Global Supply Chain Planning:<br />Impact of International Taxation and <br />Transfer Pricing<br />Masha Shunko<br />Comm...
Agenda<br />Motivation<br />Transfer Pricing 101<br />Thesis objectives<br />3 Essays<br />Proposed work<br />2<br />
Motivation<br />3<br />e<br />
Motivation<br />4<br />e<br />
Motivation<br />5<br />e<br />
Motivation<br />6<br />e<br />
Motivation<br />7<br />
Transfer pricing 101<br />8<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />M...
Transfer pricing 101<br />9<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$...
Transfer pricing 101<br />10<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />...
Transfer pricing 101<br />11<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />...
Transfer pricing 101<br />12<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />...
Transfer pricing 101<br />13<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />...
Transfer pricing 101<br />14<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />...
Transfer pricing  Legal background<br />Flexibility of Transfer Pricing Rules (§1.482 IRC)<br />Cost based methods <br />R...
Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />16<...
Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unr...
Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unr...
Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unr...
Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<...
Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<...
Tax: income shifting;</li></ul>$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,...
Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<...
Tax: income shifting;
Incentive: divisional performance.</li></ul>$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> T...
Transfer priceIncentive = Tax ?<br />Halperin<br />Chechowitz (1980)<br />23<br />
Literature review<br />Accounting<br />Transfer pricing models: Hirshleifer (1956), Horst (1972), Copithorne (1971), Hoffm...
Thesis research objective<br />Study the impact of tax considerations on the transfer pricing and operational decisions of...
Thesis research objective<br />Study the impact of tax considerations on the transfer pricing and operational decisions of...
27<br />Essay 1: Role of Transfer Prices in Global Supply Chains with Random Demands<br />Masha Shunko<br />Joint work wit...
Essay 1: Research objective<br />What is the impact of optimizing transfer prices on the global supply chain performance o...
Essay 1: Supply Chain Model<br />29<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Supply Chain Model<br />30<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Supply Chain Model<br />31<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Supply Chain Model<br />32<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Supply Chain Model<br />33<br />Headquarters<br />Local selling division<br />t, cO, cU<br />Foreign producing di...
Essay 1: Supply Chain Model<br />34<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Supply Chain Model<br />35<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<b...
Essay 1: Timeline<br />36<br />Stage 1: HQ sets the transfer price T<br />Stage 2:Selling division sets selling price P an...
Essay 1: Timeline<br />37<br />Stage 1: HQ sets the transfer price T<br />Stage 2:Selling division sets selling price P an...
Essay 1: Stochastic vs. Deterministic <br />38<br />
Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />39<br />
Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Deterministic<br />40<br />
Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Deterministic<br />Optimal Profit<br />41...
Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Profit Improvement:<br />Deterministic<br...
Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Profit Improvement:<br />Deterministic<br...
Essay 1: Why                ? <br />44<br />
Essay 1: Why                ? <br />Selling price effect:<br />45<br />
Essay 1: Why                ? <br />Selling price effect:<br />46<br />
Essay 1: Why                ? <br />Selling price effect:<br />47<br />
Essay 1: Why                ? <br />Selling price effect:<br />48<br />
Essay 1: Conclusions<br />Supply chains facing random demand achieve more benefit from optimizing transfer pricing<br />Th...
50<br />Essay 2: Transfer Pricing and Offshoring in Global Supply Chains with Cost Uncertainty<br />Masha Shunko<br />Join...
Essay 2: Research objectives<br />What are the optimal pricing, sourcing, and transfer pricing strategies of global firms ...
Essay 2: Global Supply Chain<br />52<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<...
Essay 2: Global Supply Chain<br />53<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<...
Essay 2: Global Supply Chain<br />54<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<...
Essay 2: Global Supply Chain<br />55<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<...
Essay 2: Global Supply Chain<br />56<br />Headquarters<br />Information asymmetry<br />Local selling division<br />t<br />...
Essay 2: Global Supply Chain<br />57<br />Headquarters<br />Information asymmetry<br />Local selling division<br />t<br />...
Essay 2: Organizational structures<br />58<br />
Essay 2: Organizational structures<br />59<br />
Essay 2: Modeling details<br />Cost for the local division<br />=<br />Revenue for the foreign division<br />Consolidated ...
Essay 2: Centralized model<br /><ul><li>Profit function for the headquarters is linear in the external cost, hence:</li></...
Essay 2: Centralized modelOptimal Solution<br />1.Offshoring policy: all-or-nothing<br />2. Tax advantage  offshore earli...
