Commodity Pricing Engine (CPE) – Introduction

Standard Pricing Approach

To understand Commodity Pricing Engine knowledge of SAP standard pricing is very important. I will first give a quick review of standard pricing.

In standard pricing, there are one or multiple conditions that correspond to different things in business. For example, consider a case of shopping for shoes in the season of sale. In such case, the system will show one condition that corresponds to the base price of that shoe (ZBAS) and another that corresponds to the seasonal discount (ZDIS). In both these conditions, the value is fixed and is not dependent on any factor. This is the case which can be achieved easily using standard pricing where we can maintain the condition record using MEK2 (for purchase) or VK11(for sales).

Why Commodity Pricing Engine?

What about commodities which are traded on an exchange, commodities whose prices depend on weather condition or other variable factors? For all such commodities, standard SAP pricing is not enough and Commodities Pricing Engine comes into the picture. Example, the price of petrol or the price of soybean change frequently.

In standard SAP Pricing, it is not possible to maintain complicated formulas which can yield a realistic result whereas in Commodity Pricing Engine (CPE) it is possible to give a market reference so that the prices are adjusted accordingly. With CPE it is possible to define price quotations, currency exchange rate, surcharge rule, rounding rule and whatnot.

The graph below shows the price of copper being traded at London Metal Exchange (LME). It is evident that the prices are not stable and change frequently.

For material like copper or iron, the prices are fluctuating rapidly and a fixed price is not the correct way to achieve its price. Hence, CPE is the ultimate solution.

What is CPE?

CPE is an extended SAP ERP Pricing that allows special price calculation for commodities traded at exchanges. CPE is designed to handle complex rules regarding price quotations. Moreover, these prices depend upon the market and hence having a market reference it a very important aspect in deriving price for a commodity.

Consider CPE as a black box for now to which we input a series of formulas that we create based upon our requirements. CPE will now gather data by breaking down the formulas into tiniest factor and then calculate price using this data. The final output from CPE black box would be a price that is relevant for the commodity being traded at that specific instant.

What is CPE made of?

CPE consists of numerous items and some of the important ones are:

1. Formula
2. Term
3. Quotation Rule and Market Reference(DCS and MIC)
4. Price Fixation
5. Period Determination Rule
6. Term Rule

There can be multiple pricing approaches depending upon the type of commodity being traded. Some commodities are trade only in futures like copper whereas some commodities like soybean have multiple components like futures and basis.

Setting up data according is an important part of CPE that I will cover in the coming blogs along with a detailed chapter on each of the above-mentioned topics.