Upcharges unavoidable but manageable with technology, experts say

While upcharges may be impossible for manufacturers to avoid, the right visibility and reporting can make them more manageable.

For manufacturers, surprises are rarely a happy occasion. They often come in the form of upcharges --charges added to a freight carrier or retailer's bill that are in addition to the costs negotiated in a contract. While these surprise charges are difficult to predict and perhaps unavoidable, experts say business software can make them more manageable.

"An upcharge is anything that unexpectedly takes money out of your pocket," said Steve Phillips, author of Control Your ERP Destiny: Reduce Project Costs, Mitigate Risks, and Design Better Business Solutions. "These can be extraneous charges on invoices from any supplier or invoice deductions or credits on the selling side. In some cases, many of these charges are known ahead of time by someone in the organization, but are not accounted for in the system. In other situations, the upcharge comes as a complete surprise that nibbles way at profitability."

Upcharges from freight carriers

The vast majority of upcharges occur at the freight or transportation level, according to Simon Ellis, practice director of global supply chain strategies at IDC Manufacturing Insights, based in Framingham, Mass. Also known as accessorial charges, these fees are tacked on to the freight bill when something doesn’t go as planned -- that is, when the transportation process deviates from what was outlined in the pre-shipping contract. The carrier's right to add these additional freight charges is typically part of the contract, Ellis explained.

"The contract may say there's a two-hour wait window, but if the driver has to wait longer, then they are entitled to charge fees to the owner of the product for that additional waiting," he said. "It may be that the truck driver is not supposed to do anything more than open the truck, and if the retailer or delivery location asks them to move the pallets into the warehouse, they may charge what is called a lumper fee [a labor fee] for that additional work. This happens all the time."

Upcharges from retailers

Less common, but certainly not unheard of, are upcharges that come from the retail side. A retailer may charge penalty fees of some kind to the manufacturer based on a failure to meet certain order requirements, according to Ellis.

"Years ago, Kmart wouldn't accept products on wooden pallets; they had to be delivered on slip sheets, or heavy pieces of cardboard. Kmart would assess a penalty to the manufacturer if products were sent to them on pallets," he said. "There might also be penalties from retailers based on short shipments, or pallets being delivered in bad shape."

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Whether from freight carriers or retailers, upcharges are generally deducted from the invoices that are owed to the manufacturers. For example, if a retailer owes a manufacturer $10,000 for a shipment, but claims $500 in accessorial charges, it will only pay the manufacturer $9,500 for that order, Ellis explained.

"Often they won't even tell the manufacturer that these deductions were made, and the accountants for the manufacturers will have to call and find out what the penalties were and why," he said. "Usually, the manufacturer ends up writing off the loss rather than hunting down the reason for the upcharges, because it's so much faster and easier."

How can software make upcharges less painful?

Since upcharges are almost always the result of human error -- truck drivers arriving late, labor demands that were not part of a contract, or mishandled and damaged shipments, to name a few -- it is nearly impossible to prevent them altogether, experts say. However, functionality built into enterprise systems can soften the blow with real-time visibility and intelligent reporting.

"Normally there's something called a landed cost enhancement built into ERP systems that handles cost of goods once received. Systems like SAP and Oracle will use landed costs. Any international Tier 1 solution should have this built in," said George Lawrie, vice president and principal analyst at Forrester Research Inc., based in Cambridge, Mass. Standard costing is the expected cost of the shipping freight, duties and other fees, Lawrie explained. "Of course, some times when the invoice comes in, it's different than expected. So these systems take invoices for freight and duty and spread those costs through the inventory," he said.

The functionality to process upcharges is usually found as part of a core ERP or business intelligence (BI) system, though some vendors may offer it as an add-on module, according to Phillips. "Look for software features that capture the essence of the 'sales deal' on the purchasing or the sales side," he said. "For example, software that captures the buying agreement, supports robust supplier or customer-specific info, and provides visibility of this information on orders and, ultimately, in shipping, accounts payable and accounts receivable accounting modules."

It's critical for software to capture the correct freight or retail requirements up front and make sure all departments in a manufacturing operation have access to these requirements, Phillips emphasized. For example: "If the manufacturing or shipping department does not know the customer requires unique package labeling, this will become apparent later when the customer deducts off the invoice for a labeling non-compliance issue," he said. "These systems can also report and measure the true cost or profitability from a customer-supplier standpoint, identifying customers you do not want to do business with."

Lawrie recommends careful contract negotiation ahead of time to ensure any additional freight charges or accessorial charges will be manageable. Some manufacturers choose to outsource these worries to third-party logistics providers (3PLs) and make them responsible for any additional freight costs, he said.

Ellis cautioned that manufacturers shouldn't treat software like a silver bullet for ending upcharges. "Software is not going to give you the ability to change these situations, just handle them," he said. "It can give you real-time visibility into those charges to make decisions, but at the end of the day, there's not a lot you can do to stop them from happening. What you can do is record accurately what happened, so next time you have a business discussion with that retailer or freighter, you can try to figure out where these fees keep coming from."

"You want the ability not to just understand the charges on the invoice, but to go back and report total accessories, accessories by category, what's driving them, and what can be done to reduce them," Ellis said.

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