December 26, 2022
Let me tell you an all-too-familiar story.
Finance reports a loss to the business unit this month, but you projected a solid profit margin. Nobody knows who’s to blame or why there’s a difference. More importantly, nobody knows what happened to that money.
I hope this hypothetical doesn’t hit home. I hope your freight forwarding operational ledger can be easily balanced with your financial ledgers and that the margin projected by Operations is equal to the margin reported by Finance. If it doesn’t, then you have been hit by ‘the silent profit assassin’.
Some companies blame operational efficiency. Some put the blame on over-zealous salespeople. Some hire huge ’Shared Services teams’ to follow up on every shipment.
But the real silent profit assassin is poor invoicing.
For most freight forwarders, the majority of energy and effort is put into operational efficiencies. But when all is said and done, none of that matters if you don’t get paid.
In 2013, Soren Sku, then CEO of Maersk Line famously told the TPM Conference that they suspected as many as 12% of their invoices had errors. One might argue that Maersk is an outlier. But even a 1-2% error rate could be fatal to margins. With the average profit margin of global freight forwarders hovering around 3%, 1-2% could be a game-changer.
Unfortunately, most carriers and Freight Forwarders have put the responsibility for invoice audit on the shippers’ shoulders. Many shippers then contract 3rd Party Freight Audit companies to review the invoices before they can get paid. But those 3rd Parties are focused on reducing shipper risk, and not on ensuring that the carrier includes all charges.
It is logical to conclude that not all errors benefit the shipper. Surely, there are missed charges or undercharges that a carrier should charge, but because of a faulty invoicing process, they lose out on that potential revenue.
Personally, I have seen a situation where a shipper and a freight forwarder negotiated a different dim factor for ocean transport and surface transport. The Freight Forwarder surely negotiated in this way to cover the costs as they were billed. But when they generated the invoices that included both ocean and surface legs, their system was only able to comprehend one dim factor for all charges. This simple limitation resulted in millions in lost revenue and incorrect profit margins.
These incorrect invoices were sent to a third party auditor for years, and were always approved.
The invoice audit function should not be left up to the shippers and their auditors. The focus will always be to minimize their risk. It won’t be to ensure that the invoice is correct, and that all possible charges are included. The invoice audit function should be done before the invoice is sent, in order to ensure that it is accurate, complete, and meets all shipper requirements.