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Importance of a balanced, well-drafted logistics agreement
Very often in logistic arrangements, a supplier will suggest the form of agreement. This is often a supplier’s standard form and it will need to be carefully reviewed by the customer. It is important to ensure that the agreement accurately reflects the agreed commercial terms and imposes proper service-level obligations on the supplier so that everyone is clear about expectations and consequences if the level of service falls below expectations.
Operational and logistical challenges
Service-level agreements: The basics
A service-level agreement (SLA) should be made in writing and incorporated into the main logistics agreement. An effective agreement should cover the following main aspects:
- Scope of services: Scope can include the process for transportation of goods, how the goods will be stored (i.e., the warehousing process), and any agreed targets and milestones. The scope will vary depending on which model the parties are working to. Common models include one or a combination of the following third-party suppliers:
- Warehousing – The supplier stores and manages the customer’s goods in its warehouse.
- Transportation – The supplier will manage the movement of goods, and may include negotiating freight contracts, payment solutions and optimizing efficient transportation options.
- Financial – The supplier will manage the inventory and cost implications, often involving a proprietary or third-party IT system.
- Fourth-party logistics – The supplier will manage all of a customer’s supply chain and logistics. This differs from a third-party model whereby providers are concerned with the logistical element only. Under the fourth-party model, the logistics partner oversees and manages other aspects of the supply chain.
- Performance metrics: An SLA should have clear, measurable performance metrics. These should be backed up with reporting obligations so that the metrics are properly reviewed. The metrics can include targets covering picking and packing, delivery timescales and order accuracy. The operation of online platforms can also be covered to ensure they are maintained and planned maintenance downtime is minimized.
- Dependencies: In a balanced SLA, the logistics supplier will want to clarify which dependencies are the customer’s responsibility and ensure they are set out clearly.
- Governance: The SLA should set out a governance model ensuring regular and effective communication between the parties, and outline any routes of escalation for the client.
- Interim period and contractual adjustments: In some cases, it may be difficult for the parties to settle on definite metrics due to various unknowns. In such circumstances, an interim baseline period can be negotiated (e.g., three months or six months), after which the metrics can be reviewed and finalized for the remaining duration of the term.
- Dispute resolution: While parties endeavor to maintain positive business relationships, things can go wrong, and dispute resolution clauses help resolve issues efficiently.
- Service credits and bonuses: An important part of an SLA is to consider what happens when the metrics are not met or if they are exceeded. Effective agreements have some form of “carrot and stick” approach where the supplier must pay a service credit for failures and possible bonuses or clawbacks for exceeding the thresholds. SLAs are also helpful in describing material or persistent breaches that would give a customer the right to terminate the agreement early.
Current trends
The logistics industry is being significantly impacted by accelerating technological developments. Issues we’ve been working on with clients include the following:
Last mile
The final leg of a product journey, involving the movement of goods to their final destination, is often referred to as the last mile. There are certain logistical challenges at this last phase of transportation, and the last mile is often the most expensive part of the journey. It can count for approximately 53% of a shipment’s total cost, with companies typically taking around 25% of that cost themselves.
In recent years, growth in online shopping and demand for next-day delivery has heightened demand for the last mile delivery, in some cases adding to the problem of finding a reliable and cost-efficient service provider.
AI and logistics
Artificial intelligence (AI) has huge potential and is being rapidly adopted in the logistics industry. It can assist in producing vast amounts of data for real-time tracking and monitoring of inventory, saving on costs relating to products and storage. The logistics industry can also benefit from AI’s predictability. For example, logistics operations can be susceptible to various risks, from natural disasters to labor shortages, according to a feature on the future of logistics in Forbes magazine. AI can replicate some tasks performed by warehouse workers as well as help businesses anticipate risk in their supply chain. However, the data required for such analysis is costly. AI may reduce the long-term costs of logistical operations, but high start-up costs can be a barrier for smaller companies.
Robotics and automation
While humans remain central to much of the logistics process – particularly transportation – robotics and automation have had a significant impact on the industry. From automated warehouses to self-driving vehicles and drones, the technology is leading to some major changes in delivery models. In many cases, this is uncharted territory for the customer, making it ever more important to have a well-drafted contract that clearly sets out cost and service expectations.
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