Essay 2: Centralized ModelTradeoff Curve<br />Local tax rate<br />C: No offshoring<br />Foreign cost<br />B: Full offshori...
Essay 2: Decentralized pricing<br />64<br />
Essay 2: Decentralized pricingOffshoring solution<br /><ul><li>Ignore legal constraints…</li></ul>Profit<br />Transfer Pri...
Essay 2: Decentralized pricingPartial offshoring solution<br />But there are legal bounds on T…<br />Profit<br />Offshorin...
Essay 2: What is the best organizational structure?<br />Low tax differential, high coefficient of variation<br />Fixed pa...
Essay 2: Conclusions<br />Tradeoff curve<br />Tax benefits lead to <br />More full offshoring for centralized supply chain...
69<br />Essay 3: Transfer Pricing and Sourcing Strategies in Global Supply Chains Facing Cost and Exchange Rate Uncertaint...
Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />70<br />
Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />What strate...
Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />What strate...
Essay 3: Global Supply Chain<br />73<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />74<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />75<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />76<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />77<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />78<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />79<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />80<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Global Supply Chain<br />81<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing divisi...
Essay 3: Decentralized Supply ChainTimeline<br />82<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<...
Essay 3: Decentralized Supply ChainModel<br />83<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br ...
Essay 3: Decentralized Supply ChainModel<br />84<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br ...
Essay 3: Decentralized Supply ChainModel<br />85<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br ...
Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />86...
Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />87...
Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />88...
Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Lo...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />90<br />HQ profit<br />Expe...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />91<br />Outsourcing is alwa...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />92<br />Outsourcing is alwa...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />93<br />Sourcing strategy d...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantag...
Essay 3: Decentralized Supply ChainBut… can we do better?<br />Outsource (offshore) when cost is low (high)<br />Transfer ...
Essay 3: Decentralized Flex-GSCTimeline<br />102<br />Stage 1: HQ makes flexibility investment (x) and sets contract with ...
Essay 3: Decentralized Flex-GSCLocal profit<br />103<br />Headquarters<br />Local selling division<br />p, t<br />Foreign ...
Essay 3: Decentralized Flex-GSCForeign profit<br />104<br />Headquarters<br />Local selling division<br />p, t<br />Foreig...
Essay 3: Decentralized Flex-GSCHQ after-tax profit<br />105<br />Headquarters<br />Local selling division<br />p, t<br />F...
Essay 3: Decentralized Flex-GSCOptimization model<br />106<br />Stage 1: HQ makes flexibility investment (x) and sets cont...
Essay 3: Decentralized Flex-GSCOptimization model<br />Stage 1: HQ makes flexibility investment (x) and sets contract with...
Essay 3: Decentralized Flex-GSCOptimization model<br />Stage 1: HQ makes flexibility investment (x) and sets contract with...
Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />109<br />
Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Relaxi...
Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Relaxi...
<ul><li>Outsource (offshore) when cost is low (high)
Transfer price:</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br />Relaxing incentive constraints…<...
<ul><li>Outsource (offshore) when cost is low (high)
Transfer price:
As cost of flexibility increases, profit decreases</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br...
<ul><li>Outsource (offshore) when cost is low (high)
Transfer price:
As cost of flexibility increases, profit decreases
How much flexibility do we need?</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br />Relaxing incent...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br />F...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br />F...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><...
<ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><...
Essay 3: Decentralized Flex-GSC vs.Centralized GSC<br />122<br />
No tax advantage:<br />A: Centralized GSC > Decentralized Flex-GSC<br />Essay 3: Decentralized Flex-GSC vs.Centralized GSC...
No tax advantage:<br />A: Centralized GSC > Decentralized Flex-GSC<br />C: Decentralized Flex-GSC > Centralized GSC<br />E...
With tax advantage:<br />A & B: Centralized GSC > Decentralized Flex-GSC<br />C: Decentralized Flex-GSC > Centralized GSC<...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />126<br />
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax...
Proposal<br />Incorporate flexibility in the form of postponement of the sourcing decision into Essay 3<br />Do pair-wise ...
