By R. Bruce Striegler
Inaccuracy rates estimated as high as 30 percent
Soren Skou, CEO of Maersk Line made news last spring with his keynote address at the Journal of Commerce’s13th annual Trans-Pacific Maritime Conference in Long Beach, Ca. He particularly caught the attention of shippers when he told delegates that 12 per cent of invoices issued by ocean carriers contain inaccuracies, and volatility in rates would only make improving on the inaccuracies all the more difficult.
Since the April 2013 conference, shippers both large and small, have examined how they handle back-office operations and, more importantly, how they can recoup payments from inaccurate billing. Whether done in-house or by third-party specialists, auditing ocean freight invoices is a layered process that, done correctly, can help customers do that. There was a time when freight payment and audit services were all about billing accuracy, but they now deliver financial insight through pre-payment auditing, reporting, benchmarking and other analytic tools.
In a follow-up webcast the Journal of Commerce (JOC) put together Steve Ferreira, President of Ocean Audit Inc. and 30-year veteran of supply chain management, and Peter Moore, adjunct professor at the University of Denver’s Daniels College of Business, and the University of South Carolina. Mr. Ferreira observed that in several subsequent articles reporting the Maersk Chief’s remarks, two leading E-commerce providers were quoted saying they thought Maersk was doing a good job at 12 per cent, and speculated that real industry error rates were somewhere closer to between 25 and 30 per cent. “Although I’ve been doing this for over twenty years, there is very little hard data on how E-commerce or pre-audit solutions correct error rates.”
For ocean freight vendors, it can be difficult to keep an eye on invoice accuracy when the focus is on increasing rates and margins and trying to return to profitability, but for thousands of businesses in the ocean freight sector, invoice inaccuracy represents revenue leakage on a grand scale, and Mr. Ferreira notes, “Those in the shipping industry who benefit from these financial miscalculations have not been quick to acknowledge the situation. E-commerce has been touted as the next breakthrough in the ocean freight industry, but I wonder why error rates still exist if these solutions are so perfect and they’ve had years to refine them.”
Improvements needed in complex world of ocean freight invoicing
Ferreira adds that in his view, the steps to improving ocean audits and the resulting improved cash flow need to come from an enhanced campaign that importers, exporters, and 3PL’s can consider best practices. Ferreira points out that ocean freight is the only transportation mode that has a three year statute of limitations for refunds and credit recoveries. “At the moment, ocean audit is an inconsistent and misapplied practice. There’s very little insight of enhancement of ocean audit practices and often, can’t be discussed beyond the E-commerce variety. So the bottom line, in terms of audit quality, is whatever audit solution goes live, there is generally little thought to addressing the biggest cash-cow of all, the three years of invoicing that preceded any real-time attempt at audit.” He continued, saying that if one were to assume 12 per cent of cargo was pilfered or lost overboard, it would be an actionable item, and accordingly, inaccurate invoices should be treated the same way.
In the complex world of ocean freight invoicing, Mr. Ferreira lists the potential sources of invoice error, saying that errors can originate with the supplier accounts payable department, the enterprise resource planning (ERP) system, the individual who is responsible for actually approving the invoice or the logistics team that submits an invoice for payment and finally, the actual ocean freight vendors themselves. Ferreira says that the considerable list of issues contributing to invoice error include circumstances of precision timing against contract effective dates or relying on third parties, noting that only a small percentage of invoices are audited internally by the vendor prior to release.
“Why,” asks Ferreira, “has invoice accuracy not improved with E-commerce platforms, despite claims that is has?” He points out that the answer is simple, explaining that there is no industry standard benchmarking for E-commerce providers that they can turn to and say, “We’ve really cut your error rates down substantially”. Even though leading electronic commerce platforms have noted that the invoice error rate was 25 to 50 per cent in 2010, electronic data interchange (EDI) transactions from vendors often requires cleansing, lack consistency or have issues related to charge codes. Steve Ferreira says, “No matter when you insert some type of corrective action in the pre-audit or audit process, it does nothing to stem negative cash flow that existed for the previous three years, as I noted regarding statute of limitations.” He continued explaining that pre-audit tools don’t necessarily identify duplicate billing when invoice and amounts are different.
Accounts payable systems not all up to the task
“What we often see is that at the end of the day, clients capture six of twelve per cent of errors, and the client’s perception is that the mission has been accomplished. “That’s all there is, we got it all”. He notes that less than 40 per cent of companies audit their ocean freight spending. Among the reasons that audit number may be so low Mr. Ferreira suggests that beneficial cargo owner (BCO) systems may not be robust enough to discern potential duplicates (a different invoice number and different amounts on the invoice may actually cover the same set of containers), there can be feelings of immunity from mistakes due to systems or approaches to those systems as well as a reliance upon others. “Clients don’t really perceive the audits as a service because they think there may be little potential return, thinking it’s so simple there’s nothing there.”
Supply chain specialist Peter Moore interjects that with respect to the need for audits, shippers need to look inside their company, “A lot of our accounts payable systems lack any kind of sophistication and contain little space for variability, but in real terms, there is a degree of complexity with ocean invoicing. Nevertheless, it doesn’t take that much of an error to pay for the training and sophistication on the shipper’s side in order to have the accuracy we need to have.”
Mr. Moore also says that the team negotiating ocean rates is not always the same team tasked with auditing. “It’s difficult to expect personnel without ocean freight skills to successfully audit invoices and payments. It really behooves us to get somebody to help us at a reasonable cost, and this is really where ocean audits have grown, due to the increasing volume, but as Steve has noted, it is still a minority of companies that are doing this. The evidence suggests that it really needs to be taken seriously on the shipper’s side.” He adds that audits have not been demanded by clients since, generally, they are unaware of the extent of the leakage.
Steve Ferreira concluded, saying, “Even after thousands of audits, I’ve seen very few formalized error dispute management processes, they are virtually non-existent. Shippers must have a dispute management process other than email, as payments many of you have made to ocean freight vendors are much larger than you may have thought, and having multiple ocean freight vendors makes striving for accuracy even more challenging.”