Monthly Archives: March 2011

Transfer Pricing – Do You Know What You Need To?

Transfer pricing, which allocates profits and losses among different parts of a multinational entity for tax and related purposes, can have a significant financial effect on your supply chain because the companies in a commonly controlled supply chain must comply with transfer pricing rules and regulations in determining what companies should recognize what amounts of income, deductions, credits, and allowances among the various tax jurisdictions.

Transfer pricing regulations, which are governed under section 482 of the tax code that authorizes the IRS to adjust the income, deductions, credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes in the US, and which must follow OECD Transfer Pricing Guidelines, can be quite complex, but as this recent article in Industry Week on “what manufacturers need to know about transfer pricing”, most regulations are based on one underlying principle: the arm’s length principle.

The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Transactions based on the arm’s length principle are arm’s length transactions and used in contract law to arrange equitable agreements that will stand up to legal scrutiny, even though the parties may have shared interests or are too closely related to be seen as completely independent. The principle requires that the amount charged by one party to another (related) party must be the same as it would be if the parties were not related. An arm’s length price is the same price that an independent company would pay for a good or service.

This sounds pretty easy until you get into international transactions when trying to split profits and you have to figure out who bears the product liability, the risk of currency fluctuations, and so on. At this point, most multinationals will use a transfer pricing study that performs a detailed analysis of the functions performed, assets employed, and risks borne by each party in the transaction. This will provide a justification of the cost breakdown that will stand up to regulatory and legal scrutiny.

For more information on transfer pricing, see the Transfer Pricing Network in the US, the Cole & Partners Transfer Pricing Site in Canada, or the Transfer Pricing Forum in the EU. Understanding the profit breakdowns will help you understand the cost savings that Procurement directly and indirectly generates for the supply chain.

Supply Chain Disruptions Come Without Warning

Everyone is still talking about the recent Japan earthquake and the ramifications it will have on your supply chain for weeks, months, and years to come. No one is talking about the fact that, thanks to global warming, forest fire season is now upon as and that more than 30 wildfires raged through Oklahoma last weekend (Fark.com) and that it only takes one fire to destroy a plant or distribution centre.

But it doesn’t take a natural disaster or a political uprising (such as the recent ones in Egypt and Libya) to instantly shut down your supply chain. A simple regulatory decision can have ripple effects through your supply chain. On March 10, the US Transport Security Administration (TSA) issued an emergency amendment to security measures that would take effect immediately that required freight forwarders with air cargo operations at non US locations to request additional information for all shipments on each master airwaybill ( MAWB ). As a result, Air Canada had to embargo all cargo flown to the US until further notice until they could be sure they were in compliance. (Canadian Manufacturing) Now, this embargo only lasted a day, but it could have lasted a week had the regulatory change been more onerous. But like a natural disaster, this disruption came without warning to shippers who relied on Air Canada to deliver their goods to the US.

That’s why you need contingency plans drawn up and ready to go, because you never know when you will need them.

Vendors: When the Buyer is Right

I recently pointed my readers to Stephen Guth’s Contract Negotiation Handbook that exposes 16 of your dirty tricks which they hopefully won’t fall for again once they read the book and absorb its secrets. As a result, you’re going to have to make some concessions. But what ones should you make?

In order to show you that SI doesn’t play favourites (and is only interested in a fair and level playing field), I’m going to give you five examples where the buyer is right and where you should concede, inspired by this recent article over on MintLife that asks “is the customer always right?”.

  1. When it Costs Nothing To Let The Buyer Have Her Way
    Maybe she wants her paper, free training materials, or faster delivery. If the T’s & C’s she wants have no negative impact on your revenue, if you have e-versions of the materials that can be downloaded from your FTP server, or the buyer is paying for delivery, who cares? Concede. And maybe when the buyer feels like she’s getting her share of compromises, she will back off of some issues that are a lot more costly to you.
  2. When the Law is on the Buyer’s Side
    If you screwed up on a previous contract, and the buyer is asking for fair restitution (in the form of going forward discounts), and the law backs her up, you better concede this point quick before legal gets involved. Because any savings you negotiate then will be eaten up ten times over by legal fees.
  3. When Your Delivery Team Has Been Negligent in the Past
    Even if its questionable as to whether the buyer would win in court, if your team didn’t deliver on past promises, own up and make it right. This will instill a great deal of respect for you in the buyer, remove hostility, and considerably ease negotiations.
  4. When The Company Can’t Afford to Lose the Business
    If the customer is one of the company’s top customers, and accounts for a double digit percentage of revenues, even if the customer doesn’t know it, be prepared to make a few concessions. Losing a few profit points is much better than losing profitability as a business. However, this is one concession that should not be made too quickly.
  5. If failing to concede would bring shame to you or your department if the buyer brings the complaint to the organization’s C-Suite
    Let’s say you got caught trying to pull the GSA or SOX ploy or, even worse, making a claim that no one pays less than X when another customer made it public they got a great deal from you and paid only 90% of X. You may have been following the internal negotiations playbook, but it doesn’t matter now, because shame on you or the department could be much worse than failing to reel in a big fish. (After all, there are plenty more fish in the sea.) Immediately concede the lie, and if it requires an immediate price drop to the lowest known price, concede that too (with appropriate volume or contract term conditions if the price was granted only because a volume threshold was reached).

While there’s a sucker born every minute, not every potential customer will employ the sucker. So while the followers might employ a sucker you can real in with one of your ploys, there are leaders (who read SI) who won’t fall for them, or stand for any less than what was promised. Remember this, and you’ll get a fair deal from the leaders (who understand that a fair level of profitability is key to sustainability) and survive in your job long enough to reel in the next follower (who employs a sucker) that comes your way.

Geek Cat Says

You know I never
I never heard you talk so good
You never chat the way you should
But I like it
And I know you like it too
The way that I want you
I gotta have you
Oh yes, I do

You know I never
I never ever get home late
You know that I can hardly wait
Just to ping you
And I know you cannot wait
Wait to ping me too
I gotta chat you
Cause baby we’ll be

On the Facebook
In the Farmville pen
Behind the bushes
Until I’m begging again
In the chartroom
Lock the public out
And baby
Talk qwerty to me

With apologies to Poison.