There are one of two ways to buy aluminum cans: via spot sale or a can supply agreement. At first you might gravitate toward the first choice and just purchase your supplies when you need them, but there are many situations in which a supply agreement is the right choice to save you a significant headache down the line.
Let’s take a look at supply agreements and discuss the reasons you should, or shouldn’t, enter into one with a supplier.
How are cans sold?
At large volumes, can supplies are sold in two manners: spot sales or via a supply agreement.
Spot Sales
Spot sales refer to basic purchases of products that are not planned in advance. These are typically sold at the highest price level without special or customized terms. Buyers are at the mercy of the market, including more volatile costs, current availability, lead time, and/or production scheduling at the time of order.
Because there is no prior agreed-upon plan for volume, there is no way for suppliers to know how much the buyer will need at any given time. This leads to extended lead times and potential delays if the manufacturer, or specific plant, is operating at or near full capacity.
However, the benefit of spot sales is the on-demand nature of the order. If you are just getting started, you are still market testing packaging formats, or if you simply have no idea what your packaging needs will be beyond a couple of months, the spot market may make the most sense for your business. If you know (at least the basics of) your annual supply needs and have a good idea of monthly projections, supply agreements will be in your favor.
Supply Agreement Sales
Supply agreement sales are done via an agreed-upon contract that sets out a forecast for your supply needs and allows the supplier time to prepare for timely delivery. This includes both procuring the raw materials and allocating production line time so they can reliably produce and deliver the final product on time.
The benefits are numerous, but the main one is solidifying access to products when needed, at the best possible price, over a period of time. As a commodity, supply/demand can be volatile with aluminum cans and without the safeguard of a supply agreement in place, buyers can be entirely left out when the market suddenly changes. This isn’t stated as a scare tactic. Rather, it’s a reality we saw during the pandemic and following with other world events such as wars. Agreements offer prioritization and as a result, protection.
In return, buyers need to meet certain criteria to qualify for a supply agreement so that it's a mutually beneficial arrangement. These criteria can include:
- Annual Forecast
buyers need to be able to accurately project how many supplies they will need, by item (product SKU), and month, for the duration of the contract, updated on a rolling basis, as determined by the supplier. - Volume & Time
generally, supply agreements require a minimum volume commitment over a period of time (for American Canning, this is ~2MM units per year, for 2-3 years). - Partnership/Exclusivity
the supplier needs to know that a certain quantity of cans/ends, or potentially all of their cans/ends, will be purchased from the supplier in exchange for allocating the necessary production capacity. In a true partnership, there is growth and upside possible for both parties.
Meeting these requirements not only gives buyers consistent access to product, but it often unlocks volume pricing and discounts on associated items such as artwork setup (graphics) and dunnage fees. Not to mention additional benefits such as the ability to apply for credit terms and a more personalized experience with the supplier via dedicated account management teams.
With higher volumes, even for just one SKU, a supply agreement is often the smartest way to guarantee that your business isn’t left waiting for supplies during a busy season or when new doors open.
Consider this example: You don’t have a supply agreement and are needing a large order of 16oz cans during peak summer season. The production facility closest to you is out of capacity, so production is slated at the next nearest facility, 6 states away. You may incur new graphics fees and increases your freight cost and lead times. All for no reason other than not having an agreement in place.
What is a can supply agreement?
A can supply agreement is, at its core, a contract between your business and the supplier, but in this case, the contract outlines the buyer’s intent to purchase and the vendor’s intent to supply.
These terms of a supply agreement are separated into two buckets.
- General Terms & Conditions
These include terms that apply to ALL sales of a given product, even those without a supply agreement. All customers purchasing cans must agree to certain terms. Things like: shipping requirements, damage policies, refund/return/exchange allowances, etc. - Agreement Terms
These are terms that are agreement specific and case-by-case. Things like: total volume, number of SKUs, volume discounts, added benefits, product warranties, credit terms, etc.
Agreement terms are what separate a supply agreement from a spot or web purchase and are specific to the needs of the buyers. This allows the buyer to outline their intent, and in return, receive maximum benefit.
Main Considerations when Signing a Supply Agreement
When signing a supply agreement there are many different options you’ll need to think through as you discuss these agreements with different companies.
The most important thing to consider is “What are you committing to?”
