I recently came across a bad example of a warehouse draft contract, which failed the two basic rules of 'fit for purpose' for relationships where the user occupies the bulk of the space in a shed.Those tests are 'mutual transparency' and 'mutual fairness'.
The deal gave the user a totally variable charge based on usage of space and labour.The third party logistics provider (3PL) had sought a minimum occupancy charge by quoting a cost per pallet per week, but with a minimum guarantee of 8,000 pallets. All other charges were either a) RH&D (receipt, handling and despatch) at a cost per pallet received or b) a charge per case picked.
But there were two problems: the total cost was too high and it was unclear where the excess was hidden.
So we stripped out dedicated staff costs and asked for productivity on fork trucks and case picking.Then it became clear that the excess charge was built equally into both RH&D and picking but for different reasons.
RH&D productivity was set at 20 pallets per hour, which is OK for most warehouses. However, the RH&D charge bore no relationship to the resources consumed. Picking productivity had been set for charging purposes at 235 cases an hour where 290 would have been a fair expectation.
We accepted the occupancy charges and the minimum guarantee as we could reconcile a rate of £1.32 per pallet per week against rent, rates, depreciation and IT with a reasonable profit margin. This number was both fair and transparently related to the costs incurred. We accepted dedicated staff costs and paid for them transparently. We then negotiated a rate for RH&D that recovered the costs of hourly-paid staff and equipment rental. For picking we showed the 3PL an example of picking the specific goods and negotiated the rate in line with that productivity.
So was the outcome fair to both parties? Neither got precisely what he thought he wanted at the start, but both agreed the outcome was at least mutually acceptable. Was the outcome transparent to both parties? Undoubtedly so!
is director, ProActive