Global supply chain planning: Impact of international taxation and transfer pricing

In the first essay, "Role of Transfer Prices in Global Supply Chains with Random Demands," I analyze the impact of optimizing transfer prices on the global supply chain performance of a price-setting firm facing random demand. It is well-established in the economics and accounting literature that optimization of transfer prices is beneficial for firms operating in a deterministic environment. In this work we find that the benefit of optimizing transfer pricing is even greater for supply chains facing random demands. The basic dynamics of the result are as following: The supply chain sets the transfer price above the manufacturing cost in order to shift income to the low tax jurisdiction. Asa result, the selling price set by the retailer who views transfer price as his cost is set higher than in the absence of transfer price. The presence of randomness in demand, however, counter-balances this effect by reducing the selling price and bringing it closer to the globally optimal selling price. As a result, a supply chain facing random demand gets more benefit from transfer pricing than its deterministic counterpart. Using a detailed computational study, we show that this effect is the greatest when the customer base is small, price elasticity is high, and the ratio of underage cost to overage cost is high.;In the second essay, "Transfer Pricing and Offshoring in Global Supply Chains with Cost Uncertainty," I focus on cost uncertainty as a source of randomness in the supply chain while keeping the demand deterministic. I also make the sourcing decision endogenous as opposed to the first essay, studying how global firms can design coordinated transfer pricing and sourcing strategies to leverage tax and cost differences. I derive a trade-off curve between tax and cost differences that determines the optimal sourcing strategy. Such a curve can be used by companies in order to find their optimal sourcing strategy, and also by policy makers in order to find the tax rate that should be offered to multinationals to attract their business.;Global firms, however, also face the following incentive problem: The headquarters is more concerned about the consolidated after tax profits than the local divisions. But local divisions typically have better information on the product cost structure and hence, have better information on the appropriate sourcing strategies. Hence, many global supply chains operate in a decentralized manner. Thus we seek to understand how different transfer price strategies combined with different decentralization strategies can help global supply chains exploit tax and cost benefits. I find that when the tax differential is large, a fully centralized strategy works best. In other settings, a decentralized sourcing strategy (enabling the global firm to take advantage of the local cost information) should be considered. In comparing decentralized structures, we find that the optimal sourcing strategy has an "all-or-nothing" structure only if pricing decision is kept at the headquarters level; when the pricing decision is decentralized, a partial offshoring solution may be optimal because of transfer pricing regulations imposed by the Internal Revenue Code. Finally, we show that when the cost of outsourcing increases, a decentralized company has more flexibility in setting transfer prices and hence can, surprisingly, achieve higher profits.;Finally, in the third essay, "Optimal Sourcing and Transfer Pricing Strategies for Global Supply Chains facing Cost and Exchange Rate Uncertainty," I add a second source of uncertainty to the supply chain, namely exchange rate uncertainty. However, I now consider a price-taking firm rather than a price-setting firm as in previous two essays. I again derive a trade-off curve between tax and cost differences that can be useful for both global firms and for policy makers. Again, similarly to the previous essay, we study how decentralization of the sourcing decision can be used by firms to take advantage of better cost information at the local division. I find that the incentive conflict in the supply chain forces the headquarters to set transfer prices below the level that would be optimal for tax purposes. I propose that supply chain flexibility, namely postponement of the sourcing decision, can be used to reduce this conflict and to set the transfer prices closer to the globally optimal level. Hence, we show that supply chain flexibility has a dual impact on the after-tax profitability of a tax optimized supply chain: (i) it helps the firm cope with uncertainty and (ii) it allows the firm to attain greater tax benefits. (Abstract shortened by UMI.)...