Contribute 7/8/99 by George Papa Transportation Audit Program Objectives 1. Is the company receiving the best value for its freight dollar? Determine if the company is receiving the best rate for its required level of service by obtaining an understanding of the traffic system at the location. Understand the level of focus within the Traffic department to continually monitor the freight rates of vendors and the rates of other carriers in the market. Determine there is adequate review of the actual rates paid in relation to the rates stated in any contracts or agreements. To what extent if any are in-house freight operations utilized? How are these operations monitored, administrated and scheduled? 2. Is the performance of the freight vendors adequate to service the requirements promptly and efficiently? * Are vendors evaluated on their quality of service? * What statistics are maintained to track key performance indicators such as on-time delivery and truck availability for pick-ups? * To what extent is the location prepared for a vendor failure such as lack of trucks when promised or a carrier labor strike? * Identify the process by which vendors are discontinued due to poor performance? 1. Is the performance of the Traffic Department adequate for ensuring that the company uses qualified vendors and receives the best value for its freight dollar? * Understand the shipment scheduling methodology and determine if this process seems to schedule the shipments in an efficient manner. * Is the department organized in and operating in a manner conductive to the best interests of the company including using standard contracts and bills of lading as prescribed by the company? * Is the cost to be incurred a determining factor in the scheduling process? * Determine the level of monitoring in place to identify and prevent extra costs related to scheduling errors such as loads not being ready when the trucks arrive? * Evaluate the facility load structure to see if loads are maximized wherever possible. * Review the load consistency to see if similar amounts of material are shipped each day or week. * Is the Traffic Department involved in the negotiation and planning of freight on inbound shipments to ensure competitive rates for these transactions? * Does the traffic department comply with the corporate conflict of interest policy which requires a signed statement periodically? 2. Is the location identifying Traffic benchmarking indicators and comparing these with other locations? * From the understanding of the function within the facility, determine key indicators to be used for benchmarking? * Compare these indicators with other locations. General 1. Gain a thorough understanding of the transportation function. Obtain and review the written policy manual for transportation and shipping. Through interviews and review of procedures, determine and write an overall narrative with the following information: * Identify all types of inbound and outbound freight. * Identify all freight carriers by mode for inbound and outbound freight. For example, identify carriers for rail inbound, rail outbound, truck inbound, truck outbound, intermodal inbound, intermodal outbound, ship inbound, ship outbound, air inbound, etc. * Does the location utilize third parties, such as agents, brokers and rate auditors? Obtain a working knowledge of these relationships and assess if it is appropriate. Is further testing warranted, why or why not? * Determine how carriers are selected. What is the carrier selection process at the facility? * What is the basis for requiring freight rate quotes and bids? How often are rates bid? * Describe the use of pricing agreements and contracts. How are pricing agreements and contracts entered into? 2. Determine how shipments are scheduled to ensure on-hand supply and carriers are available and adequate to ensure continuous operation. 3. Determine the extent which the location takes advantage of volume discounts. 4. Determine how carriers are added to the vendor masterfile. Consider control issues such as documentation and approval requirements, system access and controls, relationship between the transportation and accounts payable, duplicate carriers with different addresses, etc. Who is authorized to add, delete, and change carrier information into the vendor masterfile? 