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How integrating tax and trade can improve supply chain performance

Authors

6 minute read 18 Aug 2022
Related topics
Tax
Global trade

A Total Landed Cost framework helps enterprises examine myriad trade-offs involved in designing operations and managing risks.

In brief

  • Companies are experiencing disruptions and challenges that are compounding and negatively impacting operations and performance.
  • Enterprises should consider using data to integrate across functions in order to better manage Total Landed Cost.

Emerging risks rooted in a variety of factors, from shifting attitudes about free trade and a desire for more sustainable operations to the lingering effects of supply chain fragility exposed by the COVID-19 pandemic and long-standing challenges of managing logistics, are putting new pressure on global businesses.

The risks can be understood in two main categories: (1) the continuity challenge introduced by far-shoring and its reliance on fragile product flows, which becomes much more pronounced when coupled with production and transportation interruptions (an extreme example of this confluence being the 2021 obstruction of the Suez Canal); and (2) the undermining of the assumption of free flow of goods, which is being challenged by disruptions to cross-border flows through the rise of non-tariff barriers and the increasing complexity of regulations. Impacts for companies have included rises in the direct costs of transportation, significant and volatile service disruptions, unpredictable changes to indirect regulatory and taxation costs, and risks to regulatory compliance.

Those who want to thrive in this dynamic environment should take a more strategic view of the management of global flows beyond tactical reaction and short-term adaptation. A framework called the “Total Landed Cost” is one such approach, offering a fresh way to think about the challenges involved in managing globally intertwined supply chains. This framework provides a holistic way of weighing the trade-offs involved in designing and managing global operations and routes to market; it can be used as the basis for analyzing and assessing global supply networks; and it provides a method to identify and address the risks and challenges inherent in these networks.

How EY can help

What is meant by Total Landed Cost?

A range of significant costs are embedded within physical supply chains: sourcing, manufacturing, transportation and logistics costs – as well as direct and indirect taxes and other costs associated with trade. In global chains, there are also financial impacts from transfer pricing and the complex interplay of tax credits and Free Trade considerations.

 

A Total Landed Cost framework takes a holistic view across the end-to-end supply and value chains – from the origins of raw materials, to manufacturing locations of finished goods, through to final destination markets – to optimize procurement, supply chain and trade costs as products move along the chain.

 

The links between these costs are often not simply linear and might not be appreciated across the organization, where decisions around global supply are made in a series of isolated and siloed contexts:

  • Procurement has a process to decide which suppliers and vendors to use, optimising on unit cost
  • Transportation and Logistics has a process to decide how to transport these goods – the channels and pathways to use, the providers to contract with – optimising on transportation unit cost
  • Finance manages Transfer Pricing and exerts pressure on other areas to contribute to margin and profit maximisation
  • Customs agents work to facilitate movement of goods through these networks without coordination
  • Trade isn’t always able to keep up with a changing landscape of Free Trade Agreement networks (e.g., Brexit, Africa Continental Free Trade Agreement, Regional Cooperative Economic Partnership, United States-Mexico-Canada Agreement )

In addition, there is an increasing burden on organizations to manage end-to-end regulatory and compliance requirements despite being hampered by incomplete visibility across functions.

 

It is therefore easy to see that a simple procurement decision – made at the start of the chain in accordance with a discrete set of priorities – can have significant and unintended impacts on, for example, transportation costs, duties, free trade and customs compliance. For an organization working in this siloed manner, it can be very difficult to foresee these impacts and risks let alone to be able to address or neutralie them proactively. And this is before adding in consideration of the emerging and evolving ESG-related regulations around responsible sourcing, plastics, and carbon.

 

Examples of issues to which the “business-as-usual” model of global supply chain management is vulnerable can include: (1) hidden impacts where failing to comply with the customs rules of origin can result in higher duty costs because the organization does not fully benefit from preferential duty rates of free trade agreements; (2) unintended consequences of procurement decisions, in which seeking out the lowest cost raw materials can mean higher transportation costs for manufacturers, while there can also be downstream impacts on end-customer free trade agreement qualification; (3) value leakage, where lack of discipline around international trade codes (HS codes) leads to overpayment of duties.

 

As noted, companies conventionally try to address these kinds of problems reactively, responding to issues as they arise rather than taking a holistic and proactive approach. This becomes a problem not only of cost inefficiency but also risk mitigation: there are very real legal and financial risks associated with non-compliance with customs, trade, and ESG regulations.

How can a Total Landed Cost approach help?

A Total Landed Cost approach is based on a holistic overview across supply chain, procurement, finance, trade, and sustainability, to provide support to strategic decision-making and risk management.

1) It should start with an end-to-end view to support end-to-end coordination and risk management. 

2) It depends on leveraging the full range of the organization’s data. 

3) And it hinges on cooperation and collaboration between Supply Chain functions and Tax & Trade groups.

Total landed cost optimization

In any organization, data tends to exist in siloed pockets. When it is brought together it can provide valuable insights to help frame and manage the trade-offs involved in global operations. Enabled by integrated data, one can track the journey of inputs and finished goods from supplier to warehouse to distribution, from country of origin to destination, building a complete picture in one true source of data.

A bottoms-up, data-driven model centered on analysis of the Bill of Materials and built from historical transactions in the ERP allows the tracking of raw materials, components, sub-assemblies and finished goods to provide visibility of flows across the global network. Adding in data pertaining to indirect taxes, transfer pricing, customs codes and trade costs then captures the links and dependencies between Supply Chain and Tax & Trade at all levels of the operation. Finally, consideration of direct tax elements can be incorporated as an overlay as needed.

With a holistic and comprehensive data model, companies can create reporting and modelling capabilities, combining Supply Chain and global trade information to provide reports and visualisations of product flows; transportation hubs and modes; perform customs compliance checks; and carry out cost analyses from supplier comparisons all the way up to Total Landed Cost analysis.

A Bill of Materials- centered model will also allow for the overlay of specific regulatory, ESG, and externality costs – including carbon pricing, plastic taxes, tracking of conflict minerals and visibility into ethical sourcing – which are expected to evolve and become more impactful in coming years. Developing the capability to incorporate these (as is relevant to specific operations) will help companies to be ready as they become codified in regulation and standard practice.

Once a comprehensive data model is created, scenarios can be modelled to show potential global trade savings opportunities and Rules of Origin impacts of different sourcing options, and – critically – the holistic view allows for mitigation planning, such as potential opportunities and risks emerging from new Free Trade agreements or the consequences of projected changes to trade regimes.

This integrated view can illuminate the cost and compliance implications of decisions at every stage of the global supply process, from selection of specific raw materials to future supply chain network footprint design.

A total landed cost approach to the management of global product flows provides a holistic overview of a company’s operation – a thorough and transparent understanding of the network and its flows of inputs and goods.

The challenge for companies is to address siloed behaviours and processes and encourage true end-to-end thinking. With an integrated mindset and a data-driven approach, the many different functions involved in companies’ global supply flows can begin to understand their own processes as part of a synergetic whole, in which tax, operations and sustainability are interdependent, part of the same conversation.

Nothing less can drive cost efficiency and help manage the risks of doing business in complex global networks.

Summary

Businesses that make, move, and sell products are facing a confluence of challenges – some new, some renewed – that are impacting operations and performance more acutely than ever before. With hundreds of suppliers, thousands of direct and indirect materials, multiple supply locations spread across the globe and serving hundreds of countries, an integrated and data-driven approach is needed to navigate these challenges strategically: companies should be taking an end-to-end view of their supply flows and strategic trade-offs in pursuit of lower overall Total Landed Costs.

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Related topics
Tax
Global trade

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