Key considerations when choosing an index
Before we explore how to build a contract, below you can see the key considerations shippers and logistics providers should consider before choosing their index.
- Relevance: The index chosen should reflect the prevailing rates for the shippers chosen shipping corridors.
- Transparency: All parties involved must be able to independently verify the index values.
- Timeliness: The index should be updated frequently to truly reflect current market conditions.
- Reliability: The data used to calculate the index should come from a neutral, reputable source to ensure the index is not subject to manipulation and accurately reflects market conditions.
- Consistency: The methodology used for calculating the index must remain consistent, ensuring the index is a reliable benchmark.
- Comprehensiveness: The index should have the data density and breadth to be truly representative of the market.
- Accessibility: the index should be accessible to all parties ensuring everyone has the same information to make decisions.
- Historical data: Availability of historical data is key for back testing and understanding how the index has performed over time.
Here are some essential questions to ask:
Is your chosen index truly reflective of the market?
To ensure you are truly agreeing on a fair price the index needs to accurately reflect all the shippers’ chosen corridors and container types. If you chose to base a contract off data from one route or container type, the index may not be truly reflective of other required routes, meaning either the shipper or the logistics provider is likely to be losing out. Likewise, coverage and data quality control are essential for ensuring outliers are not skewing the benchmarks.
All parties should also consider whether the index covers both short and long-term market movements and long versus short to ensure you can pick the best option for your organizaton.
Is your chosen index’s data fresh?
How often does your index get updated with valid contract benchmarks? The index should be updated in real-time, meaning current contracts rates are frequently updated e.g. daily to ensure true reflectiveness of current market conditions and fair for all parties.
Is your chosen index’s data source trustworthy?
Is your index’s methodology freely available? This transparency is key so all parties always have access to the information they need and can validate the index. It’s also important to consider if the index Is based on neutral data. If data is included that comes from carriers for example, that wouldn’t be neutral and could, in theory, be skewed to one party.
