Phil BodeICN Senior Instructor / Advisor

Topics

What is a service level agreement?

Why do we use them?

Six common problems (case studies)

What Is a ServiceLevel Agreement?

A definition

• A contractual commitment

• To achieve a specified level of performance

• For ongoing services (i.e., received more than once)

What Is a ServiceLevel Agreement?

Common categories of service levels

• Responsiveness

• Availability

• Throughput

• Quality

• Satisfaction

What Is a ServiceLevel Agreement?

Components of a service level

• Objective – high level

• Scope and range of acceptable performance

• Exclusions or exemptions

What Is a ServiceLevel Agreement?

Components of a service level (cont’d)

• Measurement period

• Calculation

• Data source

• Remedy

Why Do We Use Them?

To keep the vendors focused on what is important to us

To create a record of performance

To allocate risk between the parties

To modify performance or behavior

Six Common ProblemsOverview

Cool Beanz, Inc. makes a 3-D virtual-reality gaming system (the CB3D Console) that is sweeping the world. Cool Beanz uses a just-in-time inventory system to keep costs down. Their robotic assembly line takes up 90% of the Cool Beanz plant; warehousing takes up the other 10%.

Six Common ProblemsOverview

The CB3D is comprised of several parts and raw materials; three of the most critical parts (widgets, sprockets, and gizmos) come from one supplier – WSG, LLC. Cool Beanz has been working with WSG for the past three years. WSG is the leading supplier in its industry. The two parties collaborated on redesigning the widgets, sprockets, and gizmos to enhance their capabilities and reduce their power consumption. This collaboration gives Cool Beanz a competitive edge over the competition – no other company’s gaming system is as fast, realistic, energy efficient, etc.

Six Common ProblemsOverview

Cool Beanz and WSG recently renewed the purchase agreement for widgets, sprockets, and gizmos. The previous purchase agreement did not contain any service level agreements; the new one does.

Historically, Cool Beanz has placed orders each week with WSG for widgets, sprockets, and gizmos. The size of an order tends to vary based upon sophisticating forecasting models developed by Cool Beanz.

Six Common ProblemsProblem #1

SLA reads (in part)…

WSG shall deliver all of the Widgets contained in each Order no later than five (5) days after the Target Delivery Date specified in the Order at least ninety percent (90%) of the time. For purposes of this service level, compliance shall be measured after every tenth Order and shall be based on the Target Delivery Date. Compliance shall be calculated as follows: One minus (the total number of Orders received more than five days after the Target Delivery Date divided by the total number of Orders).

Six Common ProblemsProblem #1

Order Number

Widgets Ordered

Received Timely? 0 = yes (0 days late) X = # of days late

1 2,000,000 0 2 3,000,000 0 3 2,000,000 0 4 1,000,000 0 5 4,000,000 20 6 1,000,000 0 7 2,000,000 0 8 3,000,000 0 9 1,000,000 0 10 1,000,000 0

Totals 20,000,000 20

Six Common ProblemsProblem #1

Cool Beanz calculated WSG’s on-time delivery compliance: 1 – (Number of Orders received late divided by number of Orders placed) 1 – (1/10) = 90%.

According to the calculation, 90% of the Orders were delivered timely and the service level was met.

Do you see any potential points of pain?

Six Common ProblemsProblem #2

SLA reads (in part)…

For each Order for Widgets, ninety percent (90%) of the Widgets must be Viable (according to the specifications listed in Exhibit 1) upon receipt by Cool Beanz. For purposes of this service level, compliance shall be measured after every tenth Order and shall be based on the total number of Widgets ordered and the total number of Viable Widgets received. Compliance shall be calculated as follows: The total number of Viable Widgets received divided by the total number of Widgets ordered.

Six Common ProblemsProblem #2

Order Number

Widgets Ordered

Viable Widgets

Received 1 2,000,000 1,600,000 2 3,000,000 2,300,000 3 2,000,000 2,000,000 4 1,000,000 1,000,000 5 4,000,000 4,000,000 6 1,000,000 1,000,000 7 2,000,000 1,800,000 8 3,000,000 2,500,000 9 1,000,000 1,000,000 10 1,000,000 800,000

Totals 20,000,000 18,000,000

Six Common ProblemsProblem #2

Cool Beanz calculated WSG’s viability compliance: (Number of Viable Widgets received divided by the number of Widgets ordered) 18,000,000/20,000,000 = 90%.

According to the calculation, 90% of the Widgets were Viable and the service level was met.

Six Common ProblemsProblem #2

Order

Number

Widgets Ordered

Viable Widgets

Received

Days Late

Viable Widgets Received On Time

1 2,000,000 1,600,000 0 1,600,000 2 3,000,000 2,300,000 0 2,300,000 3 2,000,000 2,000,000 0 2,000,000 4 1,000,000 1,000,000 0 1,000,000 5 4,000,000 4,000,000 20 0 6 1,000,000 1,000,000 0 1,000,000 7 2,000,000 1,800,000 0 1,800,000 8 3,000,000 2,500,000 0 2,500,000 9 1,000,000 1,000,000 0 1,000,000 10 1,000,000 800,000 0 800,000

Totals 20,000,000 18,000,000 14,000,000

Adding the previous set of data regarding on-time delivery to the viability data, and adding a new column to show the number of viable parts received on time…Were Cool Beanz’s expectations met?

