In Monday’s post, we brought your attention to Tompkins Associates‘ recent white paper on Leveraging the Supply Chain for Increased Shareholder Value which nicely complements CAPS Research and A.T. Kearney’s study on Value Focussed Supply: Linking Supply to Competitive Business Strategies and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates‘ white paper on Leveraging the Supply Chain for Increased Shareholder Value should definitely be on your reading list as you outline your Next Generation Sourcing strategy.
Today, we are going to continue our discussion of the objective of Margin Improvement.
As noted yesterday, there are three fundamental ways that a company can improve margins:
- Reduce COGS (Cost of Goods Sold)
- Improve Speed and Productivity
- Practice Tax Effective Supply Chain Management
Yesterday’s post dove into reduction of COGS in detail, so today’s post is going to address the margin improvement strategies of increased speed and productivity and tax effective supply chain management.
Not only can a fast company get the products the consumer wants to buy to market faster, but a fast company can:
- optimize the transportation mode
using airfreight for dense high-value products like laptops
and slower ocean freight for sparse low-value products like packing peanuts and take a sustainable approach
- slot warehouses dynamically
to increase picking efficiency, reduce labor costs, and adapt to a changing product mix
- pre-pack orders from suppliers
to allow for crossdocking, reduced handling, and, ultimately, reduced losses due to product damage from increased handling and re-packing
A productive company, which is continuously improving, is one that has
- reduced labor costs,
as they get more done with less
- reduced material costs
as it is constantly updating its rolling forecasts (with foresight to prevent overbuys) and its designs (to use more economical parts and raw materials and improve qauality)
- better operating efficiency
as it has not ony defined appropriate metrics, but tracks and updates them on a regular basis
Finally, a company that wants to make the most of its supply chain margins has a tax effective supply chain. As the white paper notes, the worldwide “Effective Tax Rate” (ETR) for a MultiNational Corporation is in the 20-35% range, with the average around 25%. That’s a lot of revenue lost to taxes for a company with a tax-effective supply chain. (Imagine what a company with a tax-ineffective supply chain is losing!)
Tax Effective Supply Chain Management (TESCM) is complex, dynamic, and conflicting as tax laws and regulations change. The allocations and locations of functions, assets, and risks, and decisions on transfer pricing, are inherent to the ETR, as well as to the optimized global supply chain but TECSM can make a significant difference in their company’s shareholder value. Unfortunately, the white paper does not provide any details on how to achieve TECSM due to the complexities and detailed knowledge of tax law and regulations required. However, Ernst & Young published a good article on How to Benefit When the Supply Chain Meets Tax in 2009, which was summarized in SI’s post on characteristics of TESCM, Grant Thornton LLP ran a pair of articles summarizing what to consider in a tax-efficient supply chain a couple of years back (Part I and Part II, summarized in The Tax Efficient Supply Chain), and this post lays out the basics of transfer pricing.
Thus, a company has a large number of opportunities for margin improvement at its disposal and an effective combination can easily deliver double digit percentage returns in an average supply chain. The final part of this series will dicusss the final objective of the Tompkins Associates‘ Supply Chain Value Creation Framework, Capital Efficiency.