What am I allowed to expect? This was one of the fundamental questions that the philosopher Immanuel Kant tried to find an answer to. In the same way that the Prussian thinker raised this question, logistics and its professionals need to know what services and what performance they are going to obtain from their supply chains and their logistics operators. To achieve this, the Service Level Agreement -or Service Level Agreement- is one of the most powerful tools you have at your fingertips.
What is the Service Level Agreement
The Service Level Agreement (SLA) is a document signed between a company and a provider that details the conditions of the service that will be received. This can be done in many areas, especially in the operational part of companies, and logistics is one of the sections in which it is most common to see this type of agreement.
The use of Service Level Agreements has been increasing over time and it is no longer strange that these types of agreements are made beyond the supplier-client relationship. For example, an SLA can be established between the departments of the same company, between different headquarters, etc.
What does a Service Level Agreement have to have?
As strange as it may seem, one of the most common sources of problems is the lack of specificity about how the service is going to be provided. And, contrary to common belief, the definition of the service does not exclusively bind the logistics provider.
A good service definition explains what is going to be done (which can refer to order preparation, delivery time, warehouse performance, etc.) and also sets requirements for the customer. For example, until what time will orders be managed on the same day, the way in which the merchandise has to arrive, the deadline for collection requests for the operator to manage it correctly…
Once you know how the service should be, it is time to detect which are the indicators that will allow you to check if what has been agreed upon in the service definition is being met. The logistics of a supply chain has innumerable possibilities when it comes to establishing indicators. Among the most frequent we can find: delivery times, correctness in the preparation of orders, speed in said preparation, the accuracy of the inventory and its speed of rotation, breakages, shrinkage, number of incidents, percentage of perfect shipments, etc.
Although some are very repeated among all companies, the temptation to think of a generic supply chain must be avoided, since each company needs a particular logistics that helps it position itself as a brand in the market and is consistent with it.
The levels in a Service Level Agreement mark when an indicator is in good, bad or fair ranges. As with the design of the entire supply chain, here too we cannot fall for simplification. Nothing easier than automatically setting a level of 100% to all indicators, but that would be too easy. From what point do we start? Is it realistic to go from an average order preparation time of 5 minutes to one minute?
In addition, it is not common to use a single scale, a yes or a no. Rather, a Service Level Agreement usually establishes several sections: for example, that a compliance between 90% and 100% is correct, that from 105% is excellent and that below 90% is insufficient. It is not a minor difference, since the SLAs can establish sanctions and bonuses according to the results obtained.
A Service Level Agreement has to reward excellence
Another common mistake is not paying enough attention to the way in which we are going to measure our indicators. If you want to make things easy for yourself, make sure that your indicators are measurable, that the data collection is reliable -nothing worse than both parties getting into arguing over the validity of the data- and that the process of collecting it is the simplest and most it is as automated as possible.
Imagine that you want to establish final customer satisfaction as an indicator. Are you going to be constantly surveying them to be able to measure the evolution month by month and include those results in the evaluation of the Service Level Agreement? Is your supplier going to agree that his work is valued from a source that he may consider to be subjective rather than objective?
Measurement is a very delicate part and different ways of measuring can give completely different results, for example in the case of how often we measure the indicator. Suppose that you have marked 98% punctual deliveries as an acceptable level and that for a month every day it has been delivered at 100% but one day it dropped to 95%. The average will be above 98%, but one day it will have been below. How would you view that situation? Have the objectives been met? Up to what point?
A Service Level Agreement should reward excellence and punish poor results. In this way, it helps continuous improvement when errors occur and also acts as a motivator, rewarding when the supplier goes even further than what was agreed. However, punishing poor results does not imply financial sanctions for each error, nor does it mean that the sanction is equivalent to the total cost of shipping or processing. That is why there are those levels that we have discussed and that reflect when a level of service is within what is expected or when, on the contrary, it reaches levels that are too low.
It is also common to differentiate between different errors or tasks. That is, for basic or simple processes, more demanding levels are established than for what could be considered added. For example, the level of error-free order picking is usually going to be very ambitious, due to its relative ease. But perhaps we set a “cost reduction” indicator and even though we are looking for a 20% reduction we assume that a 15% reduction (which would be 75% of the target) is not in itself a bad number. However, 75% of orders well prepared would be unacceptable.
Failure to comply with the agreement may be due to forces beyond the responsibility of the logistics operator. In such a case, said incidences would not be computable to calculate the service levels, since they would give an unfair image of reality. Closure of ports, strikes, environmental catastrophes, errors in the information attributable to the client, etc.
It is important to be thorough and precise when stating what caveats may arise. Being very lax can make the provider cling to it in inappropriate situations, but being too strict or not picking up on certain possibilities can also leave the logistics provider exposed to problems for which it is not responsible.
An SLA is a working document for the improvement of the logistics chain
A Service Level Agreement is a living document that must change and adapt over time. All the above points are likely to be modified over time. For example, it is reasonable that we want to improve the required levels over time. If we started with 60% in some process, a first objective of reaching 70% may be reasonable, but it may be undemanding in 10 years.
In the same way we can include exceptions that we had not noticed, new indicators that supersede others that have become outdated or that we have seen are not very relevant, redefinitions of services, etc.
In addition, it is necessary to periodically review where we are. We cannot sign a Service Level Agreement and forget about it until next year, but with periodic reviews we have to detect problems and incorporate solutions as we go.
The Service Level Agreement also has to set its duration. There are many possibilities when it comes to renewal: it can be automatic in the absence of notification by the parties, it can include clauses that allow the relationship with the supplier to be terminated if the required levels are not reached (and even if there is a work agreement to more years), reviewable every year, etc.
The way in which both parties, the customer and the logistics provider, are going to communicate is very important for the relationship to come to fruition. At this point questions come in, such as who will be the people in charge of periodic reviews, collecting the indicators and presenting them, resolving possible incidents with exceptions or communicating possible sanctions for the level of service received.
As we have seen, preparing a good Service Level Agreement is something that requires time and reflection. It is essential to keep in mind that after the agreement both parties must be winners; the client for having an objective basis of what to expect and the supplier for having a source of motivation for their daily work and which, in addition, can include extra benefits for excellence in their functions. The SLA that the client of a logistics provider has to look for is not a thrown or pressure weapon but a working document for the improvement of the logistics chain and the transparency in the relationship between the two.