The Role of Freight Audit & Pay as the Cornerstone of Transportation Spend ManagementPosted by: Steve Beda
Upgrading from Transactional Audit and Bill Pay Practices to Strategic Best in Class Spend Management
There’s a huge difference between paying a bill and investing in the stock market. One is a simple transaction that gets a vendor paid for a service; the other is a more sophisticated strategy and series of actions that, if done well, can lay strong foundations for future financial success and business growth. The same idea holds true for Freight Audit & Pay (FAP) – the practice of comparing carrier invoiced costs with contracted rates and performance in order to manage spend – versus the rapidly evolving, next-generation strategic discipline of Transportation Spend Management (TSM). While FAP is an essential component of any transportation operation in terms of managing carrier billing and compliance, it’s just as importantly, a first step to doing more: creating the foundation for the more data-led, proactive strategies of Transportation Spend Management that, once implemented, will lead to optimized end-to-end efficiencies and fully optimized transportation spend for any business.
Let’s dig deeper into the reasons for, and steps toward, adopting a more advanced FAP process and the role that plays in migrating to the practices and benefits of a true, strategic Transportation Spend Management approach.
Why Begin the Journey to TSM with FAP?
To be successful you have to know where your organization is headed – and more importantly, monitor the decisions and actions needed to get there. One of the biggest roadblocks along the way is escalating cost and the need to both mitigate cause and manage effect. Transportation logistics executives know this better than anyone. They’re the ones dealing with the pressures of today’s crowded, competitive, and capacity-strapped marketplace – as well as that one perennial question from leadership. How can we do more and do it better with less? How can we drive down overall spend in an industry where demand for carriers outstrips supply; where fuel prices continue to climb and the past 18-months still impacts everything from manufacturing to warehousing? When external market conditions like these make improving profit margins at best very difficult, and more likely, almost unattainable, the only way to have a meaningful impact on the bottom line is to look inside your organization. To systematically identify, unearth and seize every opportunity to improve efficiency across every element of the operation. And the only real way to gain that kind of end-to-end visibility – the kind that leads to change and improved efficiencies – is with the kind of data governance FAP with TSM can produce.
Data governance may not be sexy but it’s actually the missing piece of the puzzle every transportation logistics executive is trying to solve today. It also may not seem on the surface like a critical game-changer but it’s the key to all of unrealized benefits that embracing FAP will deliver: greater audit and bill pay efficiencies to begin with, but beyond that, root cause remediation, greater cost control across the entire operation and the foundations for a strategic, proactive approach to spend management that is backed 100 percent by data.
Step One: First, a Transition to Electronic Billing
For decades in the transportation industry, FAP data has meant dealing with a lot of paper. Paper invoices, inconsistent documentation, spreadsheets, reporting formats that vary by channel, mode, and even carrier – as well as the manual labor required to make sense of it. In an increasingly global business, where the average shipper may be managing dozens, if not hundreds, of carrier relationships, multiple currencies, time zones, and geographic variables, doing so without data to drive decisions is like driving a truck in the dark without headlights. You have an idea where you’re going but can’t plan for, or react to, turns in the road, know where the potholes are, or see opportunities for a faster, more direct route.
Transition, of course, isn’t easy. For shippers or carriers. But if you have hesitated over making the leap to electronic billing capture, 2021 is absolutely the year to start as well as an important first step on the road to best-in-class operations for your business. Expect some short-term returns: reduced invoice processing time, enhanced accuracy, and overall improved efficiencies but you will also need to allow transition time for LSP’s as you request their conversion to electronic billing. One of the key reasons for this conversion is creating consistency across carriers and invoicing so while it’s important to mandate content standards AND formats (ANSI, EDIFACT), consider offering more informal formats such as XML or Flat File which will improve earlier adoption from carriers without sacrificing either efficiency or content quality. As you do all of this, remember data is really the means to an end – creating the processes and standards to enable analytics and spend optimization. By all means, capture the data necessary to create more efficient bill pay procedures, but don’t get sidetracked and just think of this transition as solely a better way to pay invoices. It’s the beginning of a data governance approach that can have significant ROI.
Step Two: Rigorous Data Standards for Best ROI
Our goal may be to create best-in-class data capture and master data management (MDM) for the long run but that starts with ensuring FAP processes are optimally designed now. Not all FAP processes (or external providers) are created equal. Many programs are focused on monitoring at the monthly transactional level, catching errors in invoices and billing to save money – in other words, reactive problem-solving. But making the decision to employ FAP with TSM takes a more strategic approach, identifying the root cause of errors and eliminating them for good including the requirement to monitor and manage the issue on a monthly basis. Other priorities for best-in-class FAP and TSM data governance include:
- Compliance – Modes, Services, Charges
- Mandated use of common-mode definitions
- Clearly defined and understood terms for service and charges
- Normalization – Modes, Services, Charges
- Ensuring data looks and reads the same, enabling algorithms to model it effectively into consumable data
- Standardized carrier codes v common standards
- Standardization of formats, values, metrics, and values creating data visualization “rules” s
- Augmentation – Data Extensions or Derivations
- Data Derivations (channels, direction of freight, lanes)
- Mapping characteristics
- Cost Management – General Ledger Allocation
- Consolidation – All Modes, All Regions
- One centralized repository for all transportation spend data
- Data reporting that supports both regionalized and global views
- Global and country-specific ability to manage measure/currency (common vs. billed)
As we build normalized, standardized, and high-quality data, one other important consideration is realizing when an outside partner makes sense. Few truly best-in-class companies today can manage global freight audit effectively and meet the demands of running a business. When selecting a freight audit partner, look for broad, global capabilities. It can be tempting to select a local partner who specializes in a particular mode or geography, perhaps to save money. But, in a way, that’s simply another version of the issue we’re trying to solve by aggregating and consolidating data and the number of carriers. The complexities of worldwide freight audit and TSM requires a specialist with global capabilities that can work seamlessly and gather high-quality data across region, mode, channel, geography, and industry, providing the greatest time and cost efficiencies.
