tax efficient supply chain Archives

Incorporating Taxes and Duties in Supply Chain Design

Global Trade | By Austin Chrzanowski • 05/10/2016

There are numerous ways to integrate tax and duties in supply chain design. Here are a few ways to consider both logistics and tax considerations in a holistic view for the best overall design decisions.

The supply chain is core to how your business is run and its costs, profit and growth. With the increasing globalization of business, variable taxes and duties across trading borders have a huge impact on overall cost, supplier sourcing, manufacturing strategies and distribution network structure. However, the inherently complex nature of tax laws, particularly in countries such as Brazil, has obstructed many businesses from including taxes and duties in supply chain design practices. With a global average tax rate of around over 20 percent, the ramifications of this could be staggering—millions of dollars a year may be wasted as a result, but there is also potential to leverage tax and duty optimization for lowest total cost and to elevate competitive advantage.

Why Consider Taxes and Duties in Supply Chain Design?
Balance: Successful businesses must find the right balance between supply chain costs and tax/duty obligations

Lost Savings: Risk of missing out on potential savings by not considering regional customs regime or trade concessions

Competitiveness: Reduced price/cost competitiveness by not including the use of free trade agreements

Planning: Not reacting fast enough to complicated and often dynamic rules and regulations can have dramatic financial/operational consequences

Long-term Analysis: Identifying the impact of taxes and duties in future strategic moves, such as mergers and acquisitions and supply chain capacity planning, can be a vital component in building competitive advantage and global positioning

Financial Uniformity: Clearly communicating tax and duty-related challenges and opportunities internally is imperative in order to most effectively design and implement supply chain changes. While locally-focused tax calculations may currently be taking place, global optimization with both tax and logistics considerations, aligned with P&L standards, can be a more compelling proposal to stakeholders.

How to Use Modeling Technology for Tax Optimization
By including tax costs and tax credits as well as operational/logistics costs in supply chain design, global businesses can minimize total costs. Modeling technology can be used to:

Optimize supply chain with holistic view of duties and taxes and perform what-if scenario testing on regulation changes, transfer prices, etc.
Re-design optimal supply chain strategy based on regulation changes
Quantify benefits from free trade zones and regional trade concessions
Measure impact from various taxes such as:
- COFIN/PIS/IPI/ISS/IRPJ/IPTU/ICMS (Brazil)
- Value-added tax (VAT)
- State-to-state tax
- Corporate tax
- Inventory tax

Indian & Brazilian Tax Structure Example
Both India and Brazil have complex tax structures that leverage taxes on movements of goods between states while also providing credits back to companies for movements into a given facility. These systems of credits and debits create significant incentives that should be considered in supply chain design. Design without tax and duty considerations can lead to inefficiencies and lost cost savings opportunities.

Companies often form multiple corporate entities in countries with complex tax structures to minimize their tax burden. Leveraging supply chain network design tools to optimize not only the logistics but also tax and duty implications leads to a complete picture of how to run your network.

India’s planned shift from VAT and CST (Central Sales Tax) to a more consistent Good and Services Tax (GST) regime means that supply chains need to be designed to best manage the transition. The new system should be easier for companies to track and manage but may leads to higher costs. Given the existing tax structure incentives are distributed across corporate entities for tax avoidance. The new system should allow for more centralization of facilities. Effective transition plans will be needed to determine where consolidation should occur and how aggressive the timing of such changes should be.

Getting Started with Taxes and Duties Optimization
In order to be successful and establish quick wins, start small and build your way up to more complex modeling to answer wider-scope supply chain questions. As you go, evaluate the resulting benefits and how to refine your approach with different technologies and approaches to best fit your business strategy.

Austin Chrzanowski is the Product Manager of Network Optimization and Transportation Optimization Technologies at LLamasoft. At LLamasoft since 2011, Chrzanowski has worked with customers from multiple industries including food and beverage, healthcare, military, manufacturing and petro-chemical to execute supply chain projects and identify new strategic designs. Prior to LLamasoft he spent time at Pfizer, the U-M Health System, and the Australian Submarine Corporation in Adelaide, Australia. He holds a Master’s Degree in Industrial and Operations Engineering from the University of Michigan.

Apple and Total Landed Profits

Logistics Trends | By Steve Banker • 07/15/2013

Apple’s CEO, Tim Cook, was hauled in front of a Congressional subcommittee in May and grilled about corporate tax avoidance. At issue is a complex corporate structure that allows Apple’s European subsidiaries to distribute profits to a holding company in Ireland where the corporate tax rate is 12.5 percent. As a result, Apple holds over $100 billion in Ireland that the CEO says “isn’t coming back” anytime soon. This equates to avoiding $35 billion in corporate tax payments.

