Shifting from classic Freight Payment to Freight Settlement process
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By: Krypt Team - April 24th, 2020

Authored by: Ashish Mallik

Evolution of Transportation Business

Transportation business especially from Carrier Collaboration standpoint has been rapidly evolving. Owing to increased complexity of contracts with carriers & increasing competition in the market; the traditional procurement & freight payment system is not feasible anymore as a long-term solution.

Be it a shipper/supplier or a 3rd party logistics provider, both go through this process change i.e. shifting from Classic Freight Payment to Freight Settlement and it will impact other players as well, like freight auditors and payment services provider.


Basic difference between Freight Payment vs Freight Settlement

Before understanding the benefits of Freight Settlement, one needs to first understand the basic difference. To complete the process of Freight Payment function, enormous amount of time and money is used. The manpower invariably struggles between the function(s) involving accounts payable and transportation, dealing with a form of “match-pay”. The process involves physical comparison of the carrier’s invoice with the shipper’s rate file or accrual account. Based on the shipper’s rate file – several people are involved in handling and re-handling documents or files.

But Concept of Settlement is not just Freight Payment. It mostly refers to the exchange of delivery information, tracking data, and claims, in-addition-to the payment of money for transportation service.

For small and medium shippers, reconciliation between shipments and invoices is partly or fully manual and time-consuming. For many, it is a costly manual process, onerous owing to invoicing errors. Checking the freight invoices for shipments manually and printing the cheque can take between 2 to 15 minutes per invoice, provided the invoice is correct. The validation time increases drastically in case the invoice is incorrect. [Source: International Shipping News 04/05/2018]

However, this new approach involves a pattern shift in payment having following three stages:

  1. Both shipper and LSP agree on contract rates and, most importantly, agree on a single system of record to hold those rates. If the shipper system is chosen, then the carrier is automatically paid upon completion of service, without invoicing. If the carrier system is selected, then invoices are paid without review and sometimes by a debit to a shipper accrual account. Either of these “auto-pay” processes reduce costs for processing; and with billing and collections representing up to 7% of carrier cost, there are certainly savings to be had with auto-pay.
  2. Payment processing is replaced by settlement. As mentioned earlier, concept of settlement is not just payment, it also refers to the exchange of delivery and tracking information. Therefore, action is being taken on exchange of information like “proof of delivery” which triggers the payment. Carrier provides detailed data electronically on service milestones such as – pick up, transit time and delivery time. This service information is required as a part of the transaction i.e. if no information is received from the carrier, no payment will be processed.
  3. Parties step it up with dis-aggregation of the transaction elements to allow for pricing variations based upon factors such as — time of the day, risks involved, speed of loading and unloading, along with other agreed upon factors.

Implementation of SAP TM Freight Settlement as a solution

To facilitate Freight Settlement process, in SAP TM, freight agreements are used to store the carrier contracts. Versioning is available to update the freight agreements. During the shipment process, a freight order is created in the TM system and the carrier is selected based on business rules. After charge calculation, based on freight agreements, the freight settlement document (FSD) is created.

Streamlining Freight Settlement process for Shipper helps reduce the costs involved and improves operational performance by efficient fulfillment of the logistic processes. In case of any differences like final amount of a charge line or total amount of freight order, dispute management functionality can be utilized by both the parties to arrive at common ground. A dispute can go through many proposal and rejection cycles where you or your service provider make proposals or reject proposals.

Basic process for Freight Settlement as mentioned above can be achieved through basic shipping functionality of embedded TM.

How can Krypt help you?

KRYPT is an SAP’s preferred integration & implementation partner. We have assisted in the success of global businesses – private & public, through implementation/integration of SAP TM, GTS, IBP & EWM.

If you wish to integrate with existing system or implement SAP TM Freight Settlement as a new solution, we can help you deploy it rapidly.

To know more about our products/services, please request a DEMO or do contact us.

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