Leak 08 · Freight & Cost-to-Serve - Freight recovery leakage

Warning signs. None of these proves the leak exists. They tell you where to look.

• Freight expense growing faster than shipments or revenue.
• Freight revenue on the P&L well below freight expense, with no policy that explains the gap.
• Freight charged as a flat estimate that has not been reviewed in years.
• CSRs able to zero the freight field without approval.
• Carrier surcharges (fuel, residential, liftgate, address correction) approved in AP but absent from customer invoices.
• Free-freight thresholds applied inconsistently or to customers who never agreed to them.

The minimum viable set. Most of it is already in your ERP.

Start with a small sample. Gathering the exports, agreements, or observations is separate from running the check; agree that work with the person who owns the records.

1. 1Pull last month’s total outbound carrier spend from AP, and last month’s total freight billed to customers from the sales ledger.
2. 2Divide the second by the first. That is your freight recovery rate.
3. 3Now take one week of shipments and match each carrier charge to the order it shipped. Sort by the difference between what you paid and what you billed.
4. 4Look at the top twenty gaps. Note the freight term on the order and who set the charge.

Freight recovery rate = freight billed to customers ÷ freight paid to carriers

Then ask one question: Of the twenty largest gaps, how many were a deliberate commercial decision, and how many were nobody’s decision?

A conservative range, not a headline. The goal is a number management can trust enough to investigate.

Annual carrier spend × (target recovery rate − current recovery rate) × realistic recovery rate

The target rate depends on your market. Some distributors run at 90% recovery, some at 40% by design. The leak is the difference between what you decided and what is happening.

Fixes fall into three layers. Not every problem needs software, and almost none needs AI first.

Process

No freight policy, or one that is not written down, so every order is a judgment call. Nobody reconciles carrier invoices to orders.

Data

Freight paid and freight billed live in different systems with no shared key. The ERP freight table reflects rates from two carrier increases ago.

Technology

Order entry cannot calculate the actual freight cost at the moment the charge is set, and nothing flags a waived charge for review.

Start with the simplest intervention that could solve it. Move down the list only if the one above is not enough.

1. Level 1

   Visibility

   A monthly freight recovery rate, and a report of waived and below-cost freight by customer and CSR.

2. Level 2

   Policy and guardrails

   A written freight policy: who gets free freight, at what threshold, and who can waive it. Waivers require a reason code.

3. Level 3

   Rate table maintenance

   Update the ERP freight estimate each time a carrier rate changes, and add surcharge pass-through rules.

4. Level 4

   Workflow intervention

   Show the estimated actual freight cost in the order-entry screen and warn when the charge is below it.

5. Level 5

   Automated reconciliation

   Match every carrier invoice line to its shipment automatically, flag gaps by cause, and queue disputes and rebills for review.

• Free freight that a customer earned under an agreed term is a cost of the price, not a leak. Separate it before measuring.
• Inbound freight, transfers, and drop-ship freight follow different rules. Keep the test to outbound customer shipments.
• Carrier invoices contain errors too. A gap may be a carrier overcharge worth disputing rather than a customer undercharge.

ERP note. Most ERPs store the freight charged on the order. The carrier’s actual charge usually lives only in AP or the carrier’s portal. The match key is the tracking number, which many ERPs store in a shipment record if the shipping system writes it back.