Service level agreements (SLAs) in supply chains are the linchpin for keeping production lines running and customer expectations on track. When your delivery partner consistently misses 8 am drop-offs for a just-in-time assembly schedule, or a components supplier sends stock with inconsistent quality, the entire chain falters – costing time, contracts, and credibility.
Whether you're sourcing parts from Europe, managing tiered delivery windows across UK sites, or overseeing maintenance on critical machinery, a well-drafted service level agreement gives you more than just legal recourse – it provides you operational control.
Our commercial law solicitors work with manufacturers, distributors and logistics providers to craft SLAs that do more than cover the basics. We help you define performance standards, allocate risk, and create mechanisms for accountability – so you’re not constantly firefighting breakdowns in the chain, but proactively managing performance from end to end.
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Why SLAs are critical in physical supply chain contracts
If you are a head of production, procurement or logistics at a manufacturer, distributor or logistics company, your business likely relies on third-party suppliers to keep its operations moving. You may work regularly with overseas component manufacturers, or manage just-in-time delivery relationships – in which case one of your key objectives will be to minimise supply chain disruption caused by the underperformance of your suppliers. Your ability to do your job effectively will be directly impacted by the quality of the SLAs you have in place for those services.
For example, a manufacturing company suffers repeated delivery delays by a third party who supplies them with components. The delays ripple through the manufacturing process, resulting in the firm losing a key customer. Although the supply agreement includes pricing and timelines, there are no express penalties for delayed performance, and there is no escalation process. Ensuring you have the right SLA and that it is properly drafted with performance measurement metrics to pinpoint where the failures lie, and backed up by a system of service credits, would help to resolve these issues.
Setting out clear service levels will also help you to:
- Keep a lid on costs to ensure that money is spent where it is needed, and reduce overspend on services which aren’t critical to your operations.
- Improve service quality by raising performance standards and maintaining consistency, as the supplier is aware of expectations and will be held accountable for any failure to meet service levels.
- Encourage good communication, foster targeted information-sharing and a more collaborative working relationship with your suppliers by setting up regular reporting mechanisms, together with an escalation procedure in case things go awry. Specify the key individuals responsible for this in each organisation.
- Protect your business from legal risks by providing a dispute resolution mechanism to address problems as they arise, with legal redress if all else fails.
For the supplier, too, an SLA is a valuable tool because it provides certainty. It enables the supplier to allocate its resources appropriately across its contractual commitments and to accurately assess its financial exposure in the case of poor or underperformance. It’s also an opportunity for the supplier to clarify the reciprocal obligations the customer must fulfil if the supplier is to perform its job correctly.
What should your SLA cover?
There are several factors specific to manufacturing and supply chains that need to be addressed in the SLA. Getting this right with a targeted approach from the outset avoids costly and time-consuming disputes about what is to be delivered, and when, and ensures your process runs smoothly – meaning you spend less time keeping an eye on the operational detail on a day-to-day basis.
A bespoke and well-drafted contractual framework will also help you manage supply chain risk, and of course, the reputational damage which can flow from supply chain disruption.
Here are some of the key issues your SLA should cover:
- Scope of services: What exactly is required of the supplier? When must they do it by? For example, in an SLA or a logistics agreement, you will need to specify very accurate delivery timescales to support your manufacturing requirements. For supply chain agreements, fulfilment rates and quality control will be key. In maintenance agreements, you will need to detail response and repair times for machinery breakdowns.
- Performance metrics: Service levels must be measurable so you can hold the supplier accountable for failures. Include an objective set of criteria for assessing service quality, covering the key issues relevant to your relationship (such as delivery timescales for logistics, guaranteed uptime for machinery, or production volumes and defect rates in the case of products).
- Reporting mechanism: To track performance, you need the supplier to report their progress. Consider what key information you need to measure performance. Information overload is as much of a time waster as an information deficit, so bear this in mind when considering what reports you need, in what format, and how often. Avoid complex and lengthy reporting requirements which divert the supplier’s valuable time and resources away from providing the services themselves and may increase costs.
- Escalation procedure: If issues arise, you require a dedicated point of contact at the supplier and a process for escalating matters further for critical problems that need urgent attention or resolution at a higher level.
- Service credits: If your supplier fails to meet the agreed-upon service levels, you’ll need a robust system of service credits. These typically give the customer an agreed deduction from their payments to the supplier, and will incentivise the supplier to focus on delivering good performance. For example, a supplier of widgets is consistently late with deliveries, with a knock-on effect on the manufacturing process. The SLA specifies a sliding scale reduction in service charges, based on the frequency and lateness of deliveries. The manufacturing contract should also preserve the customer’s right to claim damages, because service credits alone may not adequately compensate them for major delays or other significant service level failures.
Make sure your service levels are clearly expressed. This will avoid disputes about what performance standards are expected, and will ensure that the service levels are legally enforceable in a court if all else fails.
Top tips for getting your SLA right
Here are our top tips for getting the most out of your SLA:
- Your legal and operational teams should work together so that your SLA reflects the day-to-day operation of the services.
- Ensure that any deadlines you ask the supplier to meet are realistic and achievable; otherwise, you risk setting them up to fail.
- Avoid subjective descriptions, as these can result in disputes about whether the performance standards have been met. Stick to objective and measurable criteria to assess performance.
- Avoid leaving anything to be agreed later, as this can be problematic if the parties can’t subsequently agree. Include instead a detailed mechanism or formula which will enable the parties to work out the relevant issue further down the line.
- Don’t just rely on service credits to fix problems. Consider including non-financial remedies, such as a performance improvement plan that requires the supplier to take specific steps to resolve an issue. For more serious problems, you may want the ability to terminate the contract.
- Keep your SLA under review. Diarise a contract review cycle and consider what is working well, as well as what needs tweaking to maximise the benefits of the services.
Protect your operations with strategic SLAs
A strong SLA doesn’t just enforce penalties for poor performance – it sets the tone for a dependable, collaborative supply relationship that supports your business goals. Whether you’re scaling production, securing better delivery performance, or reducing legal risk, investing in the right SLA terms can help you manage cost, raise quality standards, and ensure continuity when the pressure is on.
Our expert commercial law solicitors are experienced in drafting supply chain and manufacturing contracts that reflect real-world complexities. We can help you shape SLAs that protect your business when things go wrong – and keep things running smoothly when they go right.
