Many companies today are outsourcing to 3PL providers as a way to improve logistics performance. If it’s done right, putting logistics in the hands of 3PL partners can certainly make a positive difference.
However, it’s also not unknown for companies to make outsourcing mistakes, which all too often have the reverse effect. Sadly, these errors often take place before the “partner-ship” has sailed.
Problems associated with poor provider selection for example, are well publicised. But even if you find what seems to be the ideal 3PL, your company can easily be tripped up at the point of negotiating and drafting the 3PL contract.
If you are (or will be) involved in launching a 3PL relationship, take note of the following guidance for contract formation. To avoid putting logistics performance at risk, make sure the contract between you and the provider meets the following important criteria.
Clarity and Precision
High costs and poor logistics performance can easily result from a contract that is not well defined, especially if pricing and service level agreements are not clearly specified.
Ideally you should negotiate for an open-book contract, which clearly states your right as a client to examine your 3PLs operating costs and overheads.
This will help to ensure honesty is maintained with regard to pricing. Service requirements should be clearly documented, either in the contract itself or by way of a separate service level agreement.
Completeness of Detail
Your new logistics partner may have no tendencies towards opportunism, but you can never be certain.
Prevent opportunistic practices from impacting your logistics performance by ensuring the 3PL contract covers everything down to the finest level of detail.
Although it can be onerous and time-consuming to draft a highly detailed contract, it will go a long way towards protecting you from performance shortfalls. If you don’t have anyone in your business with the skills to draft complete, detailed contracts, it can be a good idea to invest in some help from an external consulting company.
A Focus on the Future
Your 3PL contract should focus on the development of a long-term partnership. It should also encourage your 3PL to align its goals with those of your business.
The closer the relationship becomes between your company and its partner, the greater your chances of continuously improving logistics performance.
A future-focused contract will set out predetermined changes in pricing and performance incentives, which will take place subject to relationship-status reviews—but see below for a caveat to this.
Balance and Flexibility
Drafting a future-focused 3PL contract should not mean setting everything in stone. When it comes to important future decisions like pricing-structures and incentives, ensure you have flexibility clauses written in to cover both parties for changes in environment, technology, and business conditions.
And finally, to put balance into context, it simply means “not one-sided”. In other words, the 3PL contract should be weighted in favour either of your partner or your own company.
If you think it might be good news to have a contract weighted in your favour, think again. Ultimately it may well lead to performance degradation as your 3PL fights the ebbing tide of value from its part in the relationship.
Contract a Partnership, Not a Disease
A poorly written 3PL contract can start a relationship down the road to ruin, placing stress on both partners and encouraging behaviour that harms logistics performance instead of enhancing it.
If your company is planning to outsource logistics, try to make sure the 3PL contract is a strength, not a potential performance weakness.
Use your best in-house contract specialist to negotiate and draft the document, or call on some help from outside. Above although, insist upon a document that’s clear, complete, balanced, flexible, and focused on long-term mutual gains.