Mastering Service Level Agreements for Supply Chain Success

Discover the unsung backbone of successful business relationships: Service Level Agreements (SLAs). I'm Tony Hines, and I'll guide you through the intricacies of SLAs in our latest Chain Reaction Podcast episode—a must-listen for anyone keen to navigate the waters of supply chain and procurement with finesse. Expect to gain invaluable insights into how these critical contracts set expectations, define performance metrics, and establish a framework for conflict resolution. Whether you're a supplier, client, or just supply chain-curious, this episode will equip you with the knowledge to foster improved partnerships and a keen understanding of the potential challenges and solutions within service agreements.

As we dissect the delicate dance between flexibility and specification in government procurement, you'll learn why too much rigidity can quash innovation and degrade service levels. We'll also delve into customer service, where the goal isn't just to satisfy, but to dazzle, going beyond the benchmarks of world-class service. From navigating operational hiccups to leveraging political sway, we cover strategies that can rescue sinking service levels and curb escalating costs. Join the conversation, sharpen your SLA acumen, and be prepared to turn contractual complexity into strategic advantage with Chain Reaction Podcast.

Transcript

Speaker 1: 0:02

Hi, I'm Tony Hines and you're listening to the Chain Reaction Podcast, all about supply chain advantage. Well, great, you can drop by today. We've got a few interesting things coming up on today's show, so stick around, stay tuned, find out more. Well, what happens when service levels fall through the floor and prices go through the ceiling? Well, usually it indicates failure on part of the company, unless that is, of course, that you're a government department or a government supported or regulated activity, because then it's just enforceable regardless of the level of service provided. And I'm going to take a look at service levels today, both in public and private provision. So stick around, find out more.

Speaker 1: 0:58

In procurement and supply, service level agreements have a crucial role to play. Effectively, there are a contract between the two parties entering the service level agreement, and it sets out the level of service that's expected from one party to another. For example, in procurement, service level agreements set expectations for vendors or suppliers and what each can expect from each other. Expectations might include measurable metrics such as delivery times, product quality specs and response times for enquiries and support requests. Establishing clear expectations at the start of any contract is always important and it prevents misunderstandings, so you can avoid future difficulties and it makes both parties aware of the responsibilities to each other in the end to end processes. Additionally, supply chain service levels are critical indicators which determine the percentage of delivered goods from an order compared to the total order aiming to meet demand in full so as to fulfil customer requirements.

Speaker 1: 2:08

So what exactly are the benefits of supply level agreements? Service level agreements? Well, it's claimed. They can offer several benefits. Improved relationships, for one, might be developed as customers and suppliers begin to understand each other through their relationship communications in response to service level agreements and to iron out any problems. It's also a means of conflict resolution, so you can sort out differences of understanding or opinion in the process of the relationship. It also gives a focus for particular measures of performance, so, for example, managers can understand their team's effectiveness in meeting customer expectations if they measure the performance. And it can also pinpoint problems and it provides a mechanism to resolve those problems. If the service level agreement is comprehensive and has clearly stated purposes, you can build trust by describing the levels of performance that are expected and the characteristics of those service levels, and it's a means of protection against poor quality service or the inefficient vendors. It should improve experiences for both parties, and it can, of course, lead to improved customer and employee experiences by providing clarity and structure in the agreements and in the working relationships. These documents, these service level agreements, will often include the price of the product, the service details, the start and finish dates and any penalties for missing, any completion deadlines and what's covered in any warranty that's agreed between the parties.

