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 created by A3 Freight Payment to help you better understand freight payment.
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 providers 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 freight payment provider in a variety of formats for processing. Typical methods include manual invoices sent via USPS and electronic invoices sent via EDI.
Invoice Validation - Upon receipt of invoices, the provider will validate 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 providers 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 providers also incorporate the shipper's internal source data in their data capture to further enhance reporting. In this case, shippers provide the freight payment company with electronic data which is "matched" to freight invoices and extracted to be included in the provider's reporting database.
Rate & Service Audit - During the implementation process, shippers provide their freight payment 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 utilizing the rates/contracts supplied by the shipper 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 - The freight payment 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 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 - Freight payment providers 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. Dedicated staff solutions are more costly but provide 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. 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
Every company is unique, but the justification for an outsourced solution typically falls into a few categories; cost savings, opportunity cost, and enhanced features. Following is a list of specific benefits companies have secured in each of these areas through outsourcing freight payment.
- Eliminate/reduce Internal costs associated with processing freight invoices (
According to American Shipppers Transportation Payment Benchmark Study from March, 2012, the average cost for a company to process a freight invoice is $14.12)
- Receipt of invoices
- Validation of invoices
- Keying/data capture
- GL coding
- Rate/contract maintenance
- Exception handling
- Disbursement costs
- Customer service
- Secure audit savings
- Allocate resources involved in freight payment process to business' core competency or higher priority objectives
- Reallocate staff to increased value-add role
- Implement structured process for new business acquisition
- Enhance reporting to support supply chain management
- Secure tighter financial controls
- Improve carrier relationships
Evaluating Your 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 for bid questions, and clearly communicates your requirements to a prospective freight payment provider.
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?