Moore on Pricing: Freight settlement and your TMS
Despite decades of improvement in our transportation management systems (TMS), we still have not yet fully realized the value of these systems unless we’ve grasped the concept of settlement” and not just “freight payment.”
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Despite decades of improvement in our transportation management systems (TMS), we still have not yet fully realized the value of these systems unless we’ve grasped the concept of “settlement” and not just “freight payment.”
By “settlement” I’m referring to the exchange of delivery information, tracking data and claims data in addition to the payment of money for transport services. The TMS is a unique technological development in that it uses more information than our enterprise systems—and can potentially capture dozens of items of reusable data during the transportation transaction while optimizing at the order level.
Shippers need this order fulfillment information in order to clearly understand the cost and service trade-offs made in various pricing levels with carriers.
Unfortunately, many companies still report a functional separation between freight buying and freight payment. The transportation function executes the order and gives direction to the carrier. The finance organization processes payment based upon reconciliation or “match-pay” comparing invoice prices verses freight accruals utilizing a few fields of data.
The rich transactional information so valuable for future modeling and negotiations is discarded by the finance system in the name of data storage efficiency. The transportation folks know what they planned for the carrier to do, but they don’t know if the plan was followed or some modification was made enroute that would be great information for future planning.
The result: Your current carrier has more historic transactional information about how you serve your customers than you do.
We know this lack of integration is still a very prevalent process because the pre-audit and post-audit freight processing businesses are still thriving, catching errors in the 1% to 5% range depending on mode. These services are focused upon finding and collecting funds due from carriers because of overcharge errors—and they have no inherent need for storing service data that could help shippers analyze their network.
Indeed, the post-audit business owners will tell you that there’s no incentive to correct carrier mistakes, as they’re often repeated, thus providing easy collection for auditors. With this in mind, it’s now critical that shippers design a freight settlement process that captures cost and service data while ensuring compliance with agreed upon transaction rules the first time.
A number of my graduate students in the masters in logistics and supply chain management program at Georgia College and State University have chosen to focus their research on the “uberization” of freight. When it comes to settlement, these new app-driven services are modeled on the airline and rail passenger transaction models.
These modes publish rates with variations for direction, distance, time of day and load density. Risk is managed by rules for what will be carried and limits on service. The buyer selects the desired service and cost and pays that amount without a pre- or post-audit.
New cloud-based transportation systems are “dis-intermediating” the auditing function and enabling the shipper to directly capture transactional costs and performance statistics from the carrier’s records.
The one bit of advice I give to my students is to “not just pay the freight bill, but rather settle the transaction.” This means get all the data associated with the transportation as a pre-condition for payment—service and information in exchange for cash.
Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]