Speaker 1: 3:50

As well as advantages, of course, there can be disadvantages. It prioritizes processes over outcomes, so the processes might appear to be at a service level, reasonable, but the outcome disappointing. So, for example, you can specify answering calls within certain timeframes, but that could still lead to a lack of focus and customer satisfaction. And I can give you an example. If you think of the chatbots that you get on every website these days and of course, people try to point you to those chatbots, organizations try to get you onto a chatbot rather than talk to a human being, because they haven't got the capacity to deal with all the calls received. And the chatbots can be very poor experiences, because you can ask questions and you repeat a question, or you ask a question in a different way and they give you exactly the same answer, which is unfocused, unclear and often not what you expect and doesn't provide any service at all. So they might as well not have some of those chatbots and I think chatbots are a cop out. In many cases they're still not good enough to answer any detailed questions and you do need to speak to either a human being or you need to write and put any claims or disappointments about the level of service in writing to the organization to get matters sorted. So that's what I mean. You can, on the face of it, seem okay and, yes, all your calls will be answered within three minutes. Doesn't say by who, necessarily, and the chatbot comes on and says lines are busy at the moment. But I can help well, can they?

Speaker 1: 5:26

There's unclear and limited scope often in the service level agreements. They can be unclear, reactive, they can be quite shallow and they don't cover the essential points that you might want to cover in the contract between yourself and another organization. So you have to be very careful in making sure that the detail is in the service level agreement, and they can often focus on specific metrics or performance indicators, but they don't necessarily capture the full picture of service quality. They can create a lack of visibility and transparency too, because without methods of measuring service level agreements which are accurate, they can become empty promises. Regular reviews of the service level agreement metrics with the two parties maintaining a dialogue will improve the quality of the agreement.

Speaker 1: 6:17

Service level agreements can also raise expectations to an unrealistic level. Standardized timeframes might in some cases not be met, and so if you specify a time frame, it might not be met. Now, if you think about the contract in health services in the United Kingdom, for example, they used to say that if you turned up as an accident and emergency unit in a hospital, you had to be seen within four hours. Of course they've ditched that metric because they weren't meeting the metric, so that social contract between patients and providers has disappeared. They can be overly rigid too, and they can because of the over rigidity.

Speaker 1: 6:55

Everything down in paper on the service level agreement. It can mean that people work to rule through the items on the list, but they don't actually satisfy your problem. And they can be quite inefficient because they go through a series of steps, and I think about the service level agreements on software, for example. You'll get a series of steps and it says try this, try that. Have you tried this? Has that resolved the issue? Yes, no, um, that's a simple example. But imagine that in a larger service level agreement you become very frustrated and very unhappy with the experience. It can potentially damage relationships, of course, because relationships very quickly can melt away. If you're experiencing penalties for missed metrics in the service level agreement, you may not want to do business with the organization anymore because they keep picking you up on the metric. It can also add to cost and take time if it's not sufficiently detailed, and the worst thing of all is to have vague or difficult measures of what's going on. So I think on balance we can say yes, service level agreements can be a useful means of understanding each other's point of view, but they're not the be all and end all of any relationship.

Speaker 1: 8:10

If we decide to go down the route of having service level agreements, it involves eight steps. We have to define the service clearly that we expect from the service provider. We have to identify stakeholders, enlist those stakeholders and points of contact along with roles. We have to verify service levels, the performance that we expect or the output from the service. For example, call centers have times that they expect calls to be answered in have to answer so many calls within a specific time frame. We've got established metrics. We define those metrics and we say how we'll measure service performance, and that's agreed between the two parties. We set goals to establish the goals for all the stakeholders involved in the service process. We plan for contingencies. What happens if goals aren't reached? Are there penalties or there are adjustments? Are there meetings that have to take place? Does it have to be resolved in a certain timeframe, and so on? And then there are conditions for cancellation of the service. What happens if you want to end the agreement? How can you get out of this service level agreement? And you need to have specified review dates for the level of service and you need to update regularly.

Speaker 1: 9:25

When it comes to measuring service levels, it's difficult because we have to identify what are the most meaningful, relevant measures that we can actually put in place, which are the most relevant to us in our operations, and we need to prioritize those. It's no good just going for some kind of generic measure that we've read in a particular book that doesn't really apply in our particular context. We need to actually have those measures measure what we want them to measure and we need to have a means to collect the data from service providers who need to make service level statistics available so we can see what's going on and that might be written into the service level agreement to specify how that data will be provided by the service supplier. And we need to have a means of calculating the service level so that it can work out whether they're achieving it or not, and it's usually expressed in terms of percentages of how they've performed on a particular task through time. And we need to monitor and report the measures regularly and keep all stakeholders up to date on how this service arrangement is working out. And we combine those particular service metrics with user research. We always combine metrics with other means of research, so we don't just accept the metrics alone, we have another means of checking on them.

