These days, in the midst of the e-commerce boom, millions upon millions of goods and materials are being sent across the country every single year. Now that a large portion of customers shop exclusively online, making purchases with the click a button, such customers expect their goods in a matter of days if not hours. Because of this change in customer expectations, the need for an expansive, coordinated, and efficient shipping network has never been in higher demand as more and more businesses conform to the Amazonian model.
Today, supply chains have lengthened, lead times decreased, and freight costs make up a larger portion of a company’s total cost. As a result, both retailers and vendors’ success or failure depends even more on the efficiency of their freight shipping network. Because of this, it has never been more important that you frequently audit your freight invoices. Below, we will discuss what a freight audit is and why it is essential your company performs them regularly.
What is a Freight Audit?
A freight audit is a comprehensive overview and accounting of your freight invoices in comparison to the business’ books. There are three main goals of a freight invoice audit, they are:
- Checking the numbers – The most obvious and important goal is to ensure that the numbers align, verifying that your freight carrier is charging you according to your contract.
- Look for inefficiencies – A freight audit gives you a thorough understanding of your shipping process. This grants you a golden opportunity to look for inefficiencies in your supply chain or ways to improve your freight practices in order to save money.
A freight audit should be used as a learning tool for your business. It will highlight strengths and weaknesses as well as give you the peace of mind that your company is not paying any more than it has to for your freight shipping. As we will discuss later, there are three ways to perform a freight audit:
- Using freight audit software
- Via a third-party logistics team
- Having the audit conducted in-house
Before we dive into those, it is first essential to understand the factors that can complicate a freight invoice audit.
Factors that Affect Pricing in Freight Invoices
Freight and Fuel
On the surface, a freight audit might appear to be a simple process of simply checking your invoices in comparison to your books, but in reality, it can be an extraordinarily complicated and time-consuming affair. This process is made even more convoluted due to the high correlation between global fuel prices and freight pricing.
Very few industries’ prices are as heavily dependent upon a single variable as the freight industry with the cost of fuel. As you likely know, fuel prices have undergone dramatic swings over the past few decades. Because of this unpredictable, rapidly shifting nature of fuel prices, you may have two identical freight shipments six months apart, which have entirely different service charges. Obviously, such fluctuations in fuel pricing can complicate audit invoices and make it difficult to predict future freight service costs.
Accessorial and Freight Invoices
As mentioned earlier, almost every freight company will charge accessorial fees. These additional charges can be based on several factors, some of which you may have had no idea about and would not discover were it not for a freight invoice audit. Such accessorial fees can be negotiated upon in your contract, but even then, keeping track of them can be difficult.
The most common accessorial fees include:
- Driver loading and unloading – Driver has to load or unload the freight.
- Hazardous materials charge – Handling charges for hazardous materials due to risks involved to crew or other cargo, and the possible need for a special trailer.
- Home delivery – Fairly self-explanatory, direct delivery will always cost more.
- Layover – If the truck cannot be unloaded or loaded at the expected time on a given day, a shipper will charge you for not being prepared.
- Re-Delivery – If a shipment cannot be delivered and it is not the fault of the carrier, a charge will be added for additional delivery attempts.
- Reconsignment – If a shipment destination is altered after pick up, the charge will be decided by the carrier based on when notification occurs and where the shipment is at that time.
- Sort and segregate service – If the driver has to move products from one pallet to another due to the type of good or the size of the good.
- Storage – If a delivery cannot be made, the carrier has to store the shipment somewhere until it can be delivered.
- Vehicle Order Not Used (VONU) – If a freight pickup is scheduled, and the carrier arrives only to have the shipment unavailable or canceled.
Multiple Vendors and Freight Invoice Audits
As if the freight invoice audit process was not already complicated enough, the fact that many shippers use multiple vendors can make the practice even more convoluted. Each one of these vendors may have different accessorial fees, methods, or formatting standards for their invoices.
If you use multiple vendors, it is essential that you stay on top of your invoice organization. Some vendors may send electronic invoices, and others may send physical invoice notes. Keeping organized with your accumulating paperwork will cut down on errors when it comes to the audit process.
Why Freight Invoice Audits Matter for your Business
Because of all these possible complicating factors, a freight invoice audit is an essential accounting step to ensure that you are being charged the correct amount and not overpaying on shipping. In many cases, shipping accounts for more than 10% of a business’ total costs; therefore, it is crucial that you are confident and can trust your freight carrier.
For analytics purposes, a freight invoice audit can help you see market trends, forecast future freight costs, and strategize more efficient shipping routes. Optimizing your routes and your shipping process can save you both money and time, and also benefit your relationship with your carrier. Acting on the insights gained from an audit can help you get an edge over competitors and anticipate changing trends in the market.
The Freight Invoice Audit Process
The freight audit starts with an analysis of physical invoices or those that arrive via electronic data interchange (EDI). Upon receiving an invoice, the first thing you should do is put that data into your virtual or physical ledger. This grants you immediate visibility and an easy method for comparing bills to past invoices.
Once uploaded, your objective is to see if the invoice is the correct amount. Discrepancies to check for include:
- Was the proper classification applied and charged? – The National Motor Freight Association (NMFA) publishes an annual classification guide, which groups all commodities into one of eight classes, ranging from 50 to 500. Such classes have different rates and are based on four different factors including density, storability, handling, and liability.
- Did the carrier add accessorial fees? – If you were charged accessorial fees, were you at fault? If you were at fault, are there steps you could take in the future to prevent such fees? Were you charged for fees you had negotiated away previously?
- Are there duplicate invoices? – You might be surprised to discover that duplicate invoices, the double charging of shipments, is a common error that can be sniffed out during invoice audits. In most cases, this is accidentally done by the carrier for a variety of reasons including a lack of control in accounts payable, or having multiple means for accepting or paying invoices. While shady carriers do exist, it is better to give them the benefit of the doubt that this was simply an invoicing error on their end.
- Did the carrier apply your discounts? – You may have previously made arrangements or deals with your carrier about potential discounts. If you have agreed with your carrier on discounts, be sure to check that they are appropriately applied. Further, if the carrier made a late delivery, that may negate, if not reduce, the cost of shipment. If there is a late or damaged delivery, be sure to note that immediately on the bill of lading.
- Was the mileage and zip code correct? – The further a carrier has to carry a package, the higher the cost will typically be, especially if the carrier has to go off-route, or the package needs to be transferred to different trucks.
- Does the math add up? – After verifying that charges are correctly applied, it is essential that you make sure the numbers add up. Calculation errors occur on both sides, so double checking your work is a wise way of making sure that you are not paying more than you should be.
For many businesses, your customer’s loyalty hinges on your shipping efforts and dependability. When it comes to shipping, your top priority should always be to ensure that their goods arrive promptly and in perfect condition, allowing you to build credibility and trust with your customers. After that, your emphasis should be on streamlining the process and doing everything in your power to optimize your shipping procedures so that you can cut down on shipping costs.
Freight invoice audits are vital safeguards meant to protect shippers from overpaying. They are also useful tools to help optimize their shipping process by cutting down on waste or other inefficiencies. Because of this, it is essential that you regularly perform audits on your freight invoices.
While manual freight audits are a consideration, we encourage you to purchase a freight audit system or employ the services of a third-party logistics firm. These latter options will help you save time and money in the long run and will give you tools to improve your shipping practices.