A service level agreement (SLA) is a contract between a service provider and an end-user that defines the level of service expected from the service provider. An SLA is an output-based document that defines specific performance metrics and remedies when the agreed upon performance is not met.
Fleet managers can implement an SLA with a variety of fleet service providers. This two-part article examines the advantages and disadvantages of developing an SLA with an upfitter.
“SLAs with upfit suppliers typically revolve around the goal of reducing order-to-delivery times, quality, and costs. Tracking, reporting, and performance expectations are spelled out and agreed in writing by both parties,” said Wayne Reynolds, manager, upfit design and consultation for LeasePlan USA.
There are various components of an SLA, with a key stipulation for an upfitter being the establishment of timelines for the delivery of upfitted equipment.
“The major benefit of having an established service level agreement is that you are able to set realistic timelines that a fleet management company (FMC), the upfitter, and the fleet customer can expect to be followed,” said Steve Swedberg, truck engineering and ordering specialist for EMKAY. “The agreed on timelines should cover the planning, completion, and delivery of upfitted vehicles. The result is an upfitting process that can be estimated with greater accuracy and consistency, resulting in better service for the end-user customer.”
When establishing metrics there needs to be agreement as to the definition of key metrics, such as what is exactly meant when a fleet end-user specifies “quality delivery”?
“Each fleet client needs to understand their firm’s definition of quality, delivery, and cost (as well as service), and develop key performance indicators (KPI) that support their company’s definitions of the outcomes,” said Joe Brightwell, supply chain, quality and operational excellence manager - service vehicles for Wheels Inc. “Fleet end-users always want three basic outcomes from an upfitter: quality product, delivered on time, and within budget. Each of these three outcomes must be wrapped in excellent service.”
In addition, an SLA can function as a building block for future, more complicated projects. “An SLA facilitates the transition to more customized builds or purpose-built vehicles,” said Scott Bailey, director, strategic alliances and sourcing for Element Fleet Management.
Creating an SLA is not just between a supplier and end-user, it can also be extended throughout the supply chain. “Several upfitters have taken the initiative to create SLAs with their suppliers and distributor network,” said Joe Birren, truck design consultant for Donlen.
Another function of an SLA is to provide assurances to a fleet end-user when there are concerns about a fleet supplier’s reliability. “A fleet client may want to consider an SLA when there is reasonable doubt about the ability of the provider to meet expectations, and/or has a history of inconsistent delivery that has impacted the client in a material way,” said Partha Ghosh, director, supply chain management for ARI.
Structuring an SLA
Open, two-way dialogue is critical to structuring an SLA that is mutually beneficial to all parties.
According to Reynolds of LeasePlan USA, open dialogue with the fleet supplier and the fleet end-user will determine:
- The responsibilities of all parties.
- What aspects of the processes they actually control or influence.
- The metrics to be measured.
- The scale used to measure performance.
- How information will be reported and shared.
- The remedy when agreed on performance is not met.
While each negotiation may be unique, Swedberg advises that an SLA should cover every aspect of the upfitting process, in particular:
- Product ordering.
- Start dates.
- Completion dates.
- Penalties for not completing on time.
- Warranty coverage.
In fairness, an SLA should not cover variables that cannot be controlled by the upfitter.
Below are seven factors that need to be considered when developing an SLA:
1. Identify the Critical Metrics: “An SLA should identify what is really important to each party. An SLA will bring to the surface what should be focused on during the upfit process,” said Brightwell of Wheels.
2. An SLA Should be Structured to be Fair to Both Parties: This is critical to ensure a long-term, successful business relationship between all parties. The entire supply chain process should be considered in an SLA, which includes obligations on both parties.
“For example, specifications may need to be completed and accepted by the client by a certain date, to be followed by orders being placed by a certain date to realistically meet a needed delivery date that considers the various delays that can occur. Production lead times for both chassis and upfit, while generally consistent, can vary and, thus, both parties should understand and agree on realistic time frames for ultimate delivery,” said Ghosh of ARI.
3. It is important that an SLA is written in a manner that is clearly understood by all parties.
“One of the largest advantages to having a service level agreement with upfitters is it ensures there is a clear understanding between the fleet management company, the fleet client, and the upfitter,” said Howard Goldman, vehicle purchasing manager for Merchants Fleet Management. “The SLA helps serve as one single version of the expectations, while allowing the upfitter a reasonable amount of time to complete a job that requires a rigorous quality process, as well as meeting price commitments.”