5. Determine transportation/traffic's level of interaction with other departments to assess the role (active or passive). Are there practices that preclude the best rate, i.e., last minute shipment scheduling, only shipping during limited times of the day, carriers who commit but don't show (no shows), etc.? In addition, determine whether the transportation manager meets with purchasing on a periodic basis to assess the prepaid inbound shipments and evaluate the freight rate impact to the location on purchased items on FOB Origin versus destination to see if additional money can be saved? If so, how does the traffic manager determine when to meet with purchasing? Is there periodic review of reports to assess the transportation costs? If not, explain why. Carrier Selection 1. Determine how the transportation/traffic function stays current on potential shippers/carriers for each type of shipment. This may include periodicals, reference sources, catalogs, internet, representatives, etc. 2. Determine how new carrier services and prices are obtained? Does the location have a proactive and systematic approach for looking for new carriers and obtaining new bids and quotes? Carrier Service, Contracts and Pricing Agreements 1. Review the following: * In the case of Truckload shipments, is the service being performed on the basis of common or contract motor carrier service? * Obtain a listing of the common carriers and the contract carriers for inbound and outbound commodities. * Has written shipper common carrier rate agreement or contract carrier agreement been implemented that covers freight rates, service issues, and carrier liability, along with copies of the carrier's operating authority, current insurance certificates and DOT safety rating? * Determine the cargo liability limit amounts of the contract carriers (contract carriers have limited liability based on the contract terms). Are personnel aware of the limited liability of using contract carriers? (Note: Common carriers are required to carry property damage and liability limits. On the other hand, contract carriers have no liability release and can limit their liability to certain dollar amounts as specified in their contracts. It is important that the location know the liability limits when using contract carriers. In addition, common carriers do have mechanisms to reduce their liabilities, usually through separate agreements and published tariffs.) When shipping via air carrier, verify that the carrier is declaring the full value of the item on the airbill. Typically the air carriers limit their liability. The air shipment liability amount should be checked for items shipped FOB origination and FOB destination. The locations should be checking with the Risk Management Group at Alumax HQ (Toni Stoffle) regarding liability coverage for special shipments of high dollar items (i.e., transformers shipped via air). * Is the location using the standard carrier agreements provided by the Law Department? See Standard Forms Agreement Binder provided by the Law Department. * Outbound Shipments: Evaluate controls to ensure orders are broken into appropriate sized shipments to meet the appropriate capacity of the carrier rather than breaking down into the same sized load each time without factoring the size/capacity (optimum) of the vehicle. Otherwise there may be more shipments than necessary resulting in higher transportation costs. 2. Verify that written contracts are available for carriers (rail, intermodal, ship, air, truck, ups, etc.). Is the location using the standard carrier agreements? Are fuel surcharges included in carrier agreements? 3. Determine controls and procedures for filing claims against carriers for shortages or damaged material. (Objectives #2, #4, & #5) 4. Is the management of shipping/transportation over inbound freight managed appropriately? Is the purchasing department working with the traffic manager to ensure the best price and service are being obtained? Is the purchasing manager pricing items on an FOB Origin and FOB Destination basis to verify that the best freight rates are being received? Are shipping terms on purchase orders accurate to reflect the party responsible for paying freight? Bills of Lading: 1. Perform the following related to Bills of Lading: * Are shipments being tendered with a completed bill of lading? (The bill of lading is the most important document used in commercial transactions between shippers and carriers. It serves as a receipt of the goods, contract of carriage and documentary evidence of title.) * Do the Bills of Lading contain the following information? a) Date shipped/tendered to carrier; b) Commodity description (Note: for shipments that are Less Than Truckload (LTL), the correct National Motor Freight Classification (NMFC) number and shipment class should be shown i.e., "Aluminum Lineal Shapes - Class 85, having a density per cubic foot of 12-15 pounds NMFC item 13615 and 13120 Sub 8"); c) Routing - complete carrier name; d) Designation of "prepaid" or "collect" for freight charges. Collect shipments, Section 7 "Non-Recourse Clause" - the bill of lading is the contract of carriage and the shipper being a party to this contract is held liable for the freight charges even when the carrier delivers a "freight collect" shipment without first collecting the freight charges. The shipper, however, can exempt himself from this liability by signing Section 7, the "Non-Recourse" clause found on the face of the bill of lading; e) Number of packages, cartons, skids; f) Shipment weight; g) Complete consignee destination address; h) Complete shipper address; i) Origin point of shipment; j) Shipper signature; and, k) Carrier signature and date. Freight Charges and Rate