How Service Level Agreements (SLAs) Can Propel Your Supply Chain

• Supply Chain Management

Service Level Agreements (SLAs) are a common yet underused tool for supply chain professionals. When deployed aggressively, they can become one of the best accelerants for improvement, not just for operations, but an entire company.

We used SLAs heavily at Amazon, where I helped build the ecommerce supply chain that powers Prime, among other things over my 19-year career. They are an unheralded catalyst for innovation, which I personally observed.

SLAs define success

When a company adopts an SLA-first culture, the role of the SLA is to define what success looks like. It’s a contract where performance above a certain threshold is treated as a success while below is treated as a failure. Subsequently, to implement an SLA with a partner, you must first determine that threshold. The indecisiveness of the metrics to put in place means your company isn’t quite sure what success looks like. Before anything else, SLAs are a cultural trojan horse, a change agent that is a faceless third person who is hard to disagree with.

SLAs define exceptions

Supply chain managers will always shoulder the burden of exceptions. No one ever reaches the nirvana of a 0% exception rate, so the smart supply chain manager thinks of how to define, track, and manage exceptions in a way that reduces the burden on other parts of the business. SLAs are the best artifact to uniformly decide exceptions at different parts of the chain. Even better is that an agreement with an SLA means agreement on the definition of an exception, which creates predictable processes around how to manage those exceptions with partners, thus improving efficiency.

SLAs inform a reasonable error rate

You will never achieve a 100% error-free rate within your supply chain. As long as humans are employed, the best we can do is something approaching Six Sigma. Embrace this reality, and manage it.

SLAs become the first way to manage errors. If you have defined success and exceptions, you can now model out what a reasonable error rate looks like both at individual steps along the supply chain and holistically from manufacturer to happy customer.

SLAs create accountability for negotiation

A supply chain is as strong as its partners.  If the supply chain has a weak link, it’s often the performance of a partner somewhere along the chain.

SLAs are the best tool to define performance requirements with partners, and then hold them accountable to the contract. The performance criteria defined by you becomes a powerful planning mechanism because of the predictability you can depend on. Should the partner under perform, the SLA gives you a powerful negotiation lever to either change contracting details, or entirely swap to a different partner for that step.

SLAs align incentives

Let’s say you have a higher-order operational metric. Maybe that metric is internally called “Click-to-Deliver” and is meant to measure how quickly a customer receives a package after planning an online order. This metric is critical to the CEO because the Board of Directors has mandated that your company develop an ecommerce channel because of the impact of the Covid-19 pandemic.

“Click-to-Deliver” is a metric that spans a big portion of the supply chain, from warehousing and fulfillment to outbound transportation and carrier delivery. Improving that metric will require performance marks from several partners in the chain.

SLAs become the tool to align incentives. For example, you can’t meet the goal of “4 Days or Less” for this metric if your fulfillment partner has an SLA for “Time-to-Ship” that is 3 days.

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SLAs create a feedback loop

It’s proven that being a data-driven company provides unique advantages. But it’s hard to be  data-driven without good data!

SLAs become an excellent way to collect data that can be a feedback loop into decision making processes. Beyond the benefits above regarding driving clarity and agreement, a partner providing data to support an SLA is a legal requirement of the contract. It’s an unavoidable window into transparency with the partner.

How to structure an SLA

SLAs should always be considered a figurative child of a commercial contract between you and a partner. The SLA outlines performance requirements that the partner will provide you, and if the performance isn’t met, it means very bad things for them.

You generally agree to SLAs during the contract negotiating phase. Since they want your business, that’s when you have the most leverage to define the performance requirement that align with your larger strategy.

With that said, annual review of SLAs is probably too long of a time to go. Quarterly is a better timeframe to formally outline as the cadence to review SLA performance and allow for changes to expectations.

If you are just starting out with a vendor, it might be wise to write in monthly review, however. You’ll want as tight of a feedback loop as possible on performance.

SLA management is an important concept to Shipium’s supply chain efforts. If you want to talk about this or any other topic, feel free to reach out at [email protected].

Written by Jason Murray

Jason is CEO and co-founder of Shipium, a modern logistics platform for eCommerce businesses. Prior to Shipium, he was a 19-year veteran and executive of Amazon. His last role was VP Retail Systems where he was responsible for building out the supply chain that powers Prime. Previous responsibilities include building the supply chain that powers Subscribe & Save and re-imagining Amazon’s operational metrics.

Note: This is a sponsored post by Shipium

FAQs

What is the primary purpose of a Service Level Agreement (SLA) in the supply chain?

An SLA acts as a contract that explicitly defines what operational success and failure look like. Performance above a specific threshold is treated as a success, and anything below is a failure, providing a clear baseline for company-wide improvement.

How do SLAs help managers handle operational errors?

Because a 100% error-free supply chain is impossible, SLAs establish a mutually agreed-upon definition of an exception. This alignment creates predictable processes for managing exceptions with partners and helps model out what a reasonable error rate looks like at each step of the supply chain.

How do SLAs improve partner accountability and negotiation?

SLAs define strict performance requirements tied to a commercial contract. If a partner underperforms, the SLA provides concrete data and leverage to either renegotiate contract details or switch to a different partner.

Why are SLAs critical for aligning company-wide incentives?

SLAs ensure that individual partner metrics support overarching company goals. For example, if a company mandates a “Click-to-Deliver” timeframe of four days or less, managers can use SLAs to ensure their fulfillment partner’s “Time-to-Ship” SLA is strict enough (e.g., under three days) to make that broader goal mathematically possible.

When should SLAs be negotiated, and how often should they be reviewed?

SLAs should be established upfront during the commercial contract negotiation phase, when you have the most leverage to dictate performance requirements. Performance should generally be reviewed quarterly, though monthly reviews are recommended when working with a new vendor to maintain a tight feedback loop.