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In case you have noticed my other blogs then you must have already got an idea about the Upstream & Downstream Industry Process Overview & SAP Solutions in the Oil & Gas Industry.
We have already discussed about the Downstream Industry Value Chain where you have noticed that Marketing Accounting & Pricing component plays quite a crucial role while we talk about Oil & Gas Industry. MAP) component is basically enhanced with many additional functions such as contract pricing, cumulative contract call off pricing, customer pricelist, default price lists etc. required for the downstream oil business.
Now let’s focus about Pricing portion in the Downstream Industry.
Different Pricing methods and strategies can be followed by the Downstream business to cater different needs :
  • Contract Pricing
  • Cumulative Contract call-off Pricing
  • Gross & Net Volume Pricing
  • Formula & Average Pricing etc.
Again from the transfer pricing methods point of view the frequently used pricing methods are:
  • Market based pricing
  • Cost based pricing
  • Negotiated pricing
  • Free market prices for both inputs and output
  • Cost plus margin for value of services rendered etc.
Bidding is done by the Commodity traders for oil futures contract and ultimately they are responsible for the Oil prices. These kind of contracts are basically agreements to buy or sell oil at a specific date in the future for an agreed-upon price. For example: External quotations of Oil prices are provided by Platts, Reuters etc
Let’s understand what is Formula & Average Pricing & why it is useful
  • In Oil and Gas industry, the price of certain petrochemical products like Benzene, Ethylene et al may vary every day. Since the shipping process for petrochemical products can take long, especially when the shipping method is sea/marine, it is common that the price is determined by the average of these prices over a time range (a week or month) plus a surcharge.
  • Third party providers like Argus, CMAI, Opis publish the market price of these products on a daily basis; these prices are commonly known as quotes.
  • In order to accommodate the business need to calculate the price of an order based on external quotes over a period of time, SAP introduced F&A pricing in IS Oil.
Next point comes What is the purpose of Formula & Average Pricing
  • F & A Pricing indicates Formula and Average (F&A) Pricing.
  • This method of Pricing uses external quotations such as Platts, Reuters, and others to determine the price of a material.
  • The purpose of F & A Pricing is to enable the calculation of product prices based on external quotations over a set time period.
  • The calculation is performed with company-defined calculation rules. Currency fluctuations within the time period are taken into account either by daily
    conversion or by averaging.
  • F & A Pricing can be used both on the purchasing (MM) & sales side (SD).
How Business works with the F & A Pricing
  • Most of the Businesses preferred to use the spreadsheet for price calculation.  For example: It could be average of 1 week quote of Benzene, while complex ones can be like 0.91Benzend+0.3Ethylene+surcharge then average by one month.
      However the spreadsheet method has its portion of drawback:
  • Time Consuming to find out right spreadsheet, Plugging Numbers, Referring the Spreadsheet multiple times etc.
Now its time to know about Formula & Average Pricing in SAP
F & A Pricing in SAP is quite recommended in order to address the issues with the spreadsheet load method:
  • In IS oil F&A pricing, these special formulas can be stored in the system and later used by sales order or purchase orders for automatic calculation.
  • Formula pricing is differentiated at condition type and condition record level.
  • Comparing to regular pricing, F&A pricing has a formula to be maintained for each formula pricing record, it enables variable dates for calculation, and further allows client to define multiple rules and compare two calculation results and pick the desired final rate.
The process flow for F & A Pricing is as follows:
  • Define Formulas to be used for F & A Pricing
  • Define Condition Type for F & A Pricing
  • Using Pricing Date to Determine the Rule
  • Using  F & A Pricing During Invoicing
SAP Configuration for Formula & Average Pricing
F & A Pricing can be configured from the following IMG Node:
Industry Solution Oil & Gas (Downstream)> Industry Solution Oil & Gas (Downstream)> Formula & Average Pricing
Screen Dump-1 Configuration Menu Path for Formula & Average Pricing.jpg
The prerequisite for the F & A Pricing Configuration will be as follows:
  • The Group Conditions field should not be activated in customising:Screen Dump-2 Group Conditions.jpg
  • The corresponding condition types (for example, FA00) and the access sequences must be defined and included in the pricing procedure in Customizing.
  • The price quotations used by F&A pricing are defined in the quotation table.
  • We can either use table OICQP provided in SAP Oil & Gas or we can use self-defined tables for storing the quotation data.
  • Quotation data can be entered manually in Maintaining Price Quotations, or electronically by remote connection to a data provider using the External Quotation Interface.
  • Automatic Pricing for Invoice Verification is important to set: MM Specific Settings net to be set:In the purchase order, select the item and choose Item Details. In the GR/IR area of the screen, select GR-based IV (goods receipt-based invoice verification).