Management 1. Perform the following for freight charges: * Obtain an analysis of freight cost by carrier to determine whether there is a large concentration of freight in the hands of a few carriers. These would be candidates for contract review. Determine any special relationships that exist. * Obtain a listing of rates by route. Describe the rates available or used at the location? Does the Cast House shipping system allow for both van and flat rates? Per Hundred weight and flat rate, etc.? * Estimate the annual transportation expenditures for the location. Obtain transportation costs for inbound materials and supplies. Obtain transportation costs for outbound aluminum shipments by rail, truck, and other. The transportation expenditure amounts should be monitored by accounting as well as the transportation manager, if both groups are not monitoring the transportation expenditures, conduct further review and explain. * How does the location audit, approve and pay freight charges? * How are freight rates maintained? * How are freight rates checked for accuracy? * Is the location monitoring to ensure the lowest cost carrier is being utilized? If not, why? * Is the location monitoring Trip Leasing? Why or why not? * Review the freight expenses for 1996, 1997 and 1998 and investigate any unusual shifts. 2. Review tracking method for lowest cost carrier utilization. Is a process in place to review low cost carrier utilization? Does the Cast House traffic system provide detail on when overrides occur and the lowest cost carrier is not utilized? Is shipping logging of low cost carrier overrides and tracking carrier performance adequate? How far in advance are they scheduling carrier pick-ups? Is the lead-time adequate to ensure the lowest cost carrier can pick up the load? Payment of Freight Charges 1. Perform the following for payment of freight charges: * Review the outbound aluminum shipments manifest file (located at the Cast House). Randomly select 40 manifests from the period January 1998 to February 1998. Obtain manifests for various types of shipments (rail, truck, Intermodal). * Trace the manifests to the Bill of Lading. * Then trace to the Payment Record. * Compare payment rates to system rates. * If applicable, verify mileage portion of charge. Depending on the contract, the mileage may be determined on Rand McNally mile maker or other source. Verify that the mileage charged agrees to the appropriate reference source. Remember some carriers use flat rate charges, so this may not apply. * Compare these rates to the contract documentation. * Trace to accounts payable (payment transfer record) and total amount paid. * Document and fully investigate discrepancies. Consider whether the exception is indicative of a systematic or intentional error. Is further testing warranted? Why? Or, why not? * Recaculcate the rate file charges to the actual payment record. Receiving 1. Complete the following: * Verify receipt of material and determine where records are retained. Note that different material may be received in different ways. For example, parts may come into the parts storage area, whereas scrap metal comes to another location. * Review the master purchase order and match to the invoice. * Trace amount to the accounts payable file. * Document and fully investigate discrepancies. Consider whether the exception is indicative of a systematic or intentional error. Is further testing warranted? Why? Or, why not? Contract Rates: 1. Contract Rates: * Determine the type of rates for the location (van, flat, per hundred weight, flat rate, etc.) Is the shipping system capable of handling various rate types? * Obtain a listing of contract rates by carrier. * Review contract rate amounts for all carriers (both inbound and outbound). * Compare freight rates by carrier and determine if there are appropriate variances between the carriers. (The carriers should vary some and should not all quote the same rate.) * Document and review rates that are the same for all carriers on a given route. Carrier Performance and Evaluation 1. Determine how carrier performance is measured and managed. * Are records maintained to monitor carrier performance? The types of items tracked should include on-time delivery performance, accuracy of billing/billing errors, product damage, carrier confirmation but not showing up (no shows), etc. * If carrier performance is reviewed, verify whether performance correlates to the amount of business the location gives to the carrier. * If the location is not monitoring carrier performance, determine why. 2. Determine the process used to evaluate the attributes of each carrier, including financial condition, on-time delivery, lead-time, ability to provide vehicles, etc. Who completes the evaluation? How is the evaluation completed and reviewed? What is done with the evaluation? Reporting 1. Identify transportation management reports. Describe each report - why is the report produced and what is "done" with each report. Are the reports used to manage the function? Does the location review/produce monthly shipping reports, determine the cents per pound shipped and then investigate discrepancies. If carrier prices on a cents/pound basis are increasing, what steps do they take to manage the rates? Is the location proactive in its assessment and management from the information learned from the reports? 