A commodity price adjustment changes a purchase price using an agreed relationship to a commodity input or published index. It is useful when raw material represents a material and measurable share of cost.
How the control works
Define the commodity, index, base, conversion factor, yield, review period, lag and floor or ceiling. Separate other conversion costs unless they follow their own mechanism.
| Area | What the record should show |
|---|---|
| Control | Define the commodity, index, base, conversion factor, yield, review period, lag and floor or ceiling. Separate other conversion costs unless they follow their own mechanism. |
| Evidence | Retain index sources, formula, supplier calculation, volume, effective date and approved price schedule. |
| Tradeoff | Index movement may not equal the supplier’s actual purchase cost. The formula should reflect the agreed risk-sharing model, not pretend to audit inventory. |
Evidence buyers should retain
Retain index sources, formula, supplier calculation, volume, effective date and approved price schedule.
Where the term is misused
Index movement may not equal the supplier’s actual purchase cost. The formula should reflect the agreed risk-sharing model, not pretend to audit inventory.
Related definitions: supplier qualification, strategic sourcing, landed cost.
