Value Chain Transformation - An Introduction - Supply Chain Council

Consulting
Value Chain Transformation
- An Introduction
Business Consulting, PwC LLP
Strictly Private
and Confidential
09 November 2011
PwC

Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
2

Based on historic, adhoc growth, many Euro & US companies are
operating decentralised models for their Asia businesses
Transfer Pricing
Cost Plus
Goods
China, Malaysia and Taiwan
Manufacturers
Revenue Centre
• Manufacturing
• R&D
• Demand planning/
procurement
• Supply planning
• Shipping and logistics
Services
• Limited central supply chain oversight
• Limited centralized demand planning
• Limited central relationship with suppliers
Singapore
RHQ
Cost Centre
• Regional management
• Regional marketing
• Regional design
• Regional finance/tax
• Regional treasury
Services
• Decentralized IP Management
• Decentralized treasury function
Korea/China/Mal/Japan
Sales Office
• Sales
Revenue Centre
• Volumes
• Customer relationships
• Demand planning
• Operational cost of Sales Co
• After sales service
• Decentralized control over regional tax and customs risks
PwC
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A decentralized APAC structure resulted in multiple Supply Chain
challenges
Suppliers Manufacturing –CM S1 Manufacturing –CM S2 Warehousing Sales Co
Customer
Materials SF Goods F Goods
Planning / Supply mgt
Duplications
Complex compliance mgt
PwC
Inventory
DTP
Material Flow
Information Flow
Legal / Invoicing Flow
Mix of systems
Physical footprint driven
Regional leveraging
Terms
4

In response to the challenges and risks, companies are electing to
implement a regional hub company structure
TP1
Cost Plus
TP2
Resale Minus
Goods
Goods
China, Malaysia and Taiwan
Manufacturers
PwC
Cost Centre
• Manufacturing
• R&D
• Demand planning
• Supply planning
• Shipping and logistics
Singapore
RHQ
Revenue Centre
• Regional management
• Regional marketing
• Regional design
• Regional finance/tax
• Regional treasury
• Regional demand planning
• Regional supply planning
• Regional shipping and logistics
• Customer relationships
Korea/China/Mal/Japan
Sales Office
• Sales
Revenue Centre
• Volumes
• Customer relationships
• Demand planning
• Operational cost of Sales Co
• After sales service centre
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Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
6

Value Chain Transformation (VCT) looks at how a company does business,
from strategy to customer delivery, in an optimised manner
Basic VCT concepts:
Structuring/restructuring a company’s Asia regional operations and footprint to
optimise the value chain , aligned to tax and customs structures.
1. Centralising: high value functions which drive execution of strategy & creation of
value; business controls, risk and intangibles (IP)
• profits are aligned with functions, risks and intangibles
2. Locating the centralised, new structure in a jurisdiction where tax position is best
managed and the customs position is optimised
• re-alignment accompanies business change
• The primary focus is optimising the value chain
3. Simplifying in-country operations to focus on responding to local requirements, by
centralising functions and reducing duplication of activities
This involves centralising high value functions and aligning with tax and
customs structures
PwC
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Achieving supply chain improvement through process and organisational
re-design
Shared
Service
Finance, HR
Reduction in open account
receivables beyond term
Planning
Opportunities
Consolidated planning
Inventory reduction
IPO Centralized procurement >
leverage & payables, Extended IPO
to non GC items
Scalable structure
Up & down scalability
Increased focus on supplier
delivery performance
Upside/downside supply chain
flexibility
Best Practice
Driving Best practice in
Contractual, Distribution,
Sales & pricing
PwC
More control on delivery to
promise performance
8

... and maximising financial value creation by leveraging low taxation
jurisdictions
In addition to operational savings, it is critical for companies to consider the tax impact of
their business model
50%
Incentivised Portion
Corporate Tax Rate
Decentralised Model
45%
40%
35%
30%
25%
20%
15%
10%
5%
VCT
Reduction in ETR from
approximately 30% to

This approach requires a comprehensive review of how the business
operates
Suppliers
Order processing / central
procurement / central treasury
Raw Materials
Information
Management
Shared Service Center
/ Call Center
Manufacturing
Finished Goods
Material Flow
Information Flow
Legal / Invoicing Flow
Payment / Supplier
Management
Production
Scheduling
Warehousing
Regional
Headquarters
Delivery
Instructions
Finished Goods
Distribution
Network
Demand plans /
Orders
Finished Goods
Invoicing
Sales Offices
Orders
Customers
PwC
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VCT can bring changes to all areas of the organisation
Organisation Structure
•Changes in organisational
responsibilities
•Introduction of new roles, particularly
in oversight
•Mandated activities at the Hub/
Principal
Process
• May be driven by regulatory
environment –not necessarily the
most elegant solution
• Some duplication –e.g. Billing
• Changes to control points
PwC
People
•Changes in roles and responsibilities
•Possible changes in location
•New or varied skill sets
•New performance measures
Technology and Systems
• Expanded data requirements
• Systems changes
• Workflow
• Approvals
• Reporting
• Interfaces with Customer and
Supplier systems
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Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
12

