Last week we explored the advantages of freight payment systems that are managed by an intermediary, such as a third party services provider. In this week’s blog post, we draw on TMC’s experience to look at how shippers and carriers can improve the efficiency of the freight payment process.
The suggestions mainly relate to third party payment systems, but some of the lessons can be applied more generally.
- Clarify payment conditions.
Information on conditions of payment is sometimes omitted when shippers put their freight out to tender. If the shipper is using a third party to manage freight payments, this information should be communicated to carriers during the bidding process. The required details include payment terms, frequency of self-billing and scheduled payments (often not matching), and document collection procedures if applicable.
Failure to notify carriers that invoices should not be sent as part of the self-billing agreement, and that the intermediary is the paying party, and what the payment terms are, often leads to unnecessary friction between the parties involved.
Another communications problem that can disrupt the payment process is when shippers do not provide a detailed remittance of all invoices included in a payment after transferring the funds to a third party. When this happens, the third party is unable to process the payment, which causes delays and can result in the carriers not being paid on time.
- Inform local offices.
Make sure that you familiarize local managers (i.e., the local process owner, lane owner, and accountants) with the freight payments process that is being adopted. This is not always the case, particularly in large organizations where offices are widely dispersed both geographically and functionally. The head office might adopt a third party freight payment system, but fail to properly inform regional offices or their shared invoicing centers of the change. Filling the information gaps can require a lot of time, effort, and, possibly, invoice rejections. Meanwhile, payments can be delayed, often causing unnecessary disputes.
- Align around common goals.
When the head office requires invoices to be formulated in a certain way, but local offices have different requirements, the result is usually much confusion and process inefficiencies that drive up costs and drive down service levels. A typical mismatch is when the head office is not fully aware of how a local accounting team wants invoices to be structured. As a result, the intermediary starts the invoicing process without this information, and the local accounting team has difficulty in processing the documents. This problem will continue to impede the payments process until there is alignment between the head office and the accounting team on how invoices are to be compiled, and the solution is communicated to the intermediary.
- Maintain clear lines of responsibility.
In some organizations, it is unclear exactly who is responsible for managing freight payments. It’s crucial that the process owner is clearly identified, rather than leaving it to a third party to investigate or raise the issue.
- One version of the truth.
As described in last week’s post, the intermediary makes payments to carriers based on the freight rates that the shipper negotiates during the bidding process. However, sometimes local offices pay rates that vary from the corporate ones, perhaps because they have separate agreements with local providers. Having more than one set of rates undermines the company’s central freight payments system. The practice also robs the company of opportunities to leverage economies of scale when negotiating with carriers.
- Beware of system specifics.
Different IT systems have different payment capabilities—and limitations. An example is when a shipper assigns a purchase order (PO) number along with a freight transportation budget to a lane or business unit. Even though this brings transparency to actual lane volumes and the associated costs, this arrangement can cause problems when there is unexpected growth, and the volume of business exceeds the budget allocated to that lane. Some systems will simply deduct from the budget as each shipment is paid for and stop booking loads when the allocated funds are exhausted. Meanwhile, the intermediary is unaware that there is almost nothing left in the budget and continues invoicing. As a result, the shipper is unable to book in the invoices for processing until the budget has been replenished. An experienced intermediary that is familiar with these system idiosyncrasies can forewarn the shipper.
These are not the only pitfalls that can throw a freight payments system off track. However, in our capacity as a third party in payments systems, we have worked to overcome issues like these and learned some valuable lessons along the way. Moreover, these lessons have helped us to develop better documentation, and to ask pertinent questions when asked by shipper customers to implement payments solutions.
We welcome comments from readers on payments problems they have encountered and addressed.