The Service Level Agreement Concept

A service level agreement (SLA) is a document describing the level of service expected by a customer from a supplier, laying out the metrics by which that service is measured, and the remedies or penalties, if any, should the agreed-upon levels not be achieved.

In the field of organized large-scale retail trade (OLSRT), there is a high level of attention to the quality and the level of service. In particular, customers (i.e. large retail stores or large retail groups) require that the rate of delivery on time of ordered products is greater than percentages of 95 %.

Delays and bad deliveries create revenue loss to the customer itself, which charges substantial penalties to its suppliers for this reason. Usually these penalties are planned in the supply agreement, and therefore both the supplier and the customer are aware of them.

The problem arises at the time of accounting. In fact, while the penalty is born in a certain period, the related accounting can take place several months away. Not only it is often impossible to trace the events that led to the penalty, but also it is very difficult to account the penalty itself. In other words, an accounting period, which ended positively, could later prove to be a negative period.

To avoid this problem, it is necessary to monitor continuously orders and shipments. The daily collection of information for each order, for each shipment and for each customer, indicating the level of service and the causes that have led to any stock-outs (delays by suppliers or production), allows a better control of the supply chain.

The SLA report

Fig. 3 The SLA report

Service level agreement (SLA) key measures are integrated into a supply chain scorecard (see Fig. 3) that is consistently measured across the organization allowing benchmarking inside the Group. The main KPI analysed in SLA report are:

  • • Forecast accuracy
  • • Stock levels
  • • Internal/external supplier delivery performance
  • • Transport provider measurements
  • • Warehouse operation measurements
  • • Order fill rate
  • • Product availability or stock-out rate
  • • Days sales outstanding
  • • Customer delivery transport measurements
  • • Customer order outstanding analysis

In addition to the above-mentioned tactical aspects, the model developed to measure SMA allows several strategic thoughts. As a matter of fact, it is possible to evaluate the convenience to operate on a particular market. After loading all the information related to logistics and production, you can simulate the production levels achievable and then decide whether it is possible or not to meet the demands of a potential market.

It is important to underline the complexity of the model: in fact it requires (1) a thorough understanding of the processes, (2) the availability of information related to logistics and production and (3) the availability of adequate computer facilities and databases.

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