In the not too distant past, malls and retail stores were booming public marketplaces; gathering places for Americans to browse, shop, eat, hangout, or maybe catch a movie. At that time, when brick and mortar stores and large retail outlets dominated the American commerce landscape, a retailer or vendor’s sales hinged upon a variety of factors and their costs were multivariable.
Although there were catalogs such as those regularly released by Sears or Victoria Secret, most companies aimed to entice customers to come into their physical store. While purchases could be made through the mail, a customer did not know what they were getting until the package arrived and if that item did not fit or was not what they expected, the customer would then have to go to the physical location to return the item. In these pre-internet days, the shopping experience was a drastically different and more time-consuming affair than the one we now know.
These days, however, thanks much in part to the e-commerce boom, customers expect a radically different shopping experience than what they would have two decades ago, with retail outlets and malls increasingly abandoned in favor of the ease and expediency of online shopping.
Because of these changes, today’s customers not only expect their goods to be delivered to their home, but to be delivered as quickly as possible, if not on the same day. As a result, a company’s success is increasingly more reliant upon the efficacy of their shipping network.
Now that a company’s freight services are not only more vital but also costlier than ever, it is crucial that shippers have precise and wide-ranging data to measure their successes and failures of their freight services. To obtain these numbers, any savvy company will regularly perform freight audits. Freight audit services used to be a rather cut and dry way of amending and recouping erroneous shipping invoices, but has evolved to include a greater emphasis placed on data analysis. Having precise data allows a company to thoroughly analyze their procedures and systems, which in turn will enable them to make smart business decisions, grow their company and increase profit margins.
If you are shipper who desires payment accuracy, supply chain visibility, and data analytics, it would greatly benefit you to audit your freight invoices regularly.
Types of Freight Audit
Auditing a freight bill before paying it can be a powerful means of cost savings and the ideal way of ensuring that all parties are honoring their contract. Before you begin, however, it is essential that you are aware of your options for audits. Traditionally, shippers can audit their goods in one of three different ways:
- Manually – In this case, a shipper performs audits internally. This can be done by whomever is in charge or by hiring an in-house specialist or assigning a staff member to handle invoices manually and then audit them. As you might imagine, manual audits are time-consuming and tedious affairs that are quite prone to human error. Further, the likelihood of mistakes being made increases in proportion to the number of invoices or complexity of routes. Because of this, manual audits are usually only recommended for companies that do not ship in high frequency or volume.
- Freight Invoice Audit System – Another option at a shipper’s disposal is to buy a license for auditing software that will help your in-house team manage invoices. This software allows your team to easily audit bills, track payments and gather data on your processes. On the surface, this is a more expensive route to take than manual audits, since you have to license the freight system and train your staff in its use. However, the cost savings in the long run is more than worth it, especially if you are a medium sized shipper.
- Third-Party Auditors – 3PLs and freight brokers allow shippers to focus on what they do well – the creation and sale of products – and not on data analytics. For such shippers, a third-party firm will be brought in to handle invoices review, logistical analysis, and recouping costs. Outsourcing this function allows a company to optimize and not spend money on internal audit teams, freight audit systems, or staff training. Third-Party Audits are ideal for medium to large sized companies.
Regardless of which option you select, the actions taken during the audit are relatively similar.
Freight Audit Checklist
Step 1: Collect Invoices
In the unlikely case that you have never performed a freight audit, it would be wise to collect all invoices from the past year. (Note: you can only go back 180 days for claims). Ideally, invoices should be logged and uploaded online the moment they are received. Doing so allows you the ability to pull them up at a moment’s notice. So, if you want to see a bill you paid six months ago, instead of sifting through a pile of papers, you should be able to sort by date, company or any other factor in order to examine that information.
Step 2: Categorize Expenses
After logging your information, you should group invoices by vendor and range according to date from oldest to newest. This gives you an easy method of comparing old charges with new charges and analyzing whether you are paying more or less for your shipping.
