What are the principal considerations for retailers when negotiating a last mile contract?
Why the contract for the “last mile” matters
Drafting supply contracts is not always treated with the respect the subject deserves. After all, it is hard to envisage anything much more business critical than effective supply chain management. This is particularly the case for the “last mile” offering – the key moment in the supply chain when the parcel arrives. Many consumers expect – demand – that delivery times are short and are adhered to. A failure to satisfy this demand can quickly lead to erosion of customer loyalty and loss of market share. The contract covering the logistics of the last mile, therefore, is arguably at least as important as any other commercial contract a retailer will negotiate.
The last mile delivery market has become increasingly congested of late with a stream of new entrants vying for retailers’ attention. This ought, in theory at least, to put the retailer in a strong position to negotiate a suitably satisfactory contract. However, more often than not, this is not the practical reality. Contracts for the last mile are invariably drawn up by the service provider and will usually include onerous conditions of the type traditionally seen in delivery contracts, for example:
- significant limitations on the values and types of loss that can be recovered
- short time limits within which to bring claims
- restrictions on matters for which the provider is responsible.
However, traditional forms of contract may not necessarily be the most suitable for the innovative and bespoke nature of last mile solutions. Similarly, standard form documents are not always the best approach – key contracts like that between a retailer and last mile provider often benefit from being drafted and negotiated individually rather than relying on a “one size fits all” approach.
Key contractual considerations
What are the key considerations for retailers when negotiating a “last mile” delivery contract? The starting point is quick delivery times, guaranteed delivery times, with the goods undamaged and properly packaged, all at low cost, and the retailer should approach the contract for the “last mile” with this at the forefront of their minds. The contract should:
- identify responsibility for all phases of the delivery process (and therefore for delays)
- include remedial plans to deal with actual or potential delays
- contain a mechanism for dealing with delays (e.g. service credits). Consider also offering the service provider some form of bonus payment if targets are exceeded or an “earn back” arrangement. A “gain-share” mechanism may be appropriate, most obviously it may be possible to reduce costs by sharing the delivery costs with other retailers
- contain appropriate provision regarding the condition of the goods and their packaging as delivered to the customer.
In a rapidly developing market, it is sensible to include provisions to ensure continued value for money. You should:
- include a continuous improvement obligation and/or a benchmarking regime
- ensure effective change control mechanisms.
When drafting and/or negotiating contracts for the last mile, retailers should hope for the best and prepare for the worst. This includes focusing on what happens if and when things go wrong. The contract should:
- contain a dispute resolution mechanism by which the parties meet to resolve issues and attempt to keep what is hopefully a mutually beneficial relationship moving forwards
- include an effective termination clause so that the retailer can source its requirements from elsewhere, should the need arise, as quickly and painlessly as possible.
Retailers should also consider:
- the possible application of TUPE to any change in service provider. As the law currently stands, a change of service provider can often trigger the application of TUPE, with the consequence that the relevant employees (generally speaking, those who are engaged in providing the work which is subject to the transaction) will transfer to the incoming provider on their existing terms and conditions. Not only does this mean additional overheads for the incoming provider (likely to be reflected in costs) but it may defeat the whole object of the exercise (if the same individuals are to continue to provide the service). Consider including a TUPE indemnity to cover any possible resulting liability
- the force majeure Usually tucked away in the “boilerplate” at the back of the contract, a force majeure clause will excuse performance for events outside the service provider’s control – for example, floods or fire. Retailers should ensure these clauses are drafted precisely and restrictively and also that the drafting tackles the contingency of a force majeure event occurring
- provisions dealing with tracking and tracing
- package security (where delivery is shared with other retailers).
Effective IT infrastructure is at the heart of efficient last mile delivery. Retailers must ensure that:
- their IT contracts contain sufficiently robust service levels to maintain the software and ensure that delays and errors are kept to a minimum
- service levels are sufficiently flexible; for example, there may be enhanced service levels or reduced fix periods for deliveries during peak periods
- the contract imposes strict data protection and data security obligations on the service provider, including an obligation to make back-up copies and to implement a disaster recovery plan.
Retailers are under immense pressure to manage what is an increasing number of returns as efficiently as possible with even a marginal increase on the average percentage recouped on a product’s price (whether from re-sale, re-use or scrap) capable of making a material contribution to an improved bottom line. Returns management has assumed even greater importance following the entry into force last year of the Consumer Rights Act 2015, which introduced an “early right to reject” a faulty product within 30 days and, for online purchases, the 14-day “cooling off” period under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. More important than that, consumers expect a tolerant and flexible approach to returns and will shop elsewhere if they perceive barriers to returns.
Where returns management is outsourced the nature of the contract may need to be unusually detailed given that the most effective way of extracting value from the returned item may vary from product. The contract will need to address a range of issues – again varying from retailer to retailer but typically including some or all of hours of operation, facilities, warehouse management, customs brokerage and freight flows. The key – before getting to the detail of the contract, such as KPIs, payment and incentives – is for the retailer and provider to have a shared understanding of what they are hoping to achieve and what the priorities are.
Part of the reverse logistics process will typically involve the contract with the product supplier too. Many retailers will send returns straight back to the supplier or, at least, enter into a sale and return agreement for a percentage of the goods sold.