Industry News

The logistics industry has always evolved in response to disruption. Whether it was globalisation, digitalisation or the unprecedented shocks of the covid pandemic, every major event has forced supply chains to rethink how they operate. One of the most significant developments in recent years has been the conversations around index-linked freight contracts. 

There is no question that these contracts address some of the long-standing challenges associated with traditional fixed-rate agreements. By allowing freight rates to move in line with market conditions, they reduce the need for constant renegotiation, improve pricing transparency and lessen the likelihood of contractual disputes when markets become volatile.

During the pandemic, many shippers holding long-term contracts found themselves unable to secure space as spot rates climbed. Fixed-price contracts became commercially unsustainable and relationships between strained as each party sought to protect its own interests.

Index-linked pricing emerged as a practical solution. By automatically adjusting freight rates in line with market movements, contracts remain commercially relevant regardless of whether prices rise or fall. 

Are we solving one problem while unintentionally creating another?

The greatest risk of index-linked contracts is that often they reinforce an industry-wide obsession with freight rates. Index-linked pricing rewards volatility rather than cushioning against it whereas traditional long-term contracts were designed to smooth market fluctuations. Instead of encouraging conversations around carrier capability, operational excellence, schedule reliability, equipment availability, customer service and supply chain resilience the freight index becomes the centre of every commercial discussion. In effect, price becomes the product.

A shift could have profound implications for how procurement teams evaluate solution partners. For many procurement professionals, the main measure of success centres on whether a rate sits above or below an industry benchmark, rather than whether the partner consistently delivers the outcomes that matter most to customers, both internal and external.

Index-linked pricing has the potential to reshape commercial relationships. In my more than 30 years in the industry as a freight forwarder and a shipper and now as a consultant and educationists, I have always advocated that successful shipper-carrier partnerships were built upon mutual trust, actual volumes and long-term planning. Both parties accepted that markets would fluctuate over time but the relationship itself provided stability through those fluctuations. All parties accepted that markets would fluctuate over time but the relationship itself provided stability through those fluctuations. I saw this play out in real life when I was working as a logistics manager during the gobal financial crisis in 2007 – 2009 and then again during the pandemic in 2020 – 2023. Instead of reinforcing commitment through shared objectives, it can encourage a more transactional mindset where the commercial relationship becomes increasingly tied to an index.

Freight is a derived demand and it exists to move cargo efficiently through increasingly complex global supply chains. Its purpose is not simply to optimise freight pricing.

If executive discussions become dominated by indices, benchmarks and pricing models, there is a danger that the industry loses sight of the capabilities that genuinely differentiate world-class supply chains such as:

• Schedule reliability.
• Forecast accuracy.
• Digital integration.
• Inventory optimisation.
• Risk management.
• Carbon reduction.
• Operational resilience.

Perhaps the next evolution in logistics contracting should not focus exclusively on how freight prices are determined but on what commercial agreements are designed to reward. Imagine contracts that linked commercial incentives not only to market pricing but also to measurable service outcomes such as on-time performance, equipment availability, emissions reduction, forecast accuracy, disruption response times and digital data quality.

Such agreements would encourage behaviours that strengthen entire supply chains rather than simply tracking fluctuations in freight markets. The logistics industry has rightly invested significant effort in making pricing more transparent and contracts more sustainable. That progress should be welcomed. Transparency should however remain a means to an end and not the end itself.

Companies and supply chains that secure the best freight rates will not lead the next generation of global trade. Those that build the most resilient, collaborative and customer-focused supply chains will. Index-linked contracts may well solve yesterday’s problem of unenforceable freight agreements. The challenge now is ensuring they do not create tomorrow’s problem by providing an unnecessary crutch that optimises freight prices rather than supply chain performance.

Source: splash247.com