Partnering with the 3PLs: What to Look Out for in the Contract

Your e-commerce company cannot operate without an order fulfillment mechanism. When your business is small, you can probably fulfill every incoming order in-house. But as it grows, this may no longer be feasible. In this case, third-party logistics (3PL) companies can help you immensely since they have the infrastructure, technology, and expertise to manage your requirements. By outsourcing inventory management, warehousing, inbound freight delivery, and order fulfillment to a 3PL firm, you can scale up your business, reach more customers, and boost profitability.

Nevertheless, your 3PL partner must offer a mutually-beneficial relationship for you to receive the perks described above. A mutually agreed-upon set of terms and conditions, as well as aligned objectives, is essential for your e-commerce business.  

So, how can you assess if your future partnership will be mutually beneficial? The answer: consider a few key things when negotiating with them.

This brief blog explains these considerations!

Understand the Master Agreement and Any Addendums

Most 3PL companies use a master contract agreement. It helps them standardize the legal language so they no longer have to create a new one every time. However, this doesn’t mean that you should accept the contract as it is. You can customize it with the help of addendums. Consider these addendums and add them to your 3PL contract: 

  • Statement of work summarizing the services the 3PL will provide
  • Pricing details
  • Agreed performance standards
  • Order processing procedures
  • Implementation scheduling
  • IT changes

Before finalizing the contract, make sure you have included all required addendums. Also, consider the length of the agreement. Many 3PL contracts are three years or longer, but you can change the length based on your needs.

Understand the Language of Rate Increases

Most 3PL vendors increase their rates every year to account for increased payroll costs, higher warehouse leasing costs, and many other reasons. You should budget for such increases in advance. At the same time, avoid leaving the contract open to haphazard, subjective – or worse, punitive – rate increases.

So, if the vendor uses vague language around the rate increases, ask if they can tie these increases to a specific index or industry metric instead. For instance, can they tie an increase in material costs to inflation? 

Or labor increases to an employee cost index (ECI)? 

Moreover, can vendors clarify the frequency at which the increments happen so that you can avoid surprises?

Such an approach makes it easier for you to plan for the future. It also increases transparency in the system, so both parties know where they stand at any given time.

Specify the 3PL’s Liability in Your Contract

During your negotiations with the 3PL, think about what could go wrong and what the vendor’s responsibilities would be in such cases. Usually, you will be responsible for your products, and the 3PL provider will be responsible for the warehouse facility, its equipment, and the people working.

The 3PL vendor is also responsible for any product damages resulting from incorrect handling and fixing mistakes related to shipping the wrong product to a customer. It’s imperative to clearly include these terms in the contract to prevent dealing with unpleasant surprises later.

Plus, ask the 3PL partner if they have insurance to protect against losses such as:

  • Warehouse legal liability: They must offer reasonable care while storing your products in their warehouse
  • Business interruptions: This covers events like natural disasters that prevent the partner from doing business
  • Transportation: This covers the safe transport of goods and includes payouts in the event of negligence by the 3PL provider

Make sure your contract covers liabilities for every conceivable occurrence, as well as who will be responsible for what. Get it all in writing right at the outset to avoid problems or unexpected costs later.

Also, keep in mind that the 3PL insurance might not fully cover your losses, so you should also have your own insurance.

Be Very Clear on Services and Service Standards

Many 3PL/client contracts lack definitive agreements around services and service levels, for example, schedules for shipping same-day orders. If you don’t agree on these standards in advance, disagreements may arise, and later that may lead to heated disputes affecting your relationship.

Clearly and explicitly define all expectations in the contract. Agree on implementation timelines, acceptable error rates, and cost forecasts. Include all contract terms, especially those related to the invoice and payment terms, that both parties can agree upon upfront.

Get specific and ask incisive questions like:

  • Will they sign a non-disclosure agreement, and how will they adhere to it?
  • How do they deal with delays, and how do they compensate customers?
  • Do they have a record of financial stability?
  • Can they provide references from other customers?
  • What kind of service-level guarantees do they offer?

Ask what kind of IT services they will provide. Review their books of standard reports, and ask about services like interfaces and customizations. Check if their systems integrate with your existing order and inventory management systems to improve synchronization and minimize errors or delays.

It’s also crucial to set reporting and communications expectations, especially around inventory counts, returns, incoming purchase orders, receiving stock, and shipping notices. Clearing up all communication makes the entire process seamless, even for your end consumers.

Conclusion

The global 3PL industry will be worth $1.3 trillion by 2024, and there are good perks hidden for you. Like hundreds of e-commerce firms, your firm can also benefit from working with a reliable 3PL partner. But before you embark on the partnership, review the four elements explained in this article. It will empower you to get the best possible results and grow your business.

At Ergode, we help e-commerce companies automate and streamline operations with our extensive network, comprehensive e-commerce stack solutions, and cutting-edge technology. Connect with us to know how our 3PL network can give your budding e-commerce business a boost for a lifetime.

Leave a Comment

Your email address will not be published.