Thank you !<br />134<br />
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Proposal

  1. 1. Global Supply Chain Planning:<br />Impact of International Taxation and <br />Transfer Pricing<br />Masha Shunko<br />Committee members: <br />Alan Scheller-Wolf<br />Srinagesh Gavirneni<br />Laurens Debo<br />Lin Nan<br />
  2. 2. Agenda<br />Motivation<br />Transfer Pricing 101<br />Thesis objectives<br />3 Essays<br />Proposed work<br />2<br />
  3. 3. Motivation<br />3<br />e<br />
  4. 4. Motivation<br />4<br />e<br />
  5. 5. Motivation<br />5<br />e<br />
  6. 6. Motivation<br />6<br />e<br />
  7. 7. Motivation<br />7<br />
  8. 8. Transfer pricing 101<br />8<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />
  9. 9. Transfer pricing 101<br />9<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />
  10. 10. Transfer pricing 101<br />10<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />$10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />
  11. 11. Transfer pricing 101<br />11<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />$10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />
  12. 12. Transfer pricing 101<br />12<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />$10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$7,000<br />
  13. 13. Transfer pricing 101<br />13<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Selling division, USA; <br />Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />?<br />$10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$7,000<br />
  14. 14. Transfer pricing 101<br />14<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Selling division, USA; <br />Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$10,000<br />$7,000<br />$10,000<br />
  15. 15. Transfer pricing Legal background<br />Flexibility of Transfer Pricing Rules (§1.482 IRC)<br />Cost based methods <br />Retail price methods <br />Profit split method<br />Negotiated method<br />Alternate methods<br />“Best method”<br />15<br />
  16. 16. Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />16<br />
  17. 17. Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unrepatriated profits: <br />17<br />
  18. 18. Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unrepatriated profits: <br />18<br />* Wall Street Journal, April 22nd, 2009 “Titans Vow Overseas – Tax Fight”<br />
  19. 19. Transfer pricing Legal background<br />Repatriation of profit<br />Residence based taxation, deferral of taxation<br />Unrepatriated profits: <br />General Electric** average tax rate reduction over 2008-2010 is 30.2 <br />19<br />* Wall Street Journal, April 22nd, 2009 “Titans Vow Overseas – Tax Fight”<br />
  20. 20. Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Selling division, USA; <br />Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$10,000<br />$7,000<br />$10,000<br />20<br />
  21. 21. Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Selling division, USA; <br />Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br /><ul><li>Transfer price has two roles:
  22. 22. Tax: income shifting;</li></ul>$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$10,000<br />$7,000<br />$10,000<br />21<br />
  23. 23. Transfer pricing Incentive issues<br />Selling division, USA; Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br />Selling division, USA; <br />Tax rate = 30%, <br />Sales price = $20,<br />Demand = 1000<br /><ul><li>Transfer price has two roles:
  24. 24. Tax: income shifting;
  25. 25. Incentive: divisional performance.</li></ul>$7,000<br />$0<br />$10<br />$20<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />Manufacturing division, Estonia;<br /> Tax rate = 0%,<br /> Cost = $10<br />$0<br />$10,000<br />$7,000<br />$10,000<br />22<br />
  26. 26. Transfer priceIncentive = Tax ?<br />Halperin<br />Chechowitz (1980)<br />23<br />
  27. 27. Literature review<br />Accounting<br />Transfer pricing models: Hirshleifer (1956), Horst (1972), Copithorne (1971), Hoffman (2001), Baldenius and Reichelstein (2006)<br />Offshoring: Altshuler et al. (2001), Desai and Hines (2003), Clausing (2005)<br />Operations Management<br />Global sourcing: Kogut and Kulatilaka (1994), Kouvelis (1999)<br />Global supply chain logistics: Vidal and Goetschalkcx (2001), Nieckels (1976), Cohen et al. (1989)<br />Transfer pricing: Huh and Park (2008)<br />24<br />
  28. 28. Thesis research objective<br />Study the impact of tax considerations on the transfer pricing and operational decisions of global supply chains facing different sources of uncertainty<br />25<br />
  29. 29. Thesis research objective<br />Study the impact of tax considerations on the transfer pricing and operational decisions of global supply chains facing different sources of uncertainty<br />26<br />
  30. 30. 27<br />Essay 1: Role of Transfer Prices in Global Supply Chains with Random Demands<br />Masha Shunko<br />Joint work with:<br />Srinagesh Gavirneni, The Johnson School, Cornell University<br />Published at: Journal of Industrial and Management Optimization, Volume 3, Number 1, February 2007, Pages 99 - 117<br />
