What is a Service Level Agreement (SLA)? How does an SLA work with Key Performance Indicators (KPIs)?

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A service-level agreement (SLA) is a contract between a logistics service provider and a customer that specifies, usually in measurable terms, what services the logistics service provider will furnish. Many logistics service providers will provide their customers with an SLA. More recently, logistics departments in major companies have adopted the idea of writing a service level agreement so that services for their customers (users in other departments within the company) can be measured, justified, and perhaps compared with those of outsourcing network providers.
Some examples of basic metrics or Key Performance Indicators (KPIs) that SLAs may specify include:
   • IT agreements: Customization/Integration
   • Bar coding/RFID/Voice Activation Systems
   • Slotting and re-slotting
   • Inventory Records Accuracy
   • Quality Assurance upon receipt
   • Returned Material Authorization (RMA)
   • Continuous Improvement
   • Mutual Inventory Management/increase turns/
   • Cost Reduction agreements
   • Implementation of Lean initiatives to increase throughput to customers
   • Six Sigma: Voice of the Customer (VOC) feedback/Customer Service
 
There are many more KPIs that can be added to this basic SLA agreement. The more KPIs, the more difficult the negotiation process. It can take months to negotiate a complex SLA/KPI document, as you go back and forth with your logistics provider so the document becomes a “win-win” for both parties.
 
After the SLA/KPI is an approved document by both the customer and logistics provider, this document and its contents need to be reviewed monthly to begin with, and quarterly thereafter.
 
Both parties will know how the partnership is moving along based on hitting the targets in this SLA/KPI document. Without an SLA/KPI there is no way of measuring the performance of both parties. Don’t be surprised if a logistics provider does not jump at a SLA/KPI with a “let’s keep it simple” statement. Always use some kind of basic SLA/KPI to protect you as you outsource your logistics department.
 
There should also be a QBR or Quarterly Business Review on the transportation company you choose. If they have a Transportation Management System (TMS), optimization of your freight will occur. Ensure you get your share of the Cost Reduction using optimized routes and lanes The fuel surcharge (FSC) should also be negotiated/managed and not an automatic increase. This should also be a contract with agreements and milestones.
 
Important comment: Always use collaboration and trust in your dealings with a logistics service provider. Not everything is costs or price discussions. Let the logistics provider show you his ability to be the professional you partner with in this “win-win” relationship.
 
Communication is critical. The SLA/KPI document is a living document and should be reviewed frequently: monthly during the new, “honeymoon” period and perhaps, quarterly thereafter.
You and your logistics partner’s theme should be: What gets measured gets accomplished. If not, why not?
 
Suggestion: Don’t do business with a logistics service provider unless they agree to create a mutually agreed upon SLA/KPI

Audience participation: What has your SLA/KPI/QBR experience been with a logistics service provider?
Chuck Intrieri

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