Freight audit
Encyclopedia
By definition an audit
is,
A freight audit vendor is therefore one who examines, adjusts and verifies freight bills for accuracy.
Therefore, a freight audit is the process of examining, adjusting and verifying freight bills for accuracy.
Freight costs
The forwarder
freight rate
s are usually maintained in multiple spreadsheets and usually each forwarder
has a different freight rate
format to the customer. An organization is daunted with the task of calculating the freight rate
s manually and this task can be challenging when the customer has hundreds of shipments shipped each month. Most organizations do not have the manpower to calculate all the freight invoices issued to them and at best, they perform random sampling to check if the sample invoice is billed correctly. Some organizations have the manpower to perform freight audit themselves, the manual and tedious efforts required for a freight audit will usually end up much more expensive than an outsource vendor might be able to provide.
Based on the research of inboundlogistics.com, freight costs can make up 10% of an organization’s expenditure. As a consequence of rising freight costs, an increasing number of organizations has been more proactive in controlling freight cost and outsourced the freight audit process to freight audit specialists.
) or manually, they are entered into the contractor's system, providing immediate visibility. Once the bills are entered, they are audited for accuracy. Auditors verify the bills' validity, mileage, duplicate payments, accessorial charges, and use of correct tariffs. After auditing, the charges are coded and reconciled, and the bills are paid.”
Some companies have gone forward with a process to pay freight bills called self billing. The customers calculate their freight cost themselves and instruct the freight forwarder
to invoice using credit notes. This process transfers the responsibility to correct freight calculation from the customer to the forwarder
.
noted that there are 3 models of freight audit in used today. The 3 models are listed as below.
The first option of manual matching is tedious and the cost of auditing a freight invoice rise with the number of freight invoice proportionally.
The 2nd option of buying packaged software allows the company to save time and resources in the invoice processing but the company will need to invest in the training of the staff and system infrastructure to maintain an expert process and system. The freight audit system will be able to eliminate the mundane freight calculation and matching process and the users of the system will be able to perform value add activities such as analyzing freight rate
s, negotiation with freight forwarders
or recovering freight invoice discrepancy with freight forwarder
s.
For option 3, ideally, the 3rd party firm should use a freight audit system and not handle the freight invoices manually. The freight audit system maintained by a team of expert users will eliminate the cost of training users and infrastructure setup cost. Although the cost of outsource may seem to be higher than buying a packaged software, it includes the maintenance cost of a freight system which may cost more for a team of non experts from the customer to manage.
Insource audit names model 2 and model 3 ASP, application service provider, and BPO, business process outsourcing respectively. These business models converges expert systems with organisation capability and trained staffs, the combined knowledge of the organisation and the vendor has the benefit of the combination of knowledge and resources. Hence these 2 models are well positioned to take on the challenges of tomorrow’s freight audit.
A company that has a more complex shipping process may choose to go for freight invoice verification. This freight invoice verification process is a flexible solution that allows the customer to use their shipment and package measurements and calculate against the freight quotes and finally compared against the freight invoice. By having detail shipment information, customers can analyze freight cost by product line reports or interface payment information into their ERP systems.
s, freight discounts, misapplied accessorial charges, and prevent possible duplication of payment.
The provider of a freight audit can also provide comprehensive reports for the customer to make intelligent business decisions such as consolidation of shipments to a certain forwarder
and landed costing of each product group. These reports are critical to a product costing and planning strategy in order to make the product successful in the targeted area.
Freight cost reports can be generated to compare the freight costs for forwarders
and the customers may use such reports to flag out service failures, negotiate for better freight deals or the opportunity to consolidate the shipments to a forwarder
for a better rate. Customers can simulate the freight cost calculation for new freight rate
s or packages proposed by the forwarder
and determine if this is suitable for their business model.
With large fluctuations in the surcharges, the accounts department will have lower visibility in accruing freight cost. By choosing a freight invoice verification model, a customer can forecast the freight cost to be accrued for accounting purposes. This translates to lesser risk and more predictability in cash flow for the company. Akzo Nobel’s automated freight audit process has also instilled tighter controls over their freight accounting by eliminating human communication and intervention from the point of the freight quote to the payment process. By controlling the human communication and minimizing human intervention, the audit process will be unbiased and less likely to deviate from the proper process.
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
is,
- An examination of records or financial accounts to check their accuracy.
- An adjustment or correction of accounts.
- An examined and verified account.
A freight audit vendor is therefore one who examines, adjusts and verifies freight bills for accuracy.
Therefore, a freight audit is the process of examining, adjusting and verifying freight bills for accuracy.
Freight costs
- Costs incurred by the merchant in moving goods, by whatever means, from one place to another under the terms of the contract of carriage. In addition to transport costs this may include such elements as packing, documentation, loading, unloading and transport insurance.
Complexity of Freight Audit
Rising freight cost is an emerging area of concern as seen in recent years. The cost of freight has been rising due to the increase in oil prices and all freight cost is highly dependent on the cost of transportation which relates directly to fuel prices. With high fluctuations of fuel costs, low visibility of the future freight costs and high complexity of the freight quotes, freight cost verification are vulnerable to human and process errors and this requires proper auditing to ensure that the organization does not overpay for services it did not incur.The forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
freight rate
Freight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
s are usually maintained in multiple spreadsheets and usually each forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
has a different freight rate
Freight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
format to the customer. An organization is daunted with the task of calculating the freight rate
Freight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
s manually and this task can be challenging when the customer has hundreds of shipments shipped each month. Most organizations do not have the manpower to calculate all the freight invoices issued to them and at best, they perform random sampling to check if the sample invoice is billed correctly. Some organizations have the manpower to perform freight audit themselves, the manual and tedious efforts required for a freight audit will usually end up much more expensive than an outsource vendor might be able to provide.
