The Ultimate Guide to Freight Audit
Table of Contents:
What is Freight Audit?
Freight audit is the process of investigating invoices and other data to determine the accuracy of freight costs. Because of the nature of the supply chain, a wide range of variables determine the final cost of shipping inventory. Invoiced amounts are often not aligned with the shipper’s original quotes, so a freight audit process is essential to verify all charges incurred from the transportation of a shipment.
Freight audits exist to provide a framework for companies to streamline their logistics processes in order to increase efficiency, limit costs, and achieve greater resiliency.
History of Freight Audit
In the mid-20th century, banks, shippers, and carriers formed an organization called the National Association of Freight Payment Banks in order to meet strict requirements for freight payments.
As the transportation industry underwent a phase of deregulation in 1980, industry professionals began to negotiate payment terms that were less restrictive. The decrease in regulation also resulted in an increase in the need for freight audits.
Freight Audit: Common Terms
Some common freight audit terms to understand include:
FAP: An acronym that stands for Freight Audit and Payment.
Freight Payment: A process in transportation invoices that dictates accounts payable. Once the accuracy of all charges on an invoice has been determined, shippers may submit payment to the carrier. In the case that any charges are deemed inaccurate, the shipper may choose to pay the amount they deem to be correct or contact the carrier to investigate further.
Rate Tolerance: A specific amount of variance deemed acceptable to the shipper. The unpredictability of the supply chain often results in discrepancies that cannot be avoided. In these cases, shippers predetermine dollar or percentage amounts that are within a reasonable limit. Discrepancies that go beyond a shipper’s rate tolerance will be flagged and discussed with carriers before payment is released.
Cost savings approach: A freight audit approach touted by auditors in which the focus of the FAP process is to seek ways to lower costs. This type of approach has a direct effect on budgets and invoices.
Cost avoidance approach: An alternative approach to auditing that focuses on actions that can help a company avoid incurring additional costs. This approach tends to have a less direct impact on budgets and financial statements but can increase the reliability of the invoices a shipper receives by ensuring the costs align with the carrier's original quote.
Defining Freight Audit and Payment
Freight audit and payment is defined as a comprehensive process for increasing transportation spend management. It involves examining expenses, tracking performance, and analyzing data to gain complete end-to-end visibility into a company’s transportation costs.
Freight Audit and Payment
There is a wide range of approaches to completing a freight audit and payment process. Here’s a brief overview.
The Process Behind FAP
The most effective way to reach transportation spend management maturity is with a sophisticated, technology-powered FAP process. The reason for this is that advanced technology allows for greater visibility and control over transportation processes and costs.
Here is a look into a modern FAP process supported by advanced technology:
- Begin with data integration: Examine invoices using a universally compatible data integration hub.
- Achieve complete data management: Cleanse and normalize data to ensure accuracy.
- Manage rates and contracts: Achieve complete visibility and control for all modes and geographies.
- Manage audits digitally: Manage rules-based, invoice validation, or tax focused audits.
- Allocate costs: Assign costs as needed in order to determine payment.
- Manage payments: Send or negotiate payment terms.
- Gather analytics: Report on analytics and collect relevant data for use in future audits.
When done correctly, the FAP process can equip enterprises with the ability to lower their costs, improve efficiency, and manage performance at every level of the supply chain.
Freight Audit and Payment Tools
Some of the most beneficial tools for establishing effective FAP processes are as follows:
Data Compliance Tools
Analytics dashboards and integration hubs improve end-to-end visibility and allow businesses to employ advanced business intelligence.
The ability to cleanse and normalize invoice data helps businesses fulfill requirements that ensure streamlined audit processes. With the right audit support system, this process can eventually become automated and customizable to suit a business’s unique needs.
These high-tech tools can replace the need for technically skilled auditors, which can increase cost savings.
Invoice Audit Tools
Technology can improve the efficiency of the FAP process by automating audits for liability, tax accuracy, and duplicates as well as audits against freight, accessorial, and other contracted rates.
