Dollar General uses its own process to pay ocean freight bills.
There’s a sense among many transportation executives that freight payment is a different kettle of fish than other types of accounts payable.
A sense that paying carriers and logistics companies carries with it more nuance than paying other vendors.
However, Adam Hall, senior director of international logistics for the national retailer Dollar General, isn’t buying it.
“People have looked at freight payment as unique, but I don’t think it’s that unique,” he said. “We leverage the same accounts payable process to produce transportation checks, we’re not cutting a special transportation check. Where we devote our time is managing transportation spend.”
Hall’s unique views on freight payment don’t end there. Dollar General is nearing the completion of transitioning its entire international transportation payment process to one based on what he calls “self-invoicing.” That is, Dollar General produces its own bill for what it owes a specific carrier, and then sends that bill to the carrier for audit and verification.
Traditionally, carriers invoice shippers for the amount due to them. Indeed, the vast proportion of transportation bills, like most other payables, are processed in this way.
Hall decided to go against the grain. Dollar General began piloting a self-invoicing process in 2013, first with its drayage bills. The concept worked so well that the company rolled it out to ocean freight, where it now processes all bills through self-invoice.
“We send the ocean carriers the invoice,” Hall said. “We produce the previous week’s activity and ask them to audit and then insert their payment reference number. Some use a unique reference number. They check off and audit that everything’s good to go.”
If there’s any discrepancy between what Dollar General invoices and the carrier believes it is owed, there is a dispute resolution process in place.
“A dispute on a single item on the invoice doesn’t hold up the payment process for the balance of the items,” Hall said. “We age the payment to the agreed terms, and then send payment.”
The benefits are clear to Hall.
“We were spending a lot of time reconciling because the carriers were billing us inaccurately,” he said. “We’ve reduced the time we spend on this by 50 percent.”
Hall is responsible for greater than $100 million in freight spend — freight payment associated with that spend is now managed by half the previous resources allocated prior to switching to self-invoicing. He said moving to self-invoicing has eliminated the money the company might have considered spending on outsourced freight audit and payment, and has ensured control of that spend is handled internally.
He acknowledges that the self-invoice process is not universally loved by carriers. Self-invoicing essentially puts the onus of auditing on the carriers, though Hall prefers to say that it puts the audit at the front-end of the process.
However one views the ideas of self-invoicing, it doesn’t always jive with the processes established by carriers for the majority of their other accounts. But as the 33rd largest U.S. importer by container volume, Dollar General has some leverage.
“There was initial pushback from the carriers,” he said, “but this is something they’re now finding value in through saved time.”
Hall said Dollar General is considering extending the process into its domestic transportation operations, which is also handled internally by Dollar General, but one where carriers still invoice the retailer in the traditional way.
Among shippers, Dollar General’s approach may not be revolutionary — the concept of self-invoicing has been around for a while — but it does appear rather unique. And most freight pay consultants advise that the process be handled with care.
“A self-invoice process only works well for highly repeatable and predictable shipments that were tendered by the buyer of transportation,” said Rick Langer, managing director of the freight payment consultancy Quetica. “Why waste the time of sending the invoice to the carrier? Just pay them when it is delivered.”
Langer said the self-invoice technique is most effectively applied to predictable outbound shipments.
“This is a direct materials payment technique that a lot of large manufacturers and retailers have attempted over the years with very limited success,” he explained. “The first problem comes in when it is an inbound shipment tendered on the buyer’s contract [generating a bill of lading] from either the supplier’s or carrier’s transportation management system. At best you may get a paper copy of the bill of lading, but you have no idea if it was priced correctly.”
Langer said the second problem is dealing with claims (for example, shipments that are lost, missing, damaged or short). This is typically subtracted from payment of transportation charges.
A third problem is there are many post-tender accessorial charges that cannot be predicted at the time of the shipment. Did those charges actually occur, and was the accurate amount charged?
“How do you trust the carrier to correctly audit an ocean invoice and make corrections without the buyer having to audit the correction again?” Langer said. “This is the stuff that post audit companies love.”
Post-audit companies typically examine a company’s paid freight bills to see if the payment amount is accurate, and take a percentage of any errors they find.
Another consultant, Cecil Bryan, president of the Logistics Alliance Network, said limiting or eliminating accessorials in the negotiation process is critical to a self-invoice process.
“The key to making this work is to have significant volume, moves that are very repetitive and accessorial charges should rarely come into play,” Bryan said. “Rail and truckload are good candidates. Ocean freight can have numerous accessorial charges and they constantly change. But ocean freight rates can be negotiated to limit some of the accessorial charges.
“Some shippers negotiate ‘door-to-door’ rates, which are all inclusive and make it easier to predetermine the correct freight rate. I’ve seen ocean and freight forwarder invoices have up to eight different charges, which all have to be verified,” he said.
Bryan added that a self-invoice process needs to be built upon solid contract and rate management processes.
