Freight invoicing errors are bleeding shippers, NVOs and even carriers, one small cost at a time.
There are plenty of variables to quantify the impact of ocean freight invoice inaccuracies, but here’s a simple one: the Atlanta-based food shipper Interra International devotes two full-time employees to auditing its freight invoices.
“Because logistics is so complex, the [chief financial officer] hands it completely off to us,” Jason Lloyd, director of freight trade at Interra, said on a panel at the Journal of Commerce’s TPM 2017 conference in Long Beach in late February.
Interra moves 15,000 to 20,000 TEUs annually, and Lloyd estimates 20 percent of the company’s ocean invoices go to dispute resolution. The two invoice auditors are required to determine if an invoice needs to be disputed within 48 hours of receipt. And that’s where things can really get gummed up, since carrier responsiveness on disputed invoices can vary wildly.
“We have some disputes lasting over a year,” Lloyd said, adding that the issue is compounded by high turnover at some carriers’ centralized invoice resolution departments.
“With one of the carriers, we’re on the third rep in the last year,” he said. “We as the customer are the ones who have to pay the price and we feel the brunt of it.”
Freight invoice inaccuracy and resolution is a systemic issue in the liner shipping industry with myriad causes. Some blame carrier systems for not reconciling contract amendments and billing. When a rate is amended or a surcharge added, those issues often aren’t reflected in the invoice. Others blame carriers for not prioritizing the customer service component of invoice resolution. As Lloyd indicated, many carriers don’t have dedicated dispute resolution teams, and instead lump invoicing issues in with other customer service issues to be resolved by centralized multi-purpose departments.
Whatever the cause, invoice auditing and dispute resolution is incredibly costly for all parties to manage. And it’s a cost burden that falls disproportionately on shippers.
Steve Ferreira, founder of the firm Ocean Audit, noted during the panel that every major carrier was invited to participate in the session to give the carrier side of things, and all declined.
“That’s very telling,” he said.
According to Ferreira, incorrect billing has cost the shipping industry billions of dollars over the past few years. He compared the issue to penny stocks.
“All those pennies add up over time,” he said. “The inefficiencies of invoicing systems have caused BCOs (beneficial cargo owners) to take incredible below-the-line losses. We have customers who found complaints they just abandoned because they didn’t have the resources to tackle it. It’s a silent issue.”
That’s a dilemma Lloyd has experienced first hand.
“Is a $260 discrepancy worth the time and resources to resolve?” he asked.
Slippery Slope. Many shippers use a percentage or dollar threshold under which they won’t dispute inaccurate bills. Others, like Lloyd, have to weigh the cost-benefit of dedicating time and resources to what might be seen as an insignificant amount of money.
And therein lies the bigger issue with freight invoicing: billing accuracy is never 100 percent in any mode, yet many companies struggle with auditing because they don’t have an efficient means by which to automate the audit and dispute management processes.
American Shipper tracks this discipline annually through its Freight Payment Benchmark Study, and there is always a sizable number of shippers, both domestic and international, that still audit and pay their bills manually.
But there’s another cost dimension to managing inaccuracies beyond the audit and payment steps.
“An NVO doesn’t have a lot of time to vet the invoice,” John Wierzbicki, vice president of sea freight for Hellman Worldwide Logistics, said on the panel. “Billing accuracy is a cost driver. Our resources are people. Every time they touch a file, there’s a cost to that. And that’s just reviewing it a second time. No one quantifies how much time is spent resolving that. It’s usually six to 10 phone calls in our experience to resolve that. It’s often the lag between what was negotiated and what was entered into the system. That drives a lot of time spent that’s not quantified.
“It’s nothing to do with the complexity of business,” he added. “It’s incorrect invoices. Each phone call can take 10 to 15 minutes. That’s a tremendous loss of resources and that drives cost that is eventually passed on to customers.”
Wierzbicki echoed Ferreira’s point that ignoring small variances is ultimately a costly approach.