Speaker 1: 10:48

So what are some examples of these measures? Well, latency, the delay before a transfer of data begins following an instruction for its transfer. Availability, the timer system in operation and particular tasks take to perform. The error rate the number of errors that occur in a system. The throughput the amount of material going through the system at any point in time. Response times, response rates the total amount of time it takes to respond to request for service. Durability the ability of a service system to remain available in the event of component failure, the mean time, the average time to resolve any service failure, the service health percentage, the healthy versus unhealthy state in other words, outages or disruptions that you experience, severity of incidents arising from service are also important. If you have experience of a ransomware attack and you've got cybersecurity in place, then your system goes down how long did it take to get the system back up and running again? And alerts associated with all the incidents that you experience in the service. So those are just some of the thoughts about service level agreements. Here's a few quotes from people, and from the press too, about what they say about service level agreements.

Speaker 1: 12:15

If you don't have standardized processes, how are you going to provide a consistent way to automate them? That's from supply chain today. Good is the enemy of great. That's why so few things become great. James C Collins, we care about every worker in our worldwide supply chain. What we will not do, and never have done, is stand still or turn a blind eye to the problems in our supply chain. On this you have my word. That's Tim Cook at Apple.

Speaker 1: 12:43

85% of the reasons for failure are deficiencies in the system and process, rather than the employee. That's according to W Edwards Deming. It's impossible to improve any process until it's standardized. If the process is shifting from here to there, then any improvement will just be one more variation that's occasionally used and mostly ignored. One must standardize and therefore Stabilize the process before continuous improvement can be made. That's Masaki Imae. So you just get a flavor of what service levels are about. They're about standardization. It's about being able to measure the processes, and if you're looking to improve a process, then you've got to measure it and you have to standardize it. So the things that help us to manage are also the things that might actually make service level agreements blend too.

Speaker 1: 13:42

Now let's take a little look at public and private procurement in a little more detail and provide some explanations of why those procurement processes might lead to service levels that are inadequate. Well, the first matter is about transparency and the lack of it In both the public or the private sector. A lack of transparency in the procurement process may lead to an inadequate service level, and it might be that there are complex legal requirements in the public sector or maybe a lack of technology adoption in the private sector. So, for example, if you're working with a particular company that's come on stream that you're buying a service from and they haven't got a platform which is matched to the sophistication of your technology platform to provide data and information or exchange data and information. It might be that that's quite a difficult arrangement and it might lead to an inadequate level of service that's not detected because the data is not being exchanged. Also, with a government procurement service, it might be that the legal arrangements and the complexity of those legal arrangements make it very difficult, given the specifications, for a supplier to meet the service level agreement.

Speaker 1: 15:02

And this leads on to a second point, which is about the inflexibility of procurement processes. Inflexibility in government procurement processes might impede innovation, it might reduce value for money and that in turn, might lead to an inadequate service level. And I can think of all kinds of examples that I've come across over time where this has happened because there's been an over-specification, the legal processes have been complex, they've been drawn out and it's taken a long time to reach agreement. And when they've reached agreement, then the supplier hasn't been able to meet them, even though they spent a lot of time talking about them, putting the agreements in place, but then failed to deliver on the agreement. An absence of a long-term relationship with a supplier is another reason. If you work with suppliers on an ad hoc basis, then there's no relationship that's developed in the understanding that might be necessary to have those service level agreements work effectively. Ineffective communication is another reason, and it might be that the supplier-buyer relationship is difficult. It might be that the communication between the two is not as good as it could be and therefore if communication breaks down, so might service levels be inadequate.

