THE FREIGHT AUDIT FUNCTION and UTILITY,

DRIVING CORPORATE PERFORMANCE

 

 

Executive Summary

Freight expense represents a significant portion of the overall corporate budget.  Because of its size and relative position, freight expense plays a major role in corporate profitability.  Freight expense for the average company is large enough to warrant attention and intelligent management.  Freight Cash Asset Management® is a valuable treasury tool that can convert the freight expense to an asset.  In order to properly control the expense and maximize its potential opportunities, it must be understood. 

 

The data required for an effective and efficient freight pre-audit is robust and comprehensive; the aggregation of these data collectively represents a corporate knowledgebase whose information can be used to drive corporate performance.

 

Singularly, the freight audit and payment control function is a very specific business activity that must be performed.  Errors and abuses on the parts of carriers, shippers and consignees can be significant.  The discovery and control of these errors and abuses will result in freight cost reductions and cost avoidance.

 

A good freight audit and payment control utility that collects important corporate data from the transaction stream is best described as a “freight cost control and management information portal”. (FCCMP)

In a previous white paper, “Logistics, the Beginning of the New Potential” we spoke about the advantages of using the micrologistics components, in this case, “transportation” to act as a “corporate penetrator”.  The “penetrator” is a virtual process that travels through and across departments and disciplines, placing and extracting data and information, always processing as it moves.  The “freight cost control and management information portal” uniquely performs both as “penetrator” that generates information and as a process that assures the integrity of the freight budget and the accuracy of the freight payable.   

Click here to read the entire paper

 

 

This white paper will discuss the freight pre-rating, pre-audit, management information, reporting and payment control function and provide the reader with an understanding and appreciation of the importance of the freight audit and simultaneously demonstrate how to identify and use the benefits and advantages that flow from the audit process.

 

Description

Clearly, the “audit function” can have many meanings; its most specific definition is:

·        An examination of freight bills to check their accuracy.

·        An adjustment or correction of the freight charge.

·         A comparison between the shipping contract and the freight bill for verification purposes.

 

Another view would describe the audit function by task:

Assigning freight charges to the Bills of Lading

Auditing the freight bills prior to payment for rate, nomenclature, extension, service verification and duplicate payment

Providing management reports

 

Various factors such as perspective, education, training and job description will also influence how we think of the freight audit and payment control utility.  Accounting or Purchasing would think of the audit function in terms of their specific need; the Traffic Department would also view the subject from their particular perspective.  All of the departmental perspectives would be correct.  Their unique understanding is important because it will directly influence their contribution to the utility, its process and use. However, a universal or corporate understanding must be achieved without which the capabilities, opportunities and advantages of the FCCMP could not be recognized.   

 

The singular “definition” of the freight audit function (see above) can and should position this utility directly in the center of every company.  Consider the following limited examples of the data required for a proper audit:  Origin, Destination, product, quantity, shipment date, consignor and consignee; add to this data the connective data such as: invoice, purchase order and credit.  All of this data, most of which is collected from the transaction stream can reside in a corporate repository.  The data and its end product, information, have universal corporate appeal and function.  This information is refreshed constantly and represents some of the most current data available; timely information increases the potential for better and more accurate decisions.

 

In order to maximize the benefit of the audit and to take full advantage of its overall capabilities, the freight audit and payment control utility must be understood at many levels including individuals, departments and the company as a whole.  Once a common understanding is achieved, it must be communicated effectively and efficiently to all appropriate parties.  These descriptive and definitional mandates are prerequisites for the successful development, implementation and use of the freight audit and payment control utility.  

 

Components

The Freight Cost Control and Management Information Portal focuses on two (2) primary activities:

Freight Cost Management

Management Information

 

Freight Cost Management (FCM) is that part of the supply chain process that enables an effective response to the direct and indirect, the obvious and hidden costs of moving goods across the entire supply chain. It includes, but is not limited to the following specific tasks:

 

Pre-rating—assigning freight charges to the contract and/or source information

·         Freight cost accounting

·         Freight Accrual

·         Performance monitoring

·         General ledger

·         Pre-pay and Add

Pre-auditing---examination of the freight bill prior to payment:

·         Auditing the freight bill for rate, nomenclature, extension, service verification

·         Validating the account-establishing payment responsibility

·         Freight Terms

·         Service verification

·         Service level

·         Comparing the freight bill with the Bill of Lading

·         Duplicate payment prevention

·         Compliance

·         Routing

·         Quantities

Payment Processing---preparing the freight bill for payment:

