentage. Then there are additional charges and surcharges for waiting time, port congestion, cleaning, extra services, handling charges, extra equipment, dangerous goods surcharges, etc. This list can really be endless. It shows you that logistics is far more complex than any other expense category. Since logistics is dynamic and each shipment can be unique, this leads to over 50% of invoices being incorrect and containing valuation errors.
The funny thing is that each shipper has different requirements due to their own unique situation and each carrier may take a different approach. There is no one-size-fits-all approach.
Freight audit ‘hidden’ benefits
If you are still here, you must be really interested in this topic, so I’ll briefly break down the various sub-processes that make up the freight audit process.
- Rate card setup and management: rates need to be set up in a freight audit facility for calculation and reconciliation with billing data. This data needs to be managed on an ongoing basis as new carriers and transportation routes may be added and data changes from time to time.
There is a lot more that goes into the implementation and onboarding process, but I just wanted to highlight this important point. So back to the processes.
- Shipping data is entered into the freight control system from a TMS, ERP or other source. This is optional as the data is not always good enough to be used.
- Invoice data comes into the system either via EDI, API, manual or semi-manual entry and is matched against the rate card from the system.
- Once matched, there is either a match or a mismatch, and the mismatch is handled through a claim or exception handling process to verify the discrepancies.
- Reconciled shipments or invoices are further processed and routed for payment and enter directly into the customer’s financial system.
- Reports and business intelligence give the customer good insight into savings, improvement opportunities and overall spend patterns as costs are allocated to cost centers.
This sounds relatively simple, but there are many moving parts that include reviewing data, cost allocation logic, communicating with carriers, data cleansing, mapping data, and managing connections.
CEO of Freightender, a logistics procurement platform, and its offshoot TendrX, a community platform for logistics.
Sounds pretty complex already actually, why do it at all?
More hidden treasures of freight audit
Well, this is where we get to the good stuff, but it’s often hidden and overlooked because a freight audit is not that popular due to the fact that it’s heavy change management. But once it’s done, it uncovers hidden treasures that are critical to a business, and I list them here.
- Data harmonization: freight auditing structures and harmonizes all the data elements so that they match your logic and costs can be allocated to cost centers, but it can also reduce the disparate cost items used by carriers and reduce the complexity of the data sets provided by carriers.
- Single source of data: the freight audit platform provides data visibility and intelligence on carriers, rates, contracts and costs for all modes for the entire volume you have brought on board. All logistics costs run through 1 system. No more leaky expenses or lack of data transparency.
- Clean data entry: when you run a freight tender, all you need to do is run a report to pull the data from the freight audit platform and you have a perfect starting point for any procurement action. Save a tremendous amount of time.
- Clean data output: the finance department receives only correct invoice data and clean invoices. This makes payment easier and the finance department has to spend much less time on logistics. Account coding is automated.
- Savings between 2-6%: Errors come in all forms, and sometimes it’s just a small mistake repeated many times, and often incorrect logic is used or old rates are applied. Eliminating these errors can result in significant savings.
- Opportunity to improve other processes: Thanks to freight auditing, the finance department is relieved, logistics no longer has to touch invoices but can focus only on exceptions, and running tenders becomes much easier. Generating reports on the cost of delivery and showing trends in logistics costs to management makes the lives of logistics staff much easier.
- Paying carriers on time: thanks to the improved processes, carriers can receive their money on time, which is not always the case with the old processes without an audit. In addition, carriers have better visibility into their own invoicing process.
- Carriers are held accountable: With QBRs with carriers, it becomes much easier to point out billing errors and recover money when mistakes were made.
Considering these benefits, it can be said that freight auditing creates a solid and well-structured backbone for any logistics organization that has a handle on data and data quality without wasting money or time on manual data collection processes. In today’s logistics industry, this is more important than ever.
It is all about actionable and clean logistics data
To have good input for freight sourcing you need to have good logistics data. Companies that use a freight spend management platform get this data by just easily generating a report of previous shipments with all costs associated. Companies that don’t have a freight audit platform in place will spend a lot of time gathering data from different sources which often ends up being incomplete and incorrect. Check in with us for more info on freight audit solutions.