Category Archives: Supply Chain

The Three-Pronged Core of the Modern Supply Chain

A recent article over on Supply Chain Digest purported to tackle “supply chain at the core”. I thought it would be about the core of the supply chain, but instead it was about how the supply chain is now the core of most companies. For example, GM just attributed it’s 7% increase in gross margins to manufacturing & distribution (supply chain), a 2B consumer goods company has realized that their supply chain is the key to their success, and the lack of supply chain sophistication is what allows private-equity firm Frontenac to buy companies at a discount and make profitable ventures out of them (by installing proper supply chains and supply chain management).

I was curious as to what they’d say about the core of a modern supply chain. A Google search for “supply chain core” turns up core disciplines, planning and optimization, and lean six sigma, which, while important, all miss the point. Which is very simple.

The three-pronged core of the modern supply chain is the same as it’s always been — people, process, and platform. The only difference is that the people are more skilled, the processes are more involved due to the truly global nature of the modern supply chain, and the modern platform is a sophisticated tangle of modern technology. But the core is still the same — good people, good processes, and good platform. Everything else is just a layer.

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Characteristics of Tax Efficient Supply Chain Management

One of the areas that doesn’t get enough attention in supply chain is taxation. Whether its because we think that taxes are unavoidable or we don’t know how to get rebates or avoid them in the first place, they are too often seen as a cost of business. While its true that taxes are more certain than death (as you don’t know when you’ll die but you know you’ll get taxed until you do, and then when you do), it’s also true that they can be minimized.

Last year, Supply & Demand Chain ran a great pair of articles on the tax efficient supply chain, that I covered in this post on the tax efficient supply chain. Since then, I haven’t seen much, until this article on how to benefit when the supply chain meets tax which presented ten characteristics of a tax efficient supply chain structure and ten leading practices of companies with tax efficient supply chains.

The practices, in particular, are worth pointing out:

  1. Implement limited risk structures following a business change.
    Having to make big transfers to cover losses can incur “transfer” taxes related to incoming revenue. Furthermore, if the unit or division the money is coming from is separate or in another country and profitable, you might still have to pay taxes on the “profits” in that business, division, or country and get taxed twice.
  2. Align the tax and transfer pricing structure with the locus of strategic decision making.
    If your operations aren’t in synch, the corrections you have to make after the fact could have tax implications.
  3. Focus resources on primary risks and view Advance Pricing Agreements (APAs) as key tools for minimizing the impact of tax audits.
    Good documentation is the key to a successful audit (as long as you have been truthful on your taxes).
  4. Document the business case for restructuring when the decision is being made.
    Be sure to detail compensation or indemnification payments to restructured entities, or risk being taxed and fined after the fact.
  5. Consider applying for an APA in one or more countries.
    This will protect you from double taxation in two or more tax jurisdictions.
  6. Be sure your documentation includes the responsibility profiles of limited risk entities.
    You don’t want your efforts to look like a tax evasion scheme. While it’s perfectly legal to take steps to minimize your tax burden, attempting to alleviate your fiscal responsibilities completely is a different story.
  7. Perform an annual review.
    Insure that you are documenting revenue and paying taxes consistent with all agreements and laws that are in place. Document the findings. If you ever need to show “reasonable care”, this is how you’ll do it.
  8. Establish procedures for tax authority audits.
    Be prepared and responsible. It will help.
  9. Keep informed of tax developments in each operating country.
    Being proactive will save you a lot more than if you are reactive.
  10. Talk to Peers and Experts.
    Talk with companies that have implemented Tax Efficient Supply Chains and expert consultancies (and global tax firms) that have helped.

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Oprah … Host, Actress, Producer, Publisher, and (Unintentional) Destroyer of Supply Chains

While I usually try to avoid anything even borderline with popular culture — as the last thing I want to encourage is rumour, gossip, or unfounded hype — I just couldn’t avoid this topic after coming across this recent article on CIO that did a great job of explaining ‘why the “Oprah Effect”‘ can take down the best supply chains because it’s a serious issue for any retailer who comes up with the next big thing.

