Freight Audit Process and Payment: A Comprehensive Guide
What is Freight Audit
A freight audit is a systematic process that involves the review and verification of carrier invoices to confirm accuracy and compliance with freight rates, terms and service levels (such as expedited vs. standard shipping) as agreed to in the freight booking and rate confirmation process. The freight audit process looks for incorrect charges, duplicate billing, fuel surcharge miscalculations, weight discrepancies or other errors in comparison to shipping contracts, tariffs or other shipping documentation such as the freight bill (also known as a bill of lading, or BOL). Through the freight audit process, shippers (or their 3PL or 4PL partners working on their behalf) identify and correct billing errors in order to ensure that the shipper is not overpaying for their transportation.
Basic Steps in the Freight Audit Process
Let’s walk through the steps in the freight audit process at a high level:
Data Collection
The first step in the process is collecting data, usually in the form of invoices from freight carriers. Invoices can be received electronically, via email or electronic data interchange (EDI). Some carriers still submit invoices via fax.
Invoice Verification
Once the invoices have been collected, the invoice verification process involves checking the invoice for all key details, including shipment date, origin and destination, shipment weight and service levels as compared to the BOL, delivery receipts, and shipping orders, to ensure the details match. Common errors that are identified in this stage of the process include incorrect invoice amounts, duplicate and/or missing charges. Basically, you are looking for any discrepancy between the agreed-upon charges and the invoiced charges.
Rate Validation
The rate validation process goes a step further by examining and verifying the base rates, fuel surcharges, accessorial charges and discounts, if any, in comparison with the rates as outlined in the shipping contract. It’s also important to check for any recent changes to the rates or tariffs that could affect the invoice, and to make sure any adjustments, discounts, or rebates have been applied correctly. Any discrepancies are flagged for further review.
Dispute Resolution
If discrepancies are found, the auditor communicates with the carrier to resolve the issues. This can be a time-consuming and labor-intensive process, which is why many shippers partner with a 3PL or 4PL to manage this process on their behalf. Discrepancies are typically resolved by negotiating adjustments, credits, or refunds.
Approval and Payment
If no errors are identified, or once errors are corrected, the invoice is approved and processed for payment.
Reporting and Analytics
In addition to spotting errors as they happen, another benefit of the freight audit process is in the value of the aggregated invoice data. Once collected, this data can be analyzed to deliver insights on shipping costs, carrier performance, error trends, and more, empowering decision-makers with the insights they need to make strategic decisions, optimize shipping routes and processes, and renegotiate contracts.
Importance of Payment Procedures in Freight Auditing
There are numerous benefits of proper payment procedures in freight auditing:
The Advantages of FAP
A systematized freight audit and payment process offers several benefits to shippers:
Challenges in Freight Auditing
While the advantages and benefits are clear, the freight audit and payment process is not without its share of challenges.
- Complexity of Billing Structures: Base rates, fuel surcharges, accessorial charges and discounts will vary by carrier, and can change frequently. Additionally, different service levels (standard vs. expedite, for example) will have different pricing structures.
- Data Inconsistencies: Carriers submit invoices via email, EDI, and even via fax, which can require time-consuming and error-prone manual conversion and data entry. Your 3PL or 4PL partner should be able to provide technology integration to streamline the collection and normalization of invoices data.
- Invoice Volumes: High volumes of invoices only compound the challenges of manually processing invoices for payment.
- Lack of Automation: Your 3PL or 4PL partner should provide dedicated freight audit software to automate and streamline the process. Without the proper technology, the freight audit process is laborious and prone to error.
Top Reasons to Outsource Freight Auditing Services
Now that we’ve looked at the benefits of freight audit and payment, let’s explore some of the reasons shippers look to outsource this function to a 3PL or 4PL.
- Cost savings through error reduction and lowered operational costs
- Improved accuracy and efficiency
- Access to expertise and technology
- Scalability and flexibility
- Reporting and analytics
- Speedier dispute resolution
- Improved cash flow management
- Risk mitigation
Choosing Freight Audit Service Providers
Choosing a freight audit and payment partner is a critical decision- after all, the service they provide has a direct impact on your cash flow, profitability, and relationships with your carrier network. Here are some key factors to consider.
- Industry experience and expertise: Experienced providers with a proven track record of performance are more likely to be able to meet your needs and objectives.
- Technology and automation offerings: Assess the provider’s freight audit technology, whether it is a standalone freight audit system or part of a Transportation Management System (TMS) offering.
- Data security and compliance: Your provider will be handling sensitive financial information, so it’s important to verify that they have robust data security measures in place, including encryption, secure data transmission and compliance with data protection regulations such as the California Consumer Privacy Act (CCPA) and the General Data Protection Regulation (GDPR).
- Customization: Look for a provider that can tailor their solution to fit the unique needs of your business.
- Scalability: The ideal logistics partner should be able to scale their services to match your growth or seasonal demand fluctuations.
- Analytics and reporting: Look for detailed reporting dashboards and business intelligence into specific metrics, KPIs, freight costs, trends and carrier performance that you can utilize to benchmark performance.
- Service and support: The ideal partner should work as an extension of your team, offering dedicated resources and single point of contact to streamline communications.
The freight payment and audit process is a critical component of effective supply chain management that goes beyond simple invoice audit and verification. By systematically auditing and validating freight invoices, you can uncover hidden cost-saving opportunities, ensure compliance with contractual terms, and optimize your overall transportation spend. While the process can be complex and fraught with challenges, the benefits—ranging from cost savings and improved cash flow to enhanced data insights and strengthened carrier relationships—are well worth the effort. By partnering with the right freight audit outsourcing service provider, you can leverage advanced technology, industry expertise, and streamlined processes to drive efficiency, gain greater control over your logistics operations, and ultimately improve your bottom line. To learn more, please contact Sheer Logistics.
Whether you need full logistics management, carrier sourcing, or help with any part of the logistics process, Sheer Logistics delivers industry experts and cutting-edge technology that deliver bottom-line results.
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