Service Level Agreement Defined
A service level agreement (SLA) is a contract between a Logistics service provider and a customer that specifies, in measurable terms, what services the Logistics provider will furnish. Many customers manage their Logistics providers with an SLA.
The service level agreement should be detailed with Key Performance Indicators (KPIs). These KPIs are different for each customer-Service provider agreement. These agreements can take three (3) to six (6) months to negotiate, depending on their complexity.
In my opinion, a service level agreement should be used in any customer-3PL engagement. An SLA should also be used for a LTL/TL (Less then Truckload/Truckload) agreement. Sometimes the LTL/TL contract uses a Quarterly Business Review (QBR) which details the LTL/TL contract. It states that certain KPIs in this QBR are to be negotiated/reviewed monthly.
Sometimes, the Logistics provider has their own SLA/KPI that they want to use with any customer, but negotiation is still in order. Some Logistics providers use time/percentages to implement the SLA/KPI based on the customer’s volume.
An SLA/KPI is typically used when there is a Logistics provider contract to co-sign.
Even if you are not a contract account, ask the provider what KPIs they give to new, non-contract open/public accounts.
How do you write an SLA/KPI? What sections are typically in an SLA/KPI?
In my opinion, there should be a service provider acquisition, cross-functional implementation team for the company who writes the SLA/KPI or QBR.
Each team member should submit their particular needs for the service/logistics provider to be measured as you are doing business with them.
Service Level Agreement Sections
Some general sections to be included in the SLA/KPI: If it is a Logistics provider SLA/KPI the sections should basically include:
- Information Technology (IT) Requirements: should be very detailed
- Customer Service Specifics: Turnaround time to your customers
- Receipt of goods instructions
- Quality checks/Return Material Authorization (RMA) process agreement
- Turnaround time
- Inventory Record Accuracy via Cycle Counting and Root Cause analysis
- Cost Reduction agreements over time
- Continuous Improvement Initiatives
- Optimization specifics (LTL/TL as well)
- Voice of the Customer (VOC) feedback
Each KPI has a specific measure or percentage to be reviewed based on your needs, examples: Inventory Records Accuracy: 98-100%, IT implementations: a specific timeline, Cost Reduction: 5% per quarter based on the Logistics provider’s expertise, Continuous Improvement initiatives: Going beyond the customer’s expectation: 5% improvements each quarter, etc.