ARTICLE | July 12, 2022
Authored by RSM US LLP
Companies seeking to make their operations more resilient and protect profitability commonly consider relocating components of their supply chain. That’s why whenever Mike Fletcher meets with a company about supply chain issues, he examines the notion of total landed cost.
Landed cost—the sum of expenses incurred producing a good and getting it to a customer—not only includes the price per unit of the good and the cost of transporting it, but also some location-dependent variables such as customs fees, duties, tariffs and taxes.
For a company deciding whether to relocate part of its supply chain, comparing the total landed cost under the status quo to what would be incurred in another country or U.S. state can be difficult and complex.
That challenge brings Fletcher’s conversations with those businesses to life.
“Often, companies think they have a really good system for capturing costs, but when they begin the process, they realize the data is not easily accessible, especially in the middle market,” says Fletcher, an RSM US LLP tax partner who specializes in supply chain issues.
Those eye-opening discussions have occurred more frequently, Fletcher says, as supply chain disruptions have jolted the global economy during the pandemic and the Russia-Ukraine war. Companies are exploring their options.
In fact, 70% of respondents to April’s RSM US Middle Market Business Index survey said they found other sources of supply in the United States in the last 12 months as a direct result of upstream supply chain issues, and 36% found other sources of supply outside the United States.
Changing locations usually entails a reshaped tax burden, such as introducing a sales-and-use tax in different states within the United States, goods and services tax and harmonized sales tax in Canada, or value-added tax (VAT) in Europe, Asia and elsewhere.
Analyses of those changes can be quite complex for several reasons, including the volume of a company’s transactions and the variety of tax laws and regulations in different countries.
Often, companies think they have a really good system for capturing costs, but when they begin the process, they realize the data is not easily accessible, especially in the middle market.
Mike Fletcher, RSM US LLP tax partner
For example, a company interested in regionalizing its supply chain in Southeast Asia instead of sourcing it exclusively in China would have to consider VAT compliance and customs and duties fees in multiple countries, in addition to costs of labor, transportation and other supply functions.
“We’re hearing more conversations that start: ‘I know relocating is going to be expensive, but—‘” Fletcher says. “I think companies that are looking to sustain long-term growth are trying to find options that maybe don’t give them the lowest possible price point, but a low price point with the supply chain resiliency and flexibility they think they need.”
So, what’s the key to finding that productive balance between pricing and resilience?
“That is the big question for companies,” says Jason Alexander, RSM’s national manufacturing sector leader. “It’s where they’re spending their time and trying to make sure they have the data and information to make those decisions.”
To that end, Fletcher wants a company to ask itself: Is it comfortable with its understanding of the total landed cost for the goods it produces? Does it have analytical processes in place to accurately assess that cost in the first place?
“We see lots of mistakes with over-collecting or overpaying VAT and lots of mistakes with customs and duties,” he says.
One common cause is an enterprise resource planning system implemented by finance, accounting and information technology departments without sufficiently incorporating tax functions. As a result, the system is not configured to account for different tax laws in various jurisdictions.
“All of those tax analytics, then, have to happen manually,” Fletcher says. “Somebody has to take the data out of the system, put it in a spreadsheet and then figure out what the right rules are as they pertain to all these different transactions. The volume is too big, and people make mistakes.”
Those types of mistakes are even more costly in an inflationary environment because most taxes are predicated on the sales price of a good. Seventy-eight percent of MMBI survey respondents said they experienced significant increases in price or costs for some items during the 12 months leading to April.
That underscores the benefits of making supply chains more resilient. The unpredictability of public health, geopolitics, global weather and other factors is entrenched—and companies are responding.
“Nobody is happy about these costs, but a lot of organizations are recognizing and accepting the fact that this is the cost of doing business right now,” Alexander says. “Everybody is facing these challenges to some extent. It’s about every company now taking a step back, gathering the necessary data, and developing plans for the near- and long-term to create more flexible and resilient supply chains.”
This article was written by Mike Fletcher, Jason Alexander and originally appeared on 2022-07-12.
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