The movement of goods through a supply chain is a costly and paperwork-intensive necessity for both international and domestic operations. As businesses grow, they are continually challenged by the procurement, payment and daily management of freight services. Any interruption in the supply chain, whether due to physical movement challenges, compliance restrictions or financial issues, has a direct impact on the bottom line. Multiple providers located across many countries and differing tariff structures complicate the critical process of arranging for goods shipment. In addition to inaccurate service rates and duplicate invoices, goods may not arrive at the right place at the right time thereby crippling operations from both a logistics and financial perspective.

Despite its challenges, the points at which freight services are managed provide unique opportunities for a business to take stock of reality--the reality of global freight transportation operations and its extensive working capital requirements. It is at this point that the health of an organization's transportation operations can be measured by utilizing a database of information that allows for formal root cause analysis of supply chain hiccups and a true understanding of costs at a transaction level and not just at a macro theoretical level. This accurate information would aid in making more informed and sound decisions for future contracts and procurements negotiations with transportation providers.

It is well known that Asia lags behind the rest of the world in adopting freight payment and audit services. In North America most large and many midsized companies utilize some form of freight payment and audit services available in the market. In Europe the percentage is not as high but it is quickly catching up with their peers in North America. Asia 's slower acceptance rate is largely due to the relatively lower cost of labor as well as less sophisticated business processes. The tide is turning. Many Asian companies are beginning to understand the potential efficiency and cost savings that can be realized through these services. In fact, a recent study showed that close to 40%1 of major Asia-based companies are planning to utilize some form of freight payment and audit service in the next two years.

A variety of big and small freight audit and payment service providers in Asia are now entering this space. Typically, providers only audit for duplicate invoices and perform cost analysis allocation to departments or business units. Facilitating on-time payment of freight and transportation vendors allows businesses/shippers the opportunity to leverage program incentives with vendors such as early payment discounts. Some providers may go a step further and actually link the invoices to a business's product lines thereby supporting activity-based costing which helps understand the true "landed cost" of a product. In addition, a provider that utilizes a centralized database to house freight information and tariff schedules makes it easier for a business to conduct supply chain analysis and uncover inefficiencies while enabling the tracking of Sarbanes-Oxley compliance.

Freight Payment Best Practices: The key to controlling costs, managing foreign exchange risks and gaining better access to supply chain financing is to ensure greater visibility and control while facilitating payments.

By utilizing best practices in freight audit and payment, a company will have increased visibility into global transportation data thereby enabling greater accountability and controls of overall spend.

Normalization: The best-in-class processes include data purification and normalization techniques that make it easy to compare suppliers, model proposed changes to supply chain operations and generate accurate reports. The normalization of information converts data presented by multiple parties into a consistent set of data values that have been verified to make sense for a particular business. Normalization may be across a broad range of areas such as:

Geographic identifiers: Something as simple as a place identifier can be spelled differently or represented differently and is normalized to a single common representation. For example, Rome can be spelled Roma, Rom, Rome and so on but in a report it is easier to query for one item i.e.,"Rome". In addition, postal code information, which may be missing or inconsistent with the physical addresses, needs to be validated and corrected or derived if missing.

Charge codes: There are many valid ways to express the same charges. For example, in EDI specifications "ENS," "FUE" and "405" are all valid codes for a fuel surcharge accessorial. By normalizing to one phrase or data input it is possible to measure transactions against contracted multiple rate sheets or perform simulations that compare cost from one supplier to the next.

Units of measure: In order to make comparative analysis or generate consistent reports, quantities must be normalized into a single unit of measure for each measurement type. For example, Weight could be expressed by different carriers in kilos, metric tons, tons or kilogram but can be normalized into pounds.

Monetary values: Monetary values differ by charge or invoice depending on the contracts, countries and practices of the parties concerned. In order to create accurate reports, monetary value must be normalized into a single currency. Currency values may be normalized into a reporting currency, a payment currency as well as a presentation currency. This allows the value used for the accounting processes to be different from the value from the reporting processes. This facilitates, for example, booking a charge in Euro because it will be paid in Euro but allows normalization to GBP for worldwide reporting.

Document keys: Invoice numbers, freight bill numbers, BOL (Bill of Lading) numbers and tracking numbers can all be expressed in different manners. Leading zeroes, CRC check digits, domain scoping prefixes, and semantic suffixes (e.g. "C" = correction, "B" = Balance Due, etc.) can cause different systems to not recognize the same values or fail to tie related documents together. Normalizing these values across all documents allows the key portions of the identifiers to be used to represent the identity.

