A commodity is a material for which there is little differentiation between one lot and another, regardless of the source or producer. For example, milk is a commodity, because milk produced at one farm is indistinguishable from milk produced at another farm. This contrasts with items for which different sources produce unique products. While milk is a commodity, cheese is not, because variations in production processes between one cheese manufacturer and the next result in different products.
Because every lot of a commodity is interchangeable with another, a commodity vendor has no control over pricing. While there may be slight differences between lots that can affect value, these are not significant enough to identify one segment of a commodity as more or less valuable than another segment of the same item. For example, a lot of milk with a higher percentage of butterfat may be more valuable than lots with a lower percentage. Although a higher price may be paid for milk with more butterfat, one vendor's product is still not distinguished as superior, and therefore more valuable, than the others.
Due to the unique issues that arise when working with commodities, companies that use these items for manufacturing have specific requirements for managing purchases, costing, and vendor payments. As commodities are purchased, it is necessary to process receipts as a single quantity where all units are indistinguishable from each other, while at the same time maintaining the specific amounts purchased from each vendor. This need for separation continues with costing and payment considerations, as the inventory value assigned to a commodity may not be the same as the amount paid to vendors.
The following table describes a sequence of activities, with links to the topics that describe them. These activities are listed in the order in which they are generally performed.
To | See |
|---|---|
Define the general rules, properties, and values for commodity processes. | |
Process and post several commodity purchases that enter inventory as part of the same receipt. | |
Update commodity cost factors, use these new values to adjust commodity costs on posted activities, and recalculate open purchase activities for commodities. |
Notes
The Commodities features within STAEDEAN Food Manufacturing & Distribution are based on how milk prices are set in the USA. Milk pricing regulations in US Federal Milk Marketing Orders (FMMO) are among the most complicated commodity pricing regimes across all of agriculture. To follow these regulations, we built the Commodity functionality within STAEDEAN Food Manufacturing & Distribution. This also means we look only at the product, the commodity item, and not at a specific vendor, because regulations for setting the price apply to the product (in this case milk). This is not to say that this feature cannot be used for other commodities whose price is based on quality.