Originally Published - April 21, 2008
Globalization and lean manufacturing are realities for today's manufacturers. As the manufacturing network increases and extends across borders, so do the complexities of moving components and tracking these goods, as well as difficulties in delivering the products on time, both to manufacturers and to final customers. This new reality of manufacturing is now facilitated through supply chain management (SCM).
SCM enables today's discrete manufacturers to produce and move goods or components more efficiently, thus arming them with a competitive edge. However, managing compliance, tax laws, internal policies, and contracts between multiple parties can be overwhelming for any manufacturer.
This article focuses specifically on contracts—better known as service level agreements (SLAs)—between multiple parties in the supply chain. It describes what an SLA entails and explains how a discrete manufacturer should negotiate an SLA with the numerous organizations in its supply chain.
Service Level Agreements Defined
An SLA is a contract between two parties that stipulates how one party will provide certain services and support within a given time frame to the other party.
A manufacturer can have multiple SLAs with two types of organizations: 1) suppliers and distributors that provide products to its location(s), and 2) the software provider.
Because supply chains and SCM software are very complex due to the nature of the discrete manufacturing business, SLAs are equally complex. Not only can SLAs be complicated, but a manufacturer might be dealing with multiple SLAs as well. For a manufacturer to not become overwhelmed by all these SLAs, terms must be clearly written out so that all parties involved know what is to be delivered and how. For more in-depth information on supply chains, please see Supply Chain 101: The Basics You Need to Know.
Many software SLAs include a service element in addition to information on how the software will perform, on upgrades, etc. The second element covers the terms of technical support and problem resolution. With this aspect of the SLA, software firms providing the technical support can be heavily fined if they do not respond within the time periods specified in the SLA (known as severity levels). This can bring large financial consequences to individuals involved, and disrupt the flow of business for all parties within the supply chain.
From a business standpoint, SLAs between companies, whether they are suppliers, manufacturers, or distributors, also stipulate the financial repercussions if components are (i) not delivered on time, (ii) defective, or (iii) not delivered at all.
Today, all SLAs must have a basic, fundamental format so that all parties involved know what is expected of them. Table 1 describes these elements.
Foundational Elements of the SLA
To clarify how to negotiate SLAs and minimize the risk of financial loss, Table 1 offers a basic breakdown of an SLA's main components. Subcomponents are identified and explained afterward.
|1. Establish the names of all parties involved.
||This can be multiple partners together, OR the software vendor and the name of the manufacturer. This establishes who all parties involved are, and sets the foundation for the rest of the contract.
|2a. Establish service levels from the provider or supplier, and the expectation from the manufacturer's side.
||This makes clear to suppliers what is to be delivered, where, and when, OR this will stipulate all the technical deliverables provided by the vendor, and what the manufacturer expects the vendor to provide in terms of features and functionality.
|2b. Establish of how the vendor will deliver each level of service, and what the repercussions are to not providing these elements to the manufacturer.
||Often, financial repercussions will occur either when products are not delivered on time, OR if technical support is not delivered when critical downtime occurs.
|3. Establish all exceptions.
||If an exception occurs, all parties will be notified, and roles and responsibilities will be defined.
|4. Stipulate any and all changes to the business or the software.
||As the business changes, or as more functionality to the software is modified, technical aspects in the SLA will change. This change will have to be followed by what is stipulated in this section.
Table 1. Main components of SLAs.
Subcomponents of SLAs include service availability, mission-critical definitions, and response time—elements that have a direct impact on a manufacturer's bottom line. If the SLA's guidelines for these are not adhered to, not only does the manufacturer lose money, but customers can be affected as well, depending on the industry.
Other items to factor into an SLA include training, outsourcing, implementation, and consulting. These elements can have a large cost associated with them, and negotiating them into the SLA is a crucial aspect executives should keep in mind. In addition, the SLA could include industry stipulations that need to be adhered to, either by conjunction of industry standards, safety regulations, or international laws.
Due to the complexities outlined above, many problems can occur within each component of the SLA. Whether the relationship is between manufacturer and supplier or manufacturer and software vendor, difficulties can come about with how components will be delivered, how an implementation will be conducted, or a myriad of other unforeseen situations. The following section outlines some of these issues and tries to "clear the air" in order to ease negotiating and navigating through an SLA.
Three main elements should be addressed even before negotiating each technical element (as described in Table 1): compliance, internal and external policy, and channels of communication.
The legal issues of compliance need to be spelled out in an outline format so that when the SLA is being developed, each legal point is addressed, and both parties know that they are complying with both business and governmental law when conducting business.