Consideration No. 1 - What’s the penalty if you miss your volume forecast?
A specific example would be a Take or Pay agreement. In this scenario you commit to buying a certain number of cans (and/or ends) based on your forecast. For example, let’s say you predict a need for 10,000,000 cans in a year. But, due to unforeseen circumstances you end up only needing 6,000,000 cans that year. In a Take or Pay agreement, you’ll still be on the hook for payment on the 4,000,000 that you didn’t need.
Some companies, like American Canning, do not typically require Take or Pay agreements. While customers must make a 12-month forecast, they are only held to their 90-day rolling forecast projections. This allows for adjustments throughout the year as circumstances change. However, if a customer does fall short of the original 12-month forecast, pricing structure and applicable volume discounts may need to be addressed.
Understanding volume commitments and penalties is especially important as you consider not only volume but length of the agreement.
Too often, new and/or scaling brands are quick to pursue overly optimistic volume commitments over too long of a period in order to secure better pricing.
While initially the offer is enticing, the penalty if/when demand swings can negate or even outweigh any early benefit.
Consideration No. 2 - Are you bound by exclusivity?
Most supply agreements include an exclusivity clause, but there are variances to what each one involves. Sometimes you are agreeing to buy all of your can products exclusively from this supplier. Other times you’re just agreeing to a certain type of product, like 12oz cans, a specific SKU, or a certain percentage of your cans.
Investigate the reasons you can break this exclusivity agreement before signing and determine how that aligns with your business plan. Usually you can’t break the exclusivity for reasons related to pricing or personal preference, but you can if the supplier fails to fulfill their obligations.
Something to consider, is whether you’re planning to expand your product portfolio or line during this time. For example, you’re currently producing beer but looking to expand into RTD cocktails or cannabis in the near future. Does your agreement lock you into the same can for all products both now and in the future, or, does it allow you to pursue different cans that maybe or a better fit for different products in the future? When it comes to new and different products, packaging performance is key.
Consideration No. 3 - What is the pricing structure?
Pricing structures can vary widely depending on your agreement. There are numerous factors that affect pricing, but price breaks are one of the key reasons a company would choose to sign a supply agreement. Explore your different options.
You may be able to sign up for a flat rate for the entire term of the agreement or the year, which could have significant benefits due to volatility in aluminum pricing. This option is not always available and may require significant volume guarantees.
Aluminum is traded on the London Metal Exchange and pricing can vary widely due to macroeconomic factors.
Locking in, or stabilizing, a price for a longer term is a big potential win for your business.
On the other hand, if the cost of aluminum goes down, you won’t benefit from those savings. From a cash flow planning or management perspective, some companies prefer to have clarity on their yearly spend instead of following the ups and downs of aluminum costs. You’ll need to decide what matters most to you.
Volume discounts are also involved with supply agreements, but each company offers these discounts based on different factors or at different tiers. Some are predicated on milestones throughout the agreement, others are in exchange for specific volume commitments. Take or Pay agreements often result in advantaged up-front pricing, but come with the risks discussed above.
Additionally, the timing of these discounts is not to be overlooked. When do you want to receive these discounts? As a rolling discount that adjusts throughout the year? Up front based on a volume commitment? Or via a rebate that you cash in after the end of a calendar year based on total pull? These questions must be considered and answered before you agree to a deal.
Other costs and discounts that should be considered:
- Freight
is it included in the pricing or will it be an extra cost for you? If included, what’s the cost? - Extra fees
things like specialty artwork, matte varnish, dunnage and customization all add cost(s) - Frequency of change
if you’re not locked into a flat rate, variance in aluminum will affect your cost. When and how are pricing changes communicated?
Consideration No. 4 - What are the other terms involved?
As with any agreement between businesses, many other factors are vital to explore before signing. In terms of can supply agreements there are three things to consider:
- Storage
is there a cost to store your extra cans? How quickly to do need to pull your cans from storage or after production to avoid fees? Is it worth paying storage on every can, when you only need it for some? If you were to arrange your own storage, what would the cost and freight to/from be? - Payment terms
supply agreements often unlock the potential for credit instead of having to pay a deposit or cash in advance. - Production locations
does your agreement guarantee supply from a certain location?
Consideration No. 5 - What kind of account management is included?
