Production capacity management (PCM) occurs whenever a new plant opens or an existing plant expands, contracts or closes. And while PCM begins in operations or strategy departments, finance organizations probably have the most to offer when evaluating the benefits of PCM. Applying the principles of transfer pricing economics, finance organizations can enhance the success of production capacity management movements in the following ways:
- Evaluating and establishing operational infrastructure;
- Developing "new plant" metrics; and
- Tax considerations and other costs.
Transfer pricing economics is a practical combination of micro- and macroeconomics. Properly applied, it lays out the entire value chain of activities of a corporation on a location by location basis, in order to assess the most equitable possible arrangements between disparate entities within a corporation. Then it compares the circumstances of each entity and assigns target profits to each location based on its particular activities, assets, and risks.
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