·         Reducing the payment to the lowest legal and lawful charges

·         Supporting the reduction with the governing authority

·         Transferring appropriate material to the payables responsibility

·         Transmitting appropriate payment information to the payables responsibility 

 

Management Information is a derivative of the entire audit utility.  Timely and accurate information are the quintessential requirements for success and performance.  Because the pre-rating attribute of FCCMP begins the data collection process, its initial, accretive and connective data form the foundation for the audit while developing the corporate knowledgebase. All of the available data that flows through this process is prolific, comprehensive and robust.  As a management tool, the availability of this continuously refreshed and universally applicable data offers the entire company a boundless opportunity for information, when and how it chooses.

 

Proposition

A properly configured Freight Cost Control and Management Information Portal will be driven by an expert system, delivered through an ASP and/or BPO process model, and powered by the corporate knowledgebase.  This configuration efficiently and effectively satisfies all of the complexities of the audit simultaneously provide the most comprehensive and robust information and management tool. 

 

To support this proposition, this white paper will:

 

Discuss the necessity of the freight audit function

Present a comprehensive freight audit, information and payment control strategy

Describe a method of approach for developing and implementing the FCCMP

Establish the FCCMP as a “corporate centric” imperative

Identify value added services and benefits that are driven by the FCCMP

 

Why is the Freight Audit Function Necessary?

Freight expense in the average American company consumes between 6 and 18% of every sales dollar.  Domestically, freight expense is second only to agriculture in the GDP. 

 

A typical freight pre-audit, the components of which are described above, can save as much as 33% of the freight cost during the first year implemented and average as much as 14% annually thereafter.  With the performance information available at anytime, management has the opportunity to effectively address errors or abuses; this information should continually drive out poor performers while improving operations and reducing costs.

 

Carriers, shippers and consignees produce errors and in some instances abuses.  Each of the freight audit elements such as shipment date, weight origin and destination, etc. influence the freight charge; as such every audit element must be identified, scrutinized and verified.  The error and abuse conditions can vary from occasional to constant; the FCCMP should analyze its discoveries and report information such as, pattern recognition and competitive assessment.  

 

Areas of exposure for error and/or abuse can begin with the shipment or class weight.  As an example, the Bill of Lading weight could be 50 pounds and the respective freight bill could indicate 500 pounds.  This kind of error demonstrates the need for service verification to be an absolute requirement of the audit function.  Service verification identifies the actual and potential freight cost generators, validates them and denies any detected errors or abuses and records the appropriate information.  In some instances freight terms and customer service policies are at odds.   This situation occurs when customers may require a carrier to perform inside delivery services, but the service was not requested by the shipper nor presented on the Bill of Lading. 

 

Errors and abuses can appear in known and unknown locations; they may be simple or compound.  The FCCMP will reject incorrect charges, pay only the correct amount and forward the abuse or error condition, on-line to the appropriate department for “exception review, resolution and system updating” while recording the data for subsequent informational and reporting purposes.

 

Strategy

Implement, in the shortest period of time and utilize a fully automated “Freight Cost Control and Management Information Portal” (FCCMP) whose function and capabilities are scalable, that respect FCM standards, support data collection from the transaction stream as well as supporting information for management use.  The FCCMP and all of its capability must be available 24/7 to all authorized users and operate in a highly secure environment.  The FCCMP will provide appropriate information, enabled by the corporate knowledgebase to all authorized users. 

 

Method of Approach

“Convergence” or a “coming together” of like and disparate knowledge bases, skill sets and talents presents significant opportunity for new paradigms and improved performance.

 

If you agree with this notion, it should be axiomatic that the ASP and BPO “Freight Cost Control and Management Information Portal” model represents the most efficient and effective freight audit, payment control and management information solution.

 

Corporate Centric Imperative

The data required to drive a proper and correct freight audit has there basis in many different areas of a company. The “transportation penetrator” that we spoke about is pervasive and capable of collecting data from many areas of the company. Individually and connectively the data is prolific, robust and comprehensive.  The information that this data is capable of providing can be very important to the entire company.  Sales, Marketing, Purchasing, Treasury and Finance, in addition to the micrologistics components and macrologistics strategies are just a few examples of departments that need the information and its functional capabilities.  This robust and all-inclusive data is a corporate knowledgebase; this repository of information can improve the accuracy and timeliness of management decisions resulting in improved corporate performance.  Because pre-shipment, in-transit and post shipment data is representative of many company areas, the potential information has universal appeal.  The corporate knowledgebase or corporate information repository, because it is developed from the transaction stream the data residing in the corporate repository is valid and accurate.

