Service-Level Agreement Logistics
Understanding service-level agreement logistics is a crucial part of operating an organization.3 min read
2. The Elements of a Service-Level Agreement
Understanding service-level agreement logistics is a crucial part of operating an organization. A contract between a logistics service provider and the customer it serves regularly outlines which services the customer can expect, when to expect them, and with what frequency they are to be delivered.
What is a Service-Level Agreement (SLA) in Logistics?
An SLA is a type of contract that exists between a logistics service provider along with their customers that will specify in terms that can be measured which services will be furnished by a provider of logistics services.
A large number of customers use SLA to manage their logistics providers. Logistics departments within large companies have started to adopt the concept of creating an SLA in order for all services to be measured and justified while also being compared to those of outsourced network providers.
The SLA will need to include detailed KPIs, or key performance indicators. The KPIs are going to be different for each customer and service agreement.
Agreements will take at least three to six months to negotiate, depending on how complex they are. This type of agreement needs to be used in any customer-3PL engagement. It should also be used for a less than truckload/truckload agreement.
In some cases, the provider of the logistics will have their own SLA/KPI that they use with customers. Negotiations are still in order, however. Some use time and percentages to implement the SLA/KPI are based on customer volume.
Some of the basic metrics or KPI that may be specified by an SLA include the following:
- Information technology should be detailed
- Customer service specifics, which includes turnaround time for customers
- Instructions for receipt of goods
- Quality checks and return material authorization processes
- Turnaround time
- Accuracy of inventory records via the cycle counting and root cause analysis
- Reduction of costs over time
- Continual initiatives for improvement
- Specific optimization
- VOC (voice of the customer) feedback
All KPI will have a certain percentage that will be reviewed based on your needs. This can include IT implementations, cost reduction, continuous improvement initiatives, and the like. There is a plethora of KPIs that can also be added to an SLA agreement.
The greater number of KPIs a company has, the harder it will be to negotiate, which can take several months for a difficult SLA/KPI document. It will need to result in a more beneficial situation for everyone involved, so it will volley multiple times before everyone is satisfied.
While SLAs are ideal for managing expectations, it is crucial that you are able to manage expectations on your own with regard to what it will be able to do for you. For some, they view an SLA as a way to stifle compliance or a fast fix to a relationship that is in trouble.
You should instead think of an SLA as the following:
- A method of communication. An agreement is not the only value in a product. The forces of establishing the SLA can have significant impacts on communication.
- A way to prevent conflict. The agreement helps to prevent and avoid disputes because there is a shared understanding of priorities and needs on all sides. If conflict arises, they can be resolved more quickly and efficiently without hard feelings.
- A living document. One of the most important aspects of an SLA, the agreement does not have an end date. The parties to the SLA can review the agreement and make changes as time goes on.
- The basis for gauging the effectiveness of service. The SLA will make sure that all parties are using the same criteria to evaluate services.
The Elements of a Service-Level Agreement
The service elements need to clarify services by being in communication with:
- Services to be provided or those that are not provided
- The conditions of availability of the service
- Responsibilities of all parties
- Tradeoffs of costs versus services
- Procedures for escalation
Management should focus on:
- Service effectiveness and how it is tracked
- The way disagreements regarding the effectiveness are resolved
- The way parties will review and revise the SLA
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