A Guide to 3PL Warehouse Contracts & Fulfillment Agreements

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Warehouse contracts play a crucial role in the operations of many businesses, particularly those in the logistics and supply chain industry. However, negotiating these contracts can often be overwhelming, especially for those unfamiliar with the intricacies. With so much at stake, being well-prepared and equipped with the right strategies is crucial.

As you approach the final stages of negotiating your warehouse contracts, you must consider critical considerations that can significantly affect the outcome. These tips will help you to navigate the negotiation process effectively, ensuring you secure your business’s most favorable terms and conditions. So, before you finalize any contracts, make sure to take note of these valuable insights.

What Are Fulfillment Agreements?

To get your product to market, you need to work with the right people.  A fulfillment agreement is a legal contract between a manufacturer and a product distribution company that defines that nature of the relationship, the fees, and numerous other details.

3PL warehousing and fulfillment agreements and contracts

It may sound simple, but these contracts can involve dozens of different factors, and your fulfillment agreement needs to be specifically defined so that each and every detail is laid out in clear, easy-to-understand language. While you may need legal assistance creating and finalizing the document, you shouldn’t need a law degree to understandit. With this guide, you’ll have a basic understanding of fulfillment agreements.

What to Look for From Fulfillment Agreements

Acceptable Error Rates

This is an important benchmark for working with fulfillment providers, and it’s one of the top ways that these companies gauge their own performance. The accuracy of picking products is essential to client success, so fulfillment providers need to maintain extremely high accuracy if they want to remain in business. According to our latest survey, 87% of companies measure their own performance, and the average picking accuracy is 99.51%, while average inventory shrinkage was 0.65%.

Contract Length

Each contract will also have various lengths, and you should be able to find a program that specifically meets your needs. According to our survey, over half of the fulfillment providers offer month-to-month agreements, which allow greater flexibility for your shipping contracts. About 38% offer annual agreements, while about a quarter offer agreements on a multi-year basis. Only 10% require no agreement terms whatsoever.

A Month-to-Month Contract

You may prefer going this route instead, especially if you’re worried about being locked in to a long-term agreement. Not all warehouses are going to lock you in, but you may need to negotiate if they do.

With a monthly contract, you’ll have to update it regularly for revised agreements. As many warehouse contract analysts note, one of the first things to detail in your contract is the services provided by the carrier. All of these might need revising as your startup starts to grow within a year’s time.

It’s why you need to stay communicated with your 3PL warehouse throughout each month to revise exactly what you need as you negotiate new contracts. If the warehouse isn’t willing to negotiate, know many other warehouses exist out there. You only need quality vetting services to find the ones best suitable for your business structure.

An Annual Contract

With an annual contract, you can eliminate the need to have to renegotiate every month, which can obviously become a hassle when you’re busy with other things. Along with outlining the services you need, you should also work out yearly agreements on rates, changes, and payment methods. Obligations and the rights of the shipper also need clear definitions to avoid legal entanglements.

Risk of loss and liability need mentions as well since a yearly contract is a long time without some likely damages. You don’t want to get stuck in a year-long contract without some liability since you could face major losses during the year if the warehouse doesn’t take full responsibility during shipping.

It’s always a good idea to add an amendment provision in the contract, though you both have to sign this so you’re in equal agreement.

A Multi-Year Contract

Signing a contract with a warehouse that goes on for two or more years is risky, despite having some advantages. One of the best is you’ll likely get lower rates. Nevertheless, you could get locked in further and be unable to get out if you find out some things about the warehouse you don’t like.

Being stuck with a 3PL facility that eventually becomes incompatible with your business can lead to severe financial difficulty. Since communication is important to maintain a good working relationship with a fulfillment center, being on bad terms only hurts you and how they ship items.

Warehouse & 3PL Fulfillment Fees

What should you expect in pricing? The numbers can vary and are dependent on many factors, including but not limited to volume levels, product types, and location. As an example, pricing in highly populated areas such as fulfillment and distribution centers in New Jersey (NJ) and fulfillment centers in California could vary significantly from less popular areas such as distribution centers in Illinois or fulfillment centers in Florida.

our numbers show that the average price for pick-and-pack on a single item was $2.64, while the average fee for a business-to-business order was 3.75%. Almost three quarters of all warehouses surveyed said they do offer discounts for high-volume orders, and the average discount came into effect when the client has 1,800 orders per month. These discounts ranged from 3% to as high as 10%.

