As freight shipments get scarcer, one mainstay of the shipping industry that may be gaining ground in a weaker economy is the back office business of freight payment.
That's because the push and pull between manufacturers, suppliers, sellers and carriers built around goods and services increasingly is becoming a subtle battle over billing, with receivables, reconciliation and the gears of accounting growing in importance. In world where cash is king and credit is scarce, the basics of freight payment, says CTSI Executive Vice President Clifford F. Lynch, are "definitely more important now."
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One thing shippers have in common is that they all have to pay their freight. Many still do it the old-fashioned way, by filling out forms, matching purchase orders to bills of lading, writing out checks by hand and mailing them.
Growing numbers of shippers, however, are outsourcing the function to increasingly sophisticated technology providers who not only track and pay the bills, but audit them for accuracy, saving time and money that manual processes may miss. With innovative transportation management software and algorithms running on powerful networked computer technology, freight payment and auditing companies can produce custom analyses that enable swifter, more granular and timely decision-making.
Volatile fuel prices, contracting transportation capacity and the uncertain economy have helped place freight payment auditors front and center in many shippers' battles to control costs. Freight payment companies say the weakening economy has shippers digging deeper into freight bills to fine tune their transportation spending.
"We've received more unsolicited bids in the last 60 days than we have in recent memory," said Harold B. Friedman, senior vice president for global corporate development at Data2Logistics. "People are driven more now than ever to control their costs, which brings them to the market place for both pre-audit services and looking for opportunities that will give them information to better control their costs."
Some shippers will see their freight payment and audit fees as another cost to cut, as budgets and credit tighten. Supply chain software providers such as SAP, which announced in October it has seen sudden and unexpected order cancellations due to the credit crisis, learned that projected cost savings won't rescue them when near-term budget considerations loom.
Freight payment auditors say their companies shouldn't be subject to that logic, because their services can offer quick and measurable savings rather than hard-to-measure promises.
"Our business is very good right now because of companies that have an imperative to reduce cost," said Michael A. Regan, CEO of TranzAct Technologies, which returned to the freight payment and auditing business a few years ago. "It has taken the luxury of waiting for your IT department to address your needs and turned it to the outside to get immediate help."
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Freight payment companies have a good perch from which to observe the direction of the cargo economy, and the view right now isn't pretty.
"I don't have a crystal ball, but everything I read about the retail season ? It doesn't look good for the short term," said Allan Miner, president of CT Logistics, now in its 85th year of auditing freight bills.
Sluggish freight volume figures reported earlier in the year by various companies have now spread across the spectrum. The Cass Freight Index of shipments, published by the St. Louis-based freight payment giant Cass Information Systems, has declined at a double-digit rate in each of the last four months, including a 16.6 percent drop in September that appears to be the largest in the history of the index. Freight spending measured by Cass declined 1.5 percent in September, suggesting shippers are making very serious efforts to slow down.
Freight supply, in manufacturing output, appears headed for an accelerating decline, as industrial output fell 6 percent in the third quarter, the most since 1991. Freight demand in retail sales is expected to disappoint, as sales dropped 1.2 percent in September, the worst showing in three years, and the National Retail Federation projected the slowest growth in holiday sales (1.9 percent) since the organization began its surveys in 2002.
"It's fairly significant," Friedman said. "We're not seeing any (peak) surge this year." Lynch said shipments tracked by CTSI were off about 10 percent over the past six months, and the decline sharpened late in the summer.
Most freight payment companies make money on a per-transaction basis, so each shipment not made is a fee not paid. Yet Friedman said, "Business has been pretty good for a down economy."
That's because more shippers are outsourcing freight payment and auditing, and more shippers who have already outsourced are asking for value-added services to eke out the most savings. In the past, Friedman said, shippers asked freight payment providers for data they analyzed themselves; now, they're relying on the provider's expertise to analyze the data for them.
