Logistics and the Law: Same Game, Higher Stakes

Accordingly, this year we’ll go deeper into those five challenges and focus on two aspects for surviving, or better yet, prospering in an economic slow down. The first aspect is the need to learn and understand the laws having a particular impact on the management of cash flow. The second is the need for transportation professionals to develop a system to measure their own performance in order to demonstrate their value to upper management in a quantitative manner. Today, being “a great guy” is no longer sufficient.

When times are good and cash is flowing, a “$1,000 goof” here and a “$10,000 oops” there tend to get overlooked. However, when margins are thin, there is no room for error. Any needless expense or lost revenue will be given great scrutiny. Here are four elements of cash management that absolutely need to be understood in tough economic times.

1. Avoiding late payment penalties: Transportation veterans vividly recall the “undercharge crisis” of the 1980s and 1990s. Although the passage of the Interstate Commerce Commission (ICC) Termination Act repealed the filed rate doctrine, carrier closings or bankruptcies still pose a substantial risk for shippers—liability for late payment penalties.

The credit regulations established by the ICC have been carried forward by the Federal Motor Carrier Safety Administration (FMCSA). For motor carriers, the “default” credit term is payment within 15 days of “the presentation of the freight bill” with carriers having the option to extend the credit period up to 30 days, which most do. Thus, any payment made 31 days or later from the time of the carrier’s invoice is “late.”

The credit regulations allow carriers to impose penalties for “late” payments that can include attorney fees, one-time collection fees, and a loss of discount. For shippers, this means that if your company has pricing in place which is based upon receiving a 75 percent discount from a higher base rate, and even if your company routinely pays its freight bills in 31 to 60 days, your company is subject to a loss of the discount and a penalty.

Based upon the public tariffs of one large LTL carrier (see “Pay up... or else!), an annual freight bill of 1 million dollars could be increased to 4 million dollars by losing the 75 percent discount and then increased to 9 million dollars by imposition of a 125 percent penalty.

While some carriers impose late payment penalties on a regular basis, the more common situation is for a carrier to not impose the penalties while it is in business and the shipper is doing business with them. Once a shipper stops giving the carrier freight or if the carrier goes out of business—well, get out the checkbook.

It should also be noted that the potential for late payment penalties is not limited to trucking. Air carriers, ocean carriers, rail carriers, surface freight forwarders, brokers, and other intermediaries can, and presumably do, have provisions in their standard terms and conditions relating to late payments. Accordingly, the first step in avoiding late payment penalties is to determine what the penalties are and the circumstances under which they will be applied.

Once having determined or verified the existence of the penalties, the question arises as to how to avoid them. There are at least three ways in which this can be done. The first is to pay every freight bill within the time specified. For some shippers that are either very small with a limited number of bills to pay or for larger shippers with sophisticated automated payment systems, getting a freight bill paid within the credit term may be possible.

However, for most shippers it’s very hard as a practical matter to pay every freight bill within 30 days. This is especially true if a shipper has multiple locations or uses an outside freight payment service.

The second way to avoid a loss of discount for any reason is to formulate your pricing in terms of the actual charges to be paid, not formulated as an artificial price less a discount. If there is no discount, then it cannot be lost. Nevertheless, most LTL motor carriers and their shipper customers continue to incorporate discounts into their pricing formulas.

Thus, for most shippers, the best way to avoid late payment penalties is to negotiate a contract covering all aspects of the transportation services to be provided; or, at a minimum, to include a provision for no late payment penalties in a written agreement with the carrier and instead set a commercially reasonable alternative—for example, a 1 percent per-month service charge.

It should also be noted that for those shippers who pay their bills through a web-based system or traditional electronic data interchange (EDI), an opportunity exists to negotiate an “early payment” discount—for example, 2 percent when the freight bills are paid within 10 days.

As a special note for those of you involved in any aspect of freight payment, Part 6 of our new on-line course, “Transportation, Logistics, and the Law” covers payment of freight charges including the issue of late payment penalties.

2. Expediting payment of loss and damage claims: Accompanying last year’s article was a chart prepared many years ago by Bill Augello to demonstrate the relationship of loss and damage claims to net profits. While “the math” summarized in this chart is still true, there is no benefit until the claim has actually been paid by the carrier. While many carriers process and pay claims in a timely, professional manner, there are many others who fail to do so. Lower rates are always attractive, but a lower rate must always be evaluated in light of the amount of unpaid or slow-paid claims. For readers wishing to know more about the laws relating to loss and damage claims, Part 2 of the “Transportation, Logistics, and the Law” course (logisticsmgmt.com/law) is recommended.