Potential models for international transactions to be used in Asia (export
business)
1. Procurement/Services Hub –procures raw materials / products on behalf of the group
manufacturing / sales companies
2.IP Hub –owns IP and takes all costs and risks associated with its development.
3.Trading Hub –buys product from manufacturers, holds inventory title, and sells it to sales
companies at own risk. It takes inventory holding/obsolescence risk, FX risk, credit risk, warranty
risk (epidemic failures relating design/manufacturing) and marketing risk.
4.Full Principal –takes supply planning risk, supplier quality and some procurement risks, as well
as all the Trading Hub risks mentioned in above point 2.
PwC
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Trading (buy/sell) hub provides higher levels of benefits while requiring
organisational and process changes
Manufacturers
in Asia Pacific
1. Sales of
finished
products
Singapore
Trading Hub
Manufacturers
outside Asia Pacific
/ Third-party
manufacturers
2. Sales of
finished
products
Notes
• This model changes the sales companies in the region to
limited risk distributors
• The manufacturing companies continue to be full fledged
manufacturers
• The LRDs source all their products from a central hub in
Singapore and sell to final customers on a limited risk basis
Issues to consider
• Transfer pricing issues
• Exit tax implications in the sales companies’countries
• Customs and VAT impact
• Substance required in Hub
• Operational and functional impact
• IT systems changes
• Change management
3. Sales of
finished
products
LRDs in Asia Pacific
Benefits
• Options to achieve simplified transaction flows
• Centralised demand planning and supply planning
• Customs and trade planning
• Control on majority of the risks within the group relating to
the sales side
• Potentially lower effective tax rate
PwC
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Full Principal provides the most benefits and faces stricter substance
requirements
Contract
Manufacturers
in Asia Pacific
Manufacturers
outside Asia Pacific
/ Third-party
manufacturers
Notes
• This model is an extension of the trading hub
• The manufacturers in Asia in this case are converted to
contract manufacturers
1. Sales of
finished
products
Singapore Manufacturing
Control Entity
3. Sales of
finished
products
LRDs in Asia Pacific
2. Sales of
finished
products
Issues to consider
• Transfer pricing implications
• Exit tax issues in manufacturing companies’countries
• Customs and VAT impact
• Substance requirement
• Operational and functional impact
• IT systems changes
• Change management
Benefits
• Centralised business model leading to control
• Economies of scale
• Regional demand and supply planning
• Optimised production scheduling
• Possibility to lower the effective tax rate even further
PwC
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Step by Step centralisation approach based on change capabilities, risks,
and benefits
R&D Service Providers
Singapore China
(C) Manufacturers / Suppliers
IP Centralisation
Provision of
contract R&D
services
Buy Sell Principal
for Asian
Manufacturers
Available Operating Models:
Regional SC in Principal
IP Principal
Buy-Sell Principal
LRDs
Full Principal
LRDs in Asia
Pacific
Taiwan China Philippines
Malaysia Korea Singapore
Manufacturers / Suppliers
Rest of World
Provision of contract
manufacturing services
Buy Sell Principal
for Rest of World
sourcing
Sales Companies in
Rest of World
PwC
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Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
17

