3PL AGREEMENTS - WHAT SHOULD THEY INCLUDE

The importance of 3PL service providers is increasing as there is a massive rise in online retail.  Additionally, as cost pressures increase on logistics providers, 3PL services represent a great way for logistics companies to prove their value.  3PL is not a mere commodity service, but rather, is a crucial element of a successful supply chain.

3PL services are so important to both the logistics provider and the customer that it makes sense to reflect the relationship in a written contract.  3PL agreements are not a one size fits all and without a written agreement there is a high likelihood of disagreement.  Key issues that should be considered in any 3PL agreement include:

What are the services – If you’ve seen one 3PL agreement, you’ve only seen one 3PL agreement.  There is such a variety of services that could be provided, that it is crucial to list what actually will be provided.  A failure to do this may mean that the customer expects that the fees cover more than what the 3PL provider is prepared to provide. 

Price and how fees will be calculated – 3PL is by its nature more than just warehousing.  The real value comes in the services performed in respect of the goods.  Will charges be based on storage time, per item picked, will there be extra charges for labelling and packaging?  The pricing will depend on the service.  E-Commerce will involve more picking whereas store replenishment will involve fewer, but larger, orders.

Length of the agreement, minimum volume and exclusivity – 3PL agreements often involve capital investment or at least additional staff to enable the logistics provider to meet the expected demand.  If a financial commitment will be made based on expected volumes, an agreement should set out the expectations regarding the length of the agreement, the expected volumes and whether the services are to be obtained exclusively from the 3PL company.  The parties should also consider what are the outcomes if these commitments are not meet.

Inventory and customer access to the warehouse  - While it is expected that an electronic inventory will be regularly provided, what rights will the customer have to require a physical inventory count?  If the customer can require a physical inventory count, is it at the customer’s cost and are they permitted to access the warehouse to carry out the count?

Fulfilment times – The 3PL provider should clearly set out in the agreement the timeframes for order fulfilment.  Naturally, services will always be provided ASAP and many times service levels will be exceeded.  However, the customer should be aware of timeframes the 3PL provider will contractually commit to.  

Service levels – Will a service level commitment be offered?  If the agreement has an exclusivity commitment or a long term, the customer will often require a service level commitment.  If service levels are offered they must be measurable and realistic.  The response to a breach should also reflect an ongoing relationship.  Rather than immediate penalties for a breach, consider meetings to constructively identify the reason for the failure and what steps can be taken to address this.

Other crucial issues – Any agreement that involves handling of goods needs to also cover the following crucial issues:

• Limitations of liability and indemnities

• Liens and other security for payment

• Disposal of uncollected goods

• Dispute resolution

• Force Majeure

• Ability to subcontract (especially important if the services include transportation)

• Price increases and payment terms

• Insurance requirements

CGT Law helps 3PL operators and their clients negotiate 3PL agreements that are practical and promote an ongoing relationship.  Our goal is to identify the key issues upfront and address any uncertainty before the agreement begins.  An agreement that reflects the commercial intentions of the parties is one that is less likely to lead to disputes.