3. Re-evaluation of limits of liability for loss and damage: At one time, the default position for a carrier’s liability for loss and damage claims was the full value of the product shipped. At the same time, there was an option for the shipper to elect a lower limit of liability in exchange for a lower freight rate. With the current deregulated environment for most categories of transportation services, the opposite is now the case.

Unless a shipper takes affirmative action to obtain a higher limit of liability in exchange for a higher charge, the shipper will be subject to whatever limit of liability the carrier cares to place in its tariffs, service guide, or other terms and conditions. For instance, it is now quite common with motor carriers to have a limit of “$25 per pound, per piece” or for parcel carriers to have a “$100 per shipment” limit.

Here is a twist from last year’s feature: Then I opined that a shipper needs to determine the limit of liability in order to negotiate a higher limit necessary to ensure that the products shipped are fully covered. The flip side of this for this year is to determine whether a lower limit of liability would be appropriate for the products shipped—for example, a “$10 per pound, per piece” and then to try and negotiate a lower rate based upon a limit of liability lower than the carrier’s standard.

4. Issues relating to carrier selection: The largest potential risk faced by carriers, shippers, and intermediaries is the vicarious liability arising out of the selection and use of a trucking company. If you are involved in carrier selection and haven’t heard of “Schramm v. Foster” or “the C.H. Robinson case,” you had better learn soon.

When there is an accident on the highway with serious injuries or fatalities by a carrier you selected, you can expect to be sued. The best place to get up to speed fast is Part 9 of the “Transportation, Logistics, and the Law” course (logisticsmgmt.com/law) which focuses on exposures to liability for parties in the supply chain.

The necessary due diligence and best practices for carrier selection are beyond the scope of this article, however, no matter how careful one is, accidents do happen. Thus, in addition to being very prudent in selecting carriers, one also needs to examine the options available for insurance coverage and, in particular, whether there is an “errors and omissions” or “hired, non-owned automobile liability” policy available and affordable.

While there can be no doubt that knowledge of the laws and regulations affecting the supply chain are vital for a transportation professional to perform their job and advance their career, the old saying of “no good deed goes unpunished” comes to mind as I write this. The all too common situation where the logistics professional knows very well what they are doing while upper management is “in the dark,” especially when it comes to the legalities of the supply chain, can lead to an ironic result.

Consider this: When a plant manager goes to his performance review and says that he increased production 150 percent and lowered production costs by 50 percent, he gets a raise. When the national account manager goes to her performance review and says she increased sales 300 percent, she gets a raise.

When a transportation professional goes to upper management and says, “I have collected all the back log of loss and damage claims, I have all of our carriers paying claims within 30 days, I have negotiated rates which are highly competitive and meet our necessary transit times, and finally I have negotiated contracts with all our carriers to avoid any financial surprises such as late payment penalties,” upper management says, “Great, now that the problems are solved your position has been eliminated.”

This is the reality facing professionals in risk management. Regardless of one’s title, risk management is an integral part of a logistics and transportation professional’s function.

Thus, it is incumbent upon the transportation professionals to develop performance metrics for their function so that when they go to their employment review they get a raise—not terminated. An example of this would be the chart mentioned in last year’s Logistics and the Law article relating to loss and damage along with the financial information specific for your company.

This could well be a difficult task and one may wish to solicit the help of others. For larger companies this could be done within the logistics department itself. For others, perhaps a committee could be formed by your local CSCMP Roundtable, Delta Nu Alpha chapter, or Transportation Club to develop such metrics.

To conclude, not only is it necessary for a transportation professional to educate themselves regarding the laws relating to the supply chain, it is equally vital for the professional to educate the people to whom they report. While that may not be easy, in hard times it’s vital for not only moving one rung up the ladder, but just for staying on the ladder.

Author’s Note: I would like thank the editors of LM for the opportunity to author the annual logistics and the law feature that was started by my colleague William J. Augello many years ago. In a recent conversation with Bill’s wife, Betty Augello (betty@transportlawtexts.com), she mentioned that Bill always said that the people he wanted to help were those who were actually doing the work—the person filing the claims, negotiating the contracts, rating and paying the fright bills. So, if you’re one of those people, I hope that you find this article helpful.

Brent Primus may be reached at Brent@transportlawtexts.com

Logistics Management Magazine is the co-sponsor of the On-line!, On-demand!! version of the seminar based on William Augello’s landmark text “Transportation, Logistics and the Law”