Not long ago, I was talking to a Director-level contact at a multinational pharma company about tax efficient supply chains. This was a much-discussed topic about five years ago, but it’s less so today. In his opinion this is because the tax structures and supporting supply chain flows have already been set up.

In some industries, companies lowered their tax burden by setting up a regional supply chain entity, typically in Switzerland. There is a “form follows function” rationale that means, in short, if you actually have a large number of your most important supply chain executives doing the important decision making out of Switzerland, it is much easier to justify your low tax rates to tax authorities. With this kind of structure, savings come in two areas: from lower corporate taxes and from any synergies that a centralized regional approach can bring to the supply chain. This centralized approach served to lower tax risks — the risk that the tax man would audit the structure and find it to be a tax dodge and then impose huge fines. If the company could show synergies from centralization, that risk largely disappeared.

However, in the pharmaceutical industry, this executive said the supply chain just went along for the ride and had to live with the tax structures and supporting supply chain flows that were created. The key corporate entities were more often in Ireland and Puerto Rico, and the supply chain was not so centralized. The goal was to have the supply chain impact be neutral, and to garner the savings on the tax side.

At his company, instead of talking about total landed costs, they have started talking about total landed profits. Total landed profits are based upon both lowering supply chain costs and lowering tax burdens. In this executive’s view, it was now time to go back and take a close look at the structure. The structure made assumptions, but did the supply chain costs really reflect the assumptions? So the focus should not just be on transfer prices, but also on how much more inventory needs to be carried, and the higher-than-expected tariff and logistics costs that result from the tax structure. Once they do this analysis, they can see if the tax efficient supply chain really provided all the benefits promised. He would also love to see his company implement a global trade management solution. He believes it would help them better analyze the existing supply chain cost structure, as well allow them to do a better job of delivering better total landed profits through Free Trade Zones.

After I got off the call, I realized I really should have asked him more about how the company calculates total landed costs. The tax structures described do lower the overall corporate tax rate, but they don’t necessarily improve profits. To declare a profit, the money has to be repatriated to the country where the corporate headquarters resides. It is then taxed at that nation’s corporate tax rate. In the case of Apple, which is headquartered in the US, that means 35 percent of revenues.

That is why Apple is holding $35 billion in Ireland; it is deferring profits because it doesn’t want to pay that tax. The billions Apple holds can be used for acquisitions or in other European investments that can help the company grow or decrease its cost structure.

Ultimately, the big multinationals are hoping for a tax holiday for repatriated revenues. In the US, our last such tax holiday was in 2004; we seem to have one of these tax holidays every 10 to 20 years. In 2004, a set of major corporations were allowed to bring back retained revenues from their overseas subsidiaries at a tax rate of only 5.25 percent.

With that being the case, and companies not knowing when or if such a tax holiday will occur, how could a company possibly calculate total landed profits?

Clearly, the path to higher total landed profits will depend upon retaining skilled lobbyists and generous campaign donations.

Where Should Young Professionals Look for Supply Chain Jobs?

Just for Fun | By Steve Banker • 03/08/2010

It is still a tough economy out there, with unemployment in the U.S. still hovering near 10 percent. Where should a young person interested in a supply chain management career look for a job? My top two choices: Bentonville, Arkansas and Geneva, Switzerland.

Bentonville is where Walmart is headquartered. But the jobs there are not just for Walmart. Many large consumer goods (CG) companies have account teams in Bentonville to service Walmart. These account teams frequently include customer logistics and supply chain personnel that either report directly to the account teams (i.e., the sales organization) or they still report to the supply chain organization but have dotted line reporting to the sales organization.

I recently searched Monster.com and found 13 jobs that included the search terms “Bentonville” and “Supply Chain.” None of these jobs were for Walmart.

What would set you apart if you were looking for these jobs? Walmart has a system called RetailLink that churns out lots of great data that can help CG firms compete more profitably. These firms are looking for people with the skills to help them “compete on analytics.” The jobs might not be strictly a traditional supply chain job. Often they will be a blend of demand management, replenishment, merchandising, and category management.

However, the CG-to-retail supply chain is becoming more “demand driven.” The focus is expanding beyond “have we met our commitments in delivering to Walmart distribution centers?” to a new focus on ensuring a high in-stock position at the retail shelf. CG firms are still learning how to do this effectively. There are technological, data harmonization, and cultural barriers to becoming demand driven, which is what makes this a great career opportunity. If there was a defined blueprint for how to do this, the opportunities for upward mobility would be more limited.

Why Geneva, Switzerland?

