Meaning
Pricing adjustment mechanisms allow suppliers to recover fluctuations in the costs of multiple raw materials by passing those changes directly to the buyer. Through a multi-commodity pass-through, a manufacturer can adjust their wholesale prices based on an index of inputs such as steel and plastic. This protects the profit margin of the supplier when several components of the product become more expensive at once.
Formula Weighting
Accurate price adjustments depend on assigning the correct importance to each raw material used in production. A multi-commodity pass-through uses a fixed formula that reflects the actual bill of materials for the finished good. This ensures that the price shift is proportional to the real increase in manufacturing costs.
Margin Neutrality
The goal of shifting cost volatility to the customer is to keep the absolute profit per unit stable. Using a multi-commodity pass-through prevents the supplier from suffering during a raw material spike while also ensuring the buyer benefits when prices fall. It creates a transparent relationship where the focus remains on the value added by the manufacturer.
Audit Power
Transparency in the pricing process is maintained by allowing the buyer to verify the underlying cost data periodically. Most contracts involving a multi-commodity pass-through include a clause that grants the customer access to the supplier procurement records. This verification step prevents the supplier from inflating the impact of cost increases to hide a secret margin expansion.
The auditor checks the invoiced costs against the public indices specified in the contract to confirm that the pass-through was applied correctly and fairly.