In addition to setting expectations, an SLA should also identifies what is not covered. “An SLA sets the priority and timeline. It is an excellent tool to outline what a client and an upfitter should expect, plus it can identify things that are not possible or should not be expected,” said Bailey of Element.
Unless there are specified expectations in an SLA, it is difficult to determine if the upfitting process is performing at its optimum or whether adjustments are needed. “An SLA is a way to measure success,” said Brightwell. “What gets measured gets done.”
The overall goal of an SLA is to establish a clarity of expectations. “The value of an SLA is the mutual understanding and clarity of expectations (and their scope) between the provider and client. The SLA can also provide assurance to the client that the service provider is ‘guaranteed’ to deliver against those expectations, as there is usually some sort of penalty or compensation for failure to meet expectations,” said Ghosh of ARI.
All of the subject-matter experts interviewed for this article stressed the need to use clear language in an SLA.
“An SLA needs to contain clear verbiage regarding both positive and negative impacts,” said Birren of Donlen.
Birren cited two examples of positive and negative impacts where clear language is critical:
- Bonus program paid to upfit vendors from the FMC if KPIs are met on a bi-annual or annual review basis.
- If KPIs are not met or consistently fall behind, the upfitter would reduce their invoice amount by an agreed upon amount per day or per week the vehicle is not completed.
Brightwell made a similar observation about the need for clarity in the language used in an SLA.
“It is important to define the clients’ and suppliers’ responsibilities and definitions clearly. For example, what ‘quality’ means to a client might be a different definition than that of a supplier,” said Brightwell. “This includes defining different levels of responsiveness for different situations or business conditions. Also, define the varying levels of service failure severity and what steps should be taken when an obligation is missed.”
4. Target Only Important Metrics: “Keep an SLA fairly simple and limited by targeting only the most important objectives,” said Ghosh of ARI. “Typically, the major concern with upfitters is ensuring on-time delivery of units, road-readiness, and the quality/safety/compliance of the upfitting.”
Ghosh added that the SLA should focus on the following measures:
- Establish critical delivery dates.
- Ensure that when delivered, the units are road-ready, meaning that they are fully and properly licensed and registered, and have all required permits.
- Track any quality or safety issues as a result of the upfitting.
5. Provide Consideration of Variables an Upfitter Cannot Control: “Clients should be aware that delivery dates are subject to factors typically beyond the upfitter’s control, such as chassis production delays, delivery/logistics challenges (especially on ship-through units), and issues with suppliers. Delivery date expectations should exempt these factors, and require building in some buffer to account for such issues,” said Ghosh.
6. Focus on What the Upfitter Can Control: “The best SLAs focus on those processes and activities that are within the upfitter’s control, such as throughput (units produced per time period) and unit upfit quality. Incentives for exceeding expectations should be included, so that the agreement isn’t focused on just penalties, but provides encouragement for exceeding the minimum expectations. As an example, if the client requires full delivery by a certain date to meet a project deadline, then perhaps an incentive can be provided to the supplier if they exceed the expectation by delivering all units within a window of two to four weeks in advance of that drop-dead delivery date,” said Ghosh.
7. Avoid One-Sided Stipulations or Difficult to Measure Requirements: According to Ghosh, issues that commonly arise in setting up SLAs include:
- Vague, difficult-to-measure metrics or unrealistic objectives or measures.
- Inclusion of partial aspects of the supply chain process, such as ordering timelines only, but nothing around delivery dates or expectations.
- One-sided agreements that are non-partnership oriented, which are geared toward penalizing the supplier without consideration or leeway for the uncontrollable aspects of the process.
- Not involving the right people or expertise in constructing the SLA.
Establishing Upfitting Metrics
Metrics in an upfitter SLA are used to track, monitor, and assess the success or deficiencies in the upfitting processes. Here are 13 suggestions on how to develop effective upfitting metrics.
1. KPIs should be Self-Explanatory: “An SLA should use KPIs that are clearly understood by all parties,” said Birren of Donlen.
