A Global Supply Chain Profit Maximization and Transfer Pricing Model

Abstract

In environments where tax rates in local regions do not represent major decision factors, a cost minimization methodology, which represents the most common optimization modeling approach for integrated manufacturing and distribution planning, can help formulate an effective integrated plan. However, when planning flexibility or alternatives exist because of differing local country tax rates and types and intra‐company transfer pricing options, cost minimization methodologies may inaccurately identify profit‐maximizing global production and distribution plans. Instead, a profit maximization model that explicitly evaluates decisions such as where to incur tax liabilities and how to set intra‐company prices may be required to develop an integrated global manufacturing and distribution plan. In this paper, we discuss and formulate a model that yields profit maximizing global production and distribution plans. We discuss the managerial implications of our results, and the potential applications and benefits of the model.

Formation of a strategic manufacturing and distribution network with transfer prices

“…Given a set of potential suppliers, manufacturing facilities, distribution centers and customers, Goetschalckx et al (2002), Hammami et al (2009), Miller andde Matta (2008), Peron et al (2010), Villegas and Ouenniche (2008) determine the configuration of the production distribution system and transfer prices between corporate subsidiaries such that customer demand and requirements are met and corporate profits are maximized. Similar to our work, the aforementioned papers also demonstrate the savings potential of integrating in a profit maximizing model the design of strategic global supply chain networks with the determination of production distribution allocations and transfer prices.…”

“…NIAT in our model is simply the tax rate times the difference between the accumulated operating revenue and production and shipment cost. The model in Miller and de Matta (2008) avoids dealing with losses by using average unit costs and setting the profits as a percentage of these costs. Villegas and Ouenniche (2008) present an unconstrained optimization model where the total repatriated earnings of divisions to central headquarters are maximized.…”

“…For example, the Global Profit Maximization (GPM) model described in Miller and De Matta (2008) explicitly models production lines (both their individual costs and capacities), as well as inventory levels by product family and location. The GPM model generates an integrated, detailed global production and distribution plan at the production line, plant and distribution center level.…”

Sustainable supply chain management: current debate and future directions

“…This paper classifies these as Efficient Supply Chains (Figure 3). In fact, supply chain financial maximization literature is vast, and examples of supply chain profit maximization studies are everywhere (e.g., Beamon, 1998;Perea-Lopez et al, 2003;Miller & Matta, 2008). Many supply chain studies reinforce the importance of the financial performance often neglecting the environmental and social performances of their chains.…”

Logistics and Transportation in Global Supply Chains: Review, Critique, and Prospects

“…Miller and de Matta [52] (2008) develop a global profit maximization plan that determines the optimal production policy for each plant in the firm's network, as well as a sourcing and distribution plan with associated transfer pricing policies. Their model maximizes profit while considering tax and exchange rates in each country and the lower and upper bounds on transfer prices applied to intramarket and market-to-customer transactions.…”