Shippers need to ensure that their lanes are serviced in the most cost-effective and efficient way possible when evaluating a carrier partner, but weighing reliability and relationship is key as well. Typically; after a partner is selected, the shipper and carrier formulate a service level agreement (SLA). SLAs can cover anything from the usual KPIs (OTD, OTP, tender acceptance rates, etc.) to more specific compliance agreements (EDI, billing, etc.). So how exactly are SLAs set and how do they truly impact the supply chain?
When working with SLAs, it is important to reflect on the relationship you have developed with your carrier(s). It’s imperative to set parameters, communicate them to the carrier in an effective manner, and make sure you continue to evaluate the measurable objectives on a consistent basis. While SLAs are typically measured by common industry KPIs, there are different standards and weights to where these KPIs are held and that depends on the shipper’s supply chain.
How SLAs Are Set
In a typical situation, a shipper will go through an annual bid cycle and will select a carrier as a single-source provider or will select multiple primary/secondary carriers on a lane-by-lane basis. The shipper then makes an agreement with that partner, or partners, that they will receive a certain number or percentage of loads weekly, monthly, or annually. Shippers will then set a target for each carrier partner on KPI’s that are most pivotal to the success of their supply chain operations.
Some shippers may only ship just-in-time (JIT) deliveries, meaning once the product comes off the truck, it is then processed by the warehouse staff and prepared to move off to the next destination. For this shipper, OTP and OTD would be paramount as a slight hiccup could force a plant shutdown, ultimately causing an operational bottleneck for the shipper’s end customer.
For a shipper that specializes in Customer Requested Due Date (CRDD), and needs to move large amounts of product that has to arrive on a certain date, they still need to focus on OTD and OTP. Because of this, they may prioritize a partner that has a high tender acceptance rate in order to ensure their shipments simply get from Point A to Point B.
One of the newest trends in SLAs is the emergence of on time, in full (OTIF). A few large shippers have OTIF as a necessary SLA in an effort to prioritize cost-effectiveness. When companies have limited space in their yard, they need all of the trucks on-site to be fully stocked. If the yard is full of trucks but they are only half-full, this creates a huge log jam of trucks that need to get unloaded, causing a cascading effect of delayed loads for that shipper and substantial profit loss.
The following is an example scorecard that outlines this specific shippers’ minimum requirements for each KPI and how the carrier measured up.
Current Impact of SLAs
Right now, rates have been cyclical due to the ever-changing situation of COVID-19. The driver shortage and the spike in demand for essential goods across the country has increased the need for more trucks on the road. With the stagnant driver market and increased demand, the cost to move product has skyrocketed. While a global pandemic is not something we typically plan for, having normal and recurring conversations regarding rates can help protect all parties from volatile market changes.
Overall, it is imperative to remember that communication is key to ensuring that SLA parameters are being met. Whether you send out a monthly scorecard or hold quarterly reviews with your carrier partners, having SLAs as the key driver of your operational success will lead to a longer-lasting and more cohesive partnership.