The result is enhanced visibility and more comprehensive data for better strategic planning.
Configurable settlement tools can improve efficiency in the cost allocation and payment processes. Automated payments improve professional relationships and help lower costs associated with late fees.
The Advantages of FAP
The benefits of FAP for business are measurable. They can make a significant impact on an enterprise's overall transportation spend, which can result in better relationships with carriers, customers, and merchants.
Here are some of the advantages of FAP:
- Freight auditing provides better data and analytics
- Clear freight invoices mean reduced expenses
- Freight auditing results in superior integration
- FAP results in time savings
- Reviewing every freight bill means increased visibility
- FAP provides insightful analysis
- The freight audit process results in strong business compliance
- Manage freight payment with advanced customization
Perhaps the most significant advantage of FAP is the ability to become a resilient industry-leading business that is better equipped to handle, or even master, the tumultuous and rapidly evolving supply chain.
Businesses that employ sophisticated FAP processes unlock the next level of self-sufficiency and are able to future-proof their businesses to ensure sustainability in the face of any potential challenges.
The Outcome of Freight Audit: Delineating a Maturity Journey
The transportation, shipping, and logistics industry is undergoing massive changes. Labor availability and supply chain volatility have disrupted the market on a global scale. Even without the changes brought about by the pandemic, international conflicts and evolving customer demands have placed immense pressure on all players to adapt.
Old solutions to restore predictability are proving less effective in facing these unprecedented challenges.
For these reasons, transportation and logistics industry leaders must take proactive steps to build resilience.
A recent survey found that 93 percent of senior supply chain executives planned to focus on improving the stability of their supply chains.
Another demonstrated that 87 percent of supply chain professionals intend to invest in self-stabilizing strategies in the coming two years.
Industry leaders are building resilience by investing in systems that support transportation spend management (TSM).
As a global leader in transportation spend management (TSM) solutions, Trax Technologies offers improved transportation cost control and visibility to organizations with sophisticated, global supply chains. The effect is enterprise-wide efficiency in analyzing, optimizing, and managing your logistics operations.
The Trax transportation spend management maturity model represents the ideal path for any enterprise-level organization in this space.
We’ve designed a robust framework for global companies seeking process optimization and maximized visibility.
The roadmap supports organizations from all modes and geographies in moving into an optimized system that is completely accurate and data-based.
The TSM maturity model delineates what any organization in this field should be finding tools to achieve:
- Simplify freight audit and payment processes
- Cleanse and normalize data
- Manage transportation rates and contracts
- Improve insight into current transportation spending and performance drivers
- Automate carrier payment processes
This eBook will outline the journey of a typical enterprise advancing through key stages, starting with the freight audit process and evolving toward transportation spend management maturity.
The process requires integrated technology to obtain data that can inform decisions for structural reform and improvement.
There are three stages that will loosely identify how far along a company is on its way toward maturity:
Proactive: Companies become proactive when leadership can anticipate potential needs and complications in the supply chain. During this stage, companies focus on freight audit and data management. Leaders in the business tap into and learn from a vast network of reliable data that will act as a foundation for better managing performance and optimizing systems.
Optimized: Once a company has developed a solid framework for acquiring and analyzing relevant data, it can use that data to inform decisions. A complete and comprehensive view of the structural viability of the current system allows the organization to develop new ways of optimizing operations to anticipate risk and achieve maximum efficiency.
Leading: In the final stage of the TSM maturity model, companies gain a unique insight that empowers them to achieve total optimization. Not only will leaders be better equipped to overcome obstacles, but be able to embrace them, gaining a competitive edge over other companies and turning supply chain resilience into a powerful value driver.
Companies that have moved through these stages are considered industry leaders. They have the capacity to strategize and innovate because their spend management systems are fully optimized and efficiently automated.
Mapping the Network and Operations
For transportation and logistics companies, verifiably accurate supply chain mapping became possible with the development of new technology. Digital tools accurately track every company and supplier involved in every stage of production and transport.
