Tools of the Trade: Outsourced Freight Audit and Pay Services

In 2014, my company spent over $20 million in logistics services (transportation, customs services, etc.).

Those charges were billed to us on over 50,000 invoices!

How do we audit all of those invoices?!?!
LWL023 Magnifying Glass
Those costs and invoices represent services ranging from overnight letter and parcel shipments to international ocean container loads.

With that number of invoices, there is no way that our small logistics team could properly scrutinize each invoice and provide the necessary detailed review to ensure that we are paying the correct amount to our logistics service providers.

We decided to outsource this audit and payment process to an outside specialist.

We are not alone.

Many shippers are turning to freight audit and payment companies not only for the auditing and payment services, but companies also use these services to gain an insight into their freight spend. The freight audit and payment (FAP) services are typically viewed as a mundane clerical process, but smart shippers recognize it as a great source of business intelligence.

While some choose to maintain control of this process internally, industry data shows that outsourcing freight payment is becoming the preferred option.

Based on the latest data I could find (okay, it’s from 2008!), approximately 54 percent of North American firms outsourced some part of their freight payment activity, according to The State of Logistics Outsourcing, a third-party logistics services survey conducted by Capgemini, the Georgia Institute of Technology, Oracle, and DHL. This figure shows that most companies recognize the value in this specialized service and realize that it can contribute to service improvements and reduced transportation costs.

The benefits of outsourcing this activity comes is not only the fact that these niche companies specialize in this field (they do it day-in and day-out!), but it can also save internal costs. A large company may spend up to $11 in fully allocated costs to pay a freight bill internally. If an outsourced company does this, the cost to the company will be 5% – 10% of those internal expenses. In addition, the outsourced company will find additional savings by reducing incorrect or duplicate bills.

According to data from supply chain consulting firm Spinnaker Management, most shippers claim that outsourcing the freight audit and payment services helps them recover 3% – 5% on their overall freight spend. Although I can’t confirm that based on my experience, it seems that some firms see a big benefit!

Here is a list of some of the advantages we have seen:

–    They scan invoices, provide for data entry or use EDI to capture the detail of all invoices.

–    They provide a single repository of our freight data; since we are currently without a TMS system, this provides an overview of our expenses, which we use to drill down based on plant, carrier, service level and more.

–    They provide on-line services for invoice search and retrieving invoice images.

–    They allow for a single payment per week; with that large sum of money, they disburse payment (and payment details!) to our logistics service providers.

–    Their website is the first point of contact for logistics companies inquiring about the status of their invoices. If an invoice did not have the proper documentation back-up or it was missing other information, then the logistics company can review this on-line and make corrections without contacting my logistics team.

–    They serve as a good outside resource to understand market trends or best practices, due to their exposure to a multitude of clients and carriers.

–    They have a better ability to identify charges for late payment, address correction, oversized, and additional handling fees, as well as charges for unexpected services. And, they provide this to me in a summarized report.

–    They apply for Contested Rates refunds and Guaranteed Service refunds directly with the parcel companies and they provide follow-up and reporting.

The process we set up (below) is fairly straightforward.
LWL023 Freight Audit and Pay Process Overview
Getting involved with a good freight audit and payment company has also been great for our internal processes, such as establishing proper freight rate agreements and approval processes for the inevitable “one-off” (expedite) shipments.

You must also provide clear direction to the FAP company about your transportation network and which Business Unit (B.U.) or entity will pay for a given transportation service. Often, it goes beyond “just” knowing the entity (Company XYZ Headquarters); you should also define down to the department or project level in order to properly track costs.

In summary, we have found that an outsourced freight audit and payment company is a great compliment to our existing logistics team.

Good luck!

Click the following link for a PRINTER FRIENDLY VERSION of this article:LWL023 Tools of the Trade Outsourced Freight Audit and Pay Services

Additional sources for this piece can be found at:
Percent of companies that outsource FAP services and $11 cost per invoice was from http://www.inboundlogistics.com, September 2009,  “Freight Payment Services Boosting Invoice IQ”

About Lenny

Many years of experience in a Fortune 1000 companies, especially in the logistics and I.T. areas of manufacturing companies. Through process improvements and the use of many of the tools mentioned here, I have been able to identify and implement savings opportunities worth up to $10 million. I hope that some of these real-life stories, suggestions and tools can help you!
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