Audit and Payment
- Audit: To fully check and examine
- Pay: To give money in return for work, goods or services
In the LML context, audit & pay match Webster's definitions exactly. However, there is a clear distinction between pre-audit and post-audit. Pre-audit is performed before invoice payment and post-audit after invoice payment. LML invoices can originate from carriers, intermediaries, 3rd party warehouses, IT providers and a host of other sources. This article focuses specifically on invoices from transportation carriers and intermediaries -- typically the largest logistics cost component. It also specifically addresses the benefits of conducting pre-audits instead of or in addition to post audits.Reset View
Though the problem varies from mode to mode, Freight invoices have a long-standing reputation for being inaccurate and inconsistent. As a general rule, billing errors increase as service/price complexity goes up. Conversely, errors tend to drop as IT sophistication increases. Therefore, it is not surprising that ocean freight invoices present a much greater improvement opportunity than air invoices. While ocean carriers are working hard to achieve IT parity with other modes, their penchant for introducing new surcharges with dynamic effective dates and situational applicability ensures that billing will be more art than science into the foreseeable future.
Shippers are impacted multiple ways -- on the income statement as well as the balance sheet. The most obvious problem is inflated transportation spend compared to what was budgeted and procured. This occurs when there is no audit and charge-back process of any kind. This added operations cost filters to the bottom line and erodes yields.
On the balance sheet side of the equation, the problem is cash flow. When a shipper overpays an invoice and only catches the error via post audit, there is a negative cash hit on the balance sheet. The cash to cash cycle is impacted by inventory levels, accounts payable and accounts receivable. The overpay/chargeback process increases accounts receivable and the shipper gets nothing in return for the cost of the money.
Typical billing issues
The goal of audit and payment is to reconcile the service/price agreed to in procurement with the service/price presented on the invoice. This is challenging even when the service procured matches the service invoiced. When the services vary, the difficulty multiplies.
But before digging into the specifics of a billing error, the error must be caught or flagged in the first place. An automated system is required to cost effectively catch these problems in a pre-audit environment. The system must be able to check for duplicates as well as wrong charges. The duplicates can be tricky, especially in international commerce governed by INCO-Terms. The same charge is sometimes presented to both the origin and the destination party. Simply looking for duplicate invoice numbers will not catch these instances.
Service performance can also be difficult to verify. For example, if a charge is contingent upon meeting a specific transit time, the system must be able to check actual transit time before dispositioning the invoice.
As daunting as the above sounds, a properly designed web-based tool can perform effective pre-audits of ocean freight invoices. But in order to do so, it must have some specific capabilities, for example:
- Integration with a comprehensive and reliable rate data-base against which to audit, as well as the rating and routing logic to properly rate the invoice according to the INCO-Terms and rules that were in place at the time of shipment.
- Facility to receive and open electronic invoices, as well as map them properly to the charge categories in the rate database.
- Smart logic to flag duplicate invoices with different invoice numbers by comparing multiple parameters in combination -- e.g. ship date, invoice amount, origin /destination, commodity, etc.
- Integration with a shipment tracking and tracing system (or systems) in order to verify service performance.
- Flexible business rules that can process the same type of error in different ways according to the specific agreement in place with each carrier.
- On-line work flow functionality to ease approval of new charges and management of exceptions.
In order to reap the expected benefits that emerged from the procurement process, it is imperative to pre-audit transportation invoices -- particularly for ocean freight. A web-based system with the proper integration and backend functionality can perform this task admirably -- protecting both profitability and cash flow. Though there are costs associated with implementing such a system, the financial benefits quickly negate them and provide a substantial return on investment.