Redesign of global supply chains with integration of transfer pricing: Mathematical modeling and managerial insights

Unlike the supply chain (SC) design problemwhich deals with the configuration of a new SC, the redesign problem assumes that a SC already exists and focuses on its reconfiguration in order to take profit of the changing logistics, financial, and fiscal advantages offered by each country. First, this requires considering specific decisions and cost factors such as those associated with facility closing and capacity relocation. These aspects are often ignored by SC design models. Second, to better capitalize on the tax advantages in each country, the redesign of SC requires the consideration of taxation rates and, mainly, transfer pricing. Indeed, companies can use transfer pricing to shift profits to lower-tax countries which may impact on the SC redesign decisions (e.g., on the relocation of operations and manufacturing facilities). This paper contributes to the literature by (1) developing a large scale optimization model that is specific to the problem of SC redesign while addressing decisions, costs, and complexity factors that are often ignored by the model-based SC design literature, (2) integrating transfer pricing in the model by using two methods, one of them is the profit split method that is dictated by the OECD transfer pricing guidelines (1995, 2010), which could be considered as a novelty in large scale SC optimization models, and (3) using the model to derive a series of insights that may be helpful for companies and governments, most of these insights are difficult to obtain without the support of models like the one developed here. & 2014 Elsevier B.V. All rights reserved.