“Another key is how shippers negotiate their contracts and manage the freight rating process,” he said. “One of the major challenges for a shipper or a freight payment provider is trying to manage all of their carrier rates. Most ERP (enterprise resource planning) systems are not very good when it come to the rating process. In addition, they may not have sufficient data that is required to properly rate the shipment.”
Bryan said it’s difficult to truly to know how many shippers use self-invoicing.
“I would say it’s used primarily for specific types of shipments,” he said. “Outbound shipments to major customers (rail or truckload) where there is significant volumes and inbound raw material purchase from major suppliers are two examples that come to mind from my past experiences.”
Langer said the suitability of self-invoicing to a particular freight payment process really comes down to variability.
“Ocean has a lot more variability than trucking since it usually requires cross-border customs, duties and taxes, along with movement to and from the ports,” he said. “The number of accessorial charges for ocean is typically higher because of the variability. I have seen buyers agree to contracts where there are few or no accessorial charges, but they are built into the line-haul rate by the carrier. The blended line-haul rate and accessorial rate will be priced at the worst case scenario, leading to overall much higher transportation charges even if auditing the charges is much simpler. This is a great deal for the ocean carriers but not so much for the buyer of ocean transportation.”
Hall noted that in addition to the use of standardized contracts, the retailer makes use of all-in rates and variable fuel surcharges for drayage and ocean.
“Variability in contracts makes it hard to implement standards,” he said. “Use of standardized boiler plates enables the self-invoicing process to work.”
Bryan said the complexity of the contract is what determines whether self-invoicing is practical. So in his view, it’s not necessarily that self-invoicing is more or less viable for ocean freight than other modes.
“I wouldn’t necessarily say that ocean has more or less errors than other modes,” he said. “I think it really depends on how you structure your contracts. [Less-than-truckload] freight has numerous freight classes, commodities, and discounts. However, if you negotiate a single [freight all kinds] rate that simplifies the rating process, there will be fewer chances for errors.”
Of course, many shippers don’t have the clout of Dollar General and face many accessorials. Others that do have the volume of Dollar General continue to face changing rates and surcharges because they prefer line-item rates.
With variability typical in an ocean freight contract — not just the contracted rates and accessorials but also the frequent amendments to both — Langer noted that ocean (along with rail) tends to have the highest “exception” rates. Exceptions are invoices that are kicked out by a freight payment process or system because the amount charged does not match with the agreed rate in the contract.
“Ocean and rail tend to have the highest exception rate, because they have the highest variability in the shipping process,” he said. “They typically have to interact with other transportation modes and have their freight mixed with other buyers’ freight. Add the cross-border customs component and you get to see the greater variability quickly. Again, you can have the carrier blend line haul with exception-based charges (or accessorials) and you will have simpler audit of charges but a much higher overall cost of transportation.”
Langer encourages shippers not to mistake more straightforward audits with better bottom-line results.
“Don’t sub-optimize the transportation contracts for ease of payment audits,” he said. “On the surface everything looks better but the reality is the buyer is paying a lot more money for total transportation costs and saving pennies on the audit.”
Bryan, meanwhile, said shippers will likely run into carriers unwilling or unable to rework their invoice process.
“Some carriers simply can’t accommodate self-invoicing because of their billing process,” he said. “They create an invoice and their system generates a receivables amount that is now waiting on payment to be made. They would have to ‘reverse engineer’ their accounts receivable process, which would not be feasible. Shippers need to have a discussion with some of their top carriers to determine if this is something they can do.”
A self-invoice process can, and probably should, be automated, Bryan added.
“The most efficient way to automate this is to use some type of transportation management system or ERP system that can accurately pre-rate the shipments,” he said. “Once you have established the correct rate to pay, determined that no accessorial charges will be assessed, there is really no need to receive an invoice. However, one thing shippers need to do to ensure that they are not paying for ‘phantom shipments’ is to require a proof of delivery.”
As an example, Bryan pointed to the way U.S. Bank, one of the biggest freight payment vendors, takes a shipment file from its customer, rates it and then waits for the carrier to submit its invoice.
“If the rate matches, within a certain tolerance, it is approved for payment,” Bryan said. “If it doesn’t match, they have to go through the dispute process using the U.S. Bank web portal. The carrier also has to submit the proof of delivery date, which is the final ‘trigger’ for them to get paid.”
For Hall, the proof is in the benefits Dollar General has gleaned by taking its ocean freight audit and payment process into its own hands. It is part of a wider philosophy that Hall has regarding the payment of freight bills.
“Managing freight spend needs to be a core competency,” Hall said. “I believe it’s something you should do in-house, something you should develop an expertise in. You can outsource logistics execution. What you should not outsource is the management of the dollars.”
- Self-invoicing freight bills can work for repeatable, predictable shipments.
- Modes with highly variable rates, surcharges, and contract terms can complicate a self-invoice process.
- Lay the groundwork for self-invoicing by streamlining terms in contract negotiations.
- Don’t confuse a simpler audit process with lower overall transportation costs — the benefits of self-invoicing on the audit side can be lost amid higher freight rates.
This article was published in the January 2015 issue of American Shipper.