One way to increase process efficiency is to eliminate intermediaries. But an exception to this rule of thumb is freight payments. Using a neutral third party, such as a logistics services provider, to manage the process can significantly raise efficiency levels.
Of course, there is much more to this type of payment system than just simply adding another layer to the process.
In this payment option, the shipper sends the transport rates they negotiate through freight bids—or tenders, as they are referred to in Europe—to the third party. This ensures that the confidentiality of the commercial contract between shipper and carrier is maintained. The third party or intermediary becomes responsible for invoicing the shipper on behalf of carriers and issuing a so-called self-bill (a carrier’s own invoice created by TMC and based on the shipper client’s rate schedule and legal requirements) to the carriers. After the third party or intermediary receives the funds from the shipper in accordance with the agreed payment terms, it also becomes responsible for paying carriers on behalf of the shipper. All transport and accessorial rates featured on the invoices and self-bills are based on the uploaded rate information. Both the shipper and carrier see the same information, except that the intermediary’s fee is only included on the invoices sent to the shipper.
On paper, this procedure might seem more complicated than shippers paying carriers directly, but the third party option offers some important advantages.
Centralized system. Instead of dealing with incoming invoices from multiple carriers and administering payments to them—which can be a significant admin burden depending on the number of carriers—shippers only have to deal with a single party: the intermediary. Problem solving is much easier when only a single contact has to be consulted. The intermediary deals with invoices that are rejected or in need of correcting, issues that can consume a lot of the shipper’s time when multiple carriers are involved. The intermediary also deals with carrier self-bill corrections and any carrier inquiries related to them.
Standardization. The intermediary standardizes the process, making it much simpler and less time consuming for both shippers and carriers. For instance, invoices and self-bills are routinely issued on a designated day of the week rather than being sent at different times throughout the month. Also, all documents issued, such as invoices, self-bills, and even payment details also known as remittances, can follow a standard format.
Tailor-made. Even though the process is standardized, it can still be tailored to the needs of the shipper. Special provisions, such as complying with value-added tax requirements or making payments in a particular currency, are part of the process. The currency agreed through the freight bid or tender is the one used by the third party to invoice the shipper, receive the funds, and pay carriers. Payment details can be structured to suit the parties involved. For example, certain lanes and suppliers can be grouped together on separate invoices.
Compliance. The shipper can request that the intermediary should not issue any invoices unless the carrier has provided the required transport documents for the shipments involved. The intermediary is responsible for the document collection process, and the received documents are electronically attached to the invoices. Shippers can also access the archived documents if necessary, or request them from the intermediary.
Joint responsibility. For the third party payment process to run efficiently, all parties involved must have an active role. Each party must update the system (in the case of shippers, this includes confirmations that loads have been collected; in the case of carriers, that loads have been delivered) to avoid delays. The intermediary flags failures to provide updates or the requested transport documents, and follows up with the parties concerned. Carriers that are repeatedly non-compliant are escalated to the shipper to address.
Analytics. As the central hub for payments information, the intermediary can shed light on issues that need to be addressed by shippers and carriers. They can also promote more transparency and open the door to more detailed analytics by providing reports on transport and accessorial costs. Reports can identify where and when excessive costs (e.g., demurrages, weekend deliveries) are being incurred, for instance. This type of information helps shippers pinpoint areas for improvement, and to investigate the root causes of excessive costs and potentially eliminate them in the long run.
Third party freight payment solutions are not for every shipper. However, this option is especially beneficial in complex freight networks.
Next week we will consider pitfalls to avoid when using these systems.