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11-18-2010, 05:01 PM
Has anyone had success in instituting a "Fixed price contract with downward price protection"? I am considering this for a renewal of a pallet contract. With the current economic situation, the prices of new pallets may go down if construction of new homes picks up. The boards used for new pallets are remnants from the house frames which is currently in short supply.
Also, does anyone know where I can find the index prices on wood/lumber?
11-23-2010, 05:24 PM
Use the multi-screen search at BLS.Gov to get your current index for wood products. I think wood products is a better index than the housing market, but then you know your contract. Then establish the index for a base month, which would be the first month of your contract renewal. The index is whatever number is on that BLS table. Then set up an OEP (Option exercise price) whereas you have a fixed price for each pallet and each option you exercise is a multiplier of the base price times the upward or downward delta in the index. Be sure to set a future end date for exercising the options. I would go even further and try to lock in the price such that the only time you had to make a change to your base price was when the index fluctuated more than say 5 or 10%.
Good Luck, KC, CPSM
11-23-2010, 08:46 PM
You might consider agreeing to a raw material price index (maybe see Pulp and Paper publication) with your supplier. Then in your contract you could reference a time frame (monthly/quarterly) for price changes up and down based on a formula referencing the third party published price index. You may want to discuss with your supplier the index as most of them already know the optional third party indexes to consider best for the precise product you are buying.
Also, if your purchase volume is reasonably high, you could consider a raw material contract direct with the wood supplier that supplies your Pallet provider.
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