• calculated the charge for a shipment
• created an invoice
• sent the invoice to the customer (the party responsible for payment)

The customer was then responsible for determining if the:

• charges were correct
• shipping charges were their organization’s responsibility
• invoice had already been paid
• invoice was for a shipment which actually occurred

In this historical freight payment model, the customer or their agent commonly spent considerable effort reconciling transportation invoices. Upon discovery of a discrepancy, the auditor would document the problem and forward a cutback or claim to the carrier.

In many cases, an outside organization such as a post auditor would be paid a percentage of the money recovered for performing the audit. From the customer’s point of view, they were incurring additional cost to recover money they never should have paid the carrier in the first place.

The Advent of Rate & Pay

The Federal Express Powership system is an excellent example of a carrier-provided system that calculates the freight charge at the time of shipment and generates an invoice at the end of each day.

Federal Express was originally motivated to provide these systems because they wanted to provide a strong incentive for a customer to use them exclusively. The Powership system decreased Federal Express data entry costs and improved cash flow.

Federal Express also found that customers were less likely to question billing they perceived as coming from themselves even though the Powership invoice was more likely to be wrong (a wrong invoice is due to the fact that rate updates must be performed simultaneously at multiple customer sites rather than once in the carrier’s billing system, and often this does not occur).

Third-party systems such as the Pitney Bowes Valcom system began to appear. These systems originally worked with small package and express carriers only. Customers started using these systems to replace multiple systems provided by their carriers. Since these carriers already had systems that allowed a customer to "self invoice," third-party vendors were able to tie into the existing carriers’ systems and create multiple invoices for multiple carriers, forwarding the invoicing information to the carrier’s proprietary systems.

About the same time, several large automotive companies developed systems that could Rate & Pay the vehicle shipping charges for the rail and truck delivery systems used to deliver vehicles to dealers.

The success, simplicity, and cost savings of these systems has led many to suggest that all transportation shipments could be paid by Rate & Pay systems, delivering the same benefits to the customer.

The Rate & Pay Freight Payment Model

• calculates the transportation charge
• informs the carrier what they will pay for the shipment through an electronic bill of lading (BOL)

The carrier is responsible for making sure:

• they receive a rated BOL for every shipment they handle
• the charge for the shipment is correct
• that supplemental invoices are created for any post shipment accessorials
• that original invoices are created for shipments where a rated BOL was not received

Balance due invoices are sent to the customer whenever a carrier believes it has not been paid the amount that is due.

In the Rate & Pay freight payment model, some customers tie payment to the receipt of a proof of delivery (POD). When this is done, it is usually used as a means of coercing the carrier into providing timely PODs instead of an audit verification that the goods were received within the promised time frame.

The Requirements for Rate & Pay to Work

• About 40% of all freight in the United States moves inbound collect.
• Companies often do not have the accurate weight, commodity class, and accessorial information in existing systems, necessitating new systems or major upgrades.
• The focus of the personnel responsible for maintaining the companies’ shipping systems has not been on the accuracy of shipping information from a rating perspective, but rather on getting the shipment off the dock.

• Reconciling the amount the customer paid or is planning to pay with the amount the carrier believes it is owed.
• Determining the shipments for which the carrier must still generate invoices (i.e. inbound collect, customer system failures, third-party shipments, etc.).
• Providing the customer with post-shipment accessorial billings.

Where Rate & Pay Works Well

• Most of the shipments move outbound prepaid.
• There are few accessorials that cannot be determined prior to shipment.
• The carriers have already invested significant amounts of money on internal systems that identify the shipments where invoices must still be created (because of their proprietary shipping systems).
• Carriers already have an internal audit and reconciliation process in place because they need to verify the output of their own proprietary Rate & Pay systems.

Rate & Pay can also work well on common carrier freight shipments when:

• Almost all of the shipments with a carrier are outbound prepaid.
• Shipments are standardized -- the same goods going from the same origin to the same destination (i.e. cars being delivered to dealers).
• Contracts have been negotiated that do not permit post-shipment accessorials.
• The carrier is motivated to provide Rate & Pay services for the customer.

The Rate & Pay Myth

Though a portion of a company’s shipping transactions may be good candidates for Rate & Pay, there are technical, cultural, motivational, and operational difficulties that prevent some and usually most shipments from being good candidates for the Rate & Pay process.

Almost all companies receive a combination of inbound, outbound, and third-party freight invoices from their major carriers. Though the outbound shipments might be good candidates for Rate & Pay, the third-party and inbound collect shipments offer many challenges.

Third-party shipments are shipped from a non-company location to a non-company location. It is extremely difficult to obtain consistent shipment information from either the shipper or the recipient. The only cost-effective source of shipment information for third-party shipments is the carrier. This means a company must have a process to deal with these invoices.

