What Types of Aluminum-Purchasing Contracts Do Companies Use?

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What do I need to know about purchasing aluminum from suppliers?

How Do I Select Suppliers and Determine Buying Strategies?

As with any sourcing strategy, in the aluminum metal market, the optimal award decision comes as a result of ongoing analysis of quality, quantity required, cost, delivery, service and continuity of supply.

The ongoing practice of analyzing demand and forecasting future aluminum purchases remains paramount. The power of a “locked order” on the customer side gives buying organizations leverage over the longer term on the supplier side. Furthermore, with demand in hand, buying organizations have the ability to weigh a wider variety of sourcing strategies to achieve cost savings.

Once the forecasted quantities become known, the buying organization can create cost estimates. This spend analysis, so to speak, creates a complete and documented understanding of the organization’s past and future aluminum purchases. Since the price of aluminum varies from period to period, making use of a long-term forecast provides context and expectations as to the aluminum price and therefore provides the buying organization a better budget from which to plan future aluminum purchases.

After understanding the company’s needs and the cost breakdown of its aluminum purchases, organizations may wish to re-examine the supply market to determine which suppliers would best meet the organization’s needs. Different market characteristics might require different strategies as well as different suppliers.

We have seen companies deploy a wide variety of contract types. Here are some of the typical ones:

  1. Bid out – monthly, quarterly or as needed, and awarded to the most competitive supplier; spot buy
  2. Fixed-price contract for a set period of time
  3. Mark-to-mark hedging
  4. Indexed with value-add competitive bid with price held fixed for some period of time
  5. Shared risk and reward

Though not always the case, we typically see companies deploy a variety of procurement strategies to manage aluminum purchases. Typically, the need to evolve the strategy tends to coincide with the dollar amount of the category. As companies grow, their revenues they tend to add new capabilities to their procurement strategies.

This is the third article of a 5-part series on How to Embed Forecasting Capability into Aluminum Sourcing Practices. In the next part of this series, we drill down into three specific manufacturer types by category, and how they go about buying their aluminum.

Learn more about MetalMiner’s aluminum price forecasting services.

Raul de Frutos Tinoco is MetalMiner’s lead forecasting analyst. Hear Raul and other experts speak at our upcoming commodity conference:

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