Freight Payment Versus Freight Settlement
Billing and invoicing represent 7% of carrier expenses. Today’s operations officers are looking to cut that number down noticeably by moving to freight settlement payment options, which could prove to be faster, more efficient, and more effective in the long run.
The transportation and logistics industry has been changing radically in the past few decades, with the greatest advancement in the last five years alone. Alongside the shifting industry have come a lot of implementations, from technology advancements like AI and robots to greater interconnectivity of 3PLs. A seemingly minor change with a massive impact is the movement from freight “payment” to freight “settlement.”
A lot of companies have been using their same freight payment systems since the 1980s. Those systems are now outdated, and organizations are looking for more efficient ways to process payments for freight management.
What does a movement to freight settlement look like, and what could it mean for shippers and carriers in a forward-moving industry?
In order to create an invoice for a shipment, the freight payment process uses “match-pay.” This is a physical comparison between the carrier’s invoice with the shipper’s rate file. Basically, the carrier (of the goods) says what their invoice looks like based on the trip and the shipper (the client) checks their books to make sure the rates check out. It’s a lot of back and forth with frequent re-handling of files, which wastes time and often leads to inaccuracies or discrepancies.
The system runs on accounts payable after a freight delivery has been made. Payment only happens after the match-pay invoicing process, which takes a lot of time. Lapses in invoices can lead to processing delays, errors, and even reduced revenue.
Overall, this post-auditing way of invoicing is simply too labor and time-intensive. That’s why operations and supply chain managers have been looking for new ways to eliminate the time-loss and anxieties of match-play with a more streamlined approach.
That’s where freight settlement comes in. Shippers and carriers “settle” on a price ahead of time, so the entire invoicing process can be smoother and faster. There are three stages to the freight settlement system. (We’ve named them, just for fun.)
Stage 1: the settle up
The shipper (client) and carrier (transporter) agree on the rate for a contract or shipment. They also agree to use a single system for payment, so they know exactly how they’ll transfer funds when proof of delivery comes through.
This removes the need for invoicing. If they decide to use the shipper’s payment process, the carrier is paid upon completion of service without an invoice. If they use the carrier’s process, the invoices are sent and automatically paid without review.
Essentially, the parties agree on a contract rate and that amount is automatically paid upon completion. This auto-pay reduces processing cost and time radically, sometimes saving up to 10% of expenses per transaction.
Stage 2: planning the variables
The shipper and carrier also agree to factors that will optimize and could potentially change the service costs. This allows for some pricing variation based on certain uncontrollable factors, like:
- Speed of loading/unloading
- Time of day
- Waiting time
- Specialty freight
There are a number of negotiable factors the partners might discuss. The goal is to minimize pricing variability within the ever-changing world of transportation.
Real-time factors influence the carrier’s ability to transport within the settled-upon cost, which directly impacts the shipper’s operating costs and vice versa. This second stage allows shippers and carriers to agree on certain services and better understand where costs are coming from. This removes a lot of the post-auditing that occurs during match pay, where disagreements in service costs are more prevalent.
Stage 3: info central
The final stage is the proof of delivery stage. After there is proof of delivery, it triggers the payment to automatically go off. The carrier then provides detailed digital data about the service, like pick up, delivery, transit time, customer demands, capacity utilization, backhaul routes, and more.
This information is required as part of the transaction. This proves that the carrier delivered on their promises so the aforementioned contract rate from stage one still holds true.
A lot of companies are using blockchain technology to keep this process transparent and visible to their clients as its happening. This means shippers always know where their goods are—and even the shipper’s clients can have access to their product’s information.
Assuming all of the information looks good, the payment has already gone through and they’re already moving on to the next shipment. No wasted time. Fast payments. Forward-moving business.
Freight payment vs freight settlement
Freight payment versus freight settlement is like after-the-fact invoice versus before-the-fact payment. Freight payment is an intensive process that requires a lot of back and forth after the freight has already been delivered. Freight settlement, though, is a collaborative contract that agrees upon prices and cost variables in advance to speed up payment processing. Removing the friction of processing reduces costs, which leads to a leaner and more efficient process overall.
To get freight settlement right, a lot of companies are using machine learning. They’re leveraging large amounts of data from 3PLs to create the most accurate settlement plans ahead of time. This enables a more dynamic, innovative, and flexible exchange of funds that maximizes capacity, reduces costs, streamlines operations, and optimizes resources for shippers and carriers alike.
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