Going beyond logistics: do not forget the fiscal issues!

Author: Lorenzo Bruno Prataviera (Politecnico di Milano)

Hello “Young SCholars” readers! I am Lorenzo Bruno Prataviera, a Research Fellow at the Department of Management, Economics and Industrial Engineering of Politecnico di Milano. In February 2020 I gained a Ph.D. in Management Engineering defending a dissertation entitled “Towards a new approach for Global Distribution Network Design: the integration of logistics and fiscal issues”. However, colleagues, family and friends still struggle with understanding what my dissertation is about. Thus, here I am!

My main research interests are in the area of global distribution network design, enlarging the traditional logistics perspective to include fiscal issues along the logistics ones. The intended purpose is to develop the interface between the two domains, but then the question comes: why?

Well, most of modern supply chains have nowadays some type of global presence, whether in terms of sources of supply, manufacturing locations or markets they serve, with a progressive growth in worldwide trading. In more detail, my focus is on global distribution network design, since logistics often represents the backbone of the whole internationalisation process. When the perspective is not global, distribution network design refers to determining the best way to transfer goods from points of supply to points of demand while managing the trade-off between logistics costs and service level to customers. However, global distribution involves other elements than inventories and transport costs. Indeed, fiscal systems often determine the playing ground rules for global companies when designing their distribution networks. As a matter of fact, considering only logistics can lead to pre-tax cost reduction, but each dollar (or euro) of operating savings may not turn into an actual optimization after taxes.


Original picture provided by Lorenzo Bruno Prataviera

Consequently, companies must carefully manage additional factors, such as tariffs, duties, trade agreements, cross-border trade processes, currency exchange rates and corporate income taxes, as well as dissimilarities in the culture, language and laws. To make the problem more tangible, just 2 examples about duties, which is often higher on finished products rather than components or semi-finished products. In a first example, I refer to a stereo turntable. When entering the European Union, it can be subject to duties equal to 2% of the customs value. Yet, the stylus, which is a value item, might be imported free of charge. Importing the stylus separately, and fixing it after import, would reduce overall import cost. In a second example, a well-known car manufacturer decided to adopt Completely Knocked Down assembly in some markets. This meant that car parts were imported in a given destination market, where the final car was assembled. This decision was driven by the overall sales (vehicles per year), but mainly by the difference in customs duties between completed vehicles and parts/components, which brought to the car manufacturer huge yearly savings. Given this broad landscape, an immediate effect is the increase in uncertainty when conducting global operations. And, since the 1950’s, an appealing option for tackling uncertainty is postponement. You will surely think “Come on! Postponement? It’s old!”.

And you are actually right. Postponement is surely a well-known organizational concept. It usually relates to the deferment in time of manufacturing and/or logistics operations. Therefore, it determines when adding value with respect to customers’ orders (and referring to many activities, e.g., assembly, packaging, or labeling).

However, due to differences in government regulations, customs tariffs, and international trade agreements, where performing operations (and so where value is added) can be highly important in global distribution. Companies could design postponement strategies to customize the product in the market region, instead of centrally at the factory, to take advantage of customs regimes or tax incentives. Specifically, defining what portion of the product is to be assembled at the factory, and what in the distribution network has been termed as the postponement boundary problem by prof. Hau Lee (you surely know him, he discussed the bullwhip effect in supply chains in 1997!). This means that a spatial perspective must also be taken into account when designing global postponement strategies, alongside the conventional temporal perspective.

With increasing protectionist laws and the erection of trade barriers between nations, new challenges are ahead for both scholars and practitioners. This turbulent and uncertain landscape calls for further exploration, and this is actually the research stream where I am mostly involved (also because relevant environmental implications can raise from performing operations in one location or another!).

Of course, as any other scholar, I did not start a totally new theoretical conversation. I already mentioned prof. Lee, but another leading scholar that deeply influenced my research path so far is prof. Andreas Norrman, from Lund University (Sweden). When I was a MSc. thesis student, I fell in love with his studies about developing the interface between the logistics/supply chain domain, and the fiscal one. Incredibly, from September 2018 to February 2019 I had the opportunity to visit Andreas as Guest Researcher in Lund! This was an awesome experience and, also, this is where Albachiara and I met. But this is another story…

See you soon!

Lorenzo

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