When a company promises “account management” with their supply agreement do they just mean they’ll pick up the phone when you call? Or does their account management proactively go above and beyond to ensure you feel supported from planning to purchase order to final delivery?
Above-and-beyond account management means that a company does everything they can to ensure that you don’t run out of cans. It also means that they will coordinate every moving piece of the process, from helping you place the order, submit a new forecast, stay ahead of changes in lead times, and deal with freight or quality issues.
Top-level account management will help troubleshoot issues and prioritize the success of your business. A good supply agreement should unlock this level of customer service so that you have the experience of a true partner, versus just a commodity supplier.
Why Sign a Supply Agreement with American Canning?
Supply agreements with American Canning not only help ensure you get the supplies you need at the exact times you need them, but they also provide several benefits exclusive to our supply agreement customers.
You’ll get the best pricing and included volume discounts which are not available to spot sale customers. With longer term commitments, we also offer discounts on graphics and the ability to apply for credit terms.
Perhaps most importantly, you get access to our dedicated account management team who can answer your questions about everything from supply forecasting to can graphics and help troubleshoot any issues you encounter. This open line of communication makes a major difference for our customers. We’re an independently owned business and take great pride in helping other small to mid-sized businesses succeed.
Have further questions about American Canning’s supply agreements? Check out the FAQs below.
Supply Agreement FAQs
Who qualifies for a supply agreement?
Supply agreements largely serve the purpose of allowing customers to secure their needs through manufacturers allocating capacity to these customers. To best do that, supply agreement customers must:
- Buy at least 2 million cans per calendar year.
- Provide an annual forecast with projected volumes by item and month.
- Agree to purchase items included within the agreement from the supplier for the duration of the contract.
Does a supply agreement guarantee the customer cans?
In most cases, yes. Nothing can ever be fully guaranteed in commodities however a supply agreement ensures buyers have priority when it comes to production scheduling and capacity.
Is production location guaranteed?
Production location is determined at the time of product setup and remains consistent unless a major development impacting capacity occurs. This is very rare and amost never seen.
Is pricing fixed or variable?
Most can supply agreements have variable pricing based on the cost of aluminum. Because aluminum is a commodity that trades on an exchange, the price changes constantly based on a myriad of factors (just like oil). Changes in prices are not passed through to customers in real time, however, they are reviewed periodically and if a change is to occur, communicated in advance. The benefit is that regardless of what change occurs, a supply agreement guarantees that a customer receives lower pricing than the spot market.
Buyers often desire fixed pricing, however variable pricing can have benefits. If pricing is “locked”, it guarantees costs won’t not increase for a given period, but it also guarantees they will not decrease either (if, for example, the price of aluminum falls—which frequently occurs).
What discounts are available?
Discounts are available, based on the following factors:
- Total volume commitment (the more you buy, the better the pricing).
- Discounted graphics fee (based on the length of the agreement).
- Waived dunnage fees (for Ball cans)
What happens if a customer doesn’t pull their forecasted volumes?
If demand swings and you are unable to pull your forecasted volumes especially last minute, significant financial harm may occur and impact the supplier if they have allocated production capacity to you that goes unused. This may require eliminating discounts, allocating cans to another customer (no longer guaranteeing the production), or even charging fees in extreme cases. In any case, we do not have default “take or pay” terms in our agreement requiring a customer to pay for cans they do not pull.
How do I avoid paying dunnage fees?
The best way to avoid paying this 100% refundable deposit is by returning the dunnage clean and in a timely manner. Supply agreement customers with Ball products may be eligible to have the dunnage deposit waived however it can be enacted at any time. The best course of action is to timely return all dunnage after production.
Does an agreement include product warranties?
Product warranties are only issued upon successful product compatibility testing of production liquid being packaged in printed can items. Any customer choosing to not pursue testing is required to sign a waiver prior to purchase. Warranties are not available on brite can items. Length of warranty is dependent on test results and only applicable to the test recipe. Any change in the liquid will require new testing and a new warranty.
Can a single supply agreement cover multiple types of cans and ends?
Yes. We can include multiple products within one agreement if all other terms are the same. If there are differences to key contract terms, we will need to execute two separate documents.
How to I go about signing a supply agreement?
If your business needs satisfy the requirements of a supply agreement and you are interested in learning more, please reach out to cansales@americancanning.com.