Shipment information from inbound collect shipments could be entered into a receiving system upon receipt and used to feed a Rate & Pay system. The question is whether the cost and effort to change the cultural norm and implement this new system would be worth the benefits perceived to avoid invoicing. Unless the information became available for other business reasons, this is not likely to be a cost-effective replacement for receiving invoices.

When a company tries to implement Rate & Pay with a carrier who does not have an existing structure to allow customers to generate their own payments, they are asking the carrier to operate outside its normal business process. The burden of audit (to compare paid amounts with expected receivable amounts by shipment) is shifted to the carrier. Unless the carrier is small and handles all billing tasks manually, this usually requires the carrier to operate the customer’s business outside of the normal processes and systems used for rating, billing, and posting receivables. Asking a company to work outside of their expertise and in ways that their systems cannot easily support usually increases problems and costs instead of eliminating them.

Almost all medium-sized companies have a small number of carriers who handle the majority of their shipments and a large number of carriers who handle the rest. The larger and more diverse the organization, the more this is true. This means that there is always a percentage of shipments where setting up and testing the Rate & Pay process would not be cost effective. The only logical solution for these carriers is to receive the billing from the carrier.

Though Rate & Pay can provide some advantages on some shipments, it is by no means the replacement for invoicing and audit that some suggest. Any medium- to large-sized company that implements a Rate & Pay system will also have to continue to operate an invoice and audit system for shipments that are impossible to handle with Rate & Pay.

The Best of All Worlds

If the carrier has significant experience with customers who "self invoice," and the customer’s systems are in place to provide the shipment information needed to perform Rate & Pay, then these shipments may be good candidates for the Rate & Pay process.

The goal should be to obtain the best of all worlds. The ideal solution is to have a system which rates shipment information when it is available and then either executes a payment or uses the rated shipment information to enhance the audit of invoices. In this scenario, the advantages of Rate & Pay can be achieved on shipments that are appropriate and invoices can be processed when Rate & Pay is not appropriate. A single system handling Rate & Pay, Rated BOL Match, and Invoice Audit provides the best of all worlds.

Rate & Pay requires more accurate and sophisticated systems on both the carrier and customer sites than classic invoice systems. On close inspection, one usually finds that the benefits which have been attributed to Rate & Pay systems have actually occurred because of the improvements in each organizations’ systems. The advantages of Rate & Pay are largely created by the reengineering of the information flow between the carrier and the customer, not the change in the party creating the invoice. It is ludicrous to think that customers can do a better job of calculating the cost of shipments given the same information than carriers. It is therefore important to realize that the mutual reengineering and information system improvement process should be the real focus of attention.

All of the advantages of Rate & Pay can be realized without Rate & Pay, but not all of the advantages of invoices can be realized with Rate & Pay alone.

Conclusion

Companies considering implementing Rate & Pay should first try to rate their shipment information and then match this information to invoices received from the carrier. Discrepancies should be analyzed and the costs/benefits of eliminating the discrepancies should be considered before embarking on a wholesale implementation of Rate & Pay. Only when a strategy for dealing with the discrepancies has been implemented should a company attempt to eliminate the carrier’s invoices.

Some effort should be made to confirm that the carrier has systems to deal with the reconciliation and audit issues before eliminating invoices altogether. It would not be in the customer’s best interest to have a carrier hit them with a bunch of supplemental invoices six to twelve months after implementing a Rate & Pay system. This can easily happen if the carrier does not have the internal systems to deal with the new role they are assuming.

The Rate & Pay process has been likened by some in the industry to a man with one watch instead of two. The good news is that he always knows what time it is. The bad news is that the watch may be wrong. Some companies may want to consider the time-honored value of having one system audit another. When the carrier determines the charge for the shipment, he has significant motivation to insure that he bills for everything that is due. When the customer audits the shipment, he is motivated to insure that he pays only what is owed. This process allows both customer and carrier to state their interpretations and provides a way to identify and resolve discrepancies.

A hidden problem with Rate & Pay systems is that the carrier is now asked to reconcile invoices to assure that he gets paid the proper amount. It is easy to see why he would be motivated to find undercharges, but what motivation does he have to audit the invoices for overpayment? Since all systems are imperfect, the customer must now be sure he audits his system to verify that he is not paying more than is necessary. Furthermore, this audit process is likely to be manual since many carriers have no systems to perform this function. As a result, carriers may come back to the customer for rate increases to cover the added administrative cost.

One of the great advantages of continuing to receive invoices is the ability to audit the carriers’ and customers’ systems by comparing results. This process has proven itself in everything from space shuttles to data entry to double-entry accounting systems. Since the benefits attributed to Rate and Pay have actually been achieved by improved information flows between organizations, the best chance for process improvement is a solution which combines information from the carrier and the customer in a shared processing environment.