Dr Raymon Krishnan, president of Singapore's Logistics & Supply Chain Management Society, examines whether the logistics industry's growing embrace of index-linked freight contracts may be solving one problem while creating another.

The logistics industry has always evolved in response to disruption. Whether driven by globalisation, digitalisation, or the unprecedented shocks of the COVID-19 pandemic, every major event has forced supply chains to rethink how they operate. Among the most significant developments in recent years has been the growing conversation around index-linked freight contracts — agreements that tie freight rates to published market benchmarks such as the Freightos Baltic Index, the Drewry World Container Index, or the Xeneta Shipping Index, rather than fixing prices for the contract duration.

These contracts undeniably address 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. The proliferation of digital freight rate indices over the past decade has made real-time benchmarking increasingly accessible, accelerating adoption across major trade lanes.

During the pandemic, many shippers holding long-term contracts found themselves unable to secure space as spot rates climbed to historic highs — on some routes, container freight rates surged more than fivefold above pre-pandemic levels. Fixed-price contracts became commercially unsustainable, and relationships between shippers and carriers grew strained as each party sought to protect its own interests. Index-linked pricing emerged as a practical solution, automatically adjusting freight rates in line with market movements so that contracts remain commercially relevant regardless of whether prices rise or fall.

The Risk of an Industry Obsessed with Freight Rates

Yet this approach raises a critical question: are we solving one problem while unintentionally creating another?

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

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

Decades of Lessons in Shipper-Carrier Relationships

Index-linked pricing has the potential to fundamentally reshape commercial relationships. Drawing on more than 30 years in the industry as a freight forwarder, a shipper, and now a consultant and educator, Dr Krishnan has consistently advocated that successful shipper-carrier partnerships were built upon mutual trust, actual volumes, and long-term planning. All parties accepted that markets would fluctuate over time, but the relationship itself provided stability through those fluctuations.

He observed this dynamic firsthand while working as a logistics manager during the global financial crisis of 2007–2009 and again during the pandemic years of 2020–2023. In both periods, shared commitment carried partnerships through extreme volatility. Index-linked contracts, by contrast, risk replacing that commitment with a transactional mindset in which the commercial relationship becomes increasingly tied to an index.

Freight is a derived demand. It exists to move cargo efficiently through increasingly complex global supply chains, not simply to optimise freight pricing.

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

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

This concern is particularly relevant as carriers and forwarders face mounting pressure to meet emissions reporting requirements under frameworks such as the EU's Corporate Sustainability Reporting Directive and the International Maritime Organization's greenhouse gas reduction strategy — obligations that depend heavily on the kind of operational collaboration and data-sharing that transactional, index-driven relationships may not foster.

A Case for Outcome-Based Contracting

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. Contracts could link 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, and that progress should be welcomed. Transparency, however, should remain a means to an end, 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 serving as an unnecessary crutch that optimises freight prices rather than supply chain performance.