Category Archives: Supply Chain

Aspects of the Tax Efficient Supply Chain

Many companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts — especially now that tariffs are skyrocketing and you need every source of savings you can find.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact income-based taxes), it has far reaching implications. Furthermore tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that have been noted on this blog in the past include the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states / jurisdictions, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications.

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information.

    • there are state income tax implications wherever such data is stored and maintained.
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items
  • identifying taxes that can be reclaimed

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made or the corporation is entitled to a tax rebate / refund
  • greater certainty regarding tax requirements

So get tax efficient. And maybe you can at least counter all of the duties and tariffs being imposed in the trade war.

Algorhythm: Twenty Years Later and the Optimization Rhythm Has Not Missed a Beat

It’s been almost a decade since we covered Algorhythm (Part I and Part II), and that’s because the last time the doctor caught up with them mid-decade, they were deep into creating their new accelerated cloud-native rapid application development platform, called AppliFire, with native mobile-first development support capabilities. And while it was very interesting, it was not Supply Chain focussed at the time, and not the core of what SI covers.

But fast forward about five years later, and Algorhythm has re-built their entire Supply Chain Planning, Optimization and Execution Management platform on top of this new development platform and now has one of the most modern cloud-native suites on the market — which not only has the capabilities of big name peers like Kinaxis, E2 Open and Infor, but also the ability to run on any mobile platform with seamless integration across modules and platforms.

And their optimization capabilities are still among the best on the market, and possibly only rivaled by Coupa Sourcing Optimization (powered by their Trade Extensions acquisition) — demonstrated by the fact that whether you are dealing with a demand plan, manufacturing plan, production plan, supply plan, logistics plan, route plan, or any other plan supported by the system, their system can find the optimal solution no matter how many demand locations, plans, sites, suppliers, products, lanes, etc. — and can do so rapidly if the user doesn’t overload the scenario with unnecessary constraints. (Even without constraints, these models can get huge, as the doctor knows all too well, but yet they solve rather rapidly in the Algorhythm platform.)

The Algorhythm suite of twelve (12) integrated Supply Chain Planning, Optimization, and Execution Management Modules is not only one of the most complete end-to-end suites on the market, but one of the most seamlessly integrated as well. It’s very easy to take the output of the “Demand Planner” (which allows the entire organization to collaborate on forecasts) and pump it into the “Manufacturing Network” (which integrates with the “Distribution Network” and “Inventory Planner”) to create a manufacturing (site) plan and then pump that into the “Production Planner” to create a manufacturing schedule by site and then push that into the “Logistics Planner” to determine the best logistics plan and then push that output into the “Route Planner” to optimize lanes and so on. (The suite also includes a “Supply Planner” to optimize individual shipments for JIT manufacturing; a S&OP planner to help sales and operations balance demand vs. supply; a “Manufacturing Execution System” to break PDI (Production Parameters) down, fetch actual production data, and validate results; a “Distributor Ordering” Management module to automatically create distributor orders across thousands of distributors; and a “Beat Planner” to optimize last mile delivery for outbound supply chain for distributors or CPG companies in geographies — like Asia — where last mile is difficult (due to inability to send large trucks, need to restock daily, etc.) With the exception of strategic sourcing and initial supplier selection, they basically have inbound demand to outbound supply covered in terms of supply chain optimization and management once you know the suppliers you are going to buy from and the products that are acceptable to you.

The UI is homogenous across the suite, and the modern web-based components such as drill-down menus, buttons, pop-ups, and so on make the suite easy to use — especially when it comes to tables and reports. The application supports built-in dynamic Excel like grids and tables which can be altered dynamically on the fly with built-in pagination to make navigation and view-control navigable, especially on tablets (for users on the go). It also supports standard (Excel-like) charts and graphs with drill-down, as well as modern calendar and interactive Google Map components. Navigation is easy, with bread-crumb trails so a user doesn’t get lost, and response time is great. It’s powerful and useable, which is exactly what you need to manage your supply chain on-the-go.

There’s a reason they have some of the biggest names in the F500 as clients, and that reason is their unique combination of

  1. power,
  2. ease of use, and
  3. and understanding of the Asian supply chain needs (especially around last-mile delivery).

The last point is especially relevant as many of the big name American (and even German) supply chain companies don’t really understand the unique complexities of (last-mile) supply chains in India and Asia. However, Algorhythm’s unique capability combined with their understanding has made their platform a force to be reckoned with in a market that is one of the hardest in the world. And as a result, they have built a platform that is more than sufficient for every other market as well. the doctor is looking forward to seeing more of Algorhythm outside of the Asian market as, at least in his view, the supply chain market in general needs a good kick in the pants as innovation there-in has considerably lagged the Source-to-Pay market that we primarily cover here on SI.

So if you need a good Supply Chain Orchestration solution, the doctor strongly encourages you to check out Algorhythm … you won’t be disappointed.

A Great Day in American Automotive History …

Sixty years ago Today the Ford Motor Company produced it’s 50 millionth automobile the Thunderbird, and fifty years ago today General Motors produced it’s 100 millionth automobile, the Tornado, putting the automobile revolution in full swing and launching the Automotive industry to its height (before their downfall began in the 1970s and 1980s with a series of engineering, manufacturing, and marketing mishaps and disasters, a downfall which continued in the 1990s where the recession resulted in weak auto sales and operating losses). Up until the 1980s, the US was the largest automobile producer in the world until Japan overtook it.

