As the $12 Billion global supply chain industry continues to grow at an impressive rate of 12% per year, it’s surprising that standardization is still sorely lacking in many areas. For instance, despite being a truly international industry, there is very little uniformity when it comes to freight invoicing naming conventions. This variability is primarily due to the fragmentation that exists within the industry, highlighting the critical need for a common naming convention in supply chain audit.
With up to 27 different line items of charges for each shipment and 11 different charges on average, it’s clear that the freight invoice process is incredibly complex. These charges can be broadly classified into three main categories: 1) Origin charges, 2) Freight charges, and 3) Destination charges, with some being fixed while others are conditional or tiered based on the weight of the cargo in the container. The lack of standardization in supply chain audit leads to confusion between all parties involved, causing many issues.
Before we talk about how to solve this problem, we will explore the top 6 reasons why there is a need for standardization in supply chain audit.
1. Time-consuming manual freight audit
The lack of a standard freight invoicing naming convention has resulted in companies performing manual audits of each line item on every single freight invoice they receive. This is a daunting task, especially when a single invoice may contain up to 27 different line items, and there may be multiple contracts to cross-reference against.
Consider this scenario. For a company that receives three invoices per shipment and 500 shipments a month, that amounts to astonishing 16,500-line items that require manual review on average. Some line items require complex calculations, while others must be cross verified against additional freight documents, making it an uphill task.
This time-consuming process can drain resources, decreasing productivity and increasing costs. This level of complexity and manual effort is simply unacceptable in today’s digital age.
2. Costly errors leading to overpayment of invoices
The sheer volume of invoices that need to be processed daily means that manual auditors often miss a significant number of discrepancies. This is particularly true for charges with conventional-sounding names such as “Inspection Charge,” “Cleaning Charge,” or “Transportation Charge,” which vendors often include on their invoices. These charges may seem insignificant, with values ranging from $40 to $70, but they can add up quickly. It’s easy to think that an extra $40 in an invoice of $1,200 won’t make much difference, but these overlooked charges can cost clients thousands of dollars over time.
As per studies, up to 6% of all freight invoices contain errors, with an average value of $180. With trillions of dollars in freight moving around the globe each year, even a small percentage of errors can result in significant financial losses.
3. Poor payment cycle to vendors
The inefficiencies caused by manual freight invoice auditing have far-reaching effects, including poor payment cycles for vendors. On average, an invoice takes 30 to 60 days to be processed and paid back to the vendor after it’s submitted. This delay can significantly impact the vendor’s cash flow, leading to a cash crunch and ultimately hurting their business. By addressing this issue, we can improve the supply chain’s efficiency and support the vendor partners’ growth.
4. Supply chain audit becomes unfriendly
The intricacies involved in calculating shipping rates can make freight invoices incredibly complex, leading to discrepancies between quoted and billed amounts. Adding to this challenge is that different carriers may have varying invoicing processes, making it difficult for auditors to ensure accurate billing—this lack of standardization results in lost invoices, delayed payments, and other financial discrepancies.
These inconsistencies lead to vague charges, making it difficult for companies to determine if they’ve paid the correct amount for a given invoice. This lack of clarity can result in significant overpayments, a practice that can severely impact a company’s profit margins.
5. Different systems used by various stakeholders
Freight forwarders commonly utilize a range of software to generate invoices. This can lead to variations in how charges are presented, both from vendor to vendor and even from the same vendor. This inconsistency exacerbates the other issues outlined above, causing a significant headache for both clients and vendors. The resulting slowdown in the invoicing process can severely impact cash flow and business operations.
6. Limited access to Data
Freight invoices contain a wealth of data that can provide valuable insights into shipping patterns and trends. However, accessing this data can be challenging without a standard supply chain audit mechanism. Each carrier may have a different invoice format, making extracting and analyzing data extremely difficult.
So, what is the solution?
It’s imperative to bring a standard supply chain audit in place. It is necessary to have the following:
i) A consistent naming convention that both vendors and clients must follow for all major categories of charges. This naming convention should be included in both the contracts and invoices, making the invoice reconciliation process seamless and auditing more straightforward.
ii) Additionally, the introduction of easy-to-use, supply chain audit software systems (like GoComet) can automatically reconcile invoices by storing contractual and invoice data. These systems can check when conditional charges are applied and handle tiered pricing in contracts. Implementing these solutions will make the audit process more efficient and ensure that companies are not overpaying on their freight invoices, ultimately improving their profit margins.
To sum it up
A revolutionary system of conventions that can bring order and efficiency to the chaotic world of freight invoices is much needed. It must handle the vast and complex web of charges that come with every shipment while also being easy to understand and implement for all players in the industry, regardless of their location.
The new naming convention must be:
- Backward compatible: It should be able to work seamlessly with existing processes so that the transition to the new system is as smooth as possible.
- Exhaustive: The naming convention must be detailed, leaving no room for error or missed cases that could lead to further complications.
- Comprehensive: A genuinely complete system is needed in this international industry, where vendors from all corners of the world come together to ship goods.
About the Author
Gautam Prem Jain, CEO & Co-Founder, GoComet
Gautam is passionate about building innovative products for the logistics industry. With a wealth of experience, his proven strategies have helped numerous companies achieve supply chain excellence. Whether through cutting-edge technology or innovative approaches, he continues to challenge the status quo and deliver measurable results.
Gautam regularly writes about the importance of digital transformation as the key to unlocking the full potential of supply chains and maximizing ROI for businesses. He is dedicated to building agile and resilient supply chains that can withstand any challenge.