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A Point of View
By Tom Tiede and Kay Ree Lee
A Point of View
WA OR ID
MT
ND SD WY CO MN WI MI IA VT ME NH NY MA RI CT PANJ DE MD DC VA NC
WA OR ID
MT
ND SD WY CO MN WI MI IN OH KY WV TN AR IA VT ME NH NY MA RI CT PANJ DE MD DC VA NC
UT
NE
CA
NV
KS MO OK
IL IN OH
KY WV TN
UT
NE
NV CA
IL KS MO OK
NM AZ
AR
NM AZ
GA SC
FL
GA SC
FL
MS AL TX LA TX
MS AL LA
In the example, demand fulfilled from facilities in GA and NV will lower the overall tax burden for Acme Corporation. Throwback rules on nowhere income are avoided. And, the NV facility avoids all corporate income tax on product distribution. But, is this the optimal strategy? Perhaps not; other factors, such as the impact on service, certainly need to be evaluated. Here are a few questions to consider in designing a tax efficient distribution network: In what states do you have nexus? Can you effectively move payroll and assets elsewhere to change nexus status? In what states are you the most vulnerable to taxation? What are the service requirements to customers in these states? Distribution from what other states could service these requirements? What are the tax laws in each of these alternative states of distribution? In these states, what bills are being considered that may alter current tax laws? Can you shift distribution of higher profit products to a facility in a lower tax state? Does the benefit of relocating to a less tax-burdensome state outweigh the associated costs and impact on service? Service Level Generally, there is a cost-service tradeoff between providing exceptional service to customers and the costs associated with that service. But, improving service does not always mean increasing costs. For example, opening an additional distribution center to improve service in a particular region of the country may yield freight, tax or other savings that offset or surpass the additional cost for warehousing. Service requirements can be met from an array of alternative network designs. The illustrative example matrix below is an effective way of visualizing the cost-service tradeoff associated with different what-if scenarios. It depicts the sum of costs of each alternative vs. the service level provided by the overall network.
A Point of View
3 Facility Alternatives R, C, O R, C, S A, C, S A, S R, S Legend A: Atlanta, GA C: Chicago, IL O: Oakland, CA S: Sparks, NV R: Richmond, VA Low 2 Facility Alternatives
Low High
Customer Service e
An optimal network design requires a clear definition of service expectations. Once defined, they become a stake in the ground from which further analysis can be performed and decisions made. Using the example, both 2 Facility alternatives may be quickly eliminated from further consideration if service expectations require a capability on the left side of the matrix. Other Decision Variables In addition to cost, taxes, and service level, other, less quantifiable decision variables play an equally important role in the design of a network strategy. Among them include: Growth Plans Acquisition Plans Local Government Incentives Availability of Warehousing Local Labor Pool Access to Carriers Proximity to Strategic Customers Bandwidth for Change Executive Preference Growth Plans Are you designing for the past or the future? How far into the future? Traditional network modeling is dependent on historical data - primarily sales order history and freight history. After much effort to collect, cleanse, organize, and analyze historical data, a skilled modeler with a capable optimization tool can design the ideal network for yesterdays needs. But, how well does the past represent the future? The optimal network strategy must focus on future needs, not the past. The network design must support planned growth, generally for the next 5 to 7 years. In simple terms, distribution facilities must be positioned to accommodate new customers and new service requirements in each geographic market, and each facility must have the flexibility to accommodate this growth. This may require locating facilities in areas other than what might be suggested by a centroid analysis and sizing them such that increased storage and throughout volume can be accommodated via expansion or other means. This may also mean equipping facilities with far less steel and automation than ideal for past needs. Acquisition Plans Acquisitions are often a major part of an organizations growth strategy. Rarely does an acquisition fail to create a need to re-align the distribution network. Redundant geographic
A Point of View
A Point of View
A Point of View