  31. 31. Essay 1: Research objective<br />What is the impact of optimizing transfer prices on the global supply chain performance of a price-setting firm facing random demand?<br />28<br />
  32. 32. Essay 1: Supply Chain Model<br />29<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Decision variables<br />Random variables<br />Parameters<br />
  33. 33. Essay 1: Supply Chain Model<br />30<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />P<br />D(P, ²)<br />Decision variables<br />Random variables<br />Parameters<br />
  34. 34. Essay 1: Supply Chain Model<br />31<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />P<br />D(P, ²)<br />D(P)=a - b P + ²<br />Decision variables<br />Random variables<br />Parameters<br />
  35. 35. Essay 1: Supply Chain Model<br />32<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Q at T<br />P<br />D(P, ²)<br />D(P)=a - b P + ²<br />Decision variables<br />Random variables<br />Parameters<br />
  36. 36. Essay 1: Supply Chain Model<br />33<br />Headquarters<br />Local selling division<br />t, cO, cU<br />Foreign producing division<br />c, ¿<br />Q at T<br />P<br />D(P, ²)<br />Decision variables<br />Random variables<br />Parameters<br />
  37. 37. Essay 1: Supply Chain Model<br />34<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Q at T<br />P<br />D(P, ²)<br />Decision variables<br />Random variables<br />Parameters<br />
  38. 38. Essay 1: Supply Chain Model<br />35<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Q at T<br />P<br />D(P, ²)<br />Decision variables<br />Random variables<br />Parameters<br />
  39. 39. Essay 1: Timeline<br />36<br />Stage 1: HQ sets the transfer price T<br />Stage 2:Selling division sets selling price P and ordering quantity Q<br />Decision variables<br />Random variables<br />Parameters<br />
  40. 40. Essay 1: Timeline<br />37<br />Stage 1: HQ sets the transfer price T<br />Stage 2:Selling division sets selling price P and ordering quantity Q<br />Decision variables<br />Random variables<br />Parameters<br />
  41. 41. Essay 1: Stochastic vs. Deterministic <br />38<br />
  42. 42. Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />39<br />
  43. 43. Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Deterministic<br />40<br />
  44. 44. Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Deterministic<br />Optimal Profit<br />41<br />
  45. 45. Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Profit Improvement:<br />Deterministic<br />Optimal Profit<br />Profit Improvement:<br />42<br />
  46. 46. Essay 1: Stochastic vs. Deterministic <br />Stochastic<br />Optimal Profit:<br />Profit Improvement:<br />Deterministic<br />Optimal Profit<br />Profit Improvement:<br />43<br />
  47. 47. Essay 1: Why ? <br />44<br />
  48. 48. Essay 1: Why ? <br />Selling price effect:<br />45<br />
  49. 49. Essay 1: Why ? <br />Selling price effect:<br />46<br />
  50. 50. Essay 1: Why ? <br />Selling price effect:<br />47<br />
  51. 51. Essay 1: Why ? <br />Selling price effect:<br />48<br />
  52. 52. Essay 1: Conclusions<br />Supply chains facing random demand achieve more benefit from optimizing transfer pricing<br />The effects is highest for supply chains with:<br />Low customer base<br />High price elasticity<br />High demand variability<br />49<br />
  53. 53. 50<br />Essay 2: Transfer Pricing and Offshoring in Global Supply Chains with Cost Uncertainty<br />Masha Shunko<br />Joint work with:<br />Laurens Debo, Booth School of Business, University of Chicago<br />Srinagesh Gavirneni, The Johnson School, Cornell University<br />Award: POMS Best Student Paper Award, May 2009<br />
  54. 54. Essay 2: Research objectives<br />What are the optimal pricing, sourcing, and transfer pricing strategies of global firms that face different tax rates and uncertain production costs at various business locations? <br />How does organizational structure affect the sourcing and transfer pricing strategies of the global firm? <br />51<br />
  55. 55. Essay 2: Global Supply Chain<br />52<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />P<br />D(P)=a–bP<br />Decision variables<br />Random variables<br />Parameters<br />
  56. 56. Essay 2: Global Supply Chain<br />53<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />P<br />D(P)=a–bP<br />External supplier<br />cE<br />Decision variables<br />Random variables<br />Parameters<br />
  57. 57. Essay 2: Global Supply Chain<br />54<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Offshore:<br />D(P) (1-¸)<br />P<br />D(P)=a–bP<br />Outsource: D(P) ¸<br />External supplier<br />cE<br />Decision variables<br />Random variables<br />Parameters<br />
  58. 58. Essay 2: Global Supply Chain<br />55<br />Headquarters<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Offshore:<br />D(P) (1-¸)<br />P<br />D(P)=a–bP<br />Outsource: D(P) ¸<br />External supplier<br />cE<br />Decision variables<br />Random variables<br />Parameters<br />