Dashboard monitors of carrier performance and carrier report cards, to measure costs and on-time deliveries, are becoming more popular services, Lynch said, as shippers try to better manage their carriers.
Shippers are also demanding allocation reports that identify costs by product line or transportation lane, Lynch said. Optimizing shipments by carrier or route is also a popular strategy using the fine-grain data freight payment companies can collect.
Freight payment providers can also offer peer-group analysis to compare one client's transportation spending with similar shippers. "Some companies are not as aggressive as others," Friedman said, "but nowadays almost all of them are getting more aggressive because of the price pressures."
Freight payment companies can also serve as watchdogs of supply chain partner behavior that may be exacerbated by the financial crisis.
Too many international freight forwarders "are definitely padding their bills," Miner said. Charges of fraudulent practices involving Swiss forwarder Panalpina and Houston-based air forwarder EGL (since purchased by CEVA Logistics) are being investigated by the U.S. and other governments.
Payment and audit providers are pioneering the documentation and standardization of international payment processes that too long were left to the unsupervised mercies of suspect foreign agents and agencies, Miner said. As a result, shippers are more frequently listing precisely which services and accessorials they will pay - and which they will not.
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Carrier management plays a big role in freight payment services and that discipline is growing in importance as financial pressure on service providers grows.
Some 2,000 trucking companies went out of business in the United States in the first half of 2008; trailer registrations in the second quarter were down one-third compared with the same quarter in 2007, leaving capacity tighter than it has been in several years, although experts say capacity still is running ahead of demand.
"It's really been unfortunate because a lot of these carriers have been highly leveraged," Miner said. The credit crisis that burst from Wall Street onto Main Street starting in September took down some carriers who suddenly couldn't get working capital for their otherwise healthy businesses.
As capacity shrinks, more carriers are imposing terms and conditions on schedules and routes that leave shippers scrambling to find reliable transportation, where before they could post loads with a phone call.
"People are just dying to be able to make modal shifts, because if they can do that they can save much more from making modal shifts ? than they can by negotiating with their carriers," Friedman said.
Managing capacity for shippers has become more complex lately as the cycle of expanding and contracting capacity has shortened from five or six years to three or four years, according to Christopher Timmer, vice president of sales and marketing at LeanLogistics.
This wasn't such a problem three or four years ago when transport costs were still a line item beneath a line item in someone's operating budget. But as fuel prices spiked and overseas inflation and wages ratcheted up in some of the world's most popular offshore manufacturing locations, capacity became critical "as the cost of transportation is so much more of the product cost," Timmer said.
The freight payment and audit company helps with carrier management and capacity in a highly fragmented market, one in which the largest for-hire fleet in the world accounts for only about 1 percent of the market, said Timmer.
Combining transportation management systems with their payment and auditing technology allows freight payment and audit providers to align thousands of carriers with millions of shippers spending billions of transportation dollars. For a long time, shippers were mistrustful of sending out their billing information or relying on third-parties to communicate and store that information electronically.
"The quality of the technology today is significantly better," Regan said.
Shippers have also realized that by using a third-party, they can avoid the technical difficulties imposed by trying to match their own electronic data interchange and other online systems with each and every carrier, instead leaving the translation to knowledgeable outsourced providers.
This has raised the technology bar, as systems integrators stitch together the network that increasingly allows a free but secure flow of information.
"The fun of this is that our customers are giving us the opportunity to be a valuable support function, and inviting us to step up to the plate," Regan said. "They wanted to do it before but their capabilities weren't caught up to their desires."
Information is the currency in which freight payment and audit providers traffic.
As in any industry, individual companies will survive based on their technological prowess, analytical proficiency, market connections and sometimes even luck. But their currency will retain its value.
"People are looking for every opportunity to better negotiate with their carriers, to know where they are," Friedman said. "We see large shippers not achieving the same level of rates as small shippers.
"And you have to ask how that happens," he said. "If someone is a better negotiator, has better information ? most carriers are willing to negotiate with you."