Step 3: Determine Benchmarks
Once you have all your information logged and categorized, you can begin the data analysis portion of your freight bill audit. By establishing benchmarks, you can see where and how you are spending money. This allows you to examine the numbers and set corresponding usage or reduction goals according to the benchmarks.
Step 4: Look for Overcharges or Errors
This is what most people think of when they hear the phrase freight audit. There is a variety of ways you may be overcharged or mistakenly charged, and you should be aware of all of them. When reviewing your documents, look for the following:
- Accessorials – Freight carriers regularly charge for additional (accessorial) services. While it is hard to analyze accessorials, especially since they are charged after the fact, verify that you are not being charged wrongly for additional services or for services that were reduced or waived in your freight contract.
- Discounts – Shippers will often negotiate for shipping discounts, so, if you have settled upon discounts with the carrier, be sure to validate they are applied and deducted from your freight invoice.
- Duplicate Invoices – A duplicate charge can occur for a variety of reasons, including improper controls when it comes to accounts payable, unethical carriers who want to take advantage of shippers, the carrier accidentally counting one shipment as multiple shipments, multiple options for receipt and invoice payments. To prevent duplicate invoices from going unnoticed, look for invoices with: closely matching invoice numbers, matching vendor numbers that have been paid from different accounts and matching dollar amounts.
- Freight Classification – Products are classified into one of 18 classes. Such classes are determined by a freight’s density, stowability, liability, and handling. Certain classes are easier to ship or less expensive for carriers to handle and so the shipper is required to pay less. If your goods have been categorized in the wrong class by the carrier, you may be charged too much for the service provided. Many shippers negotiate their class to a freight of all kind status, where their shipments are rated at a different class from the actual class of the product. So, if you have an FAK clause in your freight contract, be sure to check and see that it is being properly applied.
- Late Delivery – While this depends on your freight contract/carrier, a late delivery can either mean a voided shipment charge or a reduced rate. Odds are, you will experience a late delivery at one time or another. When it does happen, be sure to make a note of it and immediately alert the carrier of the issue.
- Taxes – Taxes and tax laws can drastically vary from state to state, and this is especially true if you regularly ship internationally. Be sure that the proper taxes and regulations are being applied to your goods.
Step 5: Review Current Rate of Service
After checking all of these possible error spots, add up the costs to confirm that you are being billed at the right rate and that all discounts were applied.
Step 6: Consider Autopay
Some carriers reward customers for pre-payments or on-time payments.
Step 7: Analyzing the Data
There is a variety of data points you can include in your freight audit checklist, all in the name of increasing efficiency or cutting cost. Such analysis can also aid you in your future decision making. Factors to consider include:
- Capacity Utilization – Carriers charge by either full truckload or less than truckload by verifying the weight of material in comparison to payment to carriers. By finding means to better utilize capacity, a shipper can reduce the number of required freight runs. There are various standard truck capacities, be sure that your carrier is using the one that optimizes your shipments.
- Turnaround Time – Turnaround time is the total time taken by a freight company to load and unload your goods. If turnaround times are low, you will pay less since the truck is not sitting there idly. Because of that, your goal should be to do everything in your power to lower turnaround times. This can be done by being prepared for your carrier’s arrival and having your goods ready and properly palletized. If a carrier is slow through no fault of your own, this can be used as leverage in future freight contract negotiations.
- Price Hikes – Pricing for shipping can be rather volatile, especially since some costs are often directly tied to the cost of fuel. While there are reasons for price hikes such as annual rate increases, toll charges, duty increases, seasonal rates, or fuel, any unusual hikes found in an audit should be noted and then discussed. If possible, look for ways to minimize being hit with price hikes.
While freight audits are not exactly the most exciting of affairs, they are hugely important. By regularly and dutifully auditing your invoices, either via internal manual audits, a freight audit system, or a third-party auditor, you can ensure you are paying the correct amount for your shipments and also glean valuable insights into your shipping patterns. By following the steps of this freight audit checklist, you set your company up for future success.