  59. 59. Essay 2: Global Supply Chain<br />56<br />Headquarters<br />Information asymmetry<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Offshore:<br />D(P) (1-¸)<br />P<br />D(P)=a–bP<br />Outsource: D(P) ¸<br />External supplier<br />cE<br />Decision variables<br />Random variables<br />Parameters<br />
  60. 60. Essay 2: Global Supply Chain<br />57<br />Headquarters<br />Information asymmetry<br />Local selling division<br />t<br />Foreign producing division<br />c, ¿<br />Offshore:<br />D(P) (1-¸)<br />P<br />D(P)=a–bP<br />Two point distribution:<br />Outsource: D(P) ¸<br />External supplier<br />cE<br />Decision variables<br />Random variables<br />Parameters<br />
  61. 61. Essay 2: Organizational structures<br />58<br />
  62. 62. Essay 2: Organizational structures<br />59<br />
  63. 63. Essay 2: Modeling details<br />Cost for the local division<br />=<br />Revenue for the foreign division<br />Consolidated profit<br />Comply with legal rules<br />60<br />
  64. 64. Essay 2: Centralized model<br /><ul><li>Profit function for the headquarters is linear in the external cost, hence:</li></ul>61<br />
  65. 65. Essay 2: Centralized modelOptimal Solution<br />1.Offshoring policy: all-or-nothing<br />2. Tax advantage  offshore earlier<br />3. Full offshoring  T at upper bound<br /><ul><li>Parameters:» =4, b=1, t=0.4, c =1, ®=0.9, ¿ = 0.4 (no TA) or ¿ = 0 (TA)</li></ul>Profit<br />No offshoring<br />Tax advantage<br />Full offshoring<br />No tax advantage<br />Average external cost<br />Foreign cost<br />62<br />
  66. 66. Essay 2: Centralized ModelTradeoff Curve<br />Local tax rate<br />C: No offshoring<br />Foreign cost<br />B: Full offshoring<br />A: Full offshoring<br />Avg external cost<br />Foreign tax rate<br />Parameters:» =1, b=0.1, t=0.35, cE =0.5, and ® = 0.5<br />63<br />
  67. 67. Essay 2: Decentralized pricing<br />64<br />
  68. 68. Essay 2: Decentralized pricingOffshoring solution<br /><ul><li>Ignore legal constraints…</li></ul>Profit<br />Transfer Price<br />Offshoring<br />Offshoring<br /> Parameters: ¹=0.4; »=1; b=0.4; t=0.35; ¿=0.2; c = 0.41; ®=1; CV=1;<br />65<br />
  69. 69. Essay 2: Decentralized pricingPartial offshoring solution<br />But there are legal bounds on T…<br />Profit<br />Offshoring<br />T(¸)<® P(T(¸),¸)<br />T(¸)=®P(T(¸),¸)<br />Partial offshoring solution<br /> Parameters: ¹=0.4; »=1; b=0.4; t=0.35; ¿=0.2; c = 0.41; ®=1; CV=1;<br />66<br />
  70. 70. Essay 2: What is the best organizational structure?<br />Low tax differential, high coefficient of variation<br />Fixed parameters:<br />Foreign tax rate = 35%<br />Local tax rate >= 30%<br />CV=1<br />67<br />67<br />
  71. 71. Essay 2: Conclusions<br />Tradeoff curve<br />Tax benefits lead to <br />More full offshoring for centralized supply chains<br />Partial offshoring for decentralized supply chains<br />Optimal supply chain structure depends on the expected cost advantage <br />68<br />
  72. 72. 69<br />Essay 3: Transfer Pricing and Sourcing Strategies in Global Supply Chains Facing Cost and Exchange Rate Uncertainty<br />Masha Shunko<br />Joint work with:<br />Laurens Debo, Booth School of Business, University of Chicago<br />Srinagesh Gavirneni, The Johnson School, Cornell University<br />
  73. 73. Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />70<br />
  74. 74. Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />What strategies can supply chains use to facilitate global sourcing decisions under cost and exchange rate uncertainty?<br />71<br />
  75. 75. Essay 3: Research objectives<br />How does the foreign tax advantage impact the global sourcing decision?<br />What strategies can supply chains use to facilitate global sourcing decisions under cost and exchange rate uncertainty?<br />Decentralization strategy<br />Flexibility strategy<br />72<br />
  76. 76. Essay 3: Global Supply Chain<br />73<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Decision variables<br />Random variables<br />Parameters<br />
  77. 77. Essay 3: Global Supply Chain<br />74<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  78. 78. Essay 3: Global Supply Chain<br />75<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  79. 79. Essay 3: Global Supply Chain<br />76<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Two point distributions:<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  80. 80. Essay 3: Global Supply Chain<br />77<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Two point distributions:<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  81. 81. Essay 3: Global Supply Chain<br />78<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer atT<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  82. 82. Essay 3: Global Supply Chain<br />79<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  83. 83. Essay 3: Global Supply Chain<br />80<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  84. 84. Essay 3: Global Supply Chain<br />81<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  85. 85. Essay 3: Decentralized Supply ChainTimeline<br />82<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br />Stage 2: LD makes the sourcing decision<br />θ<br />e, θ<br />LD<br />HQ<br />Decision variables<br />Random variables<br />Parameters<br />
