Logistics Service Contract

Corporations are outsourcing logistics operations to 3PL or 4PL firms to obtain cost and service benefits for building competitiveness. In addition to this, the other expectations are value addi­tion in customer value delivery process, diversion of risk and reduction of liabilities. The service supplier has to organize assets, add manpower, hire facility on lease or purchase it outright. In certain situations, the commitments on the part of the service supplier are expensive. The service supplier shall ask for risk coverage by way of higher service charges, and contract for a longer period. Similarly, the outsourcing firm shall guard its interest by imposing a penalty in the event of non-deliverance of the promised service benefits resulting in customer complaints and erosion of the customer base. For safeguarding their interests and maintaining a smooth relationship, the outsourcing firm and the service provider usually enter into a contract or legal agreement that is binding on both of them. The following are the major points covered under such an agreement:

  • Date and place of the agreement
  • Names and addresses of the contracting parties
  • Scope of service
    1. Geographical coverage
    2. Logistical services (in full or in part)
    3. Management and usage of customer’s existing logistic assets
  • Payment terms
  • Delivery requirements
  • Extra services from service providers
  • Charges of the service offered
  • Value proposition by service provider
  • Damage liability
    1. Loss (due to fire, pilferage, rains, accident, floods, act of nature, negligence, aging, and so on)
    2. Insurance
    3. Damage calculations basis
    4. Demurrage due to delays in loading and unloading
    5. Consequential damages
  • Responsibilities
    1. Employees
    2. Assets management (office, facilities, equipment, and so forth)
    3. Warehouse management
    4. Inventory management
    5. Transportations
    6. Communication
  • Performance measurement criteria
  • Risk sharing
  • Termination of contract
  • Notice for claims and filing suits
  • Authority for settling dispute
  • Notice period
  • Governing laws

Legal experts and top-level management executives are involved in the preparation of docu­ments. In many cases, those who were involved in negotiating an agreement are transferred or leave the organization during the term of the agreement, leaving it to their replacements to inter­pret the terms and conditions of the agreement in their own way. Thus, a wrong interpretation may sometimes result in breaking the partnership. However, a precise and well-written agreement will often encourage healthy relations between the outsourcer and the service provider. For a sample agreement see the annexure to this chapter.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.

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