Step 3: Create One Global Truth for Best Practices
Investing in quality data practices is worthless unless doing so gives you both transparent, end-to-end visibility across your entire operation and one global version of the truth. Across every contract, every rate, every spot quote. Best-in-class data governance requires a centralization of data with appropriate access for all parties that goes beyond what, for instance, a dropbox account for document sharing can ever do.
From RFP to final contract, creating one version of the truth eliminates multiple contract copies. Best practices include using one master platform with standardized documents with access granted to carrier, LSP, shipper, and auditor and where all parties use consistent data entry terms and practices. Modal consistency and compliance is critical too – using standard formats and content validation for accurate rating and interpretation of cost. This is especially true when dealing with ocean and air freight forwarding. This approach can also ensure change management or extensions to RFP management are simple and collaborative between submitter, reviewer, and approver.
Step 4: Use FAP Data to Measure Compliance
Imagine if every industry operated like the transportation logistics industry. You sit down to dinner in a restaurant, note the menu pricing but end up paying more thanks to unforeseen variables between the kitchen and your plate? The transportation industry is unique in that actual spend often does not match the original estimated or agreed pricing. So the only way to understand and assess what we should pay for service when it’s billed is to have real awareness and visibility across the operation and be able to match contracted rates and performance with final carrier invoicing. In other words: to measure execution and monitor variables with the use of KPIs.
Quality FAP data is critical for measuring spend, rating performance, and identifying variance to plan. It’s the cornerstone of operational metrics – providing oversight of on-time and late payments, aging invoices, and exceptions. But it also provides insights into all kinds of performance metrics and variance: verifying carrier billing accuracy, spot checking data points as part of your standards requirements, identification of incorrect use of premium services (and pricing), ensuring routing compliance (especially with third parties) and monitoring of on-time performance, a critical component of service delivery and ongoing business reputation. Only by having real visibility across all of this – rates, performance, and variances like accessorial charges – is it possible to set a strategic course, or course correction, as needed. Are assessorial charges valid and warranted, or are carriers attempting to pass through increased costs? Does a change of carrier, service or route make sense for future plans? FAP data can answer all.
Step Five: Evolving to an Optimized, Strategic Approach
Once we have solid foundational FAP data practices in place and carriers are aligned with electronic billing requirements, it’s time to turn to optimization – a next step toward moving beyond FAP’s task-oriented, reactive state toward the more strategic, planned state that TSM offers. This should be an easier undertaking as good FAP data and processes will free up time spent chasing invoices and everything necessary to process payments and enable better focus on more valuable aspects of managing transportation across the operation.
Doing so puts the protocols and practices in place that will deliver best-in-class outcomes:
|Transportation Spend Optimization||Visibility over inbound inventory and accurate expectations of cost||Premium Freight- understanding and choosing when to pay higher price premiums and avoiding frivolous expenditures to control spend||Dimensions- managing increased costs related to packaging selections and reducing spend by mode and route||Routing Optimization- selection of the best shipping routes by a combination of service standards, delivery deadlines, transportation costs, and other variables|
|Improved Accruals||Visibility over inbound inventory and accurate expectations of cost||Accurate comparison of budgeted cost with actual spend for future change comparison||Improved efficiencies|
|Transportation Budget Planning||Using historical actual costs||Using historical actual costs||Tracking variance|
|Continuous Improvement||A regular, set cadence for data review to enable more real-time actions||KPI analysis on an ongoing basis||Actionable data that drives changes for efficiencies|
The Road Ahead: Takeaways
Putting a more advanced FAP with TSM program into place may seem like that long-term investment in the stock market, but beginning the journey will create the road map for both short-term efficiency gains and long-term best-in-class operations.
From the first step of adopting electronic billing practices and aligning carriers within a standardized framework, shippers will quickly realize more accurate billing and begin to control spend. But by putting those foundational technologies and practices into play, we also build the foundation for more effective and far-reaching spend management strategies across entire operations and global networks. Migrating to a TSM approach means we are able to answer not just the immediate questions of today: is this invoice accurate and why should I pay these charges? - but also the bigger questions that inform the directional changes required to make a real impact on long-term operational efficiencies and global spend. Where are the opportunities for improvement? If I change how we execute in a given area how big a difference will it make? And perhaps most critically: do I have the irrefutable, data-backed knowledge that will allow my business to become best-in-class?