Spot-market purchasing of commodity metal products has fallen out of favor during this pricing super-cycle period, according to a survey of metals buyers. In a recent Purchasing survey, only 36% of those surveyed are buying spot on a weekly or monthly basis while 64% are using contracts of varied durations. Jesse Chang, the supply chain director at Xaloy, says that contracts "standardize costs and provide on-schedule delivery with some safety stock, if needed" for the Pulaski, Va., manufacturer of machine parts for the plastics industry.

Most buyers who use spot purchasing extensively are supplying manufacturing operations with small-volume and erratic usage. Others use spot solely to cover short-term surges caused by unexpected tsunamis in end-product demand. Interestingly, almost all buyers—no matter what method they prefer— regularly track the spot-market pricing of ferrous, nonferrous and precious metals.

In fact, the purchasing managers polled say they will continue to monitor market pricing closely—especially since 41% of the contract buyers now are using indexing systems to renegotiate prices at quarterly, six-month or annual intervals. These price indexes are expected to help buyers understand the dynamics of supplier costs and can be used to set and manage escalation clauses in supply contracts.

Actually, most buyers who use contracts, especially for steel, say that the key benefit is stability in pricing—which offers stability in end-product pricing. "With contracts, fixed pricing is hugely beneficial," says medical division purchaser Daniel Thomas at precision sheet metal products fabricator CSI Industries in Fairview, Pa. "As fluid as the market is right now, locking in a commonly used metal at a good price is helpful." Many buyers comment on the ability to develop long-term relationships through contracts with reliable suppliers who can be counted on to provide good delivery and service. Other buyers like contracts when buying so-called high-risk metals—that is, those base metals that are traded on commodity exchanges and fluctuate daily in price—because it allows the purchasing group to use the expertise of industry experts to assist in managing the purchase of materials and leveraging the volume.

"Contracts allow me to lock in prices for a quarter," says buyer William Cook at lockers and shelving maker Penco Products in Oaks, Pa. Stephen J. Rasmussen, manager of purchasing and materials at Great Lakes Technology, a Manitowoc, Wis. maker of high performance lighting products, is a contract aficionado who only uses spot buys "to fill in supply gaps or to take advantage of market corrections that have lowered pricing."

More buyers are relying on contracts as price volatility plays havoc on buying plans.

And that's what has opened the door for indexing. "Contracts supposedly allow for long-term fixed pricing but indexing provides stability to volatile market," says Don Edwards, director of the global supply chain at industrial valves manufacturer Zy-Tech Global Industries in Stafford, Texas, "by allowing the supplier and buyer to equally share in the price fluctuations based on a mutually agreed index."

Jeff Phillips, the purchasing manager at stretch-wrap equipment maker Highlight Industries in Grand Rapids, Mich., says that indexing "provides some cushion of safety against quick spikes in price from mills." He also sees indexing as "a happy medium between contracts, in which the service centers add a healthy cushion of margin, and spot buying, which leaves buyers even more vulnerable to price spikes."

Even those buyers who use spot buys for some supply are leaning toward indexing for other metals. For example, Peter Meriam, the materials manager at Interroll Manufacturing in Wilmington, N.C., uses spot purchases for "low-usage metals or one-off items that are more or less specials." The advantage of this method is that there is no commitment to purchase the metal until it's needed. "Spot buying allows us to obtain multiple offers for a particular item and ultimately drive the price down through 'spot negotiation' and/or obtain the shortest possible delivery time in order to satisfy our product delivery requirement," he says.

Still, he also uses indexing for what he terms "standard high-usage metals." The advantages of index-based buying is that "pricing has a degree of stability over a specific time period—in most cases, quarterly—so we can forecast price impact for the subsequent quarter based on current market conditions." Overall, he adds, the use of an index "eases the effort to manage the metals portion of our supply chain."

Mohammed S. Mohiuddin, global commodity leader for oilfield giant Schlumberger in Houston, likes contracts because "prices are predictable, supply is guaranteed, there are fixed terms and conditions and there are lower supplier management costs." He says indexing "provides all the benefits of the contract-based system plus lower risk of getting caught on price in a softening market."

In the current volatile metals market, purchasing manager Karen A. Miller at mechanical/electrical assembly firm Atek Manufacturing in Minneapolis, says indexing "is the most preferred buying method (since) prices can be gauged without large swings from month to month and financials can be managed easier."

Price and supply contracts are used especially for London Metal Exchange-based nonferrous and plastics commodities by Michael J. Knights, vice president of global procurement at Goodman Global, a maker of heating, ventilation and air conditioning products "because you can understand your risk, exposure and gains." The Houston-based staff indexes contracts with second-tier suppliers, though. "We fix the price at indexed rate and adjust accordingly; if you then offset pricing with a second hedge, you should come out whole," he says.