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Sliding price formula: Definition and important aspects for buyers
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The sliding price formula in a nutshell:
A sliding price formula is a contractual agreement for automatic price adjustment based on defined cost factors such as raw material prices, wages or exchange rates. It enables the purchasing department to set fair and transparent prices for long-term contracts and minimize risk for both contracting parties.
Example: In a 3-year contract for aluminum products, the base price of EUR 2,500/tonne is adjusted quarterly, with the formula taking into account the LME aluminum quotation (60%), the energy price index (25%) and the labor cost index (15%).
Contents
What is the sliding price formula?
The sliding price formula is a contractual instrument in purchasing that reflects price changes over the term of the contract. It makes it possible to adjust the agreed price for products or services to changes in cost factors such as raw material prices, wage costs or energy prices. The integration of specific indices into the price calculation ensures that both supplier and buyer participate fairly in market movements.
Core elements of the sliding price formula
Importance of the sliding price formula in purchasing
In the procurement process, the sliding price formula is used to distribute price risks between buyer and supplier in a balanced manner. It enables flexible pricing in long-term contracts and increases planning security for both parties. By adapting transparently to market conditions, companies can better control costs and increase their competitiveness.
Sliding price formula: From fixed prices to flexible price adjustments
The sliding price formula marks a significant change in the pricing of long-term contracts. Building on its theoretical foundation, it enables companies to dynamically adjust prices to current market conditions. This is of great importance in practice, as volatile commodity prices and global economic fluctuations make fixed price agreements increasingly unsustainable. The need for this transformation stems from the growing need for flexibility and risk management in modern procurement.
Old: Fixed price calculation
Traditional approach: In traditional fixed price calculation, prices were fixed for the entire term of the contract. Companies used simple costing methods based on current costs and projected margins. Tools such as mark-up costing and rigid contract terms were common. The main features of this approach were stability and predictability, but it came with significant challenges. Rising commodity prices led to margin losses for the supplier, while falling prices penalized the buyer. The lack of flexibility increased the risk for both parties and made it difficult to adapt to market changes.
New: Sliding price formula
Escalator Clause: The modern application of the escalator formula revolutionizes pricing by introducing flexible price adjustment clauses. Companies are implementing comprehensive formulas that incorporate official cost indices such as the commodity price index or labor cost index. Key innovations are the digital integration of real-time market data and automated price adjustments in the ERP system. This leads to greater transparency and efficiency. Practical benefits include the fair distribution of price risks, improved planning security and a strengthening of supplier relationships. Changes in cost structures are reflected promptly, which increases competitiveness.
Practical example: Use in the automotive industry
A car manufacturer concludes a three-year contract with a steel supplier. Using the sliding price formula, the steel price is linked to the European steel price index. In the first year, the price of steel rises by 10%, whereupon the contract price is adjusted accordingly. Despite higher material costs, the manufacturer is able to keep vehicle prices stable, as the price adjustment has been calculated. In the second year, the price of steel falls by 5% and the supplier adjusts its prices downwards. Through this mechanism, the manufacturer achieves cost savings of 2 million euros and strengthens the partnership with the supplier through transparent and fair pricing.
Conclusion on the sliding price formula
The sliding price formula is an indispensable tool for long-term business relationships in modern purchasing. It creates transparency, distributes price risks fairly between the contracting parties and enables flexible adaptation to market changes. Despite certain challenges during implementation, the advantages clearly outweigh the disadvantages: increased planning security, more stable supplier relationships and effective cost management. With increasing digitalization and AI-supported solutions, the sliding price formula can be used even more precisely and dynamically.
