While partnering with a third-party logistics company or 3PL isn’t right for everyone, multichannel companies have often found them to be comparably priced to internal ecommerce fulfillment, with quality services. They allow you to avoid capital investment in facilities and systems, and can provide a faster route to shorten transit times and lower shipping costs.
After months of working with prospective 3PL vendors, you likely received hundreds of pages of selling materials and many verbal promises. Once you select a partner and negotiate and finalize the contract, it will include:
- The statement of work and the services you’re contracting for
- The standards of performance
- The pricing of various services;
- The payment terms
- A host of legal clauses such as warranty and guarantees, and termination of the agreement
Negotiating the agreement takes time and a combination of business sense and legal guidance. You’ll want to discuss the contractual details with all stakeholders.
9 Contractual Considerations
As you work with the 3PL partner to negotiate the contract, here are some key considerations:
Get it in Writing
If the promise is critically important, whether it’s expected performance, quality, cost or systems requirements, get it into the contract. Verbal promises and selling materials are generally not contractual.
Master Agreement and Addendums
To standardize the legal language, the 3PL will likely use a master agreement for all of its clients, which it will resist changing. Addendums to the master agreement are your opportunity to customize the contract. Typical addendums include the statement of work, pricing, standards for performance, processing procedures and schedules.
Develop Accurate Multiyear Business Proforma
Most contracts are not invoiced simply on a cost per order basis. The general industry approach is to identify costs per service per month. To get accurate cost projections, you and the 3PL must develop a multiyear proforma of the current year’s business and an accurate projection for the contract term, typically three years. Each vendor will have its own questionnaire to collect the data. Spend time analyzing and planning the proforma so you don’t incur higher costs.
Implementation Scheduling
Vendors will have boilerplate Gantt charts and methodologies. Spend time with their staff to analyze the details of transitioning your business, including the project tasks and responsibilities of each party. There is a lot more to planning and managing this project than some boilerplate two-page Gantt chart. Take the time and do the detailed planning, then put together tasks, dates and responsibilities. This will help you avoid missing schedules demanded by management.
Service-Level Standards
It’s surprising how many times agreements lack definitive standards for services that are important to a merchant business. Examples include schedules for shipping same-day orders and error rates. They are often services that may end up being areas of contention when occasional disputes or differences over vendor performance arise. This is an area that is difficult to spell out and make fair for both sides.
Required IT Services
What are the details of the IT services you’re expecting? Most 3PLs have books of standard reports included in processing fees. Have you reviewed them, and are they appropriate for your business? What services are not spelled, including things like customization and interfaces, and what are the costs?
Invoice and Payment Terms
Ask to see a typical client’s monthly invoice so you’ll understand how the 3PL’s contractual charges are developed based on the services provided. How do the services provided and transactions processed result in line item extensions on the invoice? For some vendors this isn’t as easily reconcilable as you’d like. What deposits must you pay in advance for fees such as shipping? Is the entire implementation cost a fixed fee paid in advance or invoiced over a number of months?
Legal Dispute Resolution
The agreement will specify the method of settling legal disputes, either through arbitration or the courts. Many companies use arbitration because it has the full force of law and is less expensive. Because the 3PL is the seller, it can decide which state any legal proceeding or arbitration is held in, and which state’s laws they’re subject to. Your attorney will help you understand this provision.
Business Forecasts
The vendor will need to be continually informed of your business’ projections, including orders by week, promotions, purchase order receipts and projected inventory levels, in order to determine staffing needs. Generally, there is a rolling 13-week sales order forecast by quarter. There is often a provision such that if actual order processing is over or under the forecast by a certain percentage, the 3PL has recourse such as charging overtime for labor. In practice, there should be a weekly call to discuss promotions, anticipated orders and inbound receipts.
In summary form, these are nine areas to consider when contracting for 3PL services. We have developed a 27 Point Checklist for Third-Party Logistics Contracts to assist you in negotiating a 3PL contract that is fair and a win/win for you and the vendor.
Brian Barry is President of F. Curtis Barry & Company