8 Factors For Selecting A Freight Rate Index - Index Image

8 Factors for Selecting a Freight Rate Index

Negotiating rates in the freight market can be frustrating, but it can be the difference between a profitable or unprofitable year. Effective negotiation requires time, attention, and knowledge of what’s happening in real time. With so much uncertainty, how can someone know if they are getting the best rate? With capacity so tight and drivers becoming harder to find, rates continue to go up, and most industry analysts predict rates to stay high for the months ahead – and that’s assuming there are no weather incidents that make conditions worse.

The key to managing rates in any market is having accurate, timely intelligence about the modes, lanes, and regions a company operates in. The right freight rate index can help identify when rates jump or slide back. For shippers, 3PLs and brokers, having this information could provide better negotiated rates. The question is how does a company find the right freight rate index to match its business needs?

Two Primary Types of Freight Rate Indices

With so many freight indices available, and new ones often being introduced, it might be difficult for a company to know where to even start in finding the index that matches its specific business needs. Before diving into various different facets of rate indices, it’s probably good to start with the higher-level distinctions. While there are variations among the indices, and some overlap among competing solutions, most indices fit into one of two groups.

Dynamic Decision Support Indices for Brokering
This first group of indices permit dynamic access and are frequently used in decision support for brokering loads. These indices provide insights into the prevailing rates in a lane (city to city, or market to market, state to state). Many of these are derived from some of the popular load boards.

More Static, Less Dynamic Indices
Often used for benchmarking and procurement, the second group of indices provide a deeper historical perspective. When it’s time to secure contractual rates, these indices show historical rates for a lane, and provide guidance on what optimal, fair rates typically are.

8 Most Important Features of a Freight Rate Index

Each freight rate index on the market has its own strengths and weaknesses. In looking for the freight rate index that works for a company’s specific business needs, here are some areas worth looking closer at:

1. Latency

Establishing a fair rate for a load that needs to move today is difficult if data in the index is based on transports from a month ago or more. Data needs to be current, fresh, and ideally, updated daily. If the index is only providing monthly updates, it won’t be able to provide granularity within the lane definitions that a low latency index can.

2. Modes

It is also worthwhile to make sure that the modes indexed mirror the modes of transportation that a company needs to secure. Some indices are strictly truckload or dry freight, while others can include less-than-truckload (LTL), ocean, rail, and intermodal.

3. Scope

Some indices only vary at the highest levels of aggregation for the lanes, even as high as country to country for lane data. However, for brokering purposes, country to country provides very little practical value.

4. Depth – Sample size

If an index is based on a small sample, then lane data between most points will have few or even no representative data. With an index that has little depth, one load in a lane during a week could skew true rate for a mode or for a specific lane.

5.Rate Determination Method

Rate determination can be easily overlooked, but it is important to understand if the rates are driven by bidded rates or settled/actual rates, as well as distinguishing whether the rates were driven by spot or contractual rates. Bidded rates are often considerably different than what secured loads actually cost in a lane.

6.Buy and Sell

For 3PLs and brokers, having the ability to distinguish between buy and sell rates in a lane can provide a competitive advantage. The two datapoints highlight the delta between what a load can be bought at and what it can be sold at.

7.Batch Analysis

For concerns of all types, the procurement process can benefit significantly by permitting a batch analysis for a block of loads or lanes.

8.Accuracy and Adaptability

If the rate index includes regional economic markets then it equips the company to determine a fair rate from Lansing, Michigan, to Towson, Maryland, by including everything in the greater Grand Rapids, Michigan, to Baltimore, Maryland, economic regions. Furthermore, configurable confidence levels allow the manager to set a standard for the lane depth and have the index return a rate that meets that confidence level.

Finding the Right Index

If a company currently isn’t using a freight rate index, the best way to start in selecting one is to define the set of requirements for the index before demoing or evaluating any solutions.

In addition to the factors listed above, other criteria to consider include:

  • Is it easy to use and easy to access?
  • Does the index integrate with tools, like a Transportation Management System (TMS)?
  • Will the index need to support brokering, procurement, or benchmarking?
  • Can rate analysis within the index be automated?

Once the criteria are developed, the next step is to create a scorecard with the criteria listed out, and then weight the key factors that matter most to the company to make an objective assessment. And, lastly, keep in mind that the index needs to align with the overall goals and priorities of the logistics operation, so that managers can make reliable decisions when seeking rates.