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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. Dispute resolution: While parties endeavor to maintain positive business relationships, things can go wrong, and dispute resolution clauses help resolve issues efficiently.
7. 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.