Index-linked contracts new way to buy trucking capacity

The two ways shippers could purchase trucking capacity were through contracts or the spot market. 

Until now.

FreightWaves has introduced index-linked contracts as a third option for trucking capacity. Currently, 30 shippers — large consumer-brand companies — are in various stages of implementing this new product. 

Index-based contracts are linked to FreightWaves TRAC rates 

Index-linked contracts work in a similar manner to fuel surcharges. A shipper and a carrier agree to index freight costs against the FreightWaves Trusted Rate Assessment Consortium (TRAC) spot rate index or contract rate index.

As the market fluctuates up or down, the rates shippers pay for truckload capacity move in tandem. 

Currently, a number of shippers are using the new index-linked contracts on daily spot rate activity when they tender a load. Whatever the rate is on that lane that day (with a discount or premium), that’s what the shipper pays.

The benefits of index-linked contracts in trucking

This new way of pricing eliminates the back-and-forth quoting process, some RFPs and minibids. Another (and simpler method) is for shippers and carriers to agree on monthly index-linked rates for contract freight. This is my favorite strategy; at the end of the month, the amount that contract rates have moved up or down are calculated and then the premium or discount is applied to the rate contract. 

Shippers win with index-linked contracts because they don’t have to request bids as frequently to capture the best rates in the market. They use their preferred carriers but know that their freight costs are matched to the market. Shippers gain ultimate control over their routing guides and are no longer as dependent on RFP cycles. 

Carriers win with index-linked contracts because they don’t lose loads on shipper lanes because they were undercut on a bid. Their networks are much more stable. When a carrier and a shipper use index-linked contracts, a carrier no longer gives back lanes that aren’t paying market rates. It literally is the market. Carriers are familiar with this because of fuel surcharges. Index-linked contracts work the same way.

What exactly is FreightWaves TRAC?

FreightWaves TRAC provides more accurate information on volatility, rates and capacity to improve margins and contract negotiations.

TRAC produces the National Truckload Index (NTI) spot rate, which can be used by shippers, brokers and carriers to benchmark, analyze, monitor and forecast rates. The NTI is built on data collected daily from a consortium of market-driving companies that adhere to International Organization of Securities Commissions (IOSCO) standardized protocols. The NTI is constructed in accordance with a methodology and governance structure developed using best practices from the index provider industry.

FreightWaves does not profit from individual transactions — it merely provides the data 

FreightWaves does not make money on individual index-linked contract transactions. FreightWaves is not involved in the shipper-carrier negotiations. Its role is to provide the index of record used for a contract. 

This is similar to the role of the U.S. Department of Energy in fuel surcharges. That federal data is used to set those fuel surcharges. 

Ideally, the shipper and carrier both subscribe to FreightWaves data for information, but that is not required. (It should be noted that FreightWaves does earn money from SONAR data licenses.)

Interested in learning more about index-linked contracts? 

The FreightWaves SONAR team can provide additional information. Follow this link to find out more.

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Source: freightwaves - Index-linked contracts new way to buy trucking capacity
Editor: Craig Fuller, CEO at FreightWaves