Six Common ProblemsProblem #3

At the end of the second measurement period, WSG’s performance began to slip, and it did not meet the service level with respect to on-time delivery. The contract manager for Cool Beanz reviewed the data with the project manager and the vendor relationship manager, compared the actual performance to the contractual requirement, and issued a “deficiency” notice to WSG. The letter read (in part):

Six Common ProblemsProblem #3

“…Under the contract, WSG agreed to deliver all of the Widgets contained in each Order no later than five days after the Target Delivery Date specified in the Order at least 90% of the time. Based on the latest set of data, WSG has failed to meet this service level; actual on-time delivery was 88% for the most recent measurement period; this resulted in a deficiency of 2%. Accordingly, under the contract, WSG is required to pay Cool Beanz $5,000 as liquidated damages within one week…”

Six Common ProblemsProblem #3

A week later, the check showed up as requested and required. This cycle was repeated for the 3rd, 4th and 5th measurement periods as well.

If you worked at Cool Beanz, how would you feel?

What would you change?

Six Common ProblemsProblem #4

As WSG’s on-time delivery performance began to slip and have an impact on Cool Beanz’s ability to meet production quotas, Cool Beanz personnel met to decide how to proceed. Based upon the good relationship between the parties, the Cool Beanz team concluded that a “you are seriously close to losing our business” meeting with WSG was the next logical step.

As a result of the meeting, new remedies were added to the existing contract, making it financially painful for WSG to be out of compliance with the service levels. The next set of data looked like this:

Six Common ProblemsProblem #4

Order

Number

Widgets Ordered

Viable Widgets

Received

Days Late

Viable Widgets Received On

Time

Widgets that Had to Be Stored by

Cool Beanz 51 1,000,000 950,000 0 950,000 52 2,000,000 1,750,000 -5 1,750,000 1,750,000 53 3,000,000 3,000,000 0 3,000,000 54 2,000,000 2,000,000 -3 2,000,000 2,000,000 55 1,000,000 1,000,000 -7 1,000,000 1,000,000 56 1,000,000 1,000,000 0 1,000,000 57 3,000,000 2,700,000 0 2,700,000 58 2,000,000 1,600,000 -4 1,600,000 1,600,000 59 3,000,000 3,000,000 0 3,000,000 60 2,000,000 1,600,000 0 1,600,000

Totals 20,000,000 18,600,000 18,600,000 6,350,000

Six Common ProblemsProblem #4

WSG met both service levels previously mentioned. On-time delivery was 93% and the viable-parts-received measurement was 93%.

If you are Cool Beanz, are you concerned about anything related to WSG’s performance?

Six Common ProblemsProblem #5

Carol, the COO for Cool Beanz, asked the SLA management team for some information. She had heard rumblings from production that WSG inability to perform was holding up production. In response to her request, the team gave her the following data:

Six Common ProblemsProblem #5

Order

Number

Widgets Ordered

Viable Widgets

Received

Days Late

Viable Widgets Received On Time

1 2,000,000 1,600,000 0 1,600,000 2 3,000,000 2,300,000 0 2,300,000 3 2,000,000 2,000,000 0 2,000,000 4 1,000,000 1,000,000 0 1,000,000 5 4,000,000 4,000,000 20 0 6 1,000,000 1,000,000 0 1,000,000 7 2,000,000 1,800,000 0 1,800,000 8 3,000,000 2,500,000 0 2,500,000 9 1,000,000 1,000,000 0 1,000,000 10 1,000,000 800,000 0 800,000 Totals 20,000,000 18,000,000 14,000,000

Six Common ProblemsProblem #5

Putting yourself in Carol’s position, how do you think she would react?

Six Common ProblemsProblem #6

During the last quarterly status/performance meeting, Cool Beanz informed WSG that WSG had missed some of the service levels for the measurement periods in the most recent quarter. Under the contract, WSG owed liquidated damages to Cool Beanz in the amount of $300,000. The next day, Walter (the COO from WSG) invited Carol (the COO from Cool Beanz) to lunch at a posh restaurant.

Six Common ProblemsProblem #6

During lunch, Walter explained that he understood WSG’s problems were not Cool Beanz’s problems. He went on to explain that a new system implementation had caused all of the problems, but the bugs had been fixed. He asked Carol to forgive the $300,000 since they had already expended quite a bit to fix the system, and the additional damages would really hurt them financially. He offered his personal guarantee that there would be no further missed SLAs going forward.

Six Common ProblemsProblem #6

Carol accepted Walter’s explanation, and as a show of good faith, she waived the liquidated damages to further the relationship, stating, “After all, Walter, we don’t want to penalize you for trying to improve your internal processes and performance, now do we? What kind of message would that send?”

How would you feel if you were on the SLA management team?

Questions?