 

As an example of the centric imperative, consider the traditional application of a “Distribution Analysis”.  For the most part, it would be seen as a Logistics or Transportation department report.  However, it could have significant benefit for the Sales and Marketing Departments.  Specific product information, either by class or SKU is either directly available or connected to the Bill of Lading.  With origin, destination, weight, shipment frequency, pieces, consignee and product ID, the “Distribution Analysis” can demonstrate product distribution by various characteristics.   More specifically, a shampoo that contains “henna”, a product typically associated with certain markets, might be presented on the analysis as a void or lack of anticipated product distribution in that certain market or region.  Appropriate management alternatives would then be employed to determine if any failure exists and how improvement could be made.  Thereafter, an appropriate on-line driven exception file would allow the improvement process to be properly monitored. 

 

The data for another important analysis would also support and drive information to Treasury.  Cash management applications and their subsequent performance monitoring requirements are easily produced from this corporate knowledgebase.

 

Given the necessity of the audit function and the nature and availability of the comprehensive and robust data associated with and attendant to the audit requirements, it behooves every company to recognize the centric nature of the corporate knowledgebase and act accordingly.

 

 Value Added Services

The freight audit function is a necessary business function that serves a critically important role in controlling transportation costs.  This necessary function is highly capable of driving additional value. 

 

Some examples of the value added benefits that can be derived directly from the pre-audit and payment control activities are:

 

Accounting and Finance Department

Accrual Reporting

General Ledger

Budget control for various corporate activities

Expense cross referencing

Tax control

Budget performance

Competitive assessment

 

Treasury

Cash management

Float opportunities

Freight Cash Asset Management

 

Purchasing Department

Reduced quantity pricing

Enforcement of Terms of Purchase

Chargeback routines

Performance monitoring

 

Sales Department

Forecast and analysis

Promotional performance

Product Distribution

Salesman performance

Customer service monitoring

 

Conclusion

The pre-auditing of freight bills is a necessary component for success.  It reduces transportation costs and achieves cost avoidance.  The primary purpose of the audit function is the assurance of paying only the lowest legal and lawful freight charges.  The data and process necessary for best practices incorporates a host of value added services and benefits that are capable of driving corporate profit and performance.

 

It is not often that a single and necessary business utility is capable of addressing and satisfying many specific functions and tasks across the company, nor are there any other departments that can produce a corporate knowledgebase.  The automated “freight cost control and management information portal” operating as an ASP and BPO process models provides a highly secure, robust and comprehensive solution.  

 

The Internet based “Freight Cost Control and Management Information Portal” is an excellent model that properly satisfies today’s freight audit, payment processing and management information requirements.  The functions and features properly address the audit requirements for spot and telephone rates as efficiently and effectively as they process more traditional rates and charges.

 

The combined resources of an expert system and the customers handpicked staffs offers one of the best opportunities for effectively and efficiently managing the complexities of today’s freight audit and payment control requirements.

 

For more information about how TransportGistics, Inc. can help you drive corporate value and performance from the freight audit function please contact jwest@transportgistics.com

 

About TransportGistics, Inc.

TransportGistics is a global, multi-product and services company that provides market leading, simple, incremental solutions for transportation management and logistics functions within the supply chain.

 

TransportGistics commitment to education is portrayed through its advancement of professional logistics and transportation programs.  Its white paper site presents important and timely transportation and logistics subjects each month, and is regularly visited by more than 30,000 companies, universities and governments, worldwide.

 

Through its question and answer section, TransportGistics and its readers are actively engaged in asking and answering questions.  This activity has allowed us to create the Logistics Forum for the Exchange Ideas and Information. 

 

TransportGistics, Inc. is an active partner at the Center of Excellence in Wireless Internet and Information Technology at the State University of New York-Stony Brook.

 

Continuation

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com.

 

Disclaimer

The information presented herein represents the opinion of the author but not necessarily the opinion of TransportGistics, Inc. nor is it presented as a legal position or opinion.

 

 

All content copyright by TransportGistics, Inc. All rights are reserved. The authors of the articles retain the copyright to their articles. No material may be reproduced electronically or in print without the express written permission from the individual authors and/or TransportGistics, Inc. (papers@transportgistics.com)