Price Protection is a part of the relationship with Distributors that needs to take place every time the Distributor Price Book is changed. When a Distributor buys inventory they purchase it at the Distributor Book Cost (DBC) as defined in the Price Book.
At that point the inventory value ( Qty X DBC) is recorded in the financial records of the distributor and becomes a key element they use as they set the pricing in quotes because the difference between Resale price and DBC is the amount of money the distributor will make on a given piece of business. It also becomes a balance sheet amount that has to be reported in the Distributor financial reports as value of the inventory they are holding at the end of the quarter.
When the manufacturer makes a change to the Distributor Price Book that raises or lowers the Distributor Book Cost it triggers an inventory write down ( or write Up) to get the inventory value recalibrated to the current market conditions as defined in the new Distributor Price Book. The Price Protection report calculates the change in inventory value based on the new market conditions.
The NEHANET Price Protection works as follows
- For each individual inventory line item
— Capture the amount of inventory at or before but as close to the date of the Distributor Price Book change
— Calculate the Distributor Book Cost change for each part = new DBC – Old DBC
— Calculate the net inventory value change = Book Cost Change X amount of inventory on hand
— Summarize the inventory amount, Book Cost change, and net Inventory Value change
- Summarize for all Distributor Inventory
— Sum all the individual net individual part Value Changes
- Build a report with the details by part and the total net change
- Notify finance of the details and the total Distributor Inventory Change that needs to be issued or credited to the distributor for the price book change being evaluated
Issues to consider
- Distributors often report inventory value but that is what they have recorded in their system. For Inventory valuation the issuance of the price protection credit to the distributor revalues all their inventory to the new price book values. Distribution valuations may be in error.
- Care needs to be taken to record the inventory date and file from the distributor, the price book date of issue, the Old price book date used in the calculation, and the exchange rates used in the valuation.
- Finance needs to notify the distributor in a timely manor about the price protection calculations and credits provided
- All Distribution Inventory reports need to reflect the current valuation as finalized in the Price Protection approval