The “Oprah Effect” happens when Oprah Winfrey picks a product, which is often a book, but sometimes a favourite thing like a cake or a robe, and advertises it on her show — and when it does, fortune’s are made or lost. When Florida Cake Maker “We Take the Cake” was picked as a favourite thing in 2004, it’s business went from struggling to thriving, but when Oprah declared her love for Kashwere robes, operations were overwhelmed and a lot of potential customers were turned away unhappy when they couldn’t get the product they wanted in time for Christmas. In extreme cases, it can even move markets. When she exclaimed that she’d never eat another burger again in 1996 on her episode on Mad Cow Disease and the cattle industry, beef futures plunged the next day in what industry experts called the “Oprah Crash“.

While an Oprah endorsement can delight a CEO and marketer, it can agonize a supply chain manager who needs to ensure that the product is available for purchase when a customer wants it. Even the largest supply chain can be strained under an Oprah endorsement, and even when it has early warning. For example, Amazon was stocked out of the Kindle within a week of Oprah’s October 24 endorsement of the Kindle and was subsequently out of stock for most of the 2008 holiday season.

But what’s really scary is that the Oprah effect may not be limited to Oprah much longer. With the rise of new super-celebrities on a regular basis and up-to-the-minute trend reporting on the internet, any celebrity’s praise, or disdain, for your product could have a serious impact on your supply chain — as the fashion industry already knows. If Jessica Alba or Angelina Jolie gets photographed in a hot new dress or blouse from a relatively unknown designer, whomever manufacturers the fashion line will likely be bombarded with orders … that they may not be in a position to fill rapidly. If a major actress like Kristen Johnson or Sophie Monk or Alicia Silverston strips down for PETA and denounces fur or, gasp, your fast food chain … you know sales are going to drop (at least for a while). And with celebrities like Beyonce Knowles, Jay-Z, and Brad Pitt almost as popular on the Web as Oprah, it won’t be long now before any top 10 celebrity has the power to cause an Oprah effect to your consumer-driven supply chain.

Are you ready? What’s your “ramp-up plan” in case demand skyrockets overnight? What’s your “disaster plan” if a quote taken out of context suddenly sends your sales — or stock — diving? Don’t know? Maybe it’s time to do some risk analysis and scenario planning and find out.

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Supply Chain Finance: We’re NOT There Yet!

A recent article on the World Trade Magazine web site asked “are we there yet” in reference to Supply Chain Finance. To this, I must answer an emphatic NO!

Why?

First of all, thousands of business went out of business last year simply because customers, who obviously have no understanding of how financing should flow through the supply chain, wouldn’t pay on time and simply extended DPO as their method of “financing” themselves. (See They Killed Kenney.)

Secondly, as noted by Michael McKenzie of JPMC in the article, factoring is the “financing method” receiving the most attention. Factoring is not financing. It’s just a high-interest loan in reverse. “Here’s 80% of the value of your receivables.” How is that better than “here’s a 20% interest loan”? Think about it.

Thirdly, as noted by David Gustin of GBI, bank-assisted Trade Finance Products account for less than 15 percent of Trade Financing. Banks have all the money … and, generally speaking, they haven’t gotten it.

I could go on, but I don’t see the need because these three examples alone clearly demonstrate that supply chain finance, for the most part, is still far on the horizon.

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Nearshoring Adds Security to Your Supply Chain

I was very happy to see this recent article in Industry Week on “moving sourcing closer to home” because I’m not a big fan of global sourcing just because someone in the C-suite wants to say “me too” on the golf course. You source globally when it makes economic sense from a total cost of operations perspective. Even though labor might be cheaper, by the time you add transportation, import tariffs and fees, export tariffs and fees, value added taxes, extra inventory carrying costs, expediting fees, losses from stock-outs, the real savings are usually a lot less than you think they are. You need to remember yin-yang of the business universe and your international procurement skills, do your homework, and make the right decision.

Chosen properly, appropriate nearshore locations can bring increased cost competitiveness, more lead-time security, and a balanced geographic portfolio that reduces the risks associated with overly aggressive low-cost country sourcing strategies (which can include stock-outs when you don’t realize shipments never shipped until three weeks after the fact, costly currency fluctuations, unstable economic environments, and even nationalization). So be sure to consider near-source locations in your global sourcing strategy, even if they appear to cost a little more. The reduction in risk associated with producing just some of your product closer to home might be worth it in the long run.

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