Case Study 1 - US-based High Technology contract manufacturer
• Multi-billion dollar annual turnover
• Manufacturing in Asia, North and South America, Europe
• Business growth primarily in Asia
• High level of control by end Customer
• Customer drives material choices
• Highly competitive, low margin business
• Many key customers already operate under a Principal model
Major focus is to maintain customer service standards while driving
operational, procurement and tax benefits
PwC
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Case - Before
PwC
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Case - After
Materials
Suppliers
Principal
•Contractual relationship with Customer
•Contractual relationship with Suppliers
•Carries risk
•Adds value
•Materials
•Supply Chain
•Footprint planning
•Market intelligence
•Financing
$/Invoice/Sell
Material
Buy at
Cost
FG sale:
Cost plus
Service
fee
Shared Service
Centre*
* Shared Service Centre provides
services and support relating to
processes to both the materials
suppliers and the Principal.
Receives a cost-plus service fee.
Plant
Product
•Contract manufacturer
•Value add from manufacturing
•No value add on materials
•Limited risk
Customer
PwC
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Case Study 2 - Global leader in specialised steel & industrial products
•Configured as a Global manufacturer with sales units in many countries
•Growth by acquisition as well as expansion –fragmented structures in Asia
•Existing Principal structure in operation in Europe
•Aim to leverage as much as possible of their European experience
Asia Principal model designed around Sales function only –design aims to
drive harmonisation and consistency in approach across the region
PwC
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Case 2
Before
After
Global HQ/
Plant
Global HQ/
Plant
Principal
$/Invoice/Sell
Product
$/Invoice/Sell
$/Invoice/Sell
Country Sales
Unit
Country Sales
Unit
Product
$/Invoice/Sell
$/Invoice/Sell
Customer
Product
Customer
PwC
•Global Business sells to the Singapore Principal
•Singapore Principal sells to the customers in the
local country in Asia Pacific.
•Goods ordered are shipped directly by the Global
Business to the customers.
•Local Sales Units provide sales support services
to the Singapore Principal
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Critical success factors
Strategy
Definition of roles and responsibilities
Process
Adequate resources–at all levels
People
HR management to maintaining critical
project resource and motivation
Structuring
Constant and consistent communication
flow to all involved parties
Tax and Legal
Hard link of tax and legal from the beginning
Complete understanding of objectives, flows,
processes, structure across the streams
Technology
Understanding of IT implications,
tradeoffs, and willingness to resolve
systems issues
PwC
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Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
24

PwC’s scope of services for VCT assignments
With recent acquisitions:
We offer a full range of services to support Value Chain Transformation:
Operations
Driving the performance of
regional supply chains
Technology
Trusted advisory to the CIO
Shared services
Driving efficiency and excellence
in service delivery
People & change
Caring for the human side of
transformation
The consulting services we offer
•Value chain transformation
•Working capital optimisation (inventory and WIP)
•Supply chain design and implementation
•Business process improvement and rationalisation
• Back office process optimisation
− Includng financial reporting
•System selection and implementation (ERP, CRM, BI)
•Project management office (PMO) for IT projects
•Project quality review before/ during/ after project
•Assessment, design and implementation of IT controls
•Data management / data quality
•Optimising the value from IT spend
•Improving IT service delivery
•SSC strategy, design and implementation
•Location study and assistance
•Enhanced service delivery model
•Communications and training
•Stakeholder alignment
•Organisation design
Tax
Transfer
pricing
The tax services we offer
•Corporate tax and international tax advisory
services
•Tax efficient structuring
•Corporate tax compliance
•Effective supply chain transformation
•Transfer pricing controversy and dispute
resolution
•Transfer pricing documentation
The trade and customs services we offer
Worldtrade
Management
Services
•Customs value determination, optimization,
and support
•Leveraging of Free Trade Agreements for
cost savings
•Import/export regulatory impact of new
trading structures
•Import / export compliance controls and
procedures
•Duty minimization strategy
•Export controls over “dual use”products
PwC
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PwC offers a structured approach to deliver the benefits of Value Chain
Transformation
PwC
1. Assess
Opportunity
Solutions
Focus group on
range of
alternatives with
client key
stakeholders
Activities
Key Deliverables
•High-level benefit
and cost analysis
for multiple
restructuring
scenarios
Key Decisions
Agree shortlist
operating models
Timeline (indicative only)
2. Define
Concept
Provide shortlist
of target operating
models
•Design and
business case for
shortlisted
scenarios
Agree preferred
operating model(s)
3. Design and
Plan
4. Implement 5. Support
Optional: multiple roll-outs across business
units
Develop and Implement single preferred operating model or
alternate operating models for different situations
•Definitive legal and
tax guidance
•Detailed process,
org & IT design
•Detailed
implementation
plan
Agree to start
implementation
•Business transition
to new structure
according to rollout
plan
Agree to
go-live
•Resolution of daily
issues
•Post
implementation
review
10 weeks 12 weeks 10 weeks 12 weeks 8 weeks
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Agenda
• Key challenges in growth in Asia Pacific Region
• Introduction to Value Chain Transformation (“VCT”)
• VCT business models and Transform Methodologies
• Case Study
• PwC Business Consulting Services
• Questions and Discussion
PwC
27

Thank you
The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice.
PricewaterhouseCoopers ("PwC") has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based
on the specific facts involved. No reader should act or refrain from acting on the basis of any material contained in this presentation without obtaining advice specific
to their circumstances from their usual PwC client service team or their other advisers. The materials contained in this presentation were assembled in November
2010 and were based on the law enforceable and information available at that time.
© 2011 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers”refers to the network of member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
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