Based on the research of inboundlogistics.com, freight costs can make up 10% of an organization’s expenditure. As a consequence of rising freight costs, an increasing number of organizations has been more proactive in controlling freight cost and outsourced the freight audit process to freight audit specialists.
Freight Audit Process
Inbound logistics details the freight audit process as “To begin the auditing process, a freight bill payment company receives its clients' freight bills directly from carriers. When the bills are received, either via electronic data interchange (EDIElectronic Data Interchange
Electronic data interchange is the structured transmission of data between organizations by electronic means. It is used to transfer electronic documents or business data from one computer system to another computer system, i.e...
) or manually, they are entered into the contractor's system, providing immediate visibility. Once the bills are entered, they are audited for accuracy. Auditors verify the bills' validity, mileage, duplicate payments, accessorial charges, and use of correct tariffs. After auditing, the charges are coded and reconciled, and the bills are paid.”
Some companies have gone forward with a process to pay freight bills called self billing. The customers calculate their freight cost themselves and instruct the freight forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
to invoice using credit notes. This process transfers the responsibility to correct freight calculation from the customer to the forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
.
Models of freight audit
GT NexusGT Nexus
GT Nexus runs an on-demand global trade & logistics portal that is used by organizations to manage global logistics and trade processes. Customers include Xerox, American Eagle Outfitters, Procter & Gamble, Del Monte Foods and The Home Depot...
noted that there are 3 models of freight audit in used today. The 3 models are listed as below.
- Manual match—Pay for in-house staff to manually process invoices and conduct audits, with costs, errors and unrecovered charges rising as international transportation volumes grow;
- Buy packaged software—Pay an upfront license to acquire a software package, and then install, operate and maintain the software, rates, and electronic integrations to carriers, using expensive internal resources; or
- Outsource -- Pay fees to a third-party firm, send them freight invoices, and then absorb additional costs and time to administer the service, track discrepancies, and recoup unrecovered charges.
The first option of manual matching is tedious and the cost of auditing a freight invoice rise with the number of freight invoice proportionally.
The 2nd option of buying packaged software allows the company to save time and resources in the invoice processing but the company will need to invest in the training of the staff and system infrastructure to maintain an expert process and system. The freight audit system will be able to eliminate the mundane freight calculation and matching process and the users of the system will be able to perform value add activities such as analyzing freight rate
Freight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
s, negotiation with freight forwarders
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
or recovering freight invoice discrepancy with freight forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
s.
For option 3, ideally, the 3rd party firm should use a freight audit system and not handle the freight invoices manually. The freight audit system maintained by a team of expert users will eliminate the cost of training users and infrastructure setup cost. Although the cost of outsource may seem to be higher than buying a packaged software, it includes the maintenance cost of a freight system which may cost more for a team of non experts from the customer to manage.
Insource audit names model 2 and model 3 ASP, application service provider, and BPO, business process outsourcing respectively. These business models converges expert systems with organisation capability and trained staffs, the combined knowledge of the organisation and the vendor has the benefit of the combination of knowledge and resources. Hence these 2 models are well positioned to take on the challenges of tomorrow’s freight audit.
Freight audit on shipment or freight invoice level
Freight audit can be conducted at the shipment or freight invoice level. A company that has standard weights for standard packages may opt to audit freight invoices at freight invoice level to reduce complexity in the freight audit process. This is known as freight invoice validation and this process is simple as compared to a freight audit at shipment level.A company that has a more complex shipping process may choose to go for freight invoice verification. This freight invoice verification process is a flexible solution that allows the customer to use their shipment and package measurements and calculate against the freight quotes and finally compared against the freight invoice. By having detail shipment information, customers can analyze freight cost by product line reports or interface payment information into their ERP systems.
Benefits of freight audit
Inbound logistics noted that for many companies, outsourcing could be the most economical way to properly audit and process freight invoices. They have also noted that the cost to verify, process and finally pay an internal freight invoice is around USD 11 and the cost of outsourcing is around 5 to 10% of the internal cost and that has not included the cost savings from the invoice discrepancies. The discrepancies can be as much as 8.8% of the freight invoices. CT Logistics believes that accuracy of a freight invoice is assured by outsourcing because freight audit company audits for freight rateFreight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
s, freight discounts, misapplied accessorial charges, and prevent possible duplication of payment.
The provider of a freight audit can also provide comprehensive reports for the customer to make intelligent business decisions such as consolidation of shipments to a certain forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
and landed costing of each product group. These reports are critical to a product costing and planning strategy in order to make the product successful in the targeted area.
Freight cost reports can be generated to compare the freight costs for forwarders
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
and the customers may use such reports to flag out service failures, negotiate for better freight deals or the opportunity to consolidate the shipments to a forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
for a better rate. Customers can simulate the freight cost calculation for new freight rate
Freight rate
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport , the weight of the cargo, and the distance to the delivery destination...
s or packages proposed by the forwarder
Freight forwarder
A freight forwarder, forwarder, or forwarding agent is a person or company that organizes shipments for individuals or other companies and may also act as a carrier...
and determine if this is suitable for their business model.
With large fluctuations in the surcharges, the accounts department will have lower visibility in accruing freight cost. By choosing a freight invoice verification model, a customer can forecast the freight cost to be accrued for accounting purposes. This translates to lesser risk and more predictability in cash flow for the company. Akzo Nobel’s automated freight audit process has also instilled tighter controls over their freight accounting by eliminating human communication and intervention from the point of the freight quote to the payment process. By controlling the human communication and minimizing human intervention, the audit process will be unbiased and less likely to deviate from the proper process.