Modes, service levels, service scopes: These can be represented differently by different suppliers making it impossible to compare "service for service" or "mode for mode". The normalization of these concepts allows a single representation across all transactions and carriers. This also allows the same transaction to be rated against multiple carrier rates in simulations to model proposed changes to the supply chain or logistics service providers.

Audit Data Quality: Best-in-class freight payment and audit companies offer audits of tax and duty charges along with warehouse and logistics services fees. As an example, tax charges are not simply a matter of multiplying the invoice charges by a given percentage. Closer analysis may reveal that overcharging may come in the form of charges being levied where taxes are in fact not applicable due to the nature of the service or the tax-exempt status of one of the parties.

Transportation may be one of the few services where customers are routinely charged for "what they ask for" and not by "what they receive". Service level audits are therefore an important consideration. The better freight payment and audit companies bundle shipment tracking and tracing products with the freight payment and audit process. This allows them to verify that the service that was requested was actually delivered according to specifications. A side benefit of this process is that customers get track-and-trace functionality and visibility into their supply chain status.

Managing and reconciling carrier accounts receivables with a business' accounts payables while reducing disputes compels a number of freight payment and audit firms to have a large number of staff to handle paper-intensive processes. Fees for processing paper are typically higher than the cost of processing electronic transaction costs which are inevitably passed to customers. By heavily investing in establishing data pipes with all the major logistics services providers, best-in-class freight payment and audit companies mange to do these processes electronically reducing staff and costs, while deriving tangible benefits to customers.

Collaboration Breeds Successful Partner Relationships: Utilizing a freight payment and audit company helps develop and sustain collaborative relationships between logistics/freight carriers and their customers. For example, logistics service providers may not understand how to invoice large multinational customers who are frequently late and sometimes delinquent in paying for services. This is not because the business cannot pay but most likely due to internal financial procedures that prohibit invoice payment unless the invoice can be allocated to the correct business unit, line-item activity or specific job number. Proactive freight payment and audit companies have departments that help these logistics service providers take stock of the reasons why invoices are not being paid on time and proactively redesign improved invoicing processes.

Future of Freight Payment and Audit: The transportation industry is moving toward bundled financial services allowing a business and its carriers to have different payment terms. Today there is much duplication of billing, verification and audit services between logistics services providers and their customers. These result in inefficiencies and are the likely cause of disputes between parties. A comprehensive suite of freight settlement services allows both the logistics services provider and the customer to turn this process over to an independent third party without compromising visibility.

Greater supply chain visibility provides for greater transparency to third-party financial institutions that have access to the information. With greater knowledge, financial institution partners may have greater confidence in managing risks and are more likely to provide better access to financing services across the various points of the supply chain. It is possible, for example, for a carrier to be paid even before the shipper has effected the payment with credit facilities extended by freight payment and audit companies. This is accomplished by a settlement agreement between both parties with the freight payment and audit company acting as a third party who actually performs the invoicing based on the contracted terms between the parties. This process works like a credit card transaction with the carrier taking a modest discount on the invoice in exchange for immediate payment. The freight payment and audit company determines the veracity of the transaction and protects the customer by systematically processing the carrier's invoices and escalating any discrepancies.

Freight payment and audit companies working with financial institution partners also provide services mitigating the risks of foreign exchange movement or non-payment. Financial institutions may offer Foreign Exchange Contracts to fix the exchange rate at which export proceeds will be sold to the financial institution at a fixed date in the future. Financial institutions are also likely to have better access to financial standing of overseas buyers through their contacts with financial institutions in the country of export. This allows for a better analysis of the risk of non-payment and mitigation against such risks.

The demand for better freight audit and payment services grows as businesses grow--centralized procurement and the movement from paper to electronic payments is the first step in establishing a streamlined freight management process. As business expectations rise, freight payment and audit companies will respond and deliver: access to useful data that provides insight into freight operations and costs that enable better business decisions in the future.

About the Authors: Asif Raza is Managing Director of JPMorgan's Global Trade Services group for the Asia Pacific region. Asif is responsible for managing the combined Trade Finance and Logistics business for the region including sales, product management, insurance and distribution activities. He has a team of more than 200 professionals in 16 countries that provide integrated Trade solutions to financial institutions and corporate clients in Asia Pacific. Previously, Asif was the JPMorgan head of Trade Sales for Europe, the Middle East and Africa, as well as for the firm's global network Trade business. He can be reached at asif.raza@jpmchase.com.

Nicole Wong is the Executive Director for Asia Pacific Logistics Services team within the Global Trade Services group at JPMorgan. In this capacity, Nicole is responsible for spearheading the logistics business development strategy, managing the region's supply chain and trade consulting practices, and supporting service operations, as well as developing product offerings for the region. She can be reached at nicole.pj.wong@jpmchase.com.
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