All You Need To Know About Fulfillment Services Agreement

All You Need To Know About Fulfillment Services Agreement

Whenever a company outsources its fulfillment services to a third-party provider, it must sign a fulfillment services agreement. These contracts protect both parties and their interests. The contract process can often be misled when one party tries to negotiate a win-lose contract. These contracts are not sustainable. If the agreement favors one party, both parties suffer in the end.   

The critical terms in the agreement are standard, but some are also negotiable. If both parties negotiate with an open mind and mutual respect, fulfilling contract negotiations can be painless. This article will look at some important clauses in a fulfillment services agreement.

Clauses In A Fulfillment Services Agreement:

Let us take a glance at the agreement clauses.

Cost Of Living Adjustments:

Clients are surprised when their annual cost of living adjustments come out higher than the government reported increases. These numbers don’t address the significant cost drivers for third-party logistics.

For instance, employee health benefits will increase in 2022, which is an unavoidable cost for providers. Still, they can negotiate with customers to better understand the mathematics behind such increases.

Material Change In The Business:

The most important part of the contract is the price. You can calculate pricing for a customer by getting data on the number of orders per day, average lines per order, and SKU count.

If the data changes exponentially, for example, the number of orders and SKUs double, the units per order are cut in half. It would be impossible for the service provider to function at the contracted rate.  

Early Termination:

Customers may want to terminate a contract due to many reasons. This also creates problems for the 3PLS. They sometimes invest money in a contract anticipating a full recoup, but the agreement is dissolved before they can do this.

3PLS may invest at the start in capital equipment and get back these costs over time. Sometimes, logistics providers decide to operate on lower prices until productivity ramps up at the beginning of an agreement.  

Shippers also demand flexibility in the contract in terms of termination, but the agreement should address the 3PLs involvement. Their investments are skewed at the start of the relationship. They should have a way of recouping their costs following a termination.

Inventory Shrinkage:

Most customers know that a slight inventory shrinkage is allowed. However, this can become a cause of concern for customers with little experience with warehousing contracts.

Inventory shrinkage can be caused outside the warehouse or inside.

However, reliable 3PLs will not hide behind the contract language to avoid responsibility. They will do the right thing and stand behind their negligence.  

Warehousemen’s Lien:

A good contract always includes a provision for non-payment. Banks exercise their right to collateral if you default on a loan. Similarly, when a customer plans to leave with outstanding payments, 3PLs have to leverage the other inventory they hold for the customer.

A standard clause will address the provider’s rights to hold inventory as collateral until outstanding payments are cleared.

Conclusion: 

Negotiating a fulfillment contract is a long and challenging process. But it can be streamlined if both parties enter the discussion with mutual respect and create a mutually beneficial agreement.

To make this process easier:

  • You can enlist the help of attorneys familiar with warehousing law.
  • Avoid a committee approach to the contract. Appoint a decision-maker that can help reconcile conflicting opinions.

Visit Gillson Trucking for more information.