Tools can document the source and cost of all materials, the transportation process, and the manpower and cost involved in delivering products to customers.
The supply chain, network, and operations mapping process has a wide range of benefits for organizations that implement proper strategies.
Advanced networking: Teams and professionals from various industries and stages of production can collaborate to improve efficiency and minimize risk.
Accurate verification: Satellite imagery makes it possible to verify the physical movement of goods with precise location and timing information.
Real-time data: Supply chain mapping with API (Application Program Interface) allows users to sync and combine data from all necessary sources, providing better disruption or delay prediction and supporting precise decision-making.
In the face of persisting disruptions, our customers are regarded as the top-ranking companies in the world for their excellence in supply chain management. Using Trax Technologies, they have developed the most self-stabilizing supply chain systems in the market.
The Path Toward TSM
To become a leader in supply chain excellence, companies need to focus on establishing digital competence and complete adoption.
In the real world, TSM maturity will empower your organization to capture, understand, and leverage network data to promote total spend management visibility and control.
First Steps: Freight Audit, Freight Data Management
The only way to keep up with the trends and challenges posed by the rapid globalization and digitization of the transportation and logistics industry is to have a data plan. Supply chain management executives and professionals are finding innovative ways to capture, cleanse, and analyze data from their networks.
Over the past eight years, the percentage of senior supply chain executives using big data in their infrastructure has increased by 36 percent. This number continues to grow due to the ability of freight data to help organizations turn the supply chain into a value driver that saves time and money.
The first phase involves supporting and empowering your company to better obtain and understand this data. And the first round of data you have to get a handle on is freight audit and payment records. Freight audit simply refers to the process of collecting all data around the freight process, from billing to deliverables, then reviewing and verifying it.
Companies must develop a robust framework of relevant, accurate information they can later use to implement informed strategies and make calculated decisions that optimize systems in their organization.
The right freight audit and payment process uncovers meaningful insights.
Ideally, freight audit and payment (FAP) software is part of a larger system through which users access centralized, integrated supply chain data. This should include visibility into freight audits, rate management, carrier management, match management, data compliance management, claims management, accrual management, RFP/RFQ management, and freight invoice payment automation.
These systems can be designed not only to streamline operations but also align a company’s processes with necessary regulations and requirements.
We’ll use our own process as an illustration.
The Trax freight audit and payment tools provide our customers with superior capabilities, including:
Data integration: A state-of-the-art data integration hub that is compatible with every file type.
Data management: Audit, normalization, cleansing, and compliance to ensure your data is accurate and ready for use.
Rate management: Rate and contract management, visibility, and control for all modes and geographies.
Audit management: Management for rules-based, invoice validation, and tax audits. Additional support includes audit exception management and guaranteed service delivery claims.
Cost allocation: For rules-based and split coding as well as coding allocation exception identification and automated accrual management.
Payment management: Invoice aging to terms, close and settlement support, invoice review, and TraxPays.
Reporting and analytics: Access to a sophisticated and intuitive operational dashboard with KPI reporting, invoice search, and exception reporting. Superior transparency through visibility reports and data warehouse feeds. Additional support includes exclusive use of over 30 Trax applications and modules that include insights, variance analysis, advisor, and accrual management.
Building a framework for FAP data practices makes every strategy for optimization easier to execute. In many cases, dysfunctional systems result in cost and time inefficiencies that silently (or not so silently) impact the cash flow of a company for years.
The solutions that a solid FAP process can provide are limitless as they create streamlined workflows and maximize cost efficiency in an operation, leaving more time for teams to focus on strategy and innovation.
The benefits of FAP include:
Transportation spend optimization: Teams gain visibility over all inventory, accurate cost predictions, premium freight insights, route optimization, and dimensions management.
Improved accruals: Complete visibility over inbound inventory as well as accurate budget comparisons and improved efficiency across all areas.
Transportation budget planning: Historical data from actual costs to plan and budget transportation systems and track variances.
