On November 3 2020, the MIT Freightlab convened an open virtual session entitled, State of the Art in Transportation Contracts”. The goal of the session was to introduce the FreightLab’s 2020-2021 research program, which focuses on innovations that expand the portfolio of contractual forms used in transportation procurement. Dr. Chris Caplice, Dr. David Correll, and MIT Ph.D. candidate Angela Acocella presented to a virtual audience of ~150 attendees. A video of the presentation is available here.
The agenda for the event started with an overview of the MIT FreightLab’s past contributions to freight procurement. In particular, Dr. Caplice highlighted the FreightLab’s early work on packaged-based carrier bids, which optimize carriers’ bid packages according to a carrier’s existing network of customers and economy of scope. Dr. Caplice concluded this section by highlighting where these innovations have succeeded, and also where they have failed to gain traction in modern practice. While bid optimization is now commonplace in freight procurement, lane bundled-bids based on leveraging economies of scope have not. Dr. Caplice pointed out one peculiarity of American shipper-carrier contract relationships that helps explain why: contracted carriers can at any time reject shippers’ tenders in order to pursue more profitable options when the spot premium is high.This non-binding peculiarity of modern American shipper-carrier relationships complicates decision making, modeling, and optimization of these relationships.
One way that the FreightLab team proposes to address this issue is incentive alignment through the introduction of index-based pricing clauses. In essence, the FreightLab team wondered: could an index mechanism be introduced to shipper-carrier contracts that reduces carriers’ incentive to reject tenders when more lucrative spot market opportunities appear?
To set the stage for the discussion of freight indices, FreightLab Co-Director Dr. David Correll gave a brief overview of another widely known and established freight index, the Baltic Dry Index. The Baltic Dry Index is a well-established and globally renowned indicator of global ocean shipping trends. Dr. Correll’s presentation introduced the mostly trucking audience to what the Baltic Dry Index is, and how it is calculated. He concluded with a few key points for what trucking can learn from the BDI: (1) trust in the institution behind the index is critical and hard-won; (2) the index’s definition and formulations matters; and (3) index formulae must be periodically updated in order to keep current with shifts in the industry.
After Dr. Correll’s presentation, the FreightLab’s Ph.D. candidate, Angela Acocella, presented research from her dissertation on freight procurement. Angela has built sophisticated models that empirically test different index-based freight procurement strategies based on real data. Angela’s work considers which lanes, which freight, and which shipper-carriers pairs are the best candidates for introducing price index mechanisms. Angela also asked fundamental questions about what an incentive alignment index in trucking should look like. Should it be symmetrical (goes up and down with the spot market premium), or should it be an asymmetrical escalator (only goes up when the spot market is high in order to deter carriers from rejecting)? Should the index’s movements be limited up and down by imposing a ‘collar? Angela’s presentation introduced a variety of new and thoughtful questions that the FreightLab believes could become part of shipper-carrier negotiations and help expand the portfolio of contractual forms used in the future.
Questions and commentary were invited from the audience both during and after the session. A follow-up session for MIT CTL exchange members be held on November 10 2020.
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