Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the Aug 22, 2006 issue of the Bangkok Post.
By Paul Summer, Pichpajee Saichuae, Vatin Chalermdamrichai, Niphan Srisukhumbowornchai and Kulvech Janvatanavit
This is the second instalment in a series of articles that will take a look at the restructuring of supply chains. In the first instalment, Niphan, Vatin and Parima examined the issues that arise with each option. This week, they delve deeper into how cost, speed, and security can affect centralised and decentralised supply chains.
It's late Tuesday and three colleagues from Tax and Advisory at PricewaterhouseCoopers Thailand are winding down from a long day, and picking up a conversation they started two weeks earlier.
''A couple of weeks ago, we had an interesting discussion about optimising supply chain structures,'' begins Niphan. ''However, our clients face a number of issues when it comes to finding the optimum balance between centralising and decentralising their distribution systems. Some of these issues are more challenging than others. Let's start with cost. What makes this issue so complex?''
''From an operational standpoint, a major issue with cost is transport,'' replies Vatin. ''Shipping directly from the manufacturing location to the destination will generally cost less than shipping through a centralised distribution center in a hub country.''
''But even with decentralised distribution, freight often has to travel via another country, whether to change ships, or for the ship to pick up or drop off other goods,'' interjects Parima.
''Correct,'' agrees Vatin. ''But since the freight doesn't have to be unpacked or unloaded and brought to a warehouse, handling costs are lower than with centralised distribution systems.''
''Nevertheless,'' adds Parima. ''If the freight from each separate location isn't in big enough volumes for the shipping to be economical, having a centralised distribution centre may be cheaper.''
''What about other transport cost challenges?'' asks Niphan.
''Just the most obvious,'' replies Parima with a laugh. ''Look at the price of oil. Given how high they've gone in the past two years, it's significantly increasing shipping costs.''
''Actually, there is another cost issue,'' points out Vatin. ''If a company adopts a decentralised distribution system, where each country takes care of distribution operations by itself, there may be added complexity in distribution handling. This is because the manufacturer may have to manage inventory, and handle order fulfillment in each of the locations.''
''So, how do customs issues affect all this?'' asks Niphan.
''Well, customs duties may be manageable,'' replies Parima. ''Companies should review the basis of customs value to identify any non-dutiable elements, as well as take advantage of free trade agreements.''
''That's true,'' agrees Vatin. ''A lot of companies don't take full advantage of this because they don't realise the impact that customs and free trade may have on their businesses.''
''From a tax perspective, can supply chain restructuring affect the overall cost?'' asks Niphan.
''Well, tax is often one of the most significant costs that affects overall profitability,'' replies Parima. ''There are major tax issues that companies need to take into consideration at the planning stage those related to permanent establishment, transfer pricing and profit remittance tax.''
''In addition to cost, speed is also challenging,'' suggests Niphan. ''There's a trade-off between cost and speed. For example, if you want to be more responsive to your customers, it normally costs more.''
''Exactly,'' agrees Vatin. ''In general, it depends on the customer's proximity to your hub. But centralised distribution should yield a more reliable order lead time and delivery quality because all items are delivered from the same location with consistent control. With centralised control, the distribution network should be more reliable and secure.''
''Are there any specific security issues that are driving business models?'' asks Niphan.
''Definitely,'' replies Parima. ''Post-9/11, security in international transport has become a major issue for trade. Rules about container and supply chain security, particularly for shipments to the US, mean there's less flexibility for sudden changes in the supply chain.''
''Well, I think we can see how challenging cost, speed, and security are to supply chain restructuring,'' says Vatin. ''I think that's enough for us to digest for now, but I want you to think about the tax issues for different restructuring options, in view of the operational challenges we've discussed today. Understanding our clients' businesses in depth is critical to our ability to help them increase profitability and manage risk. Shall we meet again in two weeks?''
In the next instalment of this series Niphan, Vatin and Parima will look at the tax issues for different supply chain structures. Leading the Way is published every second Tuesday.
