Vendor Price Protection

There are situations in which a vendor will lower the price of a product and offer the distributors of the product (their customers) a refund of a portion of the purchase price.  The refund is normally based on the quantity of the product that the distributor has in stock on the date of the price reduction and the difference between the old and new price of the product.  This situation is called price protection because the manufacturer or vendor of the item is "protecting" the distributor from price reductions which are made by the vendor after the distributor has already purchased the product.

An example of this type of Price Protection transaction is listed below.  This example assumes that the item exists in only one inventory location.   Multiple inventory locations are discussed later in this document.

On 2/1/06 a computer distributor purchases 25 laser printers from the vendor (who is also the manufacturer of the product) and pays $500.00 each for the printers.

On 3/5/06 the vendor lowers the price on the printers to $ 450.00 each and offers to give the distributor price protection (a refund) amounting to $50.00 on each of the printers that the distributor has in stock on the date that the price change is made.

On 3/10/06 the distributor receives notice of the price protection and on this date the distributor has 15 of the laser printers in stock.  After analyzing the inventory activity for the laser printers in the location being processed, the distributor discovers that an additional 5 printers were in stock on the date of the price change and have been sold in the period 3/5/06 - 3/10/06.  The distributor fills out the claim form provided by the vendor and indicates that they are due a refund on 20 printers (amount in stock on 3/5) at $50.00 each for a total amount of $1,000.00

To properly process this transaction, the following steps need to be taken.

1.     The distributor needs to record a receivable for the amount of the refund that they will receive from the vendor.  The receivable needs to be booked in department 1 of the division in which the price protection transactions are processed to handle companies which consist of multiple divisions and/or  inventory locations (the average cost of an inventory item is synchronized or normalized in all inventory locations within a division).

2.     The distributor needs to adjust the average cost of the items that they have on hand.  Reducing the cost of the item by the amount of price protection that is being received allows the distributor to sell the item at the proper (actual) cost and the system to calculate the gross margin for the item correctly (the new cost may allow the salespeople to offer the same product at a lower price while receiving the same margin).  This step is especially critical when there is a lot of competition among distributors and when a particular sale can be made or lost on a few percentage points.

3.     The distributor needs to adjust the cost (PO price) of the item on all open purchase orders and purchase order requisitions to the vendor so that all future inventory receipts for the item are booked at the new corrected cost.  If open purchase orders exist in multiple currencies for the item and vendor being processed, both foreign and local currency purchase order lines need to be adjusted.

4.     If any QVL records exist for the vendor and item being protected (QVL records are used to specify foreign currency pricing), the QVL record or records for the item may also need to be adjusted to the new purchase price.

5.     The distributor needs to adjust the Next Cost for the item in the Inventory and Catalog files so that all future purchase orders are issued at the corrected lower price (the Next Cost field is used to default PO prices in the Purchase Order Entry program).

6.     The distributor may need to adjust the commission cost for the item.  The commission cost is the cost used to display margins in the sales order entry program.  The commission cost field can be manually maintained or it can be automatically loaded by customer specific routines.  In situations where you adjust the average cost of an item and the commission cost is loaded based on the average cost of the item, the field will be updated automatically by the system.  In situations where the commission cost is manually maintained, you may need to update the commission cost for the item as part of the price protection process.

7.     The distributor needs to adjust (reduce) the general ledger inventory control account balance that is being used for the inventory item being processed.  The amount of the adjustment is based on the quantity of the item that is in stock in the location where the price protection is processed, the quantity of the item that is being protected, and the amount of price protection per unit.  The lower of the qty being protected or the on hand quantity in stock when the price protection is processed is used to determine the change to inventory.

8.     The distributor needs to adjust cost of goods sold for the dollar amount of the refund that they will receive for items which were in stock when the protection went into effect but which were sold before the transaction was processed (the refund amount reduces the cost of the items that were already sold when the price protection was processed).  This amount is not used to adjust the current cost of the items still in stock as this would reduce the cost of the items below the actual new vendor price for the items).

9.     Data change records should be written to record the modifications that were made to Catalog Inventory, Purchase Order and QVL records as a result of the transaction.

The above situation is handled by the system as follows when a Price Protection Transaction is processed.

1.     Once the claim form has been filled out by the distributor, the distributor uses the Price Protection Program to adjust the cost of the item to reflect the refund which has been offered by the Vendor. 

2.     The Price Protection program allows the operator to specify the Vendor offering the price protection, a unique GL ID that can be used to identify the transaction, and the Inventory Item number to be adjusted.  Once the Vendor and Item to be processed have been specified, the Price Protection program displays the total quantity of the item which is on hand and the average cost of the item across all inventory locations in the operators current division (the cost of an item in multiple inventory locations in the same division is normalized or synchronized in all of the inventory locations).  The program also displays the total value of the item across the current division, and the current on order quantity for the item.

3.  The operator enters the new cost of the item ($450.00) into the New Vendor Protected Cost field and 20 into the Maximum Quantity Protected at New Cost Field. 

4.  If foreign currency QVL records or purchase orders exist for the item, the operator can also specify a currency and a new vendor foreign currency PO price.  If this information is specified, the system will update any QVL or open purchase order records for the vendor and the item being processed which are in the selected currency with the FC PO price that is specified for the currency.

5.  Once the operator enters the new cost and the quantity to be protected, and any optional foreign currency information, the program does the following.

      The program adjusts the average weighted cost of the item based on for the lesser of the

      The Maximum Quantity Protected at the New Cost entered by the operator (the quantity that is being protected by the vendor) if the on hand quantity of the item is greater than the amount being protected.

      The quantity of the item which in stock (the on hand quantity for the item) when the transaction is processed (using our previous example this quantity would be 15 assuming the transaction is processed on 3/10).

      The program creates a journal entry line to the inventory control account for the item.  The amount posted is the lesser of the on hand quantity for the item or the maximum quantity being protected multiplied by the difference between the old and new cost for the item.

      The program makes an entry to cost of goods sold for the difference between the total quantity being protected and the quantity of the item which is in stock (on hand) when the transaction is processed.   In the above example this would be the 20 items total protected, less the 15 which were in stock on the date when the transaction was processed (20-15= 5items @ $50.00 ea. or $250.00). 

The total journal entry created by the system would be as follows.

Debit Price Protection Receivable    $ 1,000.00

Cr. Inventory                              $ 750.00

Cr. Cost of Goods Sold                            $ 250.00

The Price Protection Receivable Account (or contra payable account) is a special purpose clearing account with an Autopost number of 360.  It stores the balance of price protection transactions which have been entered into the system but which have not been invoiced to the vendor/manufacturer.  The Price Protection account must be created before any Price Protection Transactions are processed.  The Price Protection account is automatically updated by the Price Protection program as price protection transactions are processed.  The Price Protection Account is also used when processing the vendor accounts payable invoices (credit memos) that are used to bill the vendor for the Price Protection.   A negative accounts payable invoice is created for the vendor and the invoice amount is manually distributed or charged to the Price Protection Receivable account.  This reduces the balance in the receivable account and adjusts the vendor open accounts payable balance to reflect the amount owed to you for the price protection.

The Inventory and Cost of Goods Sold accounts which are updated by the program will be the general ledger account numbers which are assigned the Autopost numbers specified in the product line that the inventory item is assigned to.

The Journal entry is created with a source of PP (Price Protection) and a comment line that indicates the vendor and item number which was adjusted. The reference number in the JE line is pointed to the inventory transaction that is created when the price protection is processed.  The JE number is also recorded in the Inventory transaction records to link the transactions to each other.


Automated Processing of Imported Price Protection Transactions