Multibillion-dollar multinational corporations (MNCs) typically have operations and facilities around the globe, operating in countries with widely different corporate tax rates. The effective tax rate (ETR) a company ends up paying often represents an overlay of where that company operates, the size of its operations in the various countries, and the tax rates of those countries.

Many MNCs have sought to combine a corporate structure that allows for a low effective tax rate with the optimal physical supply chain. These two goals are not mutually exclusive; in fact, they have considerable areas of overlap. Any supply chain transformation typically requires a degree of centralization as a way of creating new global or regional synergies. The same holds true for achieving a low ETR. The overarching objective is to structure the business in a way that minimizes the tax exposure without damaging the physical supply chain.

And where do MNCs pursuing a tax efficient supply chain usually end up locating their regional headquarters in Europe? Switzerland—and more specifically, often near Geneva. English is almost always the language spoken in these regional HQ sites. And I’ve heard that an English speaker that speaks no French has no trouble communicating because Geneva is full of foreign professionals.

A quick aside: what do you call someone who speaks three languages? Trilingual.

What do you call someone who speaks two languages? Bilingual.

What do you call someone who only speaks one language? An American.

This is also an excellent career opportunity because it is a multinational regional supply chain; it is a foreign assignment; and it may allow a young professional to jump to a new MNC just beginning its supply chain transformation.

It is possible that in a few years Geneva will not be the hot location for supply chain jobs that it is today. In his State of the Union address, President Obama said, “And to encourage [businesses] to stay within our borders, it’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.” However, as we’ve seen with healthcare reform and cap-and-trade trade legislation, despite the wishes of a President, it can be very difficult to pass legislation that large corporations do not believe to be in their interest.

An Asian Supply Chain Success Story

Inventory Management | By Steve Banker • 11/16/2009

Once upon a time there was a global, medical products company that was very unhappy with the way it was treating its customers in Asia. The company’s main customers are hospitals that use its products in emergency room surgeries. Not surprisingly, its customers wanted a high level of product availability. But this was a problem because the company’s factories are primarily located in North America and Europe, even though Asia (excluding Japan) is its fastest growing region, growing more than tenfold over the past decade. Furthermore, the company’s goal is to triple the size of its business by 2015. But how could it achieve a high product availability rate without flooding the supply chain with inventory?

Here is what the company did:

It established a Supply Chain Centre of Excellence in India to handle sales and operations planning (S&OP) and supply chain strategy for Asia. The goal was to staff this Center of Excellence with talented supply chain managers. The team’s talent was demonstrated by its use of network modeling tools, which requires very skilled practitioners, to recommend a new supply chain network. The network design gurus showed that the company could reduce inventories and write-offs by 25 percent if it had a regional distribution center in Singapore with the capability to replenish actual demand within 24 hours (order to border) to nearby countries. Actually, the fact that the company established its Center of Excellence in India surprised me. There are big tax advantages to setting up centralized supply chain operations in Singapore. I wrote a detailed article on this topic for Supply Chain Management Review earlier this year (see “The Tax Efficient Supply Chain”). However, there is very good talent available, at a much lower price, in India.
The company worked with Oliver Wight to establish an effective S&OP process across the region. It also used OPUS, an online sales analysis tool from Oliver Wight to analyze sales data (actual and forecast) across hierarchies (products, geography, customers and time periods). While I consider Oliver Wight the premier consulting organization for aiding companies with S&OP, I am not particularly impressed with OPUS, at least not in comparison to demand management solutions from vendors such as i2 Technologies, Oracle, and JDA (i2 and Oracle are ARC clients). The company, however, is using a best-of-breed supply chain planning solution for global manufacturing planning. Then again, who am I to make editorial comments? The company believes OPUS was of great aid, particularly in allowing it to compare the plan to the forward financial forecast, thereby ensuring business alignment.
In parts of its business, the company has implemented consignment and vendor managed inventory (VMI) solutions by using EDI with the hospitals. In Hong Kong, for instance, hospital orders are triggered electronically when a nurse in the operation theatre scans one of the company’s products. Depending on the inventory levels in the hospital’s warehouse and the agreed upon min/max levels, this becomes a signal to send more inventory to the hospital.
Moving forward, the company intends to adopt “perfect order” as its prime supply chain performance metric by 2011. Its version of the perfect order metric is defined as on-time, in-full deliveries of quality product with accurate invoicing to customers.

What has the company achieved so far? Product availability has improved by 15 percent, forecast accuracy by 40 percent, and inventory turns by 16 percent. So, the company is living happily ever after—at least until 2015 when it will see if its goals for revenue growth in the region have been met.

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