2. Does the location review shipping costs, on a period basis, for the top 10-15 customers to assess if the best rates are being used? For example, is the location always using the lowest cost carrier or a medium or high cost carrier for one of the top customer shipments? If the highest cost carrier is being utilized, investigate why - is it due to production problems in meeting the order so that shorter delivery time (and increase transportation costs) is needed? Or, is the on time delivery of the low cost carrier so poor that the carrier is not called? Or, does the carrier commit to pick up shipments and then not show? If the carrier is classified as a no show, determine why (i.e., is the carrier called with an unrealistic pick-up time - called at 2:00 for a 4:00 pickup; are pick-up times too limited - 8:00 a.m. to 2:00 p.m.? 3. Determine if the shipping/scheduling group is communicating with the transportation function on problems with production, carrier no shows, carrier on-time delivery etc.? 4. Has a retention policy been established on all transportation, shipping, receiving records? The import records, export documents, manifests and bills of lading should be retained for 7 years. Determine the retention policy and procedures, test for compliance. Location Specific Knowledge/Background/Experience 1. How does the location stay current with current transportation rules, laws and regulations? 2. Assess the expertise of the persons responsible for transportation at the location. The individual(s) should be knowledgeable with the following: * 1990 incoterms * Sherman AntiTrust Act * Robinson Patman Act * Buying/Selling in international commerce Additionally, determine if the transportation function personnel have professional certifications (i.e., Certified Purchasing Manager (CPM) and/or ICC Practitioner (although this one is no longer used much). The transportation personnel should be participating in seminar courses and professional organizations. Some organizations include, but not be limited to: * National Industrial Transportation League * Council of Logistics Management * American Society of Transportation and Logistics * National Association of Purchasing Management 3. Determine if the location has had any cases of alleged fraud in the transportation, shipping and/or receiving functions within the last few years. What is the nature of the allegation(s)? Segregation of Duties 1. Review segregation of duties over the transportation; shipping, receiving and accounts payable functions. A common practice is for the traffic manager to have control over procurement and payment approval, therefore look for evidence of conflict of interest. A common problem in this area is the traffic manager usually has control over the procurement and payment approval process. We should actively look for evidence of conflicts of interest. 2. Verify that a current and signed conflict of interest statement is on file for personnel who are involved with transportation. Determine if carriers are notified of the corporation's conflict of interest policies, including acceptance of gifts. ISO Certification 1. If the location is ISO certified, evaluate the degree which transportation is compliant NAFTA Regulations: 1. NAFTA Regulations for Imported and Exported Goods: * Identify all goods imported or exported from the location? * Determine who prepares the documentation for imported/exported goods. Is a third party broker used? If so, who retains the documentation? * Determine compliance with regulations. * Are personnel familiar with the various NAFA requirements (i.e., Certificates of Origin, customs procedures, etc.)? Hazardous Materials 1. Identify all hazardous materials at the location being shipped to and from the location. Some items include Dross (shipped almost daily from Intalco) and Spent Pot Liner (SPL - shipped weekly) * Determine which items are being transported to/from the location. * Obtain and review policies and procedures for the preparation, handling and arranging of hazardous materials transportation. Are the procedures adequate? * Identify the individuals responsible for preparing, handling and arranging hazardous materials for transportation. * Do the shipments require hazardous labeling, properly describing the hazardous material, and/or truck placarding? * If so, are personnel trained and knowledgeable of various CFR 49 Haz-Mat regulations as they relate to proper packaging for shipment, labeling and marking of Haz-Mat shipments? * Are personnel trained and retrained in accordance with regulations (every two years)? * Obtain and review procedures/documentation for Haz-Mat shipments. Audit Program - Transportation Page 16