Freight payment verses freight settlement
The shippers locked into classic procurement and freight payment processes need to pay attention to the changes that are coming in transportation operations.
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The shippers locked into classic procurement and freight payment processes need to pay attention to the changes that are coming in transportation operations. One example of the major changes coming is the evolution of “freight payment” to “freight settlement.”
For many years, the function of freight payment has been a labor-intensive function involving accounts payable and transportation dealing with a form of “match-pay.” Match-pay involves a physical comparison of a carrier invoice with a shipper rate file or accrual amount based on the shipper’s rate file—this is a process that involves several people handling and re-handling documents or files.
However, there’s a new approach involving a paradigm shift in payment that has three stages. In stage one, both the shipper and carrier agree on contract rates and, most importantly, agree on a single system of record to hold those rates. If the shipper system is chosen, then the carrier is paid upon completion of service automatically without invoicing.
If the carrier system is selected, then invoices are paid without review and sometimes by a debit to a shipper accrual account. Either of these “autopay” processes reduces costs for processing; and with billing and collections representing up to 7% of carrier costs, there are certainly savings to be had with autopay.
In the second stage, payment processing is replaced by settlement. Settlement implies multiple required actions being simultaneously closed with each freight transaction. In addition to a “proof of delivery” triggering the payment, the carrier provides detailed data electronically on service milestones such as pick up, transit time and delivery time. This service information is a required part of the transaction—no data, no payment.
The value of detailed logistics data on service and cost improvements has been well documented. It reveals information about customer demands, network patterns, capacity utilization and backhaul opportunities among other business factors.
In stage three, parties step it up with disaggregation of the transaction elements to allow for pricing variations based upon factors such as time of day, risk, speed of loading and unloading, along with other agreed upon factors.
"The carrier system has to be able to dynamically
rate the shipment based upon real-time factors
that the shipper can influence, because the shipper
can directly impact the carrier’s operating costs"
In this stage, the shipper is using predetermined contract factors to optimize cost and service. The carrier system has to be able to dynamically rate the shipment based upon real-time factors that the shipper can influence, because the shipper can directly impact the carrier’s operating costs. Planning then becomes more dynamic, as shippers select from a menu of costs and service levels provided for under a collaborative contract.
For shippers, third-party logistics providers and their carrier partners, as well as freight audit and payment services, the change is coming. The exchange of funds for service is rapidly becoming the exchange of funds for information and dynamically planned service transactions. Smart companies are collaborating to win.The carrier hosts the rate system and the shipper selects from a menu of cost and service selections that have a range of prices. Last minute moves cost more and flexibility in service allows the carrier to maximize capacity and optimize resources. This selection can be done automatically as shippers plan and tender to carriers.This third stage mimics the process by which we select airline passenger tickets.
About the AuthorPeter Moore Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]
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