Self-billing helps identify true costs
I came across a food manufacturer which queried an invoice it received from the third-party logistics provider (3PL) that ran its warehouse and transport. The invoice actually contained a gross error in it and was quickly corrected.
This error became a pivotal moment. The new finance director asked some pertinent questions of his own staff and discovered alarming process failures in the management of the commercial relationship with the 3PL.
The 3PL charged as follows: charge per pallet per week storage; charge per pallet handling; and charge per case picked. For transport, it used a matrix tariff with post codes and drop sizes to charge per consignment. This is an industry-standard mechanism.
The manufacturer had never checked the detail of the 3PL invoice against actual orders handled and delivered. When we downloaded the data required from the manufacturer's enterprise resource planning (ERP) system and checked actual deliveries against charges, more than 12% of consignments were incorrectly charged and the warehousing charges for handling and case picking were 9% more than the demand data suggested they should be.
The work to establish what the charges should have been took four days to set up and two hours to run. Subsequent months would take around three hours. You can imagine what has happened to the overall relationship with the 3PL!
The moral of this story is that, if you have a structured charging mechanism with your 3PL you should aim to simulate the activity it performs on your behalf and move to a 'self-billing' process. With this you tell the 3PL how much to charge you and let it justify any differences. It sounds like hard work, but all ERP systems already contain the data you need to go to self-billing and, in the end, it is in the best interests of both parties to do so.
Tim Knowles is partner at supply chain consultancy TKA.