Screen Dump-3 Automatic Pricing for Invoice Verification.jpg

  • In Customizing for the Industry Solution Oil & Gas (Downstream), we define the rules for copying data from the goods receipt document to the invoice receipt document

Screen Dump-4 Invoice Receipt Copy Rules.jpg

  • This is done by choosing MAP (Marketing, Accounting and Pricing) Formula & Average Pricing>Define copy rules for invoice receipt.
  • We can enter data as required by the PrTy(pricing type for invoices) field. The pricing type for invoices controls how the system carries out repricing during invoice verification.
  • The settings for controlling invoice verification and price date control based on the goods receipt can be made in the Info record and the Vendor master data record.
  • The settings made there are automatically copied to subsequent purchase documents.
  • To access the info record, choose Environment Info record. In the info record,  choose Goto Purch. Org. data 1(Purchase Organization 1), then make the following settings:

Screen Dump-5 Info Record.jpg

  • For goods receipt-based invoice verification, select GR-based IV in the Control area of the screen

Screen Dump-6 GR-Based IV.jpg

  • For price date control, enter data as required in the Pricing date cat. field in the Conditions area of the screen

Screen Dump-7 Price Date Control.jpg

Purchasing Data – Vendor:
  • On the initial screen of the vendor master record, choose Goto Purchasing org. data >Purchasing data, then make the following settings:
    • For goods receipt-based invoice verification, select GR-based inv. verif. in the Control data area of the screen.
    • For price date control, enter data as required in the Pricing date cat. field in the Conditions area of the screen

Screen Dump-8 Display Vendor Purchasing Data.jpg

Differential Invoice:

  • In the oil industry arrangements are often made with customers to calculate invoices based on the average price of a product over a certain period of time.
  • If the product is delivered before the averaging period has elapsed, it is necessary to create a provisional invoice.
  • When the averaging period has ended and the final price is known, the pricedifference is invoiced by creating a differential invoice.

Formula Condition Type

  • Formula pricing is identified at the condition type configuration in Transaction Code V/06.

Screen Dump-9 Condition Types.jpg

  • Formula pricing has the calculation type as Q, commodity Price, while regular condition types have the calculation type as percentage, quantity, fixed amount, weight, etc.
  • Regular Pricing Condition Type
Formula Pricing Condition
  • The difference in the calculation type would affect our screen in VK11. Note a new icon for maintaining formulas showed up, while scales is no longer an option, nor can we enter a number amount directly for this condition record. Screen Dump-10 Formula Pricing Condition.jpg
  • After we make an entry for our condition record like what we do with regular conditions, select the line and click on maintain formula and it will take us to the screen where we can create a new formula.
  • Note this is the first method of creating a formula. We can also choose a pre created formula repository in the system.
  • Transaction Code – O317 & O318 can be used in order to create Formula Repository.
  • Once we give a name for the formula, system take us into the below screen for formula maintenance. Note we can copy and modify from an existing formula by clicking on the Repository Proposal icon

Screen Dump-11 Formula Repository Proposal.jpg

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1 Comment

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  1. Nimai C Majumdar

    Hi Subhasish,

    This is a great post you made on F&A pricing. You have brought the complex concept of F&A pricing with very simplistic view & examples. Conceptualize, understand and implement F&A pricing and articulating in such simple way is not an easy task.

    Use cases provided in “what is Formula & Average Pricing & why it is useful” section is very much pragmatic. Probably you can list here more use cases for the benefit of readers/consultants. Not many consultants get opportunity to work hands-on in F&A pricing.

    Looking forward more such brilliant posts. I am sending you LI invite.

    Regards

    Nimai 

    (0) 

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