I have a few more gotcha threads I intend to share, illuminating disparities between what we might want to do with our company costing, and what is practical in BPCS & the real world.
In some cases you may wish to later launch a separate thread how best to deal with particular issues.

Commodity Costing is a major challenge for my company, and I believe it is a major challenge for many manufacturers. I suspect some ERP do a better job of managing this than others. When you setup your cost structure plans, you need to have a good understanding of the many company needs, such as this complication.

This is the notion that there are certain raw materials whose global pricing is like gasoline pricing on steroids. We need to stay on top of the evolution of those costs, their impact on our business, what they do to our profits, and how best to pass those rising costs onto our customers, without creating a nightmare for engineering, accounting, any other clerical area, or supply chain PR.

Different companies deal with this different ways, BPCS can manage it different ways. Many companies need to incorporate how to deal with this within both their finance policies and their cost management choices, in such a way as to get accurate data without a nightmare for staff to implement, keep current, or have to keep explaining to staff of customers, who can't understand why prices in business are fluctuating.

In the real world, we notice that in one day the gasoline prices went up by 25 cents at a particular gas station, and the same day the price of oil sent down $ 10.00 in the global market, and people ask how come. The answer is extremely complex.

In the business world the answer is simple. Our customer ordered product from us 6 months ago when the unit price was $ 1.00, and they entered that to their PO records. Now we are doing a shipment priced at $ 1.25, because of the increase in our commodity costs, and the customer accounting staff is insisting that they only agreed to pay $ 1.00 for the product. Well we TOLD them about the commodity fluctuation, but for many of our business customers, the notion that the right hand knows what the left hand is doing, in the management and approval of contracted repricing is totally laughable, and unenforceable.

Here are some approaches I have experienced:

In your BOM, make provision for RAW ____ whatever the commodity is, which you populate with the current world pricing, as it fluctuates, so you need a reliable source of the official pricing. This is something we did years ago.

Part of this planning may need access to a Cost History.
What was the cost 2 months ago? What conditions led to this Cost getting changed?
There are 3rd party products that make it extremely easy to track changes to your costs and prices. Another post might review some such enhancements.

Our auditors might ask in April for the valuation of our Inventory using last December's costs, so when setting up cost structure to deal with Commodity Pricing, and other challenges, don't forget to consult with auditor needs.

Alternatively, locate some fields in BPCS data base, tied to items in BOM, where the commodity content can be stored separately, then "rolled up" in a process parallelling BPCS standards. This is what we are currently doing.

You may be buying some product which contains this commodity, so you need to know how to setup BOM to accurately reflect how much of that product is the problem commodity, and how much is something else, so that cost rollups will accurately track impact of the commodity price fluctuations. This alone can be a major bottleneck to figuring out properly, and staying current with the info on new parts.

As the rise in commodity prices erodes your profits, are you going to constantly harrass your customers with price increases for them, or can you charge them separately for the commodity content times what's happening with world prices of that commodity? If you do the latter, then your method, of obtaining commodity content of the parts you make for these customers, has to be something that they can easily audit, or it meets some ISO standards, or both.

Currently we have reports where for end items we have the calculated content of the commodity within each unit item, multiplied by sales last month, equals the content of that commodity shipped them. Factor in the price of the commodity when we last contracted with the customer, and what it is now, and we can see the increase of commodity contact pricing in what was shipped the customer in some time period. This increase can be passed along to some customers via special billing charges, provided we have got the customer to agree to this.

Years ago, we had reports that we sent some customers
* Here is list of parts we make for you, with the commodity content of each, and our current contracted pricing
* Here is latest change in world pricing of the commodity, according to mutually agreed upon sourcing
* Multiply change in world pricing times commodity content of your products, translates to a price change in all your parts, which will be effective on a certain date schedule
* We implemented this using BPCS special pricing, but also had to update open orders, because BPCS input uses a cascade system of whatever business rules are in effect at the time that data is created, then copies that to other data.
* It typically took a customer service clerical person one week to rekey the prices on all the orders for one customer, so we had to be careful to stagger implementing this by customer.

The way this data flows to customers personnel needs to be in a form that is ERP computer system neutral, such as Excel, or EDI, because different companies on the supply chain will be on totally different computer platforms. You also need to think about how to keep this data in a format such that a program can do the updates that we were doing manually.

What I have shared here is a simplification intended to identify some major issues that you need to factor into your cost management structure design, and give you some ideas of alternate approaches available to deal with these challenges.

you wrote:
All -

Thank you for your responses. They have been very insightful.
I'm trudging through the volume of information....

Michael Perna
Business Systems Analyst - Finance

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