You hammer your procurement hard. You have your invoices audited. What else could you possibly find?
In a typical procurement exercise you go out and get prices, you beat people up and ask if they can go lower and lower. However, when you analyze the data, you may find there is a major chunk of international business you don’t have prices for. It may be hiding in there with the rest of the numbers. On average your metrics per kilo look pretty good. The audit of the stuff goes fine, because you have prices for 98% of the transactions. So what’s the problem? For a typical company, Trax often finds that there are activities taking place with carriers where there was no rate agreed. With no rate in place, they were paying the same rate someone would get if they went into the UPS store and said, “Hey buddy, can you ship this to France for me?”
Here’s another example of how governance, or lack thereof, affects your bottom line. A global company once shipped from France to Israel and had a negotiated a next day price. For the 35 kilos, the next day price was $1,200 EU. But the guy at the back door said, “This doesn’t need to be next day. It could be 2-3 days, or 3-4 days.” So instead of arriving the next day, this parcel arrived 4 days later. But here’s the punch line, they got a bill for $3,500 EU! Since there was no negotiated rate, they were charged the tariff rate. The company hadn’t contracted a tariff for 3-4 day shipping. That’s where governance comes into play. At that point, auditors couldn’t do anything about it because the company ordered a service but didn’t have a negotiated price. The carrier charged according to the tariff.
Another company was selling a $4 product and paying $17 for shipping. On average the margins were fine, but without details of the shipments, they didn’t know their cost to serve. Their sales and marketing guys were basing prices on averages, but they didn’t know landed cost or the cost to deliver one of those products. But getting that kind of visibility, they were saved $18 Million!
Over 20 years Trax has built a database of all these different risks. We have found that the overbilling risk is often between 1.5X and 3X. So if you have $100k of spend, the overbilling risk would be around 2% of that, or $2,000. If instead of focusing on purely post-audit, you instead negotiated rates for that spend, you could save $40,000. Isn’t that more interesting?
As a supply chain manager, if you are not governing your spend, you could be wasting a lot of money. You have to remember there’s an undercharge risk as well as an overcharge risk. There is a risk that you are being undercharged by your carriers, and they may come back at a future point and ask you for even more money, even if you decide not to go after these differences or overcharges. Financially that out-of-period expense has to go into the number this month, this quarter, this year, and count against your bonuses and your targets. If you are not paying attention, this risk of unrecorded liability may cost you more than you think.
Most freight audit and payment companies are most comfortable in a world where the carriers are bad, and the shippers are good and their job is to help them beat on their carriers to get their invoices correct. At Trax, we believe that getting accurate data benefits both buyers and sellers of logistics services. We work as a neutral third-party to help mitigate risk, and find savings on both sides. Trax believes that a high-tide lifts all boats.