“Setting tolerances is a dangerous and slippery slope,” he said. “That’s death by a thousand cuts. You say, maybe I’ll allow a variance of $30. Multiply that times the number of boxes you move, and that becomes real money.”
He also noted that payers cannot simply pay what they feel they owe and resolve the situation on their own.
“You have to pay on a correct invoice,” he said. “You can’t just short pay. You need an exact invoice for [the U.S. financial regulation] Sarbanes-Oxley. Resources are hard for everybody. There’s a disconnect because few people have an accurate measure of what it costs to manage this issue.”
Complex Contracts. Ocean freight invoicing is often seen as even more complex than other modes due to the number of surcharges and amendments that occur on a typical rate.
“You can’t apportion blame to carriers or BCOs,” said Anil Vitarana, president of Cranford Consulting Inc. and former president of United Arab Agencies Inc. “It’s the complexity of the contract, and not having enough time to view whether it’s right. There are [on average] 10 amendments for every one filed contract. These amendments are what lead to incorrect billing.”
Vitarana urged shippers to make accurate invoicing a priority in contract negotiations. “Don’t sit back and accept the situation,” he said. “Show your displeasure in the contracting process. Put a penalty on billing errors.”
He acknowledged that the success of such discussions “depends on how strong you are. If you’re a smaller shipper, you might not have the clout to enforce it.” But he also suggested that shippers might insist on a time limit for billing (30 to 60 days after the shipment, for example) as other panelists noted that it’s common to receive invoices up to a year late when a carrier realizes it has failed to send a bill.
“Don’t just accept the situation carriers indicate with you,” Vitarana said. “They are spending billions of dollars on ships you didn’t ask for. They can spend money to improve their invoicing situation.”
Ferreira agreed it’s wise for shippers to use the lever of the ocean freight contract to improve their invoice accuracy and dispute process. He also said that many shippers, like Lloyd, find freight payment in their laps precisely because their accounts payable (AP) departments don’t have an innate understanding of those same ocean contracts.
Jack Conaghan, director of international logistics and small parcel for Guitar Center, said his company was able to get a better handle on incorrect ocean invoices by extending payment terms with its carriers.
“Payment terms was 15 days when I first got to Guitar Center,” he said. “We didn’t have a layered process. No one from the logistics process was looking at it. It was going to AP and they were paying it. They didn’t realize there were duplicate [invoices], and they had no idea about what the rate was. Our ERP system doesn’t drill down to the invoice level to check for duplicates. Our team now is mostly looking for duplicates.”
Conaghan said extending terms to 30 days “allows us to properly audit the invoice and take our time and make sure we have it accurately invoiced. We also standardized our invoice format and allowed our auditing team to look at invoices from all the carriers in the same format. It’s just repetition—our people start to memorize the rates after a while.”
Guitar Center’s rate of invoice discrepancy is around 3 to 4 percent, lower than Lloyd’s at Interra and what Ferreira described as the industry average of around 20 percent. Conaghan attributed the lower rate to a simplification of the company’s ocean network.
“I’ve worked for other companies where we had 100 different port pairs and it gets really complex,” he said.
Simple Solution. Wierzbicki noted the inefficiency of the invoice process has a negative impact on more than just shippers and NVOs.
“Most lines don’t have dedicated dispute resolution desks,” he said. “It goes to the customer service desk and if it escalates, it goes back to the sales rep, who’s then not spending time on sales.”
For him, it comes down to a relatively simple equation.
“I’d argue that the money we spend on this would easily pay to fix the issue. If a carrier is not collecting their money on time because of disputes, how long does that drag on? That’s money not being paid. The line needs that money. More often than not, the interest they’re paying to finance that cost would pay for a way to fix that.”
And if a carrier doesn’t seem interested in fixing its invoicing problems, Wierzbicki has a simple solution.
“Money talks,” he said. “Volumes and revenues are important. If they can’t fix the problems, you need to start pulling volumes, and say, ‘I’ll return the volumes to you when your processes improve.’ We all have margins and [profit and loss] pressures. We can’t be giving money away. Even just $20 times the volume in the industry is a lot of money.”