There are also fees for storage, and you should look for this information in your fulfillment agreement as well. In most cases, warehouses charge by the pallet. Almost 80% based their storage prices on this system, and the average cost was $13.02 per pallet. However, cubic footage is used by 39% of providers to calculate the bill, while 23% measure the cost by square footage. Cubic feet averages about $.54, while the cost for storing a bin averages $2.14. As you may have noticed from the percentages, a few companies offer more than one fulfillment pricing structure.

How shipping price is calculated will also need to be considered. Many companies offer a discount off of published rates, helping to reduce the cost for their clients while increasing volume. It’s also common for warehouses to allow customers to use their own freight account, and some offer cost plus pricing, although a small portion do not apply discounts whatsoever. If discounts are offered, you’ll commonly see rates of 24% for ground, 31% for express, and 44% for LTL.

Annual Increases Must Be Defined

Throughout the life of the contract, there will be a need to gradually increase the cost of services. These annual increase should be clearly defined in the fulfillment agreement. When looking for a fulfillment agreement, be sure that these increase are laid out so you can maintain a consistent budget with no surprises. Roughly 54% of respondents say that they increase their prices annually, and the average annual increase is 2.37%.

Minimum Volume Requirements

Many fulfillment houses will require new customers to produce certain volumes, or will require new clients to spend a minimum amount each month. While there are some small business friendly fulfillment centers, most companies do have minimums. The following are 3 minimum of the most common requirements for warehouse contracts.

Monthly Order Volume Minimums

Order volume minimums in warehouse contracts refer to the stipulated minimum quantity of product orders a client must meet within a specified timeframe. This requirement ensures a consistent business flow for the warehouse, encouraging clients to maintain a minimum level of order activity. It helps warehouses allocate resources efficiently and plan operations based on a guaranteed minimum order volume.

Total Monthly Spend Minimums

Total monthly spend minimums denote the minimum amount of money that a client commits to spending on warehouse services within a given month. By setting total monthly spending minimums, warehouses ensure a certain level of revenue from each client, contributing to stable financial projections. This requirement can be advantageous for both parties, providing the client with predictable costs and the warehouse with a reliable revenue stream.

Monthly Storage Minimums

Storage minimums in warehouse contracts specify the minimum amount of storage space a client must utilize or pay for within the warehouse facility. This requirement is crucial for optimizing warehouse space and resource allocation. Clients committing to storage minimums help warehouses plan their inventory management efficiently, ensuring that available space is utilized effectively and providing a consistent revenue stream for the warehouse.

Insurance, Damages, and Liability

A quality fulfillment agreement will also have details for insurance, damages, and liability, which helps protect the manufacturer from ruined product or other issues that are the fault of the distributor. This area of the contract should include a few different aspects, including procedures for handling loss and damage, and the required timing of claims. In many cases, claims for damages will need to be filed within nine months.

Warehouse insurance for the contract should also include various aspects, including workers’ compensation, liability insurance, and cargo liability. All of these should be described in full in the fulfillment agreement.

Service Level and Responsibilities

While it can be easy to assume that the service level and specific jobs are a clear and well-understood component of fulfillment agreements, the exact specifics should be defined in the contract. There are simply too many forms of service to leave this area unaddressed.

Essentially, the contract should state, in clear wording, what fulfillment services will be performed. These services can include receiving, storing, and shipping the goods at the facility for the agreed term. It will include who is responsible for selecting the location for storage and whether or not the goods can be moved without the owner’s permission or notice.

There are also complications with operating procedures, so if the client has specific standards, the contract will need to define whether or not these standards will be implemented, and if they will be used, how the provider will implement the standards.

Other aspects of service that need to be defined in the contract include the process for submitting written instructions and the schedule of delivery appointments.

Liability for SLA Non-Compliance

Non-compliance can result in various liabilities for the parties involved. SLAs define the agreed-upon standards for performance, including metrics such as order fulfillment times, inventory accuracy, and other key performance indicators. If a party fails to meet these defined standards, they may be held liable for breaches of the SLA.

Liabilities for SLA non-compliance often include financial penalties outlined in the SLA itself. These penalties act as a means to compensate the affected party for failing to meet agreed-upon service levels. Repeated or significant SLA breaches can lead to more severe consequences, such as contract termination or legal action.

It’s essential for parties in a warehouse contract to clearly outline SLAs, including specific metrics, benchmarks, and the corresponding penalties for non-compliance. This ensures a transparent framework for assessing performance and establishes accountability for meeting the agreed-upon service standards. Regular monitoring and communication between the parties help address any issues promptly and mitigate potential liabilities arising from SLA non-compliance.

