Logistic Network Optimization

It's increasingly evident that companies are seeking to design supply chains and operating models that are flexible, resilient and can improve tax efficiency.
United States Tax
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It's increasingly evident that companies are seeking to design supply chains and operating models that are flexible, resilient and can improve tax efficiency. Indeed, Logistics Network Optimisation is a process that reviews physical supply chains to reduce complexity whilst simultaneously improving service levels.

This article defines Logistics Network Optimisation and explores some of the macro drivers stimulating renewed focus in this area, in addition to explaining how companies undertaking such changes in their supply chains can only achieve commercial objectives by recognizing the need to balance indirect tax outcomes (e.g., global trade and customs duties) with direct taxes (i.e., transfer pricing).

What Are the Benefits of Logistics Network Optimisation?

Logistics Network Optimisation helps a company improve its service offerings, reduce working capital requirements and streamline operations by addressing the various levers and variables that make up a physical supply chain. These levers of Logistics Network Optimisation can include commercial and operations strategies, supply chain costs and structures and both direct and indirect taxes. Collectively, these levers of a physical supply chain will enable the go-to-market strategy by finding the right trade-offs of each.

Logistics Network Optimisation is often used to rationalize supply chains (i.e., warehouse usage) post-merger or acquisition, taking out costs associated with merged supply chains and bringing out synergies between the two, for example. Given the key focus of Logistics Network Optimisation is on the physical supply chain, it is important to ensure tax implications—specifically, ensuring indirect tax implications such as customs duties are considered.

Commonly asked questions often addressed by Logistics Network Optimisation projects include:

What is the optimal number of logistics facilities, their location, type and capacity considering total logistics costs, tax aspects and service levels?

What investments must be made in manufacturing and warehousing capacity to support entry into new markets, as well as new channels or products?

How should the network be modified for new global trade policies which are becoming increasingly relevant given the introduction of the Regional Comprehensive Economic Partnership ("RCEP") and the Comprehensive and Progressive Agreement for TransPacific Partnership ("CPTPP") in the region.

There are several challenges in the market that drive companies to look at Logistics Network Optimisation. These challenges, or factors, are summarized as follows:

Cost Pressure – There are significant costs and capital associated with the physical supply chain—sourcing, manufacturing, warehousing, inventory and transportation. This is increasingly evident in today's relatively high interest rate environment. Companies must reduce supply chain costs while continuing to meet and improve target customer service levels;

Globalization – Cross-border trading particularly in the Asia-Pacific ("APAC") region is highly complex and requires a good understanding of supply chain, legal, customs and risk factors. At the same time, there is an increasing trend of nationalism where countries are raising tariffs and duties as a way to protect local industry participants at the expense of others.

Market Volatility – Besides global inflation, there has also been unprecedented volatility in commodity prices, oil prices, labour and real estate prices which are affecting decision makers on location suitability when it comes to physical supply chain footprints.

Supply Chain Resilience – Supply chain networks must be agile and adapt to changing business conditions, particularly in light of supply chain shocks like global epidemics or warzones.

Customer expectations – Evolving customer demand for next-day and same-day delivery (one to four hours becoming the new normal express service offer) has led to moving inventory closer to consumer densities, creating new tiers to be considered in the consumer products network including dark stores, hub stores and store-based fulfillment (deliver to door or click-and-collect).

With this brief background as to what Logistics Network Optimisation is and what is influencing these types of projects, it is now possible to highlight how Logistics Network Optimisation works in practice.

The Balancing Act of Logistics Network Optimisation

As outlined, a Logistics Network Optimisation project incorporates and trades off multiple variables to find the preferred solution for a given service proposition. While key variables can include future volume and demand and supply locations or products and product characteristics, the interplay between indirect tax and direct tax is critical to the success of these projects. Effectively, each tax cannot be analysed in isolation and can be thought of as key levers to the decision-making process respectively.

There is a clear dichotomy between physical network flows which are the focus of indirect tax compared to direct tax where financial flows are often of importance. For indirect tax (i.e., customs duties, good and services tax (GST) and value-added tax (VAT)) it is the physical network flows which drive key outcomes. The physical flow of goods from point of manufacture to destination point will have a direct impact on potential customs duty payable and duty mitigation strategies that may arise from Free Trade Agreement or Free Trade Zone (and other customs-controlled zones) application.

For example, the APAC region is characterised by a series of bilateral (e.g., Australia-China, New Zealand-China etc.), regional (e.g., RCEP and CPTPP) and trading bloc (e.g., ASEAN, ASEAN+1) Free Trade Agreements.

Indeed, these Free Trade Agreements facilitate trade in the region by mitigating or reducing to zero customs duties. Each Agreement will have its own rules regarding product origin, direct consignment and third country invoicing—all which need to be considered as part of any duty mitigation strategy.

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Originally Published 9 May 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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