  86. 86. Essay 3: Decentralized Supply ChainModel<br />83<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br />Stage 2: LD makes the sourcing decision<br />θ<br />e, θ<br />LD<br />HQ<br />Stage 1:<br />Decision variables<br />Random variables<br />Parameters<br />
  87. 87. Essay 3: Decentralized Supply ChainModel<br />84<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br />Stage 2: LD makes the sourcing decision<br />θ<br />e, θ<br />LD<br />HQ<br />Stage 1:<br />Stage 2:<br />Decision variables<br />Random variables<br />Parameters<br />
  88. 88. Essay 3: Decentralized Supply ChainModel<br />85<br />Stage 1: HQ sets the transfer price (TF) and offers it to the LD<br />Stage 2: LD makes the sourcing decision<br />θ<br />e, θ<br />LD<br />HQ<br />Incentive constraints<br />Stage 1:<br />Stage 2:<br />Decision variables<br />Random variables<br />Parameters<br />
  89. 89. Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />86<br />
  90. 90. Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />87<br />HQ profit<br />Expected outsourcing cost<br />
  91. 91. Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />88<br />Relaxing incentive constraints…<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />
  92. 92. Essay 3: Decentralized Supply ChainSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Look at the brown line…<br />89<br />Relaxing incentive constraints…<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />
  93. 93. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />90<br />HQ profit<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />
  94. 94. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />91<br />Outsourcing is always better<br />HQ profit<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />
  95. 95. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />92<br />Outsourcing is always better<br />Offshoring is always better<br />HQ profit<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />
  96. 96. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />93<br />Sourcing strategy depends <br />on the realization<br />HQ profit<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />
  97. 97. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />94<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  98. 98. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />95<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  99. 99. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />96<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  100. 100. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />97<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  101. 101. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />98<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  102. 102. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />99<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  103. 103. Essay 3: Decentralized Supply ChainImpact on Profit<br />HQ profit without tax advantage:<br />HQ profit with tax advantage:<br />100<br />HQ profit<br />HQ profit<br />Expected outsourcing cost<br />Expected outsourcing cost<br />Parameters: ¿= 0.2, t = 0.2 ® = 1, p = 1.5, Á = 0.5, ¾µ = 0.1, c = 1<br />Parameters: ¿= 0,t = 0.2, ® = 1, p = 1.5, Á= 0:5, ¾µ= 0.1, c=1<br />
  104. 104. Essay 3: Decentralized Supply ChainBut… can we do better?<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />101<br />Relaxing incentive constraints…<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />
  105. 105. Essay 3: Decentralized Flex-GSCTimeline<br />102<br />Stage 1: HQ makes flexibility investment (x) and sets contract with LD (TO,TF)<br />Stage 2: LD chooses a transfer price from the contract and makes sourcing decision for non-flexible proportion (1-x)<br />Stage 3: HQ makes sourcing decision for the flexible proportion x<br />θ<br />e, θ<br />LD<br />HQ<br />Decision variables<br />Random variables<br />Parameters<br />
  106. 106. Essay 3: Decentralized Flex-GSCLocal profit<br />103<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  107. 107. Essay 3: Decentralized Flex-GSCForeign profit<br />104<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  108. 108. Essay 3: Decentralized Flex-GSCHQ after-tax profit<br />105<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  109. 109. Essay 3: Decentralized Flex-GSCOptimization model<br />106<br />Stage 1: HQ makes flexibility investment (x) and sets contract with LD (TO,TF)<br />Stage 2: LD chooses a transfer price from the contract and makes sourcing decision for non-flexible proportion (1-x)<br />Stage 3: HQ makes sourcing decision for the flexible proportion x<br />θ<br />e, θ<br />LD<br />HQ<br />Stage 1:<br />