Speaker 1: 16:23

Risk management's another issue. Public procurement is threatened by risks in areas of diversity and compliance, sustainability and operations, and if risks aren't properly managed they might lead to inadequate service levels. And, of course, the compliance with public procurement laws. Most public bodies have their own public procurement arrangements and the government, for example in the United Kingdom and in the United States, have procurement laws which specify how those arrangements will work and what the service levels need to be. So if the strict and strict compliance is enforced, the laws can sometimes limit the flexibility and innovation in the procurement process, which might reduce the level of service given by the supplier. So it's difficult to talk about every possible contingency, but you get the picture that there can be lots of different things impacting service levels.

Speaker 1: 17:23

Now let's just turn things around for a moment and talk about customer service levels. This is the quality of service that you as a customer experience from the service provider, and often customer service levels are expressed in five categories. Unsatisfactory means that the level of service being provided is not meeting the customer expectations, and this might be for all kinds of reasons, such as the quality of the service is poor, face-to-face interactions are poor, the time it takes to receive a product or service and just the general overall experience with the company is poor. The minimum expectation is that the supplier meets customer expectations, and this is often the lowest level of service in the sense that you're meeting the customer expectation. But it needn't be the lowest level, because if you specify in a service level agreement what your expectations are and that's the service level you expect, then customer expectations being met might be all right. We might go beyond meeting expectations and service might be good, and good service levels sometimes are referred to as just satisfactory. Exceptional service levels often mean that the company supplying the service goes beyond what's expected, and good companies often do that. They'll just get things done to keep clients relatively happy with the service level and they want to build for the future because they're looking to future contracts and contract renewals. Maybe they want some degree of loyalty and they don't want their competitors to take you away as a customer. And then, of course, there's the idea of world-class service levels, and you can find out more about world-class service levels by reading my supply chain strategy book. So I'll leave that one for you to ponder, and we might do an episode on world-class in a future edition of the chain reaction podcast.

Speaker 1: 19:19

Now let's take another scenario. Supposing I procure services from the government department and find that the service level is through the floor, but the prices are through the ceiling. Well, there's various advice on this. You need to raise the concern immediately, but the department and provide specific examples of the issue. So you need the data to do that. You need to actually note it down every time there is a service failure and keep a record. You need to look at the contract that you have, the service level agreement. Does it outline the expectations and is it easily identifiable? Were the falling short and what the penalties might be for not meeting those expectations? If that's the case, point them out, tell them about them and see what they do.

Speaker 1: 20:01

You can escalate the issue if you feel you're being ignored and just go to a higher authority within a department or to an oversight body. There might be a regulatory authority that you can go to and speak to them. You can seek legal advice. If the issue continues, you may want to go to a lawyer and spend a bit of money to sort it out. It might be worthwhile. At least you'll know what the position is and you can consider other alternatives if the service continues to be unsatisfactory and overpriced. If you have the opportunity to, you may want to go somewhere else. Of course, we don't always have that opportunity with a government service because they hold a monopoly in some services. But you still need to go through those steps. You need to raise the concern. Look at who the regulation bodies are. The regulatory bodies are and get them to intervene in the process when they're not delivering or they're poorly performing.

Speaker 1: 20:55

And you can engage politically. You can endeavour to apply political pressure. Easier said than done. Of course, you probably need someone to be an advocate on your behalf. That might be a political representative or a political lobby group. And then there's raising public awareness about the issue. Social media, consumer advocacy groups, press put it out there. Let them know about the inadequacy of the service you're receiving and see what the response is, and in the final nothing done situation, you'll have to go for legal redress if you think you've got a case.

Speaker 1: 21:34

So there we are. That's our discussion of service level agreements and what they are, what the advantages are, what the disadvantages are, how they actually work in practice and in different contexts, and you might want to read further on these matters and find out more about them if you're experiencing some difficulty at present. Of course, all the statements I make in this program or really for information, they're not advising you in any sense whatsoever. So I'm disclaiming any responsibility for any action you take as a result of listening to my comments in this particular episode. So I hope to see you in the next episode of the Jane Reaction podcast. I'm Tony Hines, I'm signing off and I'll see you next time. Bye for now.