Producing a million units of anything in the 50’s was a feat, especially for something as large and complex as an automobile, and the fact that American companies could do it … and do it well … means that they used to have great supply chain management. Remember, even local and vertically integrated supply chains are still supply chains and this goes to show the value of near-, and home-, sourcing and (deep) control over key aspects of your supply chain.

Significant (non optimization backed) cost savings always comes at a price, and that price is usually an increase in risk. Be careful. Or your company could meet the same fate of the US automotive manufacturers, many of whom had to enter into bankruptcy and receive big bailouts from the government just to stay alive.

There are No Economies of Scale … Just Economic Production Quantities

As the public defender likes to point out on a regular basis over on Spend Matters UK / Europe, economies of scale is a procurement myth. The idea that the more you buy, the bigger discount you can get because the cost diminishes is a myth because, if it were not, if you could buy a large enough quantity, then the cost would eventually get close to 0 per unit.

But the reality is that there are always hard costs that cannot be reduced in the supply chain … particularly those components that involve human labour — product creation, product transportation, product component creation, product component transportation, raw material mining, raw material component transportation, security guards for storage, etc. — and facility leases, utility cost, taxes, etc.

And there are always limits to “economies of scale” production lot sizes. If the line can only do 60 units per hour, then the line can only do 2400 in a normal workweek, 4800 in a double shift work week, 7200 in a triple shift work week and maxes out at 10,080 a week … assuming no downtime (and most lines will require some maintenance). In this case, the major economies of scale are 2400, 4800, and 7200 — as this insures that the labour cost (and facility costs) are spread over the maximum number of units.

In other words, there are economic production quantities (EPQ) where the price per unit is minimized, and this is the optimal economy of scale.

So if you really want to minimize your costs, you can start by minimizing your supplier, and carrier costs, which can be done by appropriately distributing the award across suppliers in economic production quantities that can allow them to give you larger discounts (and still retain a reasonable margin). So how do you do that? Considering that each supplier has a different EPQ, each carrier has a different EPQ, and this varies by product (and plant location), how can you possibly figure out how to split in such a way that you can enable suppliers to reduce their bids?

If you’re a regular reader of Sourcing Innovation, you know the answer. A decision optimization platform …

Factors to Consider When Re-Shoring Your Supply Chain

As part of his Make America Great Again campaign, Trump is preaching Buy American. If you want to fall in line, then you have to Buy American. But you can’t Buy American without American manufactured goods, of which there are not enough to go around if everyone wants to Buy American as so much manufacturing was outsourced over the years.

And even if you don’t want to fall in line with Trump, you might still want to Buy American because if Trump continues to raise import tariffs on a whole host of goods, you might want to Buy American just because the costs of not doing so are getting too high. Either way, if more companies want to Buy American, then we need to bring back American Made.

And if we are to return to “American Made”, that’s going to mean an awful lot of restoring. And, unfortunately, that’s easier said than done. Why?

Our Factories our Out of Date

You can’t just bring in a cleaning crew and restart a 20 year old factory overnight. By now, anything of value of moveable size that wasn’t already looted is probably broken or rusted. But even fixing everything up is not enough. Technology has moved on, and so has the production lines for that technology — and right now all the new production lines exist in China, not the United States, as a result of all of the production moving there and Chinese factories investing in the infrastructure necessary to make new products. In many industries, we need completely new or fully overhauled factories to start producing American Made products again, and these factories are not going to be built or revamped over night.

Our Workforce is Unskilled

You can’t just un-retire the workforce, or at least the workforce still of working age. First of all, if a plant has been shut down for two decades, any workers who are still young enough to come back full time would be in their late 40s or 50s now and would have been late 20s or early 30s then. These would have been the junior line engineers, not the senior line engineers or plant managers. As a result, they wouldn’t even have had half of the skills you’re looking for when they retired. And since technology has moved ahead 20 years, and they haven’t kept up (as they had no reason to without an appropriate job), they know less than kids in college. The workforce has to be retrained.

Our Logistics Have to be Rethought

This is not as big of an issue, but right now all of the carriers have lanes optimized for getting goods from ports to common warehouse locations, not from factories in busy industrial parks, or, more likely, on the outskirts of big cities to your warehouses on the outskirts of other big cities. You need to redesign your logistics and so do they. But the good news is that with the right re-design, and freight optimization, they’d have less empty lanes as, right now, they have a lot of full lanes from ports to warehouse districts and empty lanes back. Now they’d have full lanes from industrial parks with factories to other industrial parks with warehouses that also have nearby factories they can pick up from and so on.

Our Labour Costs are Much Higher

So not only do we have to overhaul our factories, but we have to insure we adopt the most efficient technologies that allow our workers to be as productive as possible for every hour they work. And we have to focus on lean process design and lean manufacturing to ensure that there is no waste in the process. That’s the only way a company can really compensate for the higher labour (and sometimes energy and overhead costs in general) that comes with American Made. One has to remember that even though a lot of consumers want to buy American, just like they want to buy sustainable, they are only willing to pay so much of a premium.

This is not to say that you should not reshore. You absolutely should. the doctor has been preaching the value of home-sourcing for a decade! However, you have to do it smart and to get it right, you will have to start slow. And don’t be afraid to ask for help.