Tuesday, September 8, 2009

Freight Bills: Auto-pay or Match-pay?

Freight consists of a substantial cost of distribution operations. It is generally true for most industries, but especially true for retailers since they tend to distribution-intensive. As shipments are completed, the freight invoices start arriving. Freight invoices can have a lot of components such as the long haul rate, short-haul rate, fuel surcharges, and accessorial charges that may cover everything from waiting time, to tarp-covers due to bad weather. Therefore, processing freight invoices manually to ensure their accuracy can have substantial costs.

That is where an automated freight audit and verification process kicks in. These processes are generally supported by transportation management applications and ensure that the freight invoices are verified against actual shipments and their statuses, and that the invoices have been computed using the correct shipping rates, fuel surcharge rates, and accessorial charges according to the agreed contract between the shipper and the carrier.

The freight payment process has two general variations used in the industry. Match pay refers to the process of paying for shipments after receiving the invoices from the carrier, and matching them up against authorized/referenced shipments. Auto pay is the process where the shipper chooses to pay immediately on completion of a shipment, after obtaining a proof of delivery from the carrier that may come as a final shipment status message. Both of these variations are supported by many solutions offering the functionality. Both depend on the system's ability to estimate what the freight charges, verify that hauling rates, fuel surcharge, and accessorial charges are compliant with the contract. Both allow the shipper to define limits on the difference between estimated and actual invoice amounts within which the invoices are automatically approved for payment.

These automated processes directly reduce the headcount required to manually verify and process each and every freight invoice. They also eliminate manual processing errors as well and support a transparent & on-time payment, fostering stronger partner relationships.

The process also provides an opportunity for managing any claims against the carrier for loss and/or damage during transit. This is a good place to execute freight cost allocations as well, if required. Freight is generally considered to be overhead that is allocated to the underlying cost centers to determine profitability of operations. For example, a retailer may allocate the cost of freight to the stores that are getting the shipments to account for the cost of freight. The cost allocation scenarios will differ among retailers, and depend on their cost accounting methods and the objectives for such allocations.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

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