Typically, KPIs are unique to a fleet’s business. “Every client’s business is different, so each set of SLAs should be tailored to their specific business needs,” said Brightwell of Wheels Inc. “When the KPIs are established, there should be agreement on numeric goals for each KPI between the client, the FMC, and the upfitter. This will establish a meaningful and effective SLA.”
2. Establish Meaningful and Measureable Goals: “A realistic, fair SLA will help keep all parties accountable for the areas and processes they can control,” said Reynolds of LeasePlan USA.
3. Set Standards that are Agreed on by All: “An SLA must set standards of performance in key areas that the end-client, the FMC, and the upfitter all agree upon,” said Brightwell. “With agreed on standards in place, routine transactions become more predictable and therefore allow for waste reduction in processes, labor, and material.”
4. Base an SLA on Achievable Standards: “An SLA should be based on standards which can be met or exceeded and it should focus on standards which will impact customer service expectations if not adhered,” said Birren of Donlen.
5. Provide a Time Range for Milestones vs. Specific Dates: “Specify a date range for most key milestones instead of specific dates since these are very difficult or impossible to hit,” said Bailey.
6. Structure an SLA to Provide a Process for Quality Assurance: “An SLA agreement should provide a quality assurance (QA) process to avoid defects, warranty claims, and customer complaints. It should define delivery and cycle time. There should be performance guarantees, such as pay incentives or penalties,” said Bailey of Element.
7. Status Updates: “If possible, the upfitter should provide status of the upfit through the build and delivery process,” said Bailey.
8. An SLA Agreement Should be Adjustable to Changing Business Conditions: “An SLA is a process that keeps ever-changing business/expectations aligned,” said Brightwell.
9. Define the Degree of Upfitter Responsiveness: “Specify the degree of desired responsiveness through the ordering process and the build process,” added Bailey.
10. Price-Level Guarantees: “The SLA should include price-level guarantees, including expiration dates, if applicable, as well as anticipated turnaround time for completion of the upfits, along with timely invoicing once work is completed,” said Goldman of Merchants Fleet Management.
11. Terms for Agreement Termination: “Define under which situations the client or supplier can end the relationship and what the procedure should be in doing so,” said Brightwell.
12. Liquidated Damages: “Define what liquidated damages would be for issues impacting the business,” said Bailey.
Reynolds of LeasePlan USA added: “An SLA should also include any relief for the customer should the SLA not be met. However, we suggest that these agreements be reviewed beforehand by your legal department.”
13. An SLA should be Viewed as a Living Document with Ongoing Reviews: “Review an SLA for relevance on a scheduled basis and adjusted as client or supplier needs change with time,” said Brightwell.
Benefits of an SLA
If an SLA is structured correctly, there are five benefits to having such an agreement with an upfitter.
1. An SLA is a Leading Indicator of Upfitter Performance: “As an example, if a shop has an SLA for client orders entered into its system within 48 hours, but an order for a particular vehicle isn’t entered for five days, a client or the FMC can predict that that vehicle is out of the glide path and a good candidate to deliver late,” said Brightwell.
2. Platform for Continuous Improvement: “Well-thought-out SLAs are a great tool for continuous improvement, as they set the stage for performance measurement, which allows thoughtful improvements to be developed,” said Brightwell of Wheels Inc.
Seconding this observation is Bailey of Element. “An SLA drives upfitters to improve performance to enable the FMCs to better meet our customer needs,” said Bailey.
3. Improves Documentation: “An SLA improves and enhances other contractual documents (POs, MSAs, contracts, etc.),” said Bailey.
4. Improves Relationships: “An SLA can improve the relationship between an FMC and upfitter identifying areas of concern with an upfitter’s current status reporting process,” said Birren of Donlen. “Developing an SLA with an upfitter clearly demonstrates what is important to the FMC and what areas the upfitter needs to focus on. An SLA is a tool to measure the success of the upfitter.”
5. An SLA Can Strengthen a Relationship: “SLAs can help to identify overarching goals for the build and the ongoing relationship,” said Bailey.
An SLA is a complicated instrument that can provide many benefits.
“Executed correctly, an SLA can provide a client and their supplier/upfitter with clear expectations of performance and/or results, which can be reviewed annually or on some agreed-on frequency, to determine if the results meet expectations, and what consequences may occur if they do not,” said Ghosh of ARI.