  110. 110. Essay 3: Decentralized Flex-GSCOptimization model<br />Stage 1: HQ makes flexibility investment (x) and sets contract with LD (TO,TF)<br />Stage 2: LD chooses a transfer price from the contract and makes sourcing decision for non-flexible proportion (1-x)<br />Stage 3: HQ makes sourcing decision for the flexible proportion x<br />θ<br />e, θ<br />LD<br />HQ<br />Stage 1:<br />Stage 2:<br />107<br />
  111. 111. Essay 3: Decentralized Flex-GSCOptimization model<br />Stage 1: HQ makes flexibility investment (x) and sets contract with LD (TO,TF)<br />Stage 2: LD chooses a transfer price from the contract and makes sourcing decision for non-flexible proportion (1-x)<br />Stage 3: HQ makes sourcing decision for the flexible proportion x<br />θ<br />e, θ<br />LD<br />HQ<br />Stage 1:<br />Stage 2:<br />Stage 3:<br />108<br />
  112. 112. Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />109<br />
  113. 113. Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Relaxing incentive constraints…<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />110<br />
  114. 114. Essay 3: Decentralized Flex-GSCSolution<br />Outsource (offshore) when cost is low (high)<br />Transfer price:<br />Relaxing incentive constraints…<br />Adding flexibility<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />111<br />
  115. 115. <ul><li>Outsource (offshore) when cost is low (high)
  116. 116. Transfer price:</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br />Relaxing incentive constraints…<br />Adding flexibility<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />112<br />
  117. 117. <ul><li>Outsource (offshore) when cost is low (high)
  118. 118. Transfer price:
  119. 119. As cost of flexibility increases, profit decreases</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br />Relaxing incentive constraints…<br />Adding flexibility<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />113<br />
  120. 120. <ul><li>Outsource (offshore) when cost is low (high)
  121. 121. Transfer price:
  122. 122. As cost of flexibility increases, profit decreases
  123. 123. How much flexibility do we need?</li></ul>Essay 3: Decentralized Flex-GSCBut… flexibility is not free<br />Relaxing incentive constraints…<br />Adding flexibility<br />HQ profit<br />With incentive constraints…<br />Expected outsourcing cost<br />114<br />
  124. 124. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />115<br />
  125. 125. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />116<br />
  126. 126. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><ul><li>Flexibility investment with tax advantage:</li></ul>Flexibility investment<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />Parameters: ¿= 0, t = 0.35, ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c=1;<br />117<br />
  127. 127. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><ul><li>Flexibility investment with tax advantage:</li></ul>Flexibility investment<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />Parameters: ¿= 0, t = 0.35, ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c=1;<br />118<br />
  128. 128. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><ul><li>Flexibility investment with tax advantage:</li></ul>Flexibility investment<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />Parameters: ¿= 0, t = 0.35, ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c=1;<br />119<br />
  129. 129. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><ul><li>Flexibility investment with tax advantage:</li></ul>Flexibility investment<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />Parameters: ¿= 0, t = 0.35, ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c=1;<br />120<br />
  130. 130. <ul><li>Flexibility investment without tax advantage:</li></ul>Essay 3: Decentralized Flex-GSCImpact of variability<br /><ul><li>Flexibility investment with tax advantage:</li></ul>Flexibility investment<br />Flexibility investment<br />Flexibility investment<br />Outsourcing cost variability<br />Outsourcing cost variability<br />Parameters: ¿= 0, t = 0 ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c = 1.<br />Parameters: ¿= 0, t = 0.35, ® = 1, p = 1.5, Á= 0:5, ¹µ = 1, c=1;<br />121<br />
  131. 131. Essay 3: Decentralized Flex-GSC vs.Centralized GSC<br />122<br />
  132. 132. No tax advantage:<br />A: Centralized GSC > Decentralized Flex-GSC<br />Essay 3: Decentralized Flex-GSC vs.Centralized GSC<br />C<br />Outsourcing cost variability<br />A<br />Expected foreign cost<br />Parameters: ¿ = 0:1, t=0.1, ®= 0.8, p = 2, Á = 0:5, » =0.5, ¹µ = 1, ¾e= 0:4<br />123<br />
