Page 253 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes manufacturing processes to inventory risk management. Major Chinese cities are employing
the similar strategy to attract firms or industries to their industrial parks, and their success is
copied in other countries, such as Vietnam and Cambodia. Even the U.S. has witnessed increased
interest in “Free Trade Zones” or “Tax Free Zones” as a motivator to magnetize jobs.
There has been a shift in the priorities for supply chain design. While proximity to market
demand is still the main factor (“Location, Location, Location”), the order of significance (most
to least important) for the remaining four factors is: tax policy; transportation cost; production
cost; and raw material cost. In many cases, the differential due to tax policy habitually overwhelms
the differences due to production or labour rates.
First, it is significant that supply chain managers understand the various dimensions of local,
state and federal tax policy and how that may impact supply chain design. The use of incentives
for property, income, value added and corporate taxes and their relative impact on a variety of
supply chain activities need significant consideration for supply chain design.
Second, the use of tax policy as a strong contemplation in supply chain design introduces a
number of issues for logistics and supply chain management. These include infrastructure
concerns, tax policy dynamics and action integration. Infrastructure concerns refer to the logistics
and transportation infrastructure that is in place to support supply chain activities.
For instance, while both Ireland and China used tax incentives to attract supply chain value
added activities to their countries, the transportation infrastructure was not initially able to
handle the competence required. While the Irish infrastructure is beginning to catch up, it will
be a while before the Chinese infrastructure can accommodate the new level of activity. Supply
chain and logistics managers need to understand the implications of these infrastructure problems;
and should be able to communicate them with the planners evaluating the design strategy.

Tax policy dynamics refers to the detail that; such tax incentives may change quickly, resulting
in a need to adapt the supply chain design. Specifically, the decisions based on the tax incentives
are inherently long-term while the tax incentives may sunset after a recommended time or may
change due to the political environment. Activity integration refers to the combination of
locations within the supply chain when specific value added activities take place.

Example: The tax incentive may motivate production or other value added operations
or inventory risk.
For instance, some firms manage global or regional inventory from Singapore by having a
Singaporean entity purchase product from global production operation at the customary
production cost and then resell it to markets around the world, resulting in the profits being
generated in a tax preferred environment. While there are certainly limits in a firm’s ability to
administer the location of global profits, such strategies can make a significant impact.
Third, since tax incentives and transportation cost have an increasingly significant role in supply
chain design, logistics and supply chain managers need to develop a deep understanding and
awareness regarding their dynamics and interactions. Distinctly, what is the relative impact of
value-added income, property, or income taxes on specific supply chain activities? Similarly,
changing transportation cost consequential from capacity congestion, lane imbalances, and
mode shifts due to global activity can be an incentive for a change in the supply chain network
design.

These challenges call for the improvement of transport cost dynamics and inclusion of tax policy
implications in supply chain academic and management education. These are topics that not
numerous supply chain managers have much knowledge about today. Individuals involved in
supply chain design need an in-depth understanding of the relative impact of transportation and
tax incentives and their dynamics based on policy, fuel volatility, congestion and capacity. It is

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