Increasing cost and complexity

One of the biggest line items in logistics spend is the cost of moving goods over the ocean. This is true for several reasons, not the least of which is the complexity of the movement itself and, in turn, the complexity of billing processes. Ocean freight rates encompass a growing inventory of surcharges, turning bill of lading calculations into mathematical challenges. Given that ocean freight invoices represent the largest single component of any logistics spend, they also account for the greatest margin of error in the financial supply chain.

Now, more than ever, there is a need for automated, electronic-based systems and processes that can simplify freight payment and audit management, improve accuracy, and ultimately reduce costs.

The high price tag of manual processes

Despite the technology and resources available to the logistics sector today, manual processes are still used extensively in freight invoicing processes. Unfortunately, that inefficiency comes with a high price tag. Audits and spot checks have shown that anywhere between 25% and 30% of all ocean freight bills of lading are incorrectly rated. Today the question is not whether the shipper is being billed inaccurately. Rather, it is a matter of by how much.

The complexity of ocean freighting has always made bills of ladings prone to inaccuracies, and the remedy has been too costly to put into effect. This is in large part because the processes used to pinpoint incorrect rates are time consuming and require specialized skills. Even at that, only a fraction of errors are uncovered, simply because of the inability of human resources to sift through the volumes of contracts and carrier governing rules tariffs to capture all discrepancies. As a result of the difficulties and costs associated with performing a worthwhile audit, shippers find it easier to simply pay the overages, despite knowing they may be paying too much. Even when rates began to be published electronically, most applications in use still required clerks to manually enter rate information, and find and calculate rates for generating contracts. Those that have implemented more sophisticated billing systems in recent years continue to experience inaccuracies as ocean freight rates and surcharges do not conform to most accounting packages. Even when those errors are relatively small, the cumulative losses can be significant.

Electronic freight auditing

The optimal ocean freight audit solution is one that audits all bills of lading prior to payment, with limited user oversight required. This is achieved by leveraging the capabilities of a globally connected network combined with a Web-based rate management system to automate the process of comparing and auditing bills of lading with contracted rates. With this approach, standard ocean bills of lading are transmitted electronically over a value-added network and processed within a rate management system for auditing. By combining electronic messaging with a powerful and sophisticated contract management system, shippers have the framework in place for much more efficient and accurate freight invoice audit, approval and payment process.

The critical components of an automated freight audit solution include:

Eletronic Messaging Integration

The logistics industry depends upon electronic messaging, using a variety of file types and formats, including EDI, XML and flat files. Electronic bills of lading and advanced shipment notifications (ASNs) are relevant business documents that contain the data elements required for integration of electronic messaging and contract management in any ocean freight audit solution. For an automated solution to work, it is essential to have these electronic messages available through a network that offers connectivity to the greatest number of ocean carriers; and supports flexible options for electronic invoice receipt. Having the ability to manage different message types  on a global network simplifies the carrier on-boarding process and drives down costs.

Contract Management  

The core of a successful, efficient ocean freight audit system is a contract management solution that provides tools to easily maintain all rating charge components: base ocean rates, inland moves and surcharges. In order to minimize the costs of the audit process, managing the contracts and rates that are being audited must be simplified and utilize the range of web and office tools available. The ability to efficiently manage large numbers of rates and ocean carrier surcharges with self-service tools is essential to keeping costs down for managing the maintenance of a contract management database.

A successful ocean freight audit system therefore must combine the two key components of a robust, electronic messaging network with the power and flexibility of a contract management system. The latter system needs to automatically receive the messages from the network, process them, search for rates, calculate and compare. This automated workflow allows the system to drive down the cost of the audit and improve its accuracy, while performing audits on electronically processed billings. In addition, the reporting analytics can be invaluable in assessing carrier performance and providing data to negotiate favorable payment terms with carriers.

Additional features to look for in an automated solution include:

  • Built-in flexible tolerance thresholds to streamline audit processing, to enable shippers to pinpoint deviations that are worthwhile to address.
  • A workflow for evaluating and correcting audit failures and any data quality issues that arise.
  • A reporting solution that can provide ad hoc reports based on the results of the freight audit to analyze the number and nature of incorrect ratings and evaluate ocean carrier performance.
  • The ability to integrate with shipper back office accounts payable systems to close the loop in the financial supply chain.
  • Rapid return on investment for shippers and NVOCC (non-vessel operating common carrier) customers.

Effectively keeping freight costs in check

For today’s organizations, removing costs and identifying opportunities to improve cash flow are paramount to financial success. The complexity associated with bills of lading has made it increasingly difficult for shippers to use traditional, labor-intensive methods to audit even portions of these bills. Embracing an automated ocean freight audit system is gaining popularity to a larger number of shippers who want to manage their transport spending and improve audit accuracy and efficiency. Fast, cost effective and able to drive value in an increasingly shorter time frame for a rapid return on investment, a flexible ocean freight audit system is a must for any large shipper where ocean freight is a major component of their logistics costs. The potential to identify savings on a large portion of ocean invoices, while leveraging better tools to evaluate ocean shipping providers, is making ocean freight audit systems a critical tool for managing the financial supply chain.

Written by Jim Alemany

Director, Rate Management Solutions at Descartes