Continuous improvement: A recurring system for data review, including ongoing KPI analysis with the aim of obtaining actionable data.
By using the Trax advanced FAP process and technology as outlined in the TSM maturity model, companies obtain accurate, relevant, and valuable data to assess the viability of their current supply chain structure.
This information equips global transportation and logistics teams with cutting-edge insights into every aspect of their network, allowing them to develop a plan to optimize systems that aren’t working or to reform and innovate.
Looking for a freight audit approach that will help you achieve TSM maturity? Contact us to learn more about freight audit with Trax.
Second Steps: Systemization, Automation, and Scale
Once a foundation of accurate and relevant data has been established, companies move toward optimizing systems and scaling operations. To begin this step, they must first use data to assess the status of operations in each area of the supply chain.
Step 1: Address reactive systems. Companies use data to analyze the reactivity of individual sections of their supply chain. The goal is to automate and address concerns so each system can move from a state of reactivity to a state of proactivity.
Step 2: Address low productivity. Once all systems and subsections in the supply chain are stabilized, teams can move to increase performance by automating all possible processes. Automating and standardizing systems to be as efficient as possible ensures people-power can be maximized to anticipate demand and alleviate bottlenecks. During this stage, organizations begin to notice a significant change in indicators like fulfillment percentage and returns.
Step 3: System-wide integration. Now that best practices have been adopted over various spots in the supply chain, they can be adjusted and applied to all remaining areas. The goal of this step is to fully optimize all sections of the supply chain. During this stage, operations leaders consider the implications of all changes on factors like customer satisfaction and industry relationships. After consulting with partners, companies achieve maximum cost reductions and enhanced productivity.
Step 4: Collaborating with the network. At this final step, all areas in the supply chain have been addressed and improved. Leaders can shift to an external focus, collaborating with suppliers and manufacturers and further optimizing the supply chain network by negotiating increased visibility into their partners’ processes and systems. This allows all parties to strategize and shape the supply chain network.
As a result of this optimization, companies become network orchestrators. They develop a reputation as a leader in transportation and logistics and, as a result, have a broad network of reliable and valuable industry partners.
These connections provide access to total-system visibility and real-time updates on operations across the entire network, enabling the company to embrace conflicts and obstacles as opportunities to widen the gap on the competitive field.
At this stage of the TSM maturity journey, companies have elevated access to information that allows them to make calculated directorial decisions about the businesses. This means unlocking the ability to improve market value and find firm footing as industry leaders.
Performance demands on supply chains continue to increase as the availability of new technologies changes customer expectations. As a result, performance must be continuously improved for a company to remain competitive and profitable.
When addressing performance management in the supply chain, it’s important to consider the following elements, outlined by analysts at Deloitte. Together, these bridge the gap between a company’s executives and performance measuring IT systems:
- Supply chain strategy
- Control activities
In order for a strategy to be well executed, a performance management plan must consider all these elements. When all factors are in play, professionals gain access to view and share supply chain reports that balance the needs of customers, demand, supply, and finances.
Aside from performance management, transportation optimization is perhaps the most important area for focus when systemizing, automating, and scaling a business.
Companies in the process of optimizing their transportation systems will optimize in these key areas:
Automation: Much like optimizing the other areas of your supply chain, automation is the first step to achieving transportation efficiency. By automating all possible systems, teams alleviate pressure. Every department's efforts can be directed toward improving workflow. They also limit the possibility of error as standardized practices simplify training and compliance processes.
Picking and packing: Using data and insights from the management team in the physical location of each step of the supply chain, companies can optimize the location of inventory and workflows to achieve maximum efficiency during the picking and packing process.
Routing: GPS data and real-time analytics will help companies understand traffic trends, fuel costs, and disruptions due to weather, emergencies, or other factors. This allows timely planning for optimal route selection, which directly ties into speed to destination and, ultimately, customer satisfaction.
Fleet maintenance: The ability to access data about fleet vehicles has been a game-changer. On-vehicle sensors, cameras, IoT devices, and similar technology help companies avoid costly damages and downtime.
