Monday, January 10, 2011

Stocking Hubs

I can remember dealing with a Buyer that was upset because a Supplier was unwilling to set up a stocking hub close to their manufacturing location in another country.  While the goal is to have inventory available for pulls by the Buyer to reduce the levels of inventory the Buyer must carry, Buyers need to be aware that there are several things that will impact the Supplier’s willingness.  Many of them have a cost impact.

When you conduct business within a different country, certain things are required.
  • You must be legally registered to do business within that country. To sell under origin based delivery terms (FOB, Ex-Works) this isn’t required. Legal registration in a different country can be a costly, lengthy process. 
  • You become subject to the laws of that country.  Since the sale will be a local sale, local law regarding that sale would apply and that may not be favorable from a risk or protection of intellectual property protection standpoint
  • The profits made on that sale are subject to taxation in that country. While suppliers may be