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January 7, 2011 8:00 AM, EST

Opinion: Late Fees and Supply Chain Integrity

By William Feld

President

D&G Transportation Inc.

This Opinion piece appears in the Jan. 3 print edition of Transport Topics. Click here to subscribe today.

Appointment scheduling is common in today’s transportation industry. It allows for the orderly receipt of shipments, reduces waiting time and increases routing and operations productivity. When all goes according to plan, the supply chain flows with optimal efficiency.

Unfortunately, problems often occur and trucks may arrive late for designated delivery times and/or be detained at warehouses, causing a ripple effect of late deliveries.

With increasing frequency, consignees have implemented policies whereby deductions are made from vendor invoices for reasons attributed to carrier performance, that is, “late fees.”

Explanations for the deductions include — but are not limited to — late delivery, early delivery, mechanical breakdown and dock congestion. These “fees” range from $150 to $1,500, occur without the knowledge of affected parties and are often implemented without recourse and regardless of timely communication between carriers, vendors and consignees.

The greatest contributor to this trend is nothing less than fear. Most carriers are reluctant to refute responsibility for these arbitrary deductions when their customers seek reimbursement. In spite of reduced margins, most carriers will compensate their customers — and thereby perpetuate this practice — because of the threat (real or perceived) of partial or complete loss of future business and relationships.

Similarly, in an effort to maintain market share, most shippers/vendors allow these deductions to continue and simply pass them along to the carriers or rationalize them as a “cost of doing business” without questioning the validity of the charges.

With market forces and a desire to maintain the status quo of all working together in favor of consignees, what recourse is available to help shippers, carriers and consignees work together to effectively eliminate late fees and other arbitrary and wasteful practices?

One important tool is information.

From a legal perspective, any legitimate claim for a late delivery must be predicated on actual damages having been incurred by the consignee. Most products are code-dated, and their shelf-life attributes will drive distribution and promotion. If a product’s life cycle is beyond the acceptable range for receiving, most consignees simply will reject or refuse the order. However, assuming that product arrived in good condition and the carrier did not “absolutely, positively guarantee” a specified date/time for delivery, the burden of proof is on the consignee.

In this regard, a grocery warehouse would have a very difficult time proving any substantial amount of damage for a “late” delivery that is nothing more than a missed appointment. Beyond that, any such claims must first meet the legal test of “forseeability” regarding such damages, which presents yet another hurdle for a consignee claimant to overcome.

With these legal impediments, it is fair to say that when a consignee makes a deduction for an alleged late delivery from a vendor’s invoice, it may well be acting without any legal support for its actions.

Legalities aside, a tremendous amount of waste and inefficiency is generated when revenues are deducted from invoices without notice. Back-charges, while commonplace in the industry for many years, are inherently wasteful and remain a bellwether for brokenness in any process.

Examples of “standard” back-charges include a stocking fee, slotting fee, sorting fee, code-date fee and bad-pallet fee. This list does not include other questionable charges associated with unloading/lumpers and pallet exchange policies. Not only are revenues gained from the sale of product received as one would assume from the normal process flow, but margins are increasingly padded through unilateral receiving policies and vendor invoice deductions.

For vendors and their logistics partners, many hours of rework are involved with after-the-fact communications, invoicing, settlement and account adjustments. Diminished trust and strained relationships result in non-value-added patchwork as layers of results-oriented “fixes” create inefficiencies, add cost and do nothing to expose the root cause of the original problem, much less to resolve it.

For example, a carrier may experience revenue deductions without recourse for arriving one half-hour late and, at the same time, receive zero compensation when a different truck is detained for five hours at the same facility.

Consequently, arbitrary forfeitures and productivity inhibitors tend to drive up transportation rates. With looming competition and/or negative rate pressures, carriers operating at or near-zero margin will look for other ways to reduce costs that may adversely affect safety and service.

Likewise, shippers will account for additional expense in their product pricing as a result of absorbing late-fee deductions from their customers and detention fees from their carriers.

Selection of marginal carriers will become a less viable solution for shippers with the implementation of the Federal Motor Carrier Safety Administration’s new Compatibility Safety Accountability program and revised hours-of-service regulations. This new environment is likely to reduce the motor carrier population and have a negative effect on those remaining in business. As a result, it is more important than ever to maintain and protect the processes that provide for a safe, viable and productive supply chain environment.

One solution for combating late-fee deductions is for carriers to publish a rules tariff that identifies and communicates liability limits and exposure to risk. Likewise, shipper/vendors must negotiate certain terms that reduce or eliminate their exposure to late-fee deductions and other questionable policies and charges when contracting with customers.

If information is the first tool in this process, the second is cooperation, which serves as the basis for action necessary to resolve these issues in a most efficient process-oriented manner. Zero-sum relationships do not set the groundwork for healthy, sustainable partnerships. Pointing fingers will not drive efficiency and improve safety in the supply chain. Continued supply chain inefficiencies inevitably will spill over and exact costs on society in ways that are both quantitative and qualitative. Leaders in logistics must empower all transportation professionals by working together to establish a culture that perpetuates ownership and action in the face of diminishing supply chain efficiency.

Based in Germantown, Wis., D&G Transportation Inc. is a family-owned truckload and less-than-truckload carrier that offers temperature-controlled services.