Purchase Price Variance Analysis: How it Helped a Drinks Brand to Gain Visibility into $70 Million of Future Purchases

Mar 17, 2020

Global Beverage Industry Overview 

Considered as one of the largest marketplaces of the 21st century, the beverage industry has come on its own in the last few years. The industry has undergone a spate of changes owing to ever-changing consumer demands and innovations. This has consequently increased the challenges for companies operating in the industry. Rising awareness for nutrition-friendly and sugar-free products has coerced companies to bring about surplus changes in the existing manufacturing process and improve cash flow. They are required to reduce operating costs, gain greater visibility into purchases, monitor price variances, and manage large transactional volumes to ensure profitability.  

Business Challenges Faced

The client is a multinational soft drinks company with an extensive product portfolio of famous drinks in more than 50 countries. The procurement model of the client included numerous third-party contract manufacturers for the purchase of raw materials and packaging. However, this diversity was negatively impacting budgeting and cash flow as the transaction parameters such as pricing, lead times, and minimum order quantities set by the client’s procurement team were different than that of contractors and resulting in frequent discrepancies between contract and invoice prices. The client, therefore, decided to engage with SpendEdge to track purchase price variance for different raw materials and improve cash flow.  

Tracking purchase price variance for different raw materials crucial for companies to improve cash flow. Request a proposal to access our price forecasting solutions for FREE now!

Our Research Approach

The experts at SpendEdge analyzed the procurement and manufacturing data of the client. This helped them gain vital insights to develop a process that could gain raw data from third-party manufacturers, standardize and consolidate it for effective analysis.

Conducting purchase price variance analysis helped the client to analyze the complete data set and compare the purchase order prices to internal price standards and create a price variance calculation tool for the future. 

A full picture of the entire network was presented which helped the client to proactively monitor and control purchase orders. Tracking purchase price variance further facilitated the team to minimize growing over-spend. The solution improved cost forecasting, thus, enabling the client to better predict the cost of goods sold, and optimize product costs.

Wondering how you can proactively monitor and control purchase orders? Reach out to our experts for customized solutions. 

Engagement Outcome   

Monitoring purchase price variance helped the multinational soft drinks company to identify purchases that had some variance to expected costs. The solution increased accuracy to 50%, significantly reducing the volume of rework for the client. Obtaining insights into the procurement function further helped the client to build business processes, manage large transactional volumes, and analyze different data sources. The consolidated analysis provided visibility into $70 million of future purchases.

Managing large transactional volumes requires tracking purchase price variance periodically. Subscribe now to enjoy free access to our web-based platform to obtain comprehensive insights. 

Tips to Calculate Purchase Price Variance 

1. The assertion of material purchase price variance becomes distorted if the company does not analyze the current effect. So, take current effects into account as it might constitute 30% to 80% of the overall deviation.

2. The key indicator-purchase price variance cannot be directly calculated without knowing prices for material in the previous period. If historical prices are known, companies can create default values.   

3. Purchase price variance for two materials or of two suppliers can only be compared if the same Incoterms apply.   

To know how you can track or measure purchase price variance for different materials, request for more information from our analysts.

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