Developing supplier relationships

Supplier service level agreements


Service level agreements (SLAs) are agreements or contracts with suppliers that define the service they must provide and the level of service they must deliver. They also set out responsibilities and priorities you and the supplier agreed to.

SLAs are contractual obligations often built into a legally binding contract. They can be included in the contract as one or more clauses, or as an entire section. You can use SLAs in any supplier contract where they provide you with a service.

Service level agreements in supply chains

A supplier service level agreement should provide a comprehensive description of all aspects of the supplier's service. Typically, the SLA will set out:

  • the type of service to be provided
  • the acceptable and unacceptable levels of service
  • the metrics associated with the supplier's service and performance
  • the timetable for delivery
  • responsibilities of service provider and customer
  • provisions for legal and regulatory compliance
  • mechanisms for monitoring and reporting of service
  • payment terms
  • how disputes will be resolved
  • possible corrective actions
  • confidentiality and non-disclosure provisions
  • termination conditions

If suppliers fail to meet agreed levels of service, SLAs usually provide for compensation, commonly in the form of rebates on service charges.

Service level agreement best practices

Establishing an SLA will typically take a good deal of time and effort. Be diligent in gathering information, negotiating and building consensus with your supplier. An SLA will work best if both parties mutually commit, so try to reach an agreement in good faith.

Your SLA should be specific, measurable, achievable, relevant (SMART) and time-bound. Go into detail with anything that matters in the service and avoid SLA loopholes and ambiguous wording.

It can help to highlight the most critical components of the deal in an SLA, so you can apply the strictest penalties to these. Work out all the 'what if' scenarios and remember to include a clause that allows you to periodically review your suppliers' performance.

In some cases, you may need to accept a supplier's standard SLA. For example, you are unlikely to be in a position to negotiate a customised SLA with your telecoms provider. If the SLA does not guarantee the service quality you require, you may need to look for alternative suppliers or make contingency plans to deal with any problems.

SLAs are complex documents. You should take every care to carefully define and draw up an SLA and, if necessary, seek legal advice before agreeing to the terms.

See also best practices in supplier quality management.