Balance historical and real-time data: Bad data is siloed data. Good systems — like the Trax data integration hub — provide access to information from a wide range of sources all at once. This means that leaders can trust the view, quickly making strategic and often important business decisions. Our tool allows teams to set KPIs and compare transportation costs, delivery performance, and more in a single platform.
Destination: Transportation Spend Management Maturity
Companies that move through the automation and optimization stages described here achieve transportation spend management maturity.
Leaders stand in a control tower, benefitting from complete transparency and control over transportation spend and processes. This enables all kinds of efficiency efforts, such as automating spot quotes, optimizing payments and contracts, and improving productivity in every area of the supply chain.
These changes improve the consumer experience: optimized shipping routes lead to improved delivery times and lower transportation costs allow for lower shipping charges. The improvement in customer experience has a positive impact on revenues, which opens new possibilities for expansion and investments.
The process and possible outcomes are clear.
Two final questions need to be answered:
- What are the success metrics to evaluate transportation spend management maturity?
- What are the provable returns on these efforts?
Internally, measuring transportation spend management success involves analyzing cash flow and cost to serve.
When an organization is fully optimized and backed with comprehensive data for making informed decisions, its cash flow will be predictable. What’s more, its financial processes will reduce (perceived or real) risk for shippers and carriers.
Capital optimization systems, such as TraxPays, offer full-system support by streamlining back-office processes and automating payments. These in turn strengthen business relationships and the network as a whole benefit.
Organizations that have reached TSM maturity will have the total supply chain visibility required to calculate precise cost-to-serve figures. The same process that makes these figures visible also improves control. This empowers leaders to make competitive, strategic decisions that sharpen focus on leadership and innovation instead of reacting to disruptions.
Transportation spend management maturity means moving your company from reactive to proactive to predictive. It is the foremost way leaders can develop resiliency to prepare for, and even embrace, the persistent and growing list of challenges in the industry.
At a time when global trade has crested, the wide range of obstacles the industry faces has never posed a greater threat to companies.
Visibility and control are critical factors for all organizations that operate today. The Trax TSM maturity model is designed to help your company incorporate end-to-end visibility to achieve resilience and limit risk.
Pricing, business sustainability, and even environmental sustainability challenges are overcome with TSM maturity.
Pricing — Leveraging unique, reliable insights, companies that partner with Trax have access to data that helps them implement pricing strategies to increase their operating profit by as much as 60 percent.
Business sustainability — Sustainability is a tangential positive outcome of TSM maturity. Companies that implement best in class technology increase the sustainability of their operations.
Environmental sustainability — A recent survey of employees in the transportation industry found that 23 percent of respondents felt an increase in pressure to implement environmentally sustainable strategies.
By doing so proactively while simultaneously cutting costs, Trax partners put cost-effective, environmentally sustainable strategies to work and find measurable results.
The Trax transportation spend management system is a key to reaching TSM maturity. Read more about how we can help your organization go from reactive to proactive to predictive.
Freight Audit Solutions for Strategic Market Leadership
The key to building supply chain resilience in the face of perpetual disruption is mastering transportation spend management. This is the reason 87% of supply chain professionals intend to make it a priority in their strategies moving forward.
After years of chaos in the supply chain, new technologies are releasing the pressure valve, and full adoption is key.
At Trax, we know that transportation spend management maturity starts with freight audit. Once you have visibility into freight invoicing and payments, you can advance into more sophisticated levels of tech-supported growth.
Companies that have the right processes and visibility into the basics can then begin to automate and optimize. This builds competence and confidence as well as mitigating risk.
Trax is the global leader in Transportation Spend Management solutions. We partner with the most global and complex brands to drive meaningful optimizations and savings through industry-leading technology solutions and world-class advisory services. With the largest global footprint spanning North America, Latin America, Asia, and Europe, we enable our clients to have greater control over their transportation performance and spend. Our focus is on your success.