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What a 3PL Warehouse contract needs to include

Well, continuing from my previous blog on Warehouse Costs and Margins, let's now touch upon the components that needs to be included in the contract between the 3PL Warehouse service provider and the Client who will be using the services of the warehouse.

The contract includes, at a broader level, the terms and conditions on usage, rate and billing contract, payment terms, warehouses contracted, billing period, space utilised, the client's customers and warehousing activities agreed upon.

In the billing contract, both storage based and activity based pricing are agreed upon. All activities that will be charged to the client will be listed with their individual rates. The method of charging will also be indicated, viz, weekly, monthly, quarterly or yearly. For storage based billing, the type of method will be agreed, whether fixed rental fee, pack UOM based or storage UOM based. This is decided based upon kind of items being stored, the kind of packaging, duration of storage and various UOMs in which the items may be stored. Fixed rental could be decided mostly when the similar kind of items having the same weight and dimenions, occupy almost a  fixed space each month or for a period. In case there is a wide variation in the packaging in terms of size and weight, the Pack UOM based pricing is preferred. However, if the item is stored directly in its UOM, rather than its packaging type, then Storage UOM is taken up.

Billing period can either be daily, weekly, fortnight, monthly, bi monthly, quarterly, half yearly  or annual.  However, activity billing and storage billing cycles are maintained separately. Also separate invoices for storage and activity can be created, based on the client's request.

The client should also include a list of his customers (who are basically suppliers) in the contract that will utilize the services of the 3PL warehouse. He will also have the option of having dedicated storage loactions reserved for each of his customers, which will roll up to reservations at the client's level. There can be an extra reservation fee that can be levied on top of the storage charges.However, the client can also opt for random storage of goods, wherein he would not have dedicated positions for each of his customers.


Nice thoughts. I reckon ownership management is one of the key areas that needs to be focussed on 3PL services.Who is going to own the goods and what stage and what insurance mechanisms are in place.

I agree with you Venkat, goods ownership is the key aspect of the contract which needs to be defined upfront. Insurance needs to be taken up by the client, whose duration will be as long as that of the contract. Insurance can also become a bit tricky here as the value of goods in the warehouse keep changing from time to time.

Good article. Would like to add that Storage Type (like cold storage, Special storage for hazardous material), Special handling equipments should have to be considered in addition. Moreover, in some cases, the clients position their resource for special tasks like Inbound QC, which needs a specific skill and cannot be managed by the 3PL Service Provider. This fact should also be mentioned while entering into contract terms.

In my view, especially the Indian enterprises, would not opt for dedicated storage against Suppliers as this could imbalance the utilisation due to unpredicted delivery schedules & demand variations.

Thanks Parthasarthy for your comments. Yes, Storage Type would be a variable to which multiple values can be assigned. Special handling equipment charges can be defined as activity codes with defined rates. Inbound QC as you rightly said, could be outsourced depending on the depth of quality proecedures that need to be applied. In the Indian context, storage based billing based on usage would make more sense for smaller suppliers but a very few larger ones would prefer to go for dedicated storage since they would deal with a wider range of SKUs with varied demand variations.

Adding few more thoughts to the Good Points already shared by our friends,Value added Services provided by 3PL Warehouse becomes an essential parameter to leverage the Cost you put into a 3PL Contract.Hence a 3PL Contract should look into this Services and to mention here are few Value added Services commonly provided by 3PL warehouses-Pick/Pack,Order Assembly and Fulfillment,Labeling,Packaging and Re-Packaging,Sub-Assembly,Price Ticketing and Kitting.
Also Customer Specific QA/QC should be taken into the contracts to define the Delivery Standards and last but not the least handling Product returns (Reverse logistics) are essential areas to be part of a Good 3PL Contract.

This is a very good discussion happening on 3PL contract. Adding a few more thoughts, Supply chain security needs to be covered in the contract. When I say supply chain security it is basically pilferage of goods in a warehouse. This is very important for retailer and Consumer goods companies as most of the items belonging to these organizations can be consumed by workers in the warehouse while working i.e. performing picking, put away or any other warehouse activity.
One more angle of security is to ensure that 3PL doesn't tamper the product. This becomes of great concern for the organizations because of recent events in China on product tampering. The 3PL contracts should have stiff penalties for the above mentioned issues as they have potential to harm the brands and have negative impact on customer loyalty.

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