  133. 133. No tax advantage:<br />A: Centralized GSC > Decentralized Flex-GSC<br />C: Decentralized Flex-GSC > Centralized GSC<br />Essay 3: Decentralized Flex-GSC vs.Centralized GSC<br />C<br />Outsourcing cost variability<br />A<br />Expected foreign cost<br />Parameters: ¿ = 0:1, t=0.1, ®= 0.8, p = 2, Á = 0:5, » =0.5, ¹µ = 1, ¾e= 0:4<br />124<br />
  134. 134. With tax advantage:<br />A & B: Centralized GSC > Decentralized Flex-GSC<br />C: Decentralized Flex-GSC > Centralized GSC<br />Essay 3: Decentralized Flex-GSC vs.Centralized GSC<br />Outsourcing cost variability<br />Expected foreign cost<br />Parameters: ¿ = 0:1, t=0.1, ®= 0.8, p = 2, Á = 0:5, » =0.5, ¹µ = 1, ¾e= 0:4<br />125<br />
  135. 135. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />126<br />
  136. 136. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />127<br />
  137. 137. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />Incentive role pushes the transfer price down;<br />128<br />
  138. 138. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />Incentive role pushes the transfer price down;<br />Higher outsourcing cost can be profitable for the firm.<br />129<br />
  139. 139. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />Incentive role pushes the transfer price down;<br />Higher outsourcing cost can be profitable for the firm.<br />Flexibility loosens the incentive constraint on the transfer price and leads to higher tax benefits;<br />130<br />
  140. 140. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />Incentive role pushes the transfer price down;<br />Higher outsourcing cost can be profitable for the firm.<br />Flexibility loosens the incentive constraint on the transfer price and leads to higher tax benefits;<br />Flexibility is helpful when the cost variability is low.<br />131<br />
  141. 141. Essay 3: Conclusions<br />Incorporate tax perspective into global SCM;<br />Dual role of transfer price: incentive and tax;<br />Incentive role pushes the transfer price down;<br />Higher outsourcing cost can be profitable for the firm.<br />Flexibility loosens the incentive constraint on the transfer price and leads to higher tax benefits;<br />Flexibility is helpful when the cost variability is low.<br />Tax benefits make the centralized control optimal in more cases.<br />132<br />
  142. 142. Proposal<br />Incorporate flexibility in the form of postponement of the sourcing decision into Essay 3<br />Do pair-wise comparisons of decentralized structures<br />Show the effect of exchange rate variability on the aforementioned comparisons<br />133<br />
  143. 143. Thank you !<br />134<br />
  144. 144. BACK-UP SLIDES…<br />135<br />
  145. 145. Why is it important for global SCM?<br />What other factors are important for the global sourcing decision? <br />Cost<br />Exchange rate<br />Demand<br />Lead times<br />Tariffs<br />Availability<br />Political stability<br />Local content rules<br />Import quotas and tariffs<br />…<br />136<br />
  146. 146. Decentralized Flex-GSCLocal profit<br />137<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  147. 147. Decentralized Flex-GSCForeign profit<br />138<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  148. 148. Decentralized Flex-GSCHQ after-tax profit<br />139<br />Headquarters<br />Local selling division<br />p, t<br />Foreign producing division<br />c e, ¿<br />Offshore<br />Transfer at T<br />Outsource <br />External supplier<br />θ<br />Decision variables<br />Random variables<br />Parameters<br />
  149. 149. Research overview<br />Shunko M., L. Debo, S. Gavirneni “Transfer Pricing and Sourcing Strategies in Global Supply Chains”;<br />Shunko M., L. Debo, S. Gavirneni “Transfer Pricing and Offshoring in Price-Setting Global Supply Chains with Cost Uncertainty”;<br />Shunko M., S. Gavirneni “Role of Transfer Prices in Global Supply Chains with Random Demands”.<br />Global<br />Taxation,<br />Transfer <br />Pricing<br />Supply Chain <br />Management<br />Accounting<br />
  150. 150. Research overview<br />Shunko M., G. Fenu, S. Kekre, A. Scheller-Wolf, V. Tardiff , S. Tayur, and T. Yunes· “Implementing a Bundling, Lane and Price Sheet Strategy for Caterpillar's Compact Construction Equipment Division”<br />Cost of<br />Complexity<br />Supply Chain <br />Management<br />Accounting<br />
  151. 151. Research overview<br />Shunko M., S.H. Cho, P. Enders, and A. Scheller-Wolf, “Impact of Emergency Departments’ Delay Signaling on Patient and Hospitals Welfare”.<br />Shunko M., A. Scheller-Wolf “Value of Information Sharing between Emergency Departments and Ambulance Crews”.<br />ED <br />Operations, <br />Ambulance <br />Diversion<br />Health Care <br />Management<br />Supply Chain <br />Management<br />
  152. 152. 5-Year Research Agenda<br />International Taxation and Transfer Pricing<br />Intellectual Property, Royalty, Licensing<br />Local Content Rules<br />Healthcare Management <br />Value of Information Sharing in Hospital Networks<br />Inpatient Bed Assignment Strategies for ED Patients<br />143<br />
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