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.
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
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%.
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%.
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.
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 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.
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.
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.
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.
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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