Internal and external policies need to be addressed in the same flavor as is done with compliance issues (point 1 above), in that when negotiations are taking place, both parties know what is expected of them so that business practices will not be compromised.
How will communication between all parties take place? Channels of communication need to be established at the beginning of negotiations in order for all elements to fall into place. With regards to a software vendor-manufacturer relationship specifically, if this aspect is not established from the beginning, communication breakdowns will prolong implementation time.
Other challenges that need to be addressed in the beginning stages of negotiating an SLA include the following:
What capabilities can the software vendor or supplier provide? The capabilities of the software solution or supplier need to be outlined to ensure they match with the manufacturer's business processes, as well as to make certain these capabilities will address the manufacturer's business needs.
Particular to the software vendor-manufacturer relationship, the scope of the implementation, an overall definition of what is to be done, and who is to be assigned to each task should be addressed in order to clarify each aspect of the implementation and to create a road map. Each member of the implementation team (on each side) will then know exactly what they are responsible for and with whom they will be working.
If both the manufacturer and the vendor follow these basic steps and outline their processes before negotiations begin, many unfortunate events will be happily averted, and a framework will be set in place: if anything goes wrong, processes and the people responsible will have been clearly defined, and the risk of more complications occurring will be minimized.
To be clear, a properly defined and negotiated SLA between both parties should either avert or help to resolve potential problems.
Implications for Both Vendors and Manufacturers
The bottom line is that SLAs help to reduce costs on both sides as well as to minimize the amount of technology used throughout the manufacturing supply chain. Both parties want an efficient and successful implementation or business partnership in order to 1) have the manufacturer's system up and running in as little time as possible, or to have the supplier deliver the necessary goods so that production can continue, and 2) not have the vendor lose time and money by fixing mistakes that could have been avoided if processes had been properly defined.
If the software vendor must continually fix problems and bugs, or if there is a loss of integration between software components and other items, its future projects may be affected in either of the following two ways: 1) the vendor will have less time to dedicate to new projects, having focused so much of its time on the present implementation, or 2) the vendor will receive a negative recommendation from the manufacturer because the vendor took too much time to complete the implementation, thus not winning future bids for software implementation projects.
Suppliers are also subject to the above repercussions. Suppliers within the supply chain that are negligent in providing products on time and within budget can receive poor recommendations from the manufacturers, thus losing bids to supply components to other discrete manufacturing companies.
Such issues can be avoided if every component of the SLA is clearly defined during the negotiation process and closely followed during the implementation—an approach that is in both party's interests. To not do so can result in higher costs for all parties involved.
Items to Negotiate in Technical Support
Between the manufacturer and the software vendor or supplier, the two components most recommended to negotiate are the response time and what constitutes a critical situation. The cost savings of having these two elements in line with the business needs is crucial to prevent financial loss because of unpredicted downtime.
Here are three questions the manufacturer should ask when negotiating with the software vendor or supplier:
How is the software vendor or supplier going to deliver these two crucial elements, and how fast are they going to respond?
What is the quality of the response? The manufacturer should do some preliminary research on the software vendor's or supplier's history with previous clients before making a selection.
How qualified is the software vendor's or supplier's support staff? If the software vendor or supplier is devoted to servicing the manufacturer at any cost, and if it has a proven track record of doing so with past clients, then the manufacturer should take this into consideration, as it is clear the software vendor or supplier places value on minimizing future problems.
Once these questions have been answered to the manufacturer's satisfaction, the manufacturer can expect the benefits that smooth technical support or delivery of goods provide, which include reduced costs, less nonscheduled downtime, and less overall frustration.
The Final Word
By following the steps discussed throughout this article, the process of negotiating a thorough and correct SLA for all parties within the supply chain—whether these parties are software vendors, manufacturers, or suppliers—should be eased. A few other points important to consider during negotiations include
What service levels are going to be delivered by the providers?
How are these items going to be delivered?
What time frame is each item going to be delivered?
Who is responsible for each part of the above items in the negotiations?
The SLA allows the software vendor and the manufacturer know what the software solution's capabilities are and if there is room for scalability. If scalability is an option as the manufacturer's business grows, the SLA will outline how this will be dealt with.
An SLA can include multiple organizations within the supply chain so that goods flow easily throughout it. All parties' and key individuals' roles and responsibilities will be clearly defined so that production and movement of goods is quick and efficient.
A final element that needs to be stressed is the importance of responsiveness. If a software vendor has a track record of responding slowly to implementation issues, or if a supplier has a track record of not delivering products on time, the manufacturer must take these factors into consideration, as such poor performance has major (negative) financial implications for the manufacturer.