Carrier Liability

The liabilities of a carrier, often referred to as carrier legal liability, encompass responsibilities related to the transportation of goods. These include accountability for potential cargo damage or loss during transit, adherence to agreed-upon delivery schedules, and compliance with safety regulations. Carrier liability involves financial repercussions or legal actions in case of breaches, emphasizing the importance of comprehensive insurance coverage to mitigate risks and ensure compensation for any losses shippers incur.

Law and Venue for the Warehouse Contract

The choice of law and venue in a warehouse contract hinges on key factors:

  • Location of Parties: Determined by the geographic locations of the contracting parties.
  • Operational Location of the Warehouse: Often aligned with the jurisdiction where the warehouse operates.
  • Industry Standards: Adherence to established norms within the industry.
  • Cost and Convenience: Considerations of cost-effectiveness and logistical convenience.
  • Enforceability of Judgments: Opting for a jurisdiction with efficient enforcement of judgments.
  • Neutral Jurisdiction: Choosing a neutral jurisdiction for parties in different locations.
  • Legal Expertise: Selection based on the jurisdiction’s expertise handling warehouse contract legalities.
  • Mutual Agreement: Finalized through mutual agreement in the contract terms.

Careful consideration of these factors ensures a clear and effective legal framework, facilitating the smooth resolution of disputes or legal matters within the warehouse contract.

KPIs and Performance Reviews

Key Performance Indicators (KPIs) are measurable metrics used to evaluate the effectiveness and efficiency of warehouse operations. These indicators are crucial for warehouse operators and clients to gauge performance, monitor service quality, and meet contractual obligations. Common warehouse KPIs include:

  • Order Fulfillment Accuracy: Measures the precision of picking and packing orders, ensuring that the correct products are delivered to clients without errors.
  • Inventory Accuracy: Reflects the precision of inventory management, indicating how well the actual inventory matches the recorded stock levels.
  • On-Time Delivery: Evaluates the punctuality of order deliveries, a critical KPI to ensure that products reach clients within agreed-upon timeframes.
  • Cycle Time: Measures the time to complete specific warehouse processes, helping assess operational efficiency.
  • Warehouse Space Utilization: Examines how effectively the warehouse utilizes its storage space, optimizing capacity and minimizing unnecessary costs.

Performance reviews in warehouse contracts involve the systematic assessment of these KPIs and other relevant factors. Regular reviews allow both parties to identify strengths, address weaknesses, and make necessary adjustments to improve overall performance. Clear communication, transparency, and a collaborative approach are essential during performance reviews to maintain a strong and mutually beneficial partnership between warehouse operators and clients.

The Best Fulfillment Agreement?

So what does the right agreement look like? After reviewing all the various aspects of a fulfillment agreement, what should you have as a final result?

The best fulfillment agreements will include these features:

  • 99% of all orders will be shipped the same business day.
  • 100% of rush orders received by 3:00 PM will ship that day.
  • There should be a pick accuracy greater than 99%.
  • 100% of all returns should be processed within 48 hours.
  • 100% of all inventory should be received within 48 hours
  • 80% of all calls received should be answered within 30 seconds.
  • 100% of all incoming calls must be answered.

An Example Fulfillment Agreement

Want to see what a fulfillment agreement looks like? Download this file to get an example. (This fulfillment agreement was provided by Charles Intrieri.


Final Tips on How to Negotiate Warehouse Contracts

Negotiating warehouse contracts demands strategic finesse to establish mutually beneficial agreements. Here are some of the best tips to navigate these negotiations effectively:

  • Clearly Define Requirements: Clearly articulate your warehouse needs, specifying storage space, services, and performance expectations to set the foundation for productive negotiations.
  • Understand Pricing Structures: Understand pricing models and ancillary fees to assess overall costs and ensure negotiation transparency.
  • Flexibility in Contract Terms: Strive for flexibility in contract terms, negotiating provisions that accommodate potential changes in business requirements.
  • Service Level Agreements (SLAs): Clearly define and negotiate SLAs with measurable metrics and consequences for non-compliance to ensure accountability and performance alignment.
  • Volume Discounts: Explore opportunities for volume-based or long-term commitment discounts, negotiating favorable pricing based on the scale of your operations for potential cost savings.

Now that you fully understand fulfillment agreements, you will be able to select the right contract for your specific needs. Rather than searching lists of fulfillment companies, we can help match you to the best fulfillment centers for your needs. If you have any further questions, we encourage you to contact us today.

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