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Improving Operational Efficiency and Pricing Accuracy through Commodity Market-based Pricing

Friday, July 17th, 2009 by admin

Within numerous food industries, including the cheese market, it is a common scenario for two businesses to agree to transact business together in a buy-sell relationship with the pricing set relative to a commodity market.  For example, a given company may import cheese from another entity and then cut and pack that cheese for their retail customer base.  The cut and pack business may elect to buy a given Swiss cheese at $0.10 per pound above the Block and Barrel weekly market average based on the date of manufacture while agreeing to sell their cut and packed finished product for $0.15 per pound above this same market based on the date of shipment.

There are varying methods by which the cut and packaging company may choose to manage its business relative to these pricing methods.  One method would be that personnel could manage the vendor and customer pricing records directly for the specific vendor and customer described above.

Alternatively, by using commodity market-based pricing functionality, one could establish the specific Block and Barrel weekly market average as the basis for pricing in this example.  Then, within vendor and customer pricing records respectively, one could establish that the given Swiss cheese supplier has agreed to sell the cheese to the cut and pack organization at an overage of $0.10 per pound based on the date of manufacture of the cheese.  Likewise, within customer pricing for the specific example above, a customer pricing record would be established for a given retail customer such that they would be billed an overage of $0.15 per pound relative to the given commodity market average based on date of shipment.

In either case, the system would establish a purchase order with the supplier and a customer order with the given retail customer respectively for the proper pricing based on these agreements; however, the method by which pricing updates would be made would vary by these two methods.  In the case where the exact pricing is set up for the vendor and customer respectively, each time the commodity market pricing would change, the specific vendor and customer pricing would need to be updated directly.  On the other hand, if the pricing records were managed relative to the given commodity market pricing, only the reference market-based pricing would need to be updated – either manually or electronically – and the associated vendor and customer pricing records which reference the given commodity market price would be updated automatically.

While this process may not appear to save any time when we’re talking about an example with only one vendor supplying one product and one customer buying one product, you can imagine how much more complex this can be when there are dozens of vendors supplying a wide variety of products which can be cut and packed to yield hundreds of finished goods for a multitude of customers.  In this case, by setting up the reference commodity markets and associated vendor and customer pricing records once and allowing the system to automatically calculate the appropriate contract pricing as the various commodity market prices move up and down, there can be tremendous gains in time efficiency by managing the pricing in this manner.  In addition, since the pricing is set up once with the movement of reference commodity markets kept in only one place in the system, the potential for errors in pricing of purchases and sales is likely to be substantially reduced.

By using strong ERP systems like TGI’s Enterprise 21, food-based businesses and organizations in other industries that leverage commodity market-based pricing as a norm can save time and money while reducing the possibility of errors through market-based pricing functionality on the procurement and customer sales sides of their businesses.