We continue our series on all things freight and transportation accounting by speaking about a common practice all shippers must partake in freight payment for all your freight bills. Often, a logistics or transportation manager is tasked with rounding up all of the invoices from the various carriers they work with for every single shipment made, has to compile all of the invoices, give over to the accounting team, and then the arduous task of processing all of these separate payments by a direct ACH, or much worse through cutting checks, begins. Not only is this time-consuming and process heavy, but the practice of handling so many invoices can lead to costly errors, and worse, late payment due to bad internal processes. So why not just get rid of the responsibility and headache all together through a freight payment service?
The concept of freight payment is relatively simple in theory but very complex in practice. Below you will find information and a selection of resources to help you better understand freight payment and freight payment services provided by third-party logistics companies.
How Freight Payment Works
Freight payment is a collection of processes that can be thought of in general terms as an accounts payable service for transportation invoices. Freight payment services providers, such as a 3PL, act as the intermediary between the shipper and the carrier to receive, process, and pay invoices. Every company is different so some processes may vary slightly, but typically invoices are sent directly to the freight payment provider by the carriers. Upon receipt of the invoices, the following processes are usually included in a quality freight payment solution.
Invoice Receipt – Carriers submit invoices to the intermediary (such as a 3PL) in a variety of formats for processing. Typical methods include manual invoices sent via the mail or email and electronic invoices sent via EDI.
Invoice Validation – Upon receipt of invoices, the logistics services provider will validate and audit each invoice to make sure that the invoices have not been previously processed (duplicates), are the shipper’s responsibility to pay (billed correctly), and include proper/necessary documentation. Additional shipper-specific validations are frequently included in this process such as the validation of bill of lading or purchase order numbers against a shipper’s internal data sets.
Data Capture – Unlike the limited fields of information typically captured in an accounts payable process, freight payment services from 3PLs capture comprehensive data elements from the freight invoices and supporting documentation to create a reporting database. Shippers utilize this business intelligence to analyze and manage their supply chain activity. Many of these 3PLs who offer managed transportation services, such as freight payment, also incorporate the shipper’s internal source data in their data capture to further enhance reporting. In this case, shippers provide the third-party logistics company with electronic data that is “matched” to freight invoices and extracted to be included in the provider’s reporting database.
Rate & Service Audit – During the implementation process, the 3PL will utilize their expertise in carrier relationship management to negotiate and establish competitive freight rates based on an analysis of the shipper’s lanes and shipping history. The 3PL will secure either a base rate or get multiple and specific lane pricing through an RFP (request for proposal). It is also an option that shippers provide their logistics services provider with a valid set of rates and contracts for each carrier they utilized. Valid invoices are subjected to a detailed audit of all charges presented on the freight invoice to ensure all charges are billed correctly. The cost savings/avoidance from the audit of invoices is a primary reason companies outsource freight payment.
Cost Accounting – Through the freight payment service the logistics services provider will apply the proper general ledger code(s) to freight invoices based upon the rules provided by the shipper. These rules are typically driven by data elements present on the freight invoice or can be determined by “matching” an invoice to a shipper’s internal data and extracting the proper code(s).
Exception Management – Exceptions occur quite often for various reasons. The most common exceptions include incorrect billing by the carrier and the inability to derive the proper cost accounting rules due to missing or incorrect data. Providers vary significantly in how they process, manage, and resolve these exceptions. A quality solution should provide proactive management and resolution of exceptions.
Payment – Upon completion of the above processes, a provider will typically “close” once a week and issue an invoice or request for transportation funds to the shipper. Upon receipt, the shipper will validate the request and issue funds to the freight payment provider who will then disburse payment and remittance details to the carriers. Solutions that utilize 100% electronic payments are preferred as they are more secure and efficient than paper check payments.
Customer Service – Third-party logistics providers who offer freight payment and accounting services employ customer service staff to answer shipper and carrier questions, train users of the information systems, manage exceptions, and assist in reporting needs. Most solutions only offer support during standard business hours (8-5) and vary greatly in the amount of support and quality of support provided. If you were to replicate this in-house as a shipper, you would have to maintain your employees and systems to replicate what the 3PL does at scale — and it could prove costly over time. When you outsource to an expert provider, you need fewer resources and are provided a high level of service and customer satisfaction.
Business Intelligence – Shippers and carriers are provided with access to online reporting tools as part of a freight payment solution from a third-party logistics company. The ease of use and functionality of these tools varies greatly but typically includes tools for building queries, running canned reports, managing exceptions, and quick research of invoices.
Why Companies Outsource Freight Payment to a 3PL
Every company is unique, but the justification for an outsourced solution typically falls into a few categories; cost savings, opportunity cost, and enhanced features. The following is a list of specific benefits companies have secured in each of these areas through outsourcing freight payment to a 3PL.
The “2014 Transportation Payment Benchmark Study: Paying the Price for an Outdated Payment Process”, from American Shipper, suggests that logistics managers continue to be tasked with more responsibilities, including the integration of domestic and international functions. More than a quarter of this year’s respondents don’t use any technology to pay freight bills, and there is an undeniable gap in terms of the use of manual processes in international freight payment versus domestic freight payment. When you use a freight payment service which is included as an ancillary managed transportation service to the implementation of a transportation management system, you realize the great benefit of several cost-saving measures.
These benefits eliminate or reduce internal costs with processing freight invoices related to the following:
- Receipt of invoices
- Validation of invoices
- Keying/data capture
- GL coding
- Rate/contract maintenance
- Exception handling
- Disbursement costs
- Customer service
- Secure audit savings
- Opportunity Cost
- Allocate resources involved in the freight payment process to business’ core competency or higher priority objectives
- Reallocate staff to an increased value-add role
- Implement a structured process for new business acquisition
- Enhanced features
- Enhance reporting to support supply chain management
- Secure tighter financial controls
- Improve carrier relationships
Evaluating Your Freight Payment Needs
Too often companies recognize the benefits of outsourcing freight payment and proceed with a procurement initiative without documenting the features they need from a freight payment solution. Documenting specific requirements helps companies further quantify ROI, provides a good basis forbid questions, and clearly communicates your requirements to a prospective logistics service provider offering freight payment. The following questions will help companies begin to document their requirements and lay the groundwork for conducting a bid for services.
- What is the company’s ROI for outsourcing freight payment?
- What modes of transportation need to be supported?
- What geographical locations need to be supported with a solution?
- What are the expectations regarding customer service?
- What volume of transactions must the solution be capable of supporting?
- What are the reporting/business intelligence tool requirements?
- What are the requirements for data capture and cost accounting?
- What financial controls and safeguards are required to meet the company’s comfort level?
Conclusion on Freight Payment
The American Shipper report goes on to say that both large and small-to-medium shippers were slightly more likely to say finance and logistics would both be involved in the decision to invest in a freight payment solution, a significant change from last year. Involving finance in such a decision is important for a host of reasons, not least of which is that most companies route all their payables through their finance department. This is why we stress that you continue to follow our series on all things freight accounting so you are able to have a better relationship around knowledge with your accounting personnel. If you would like to learn more about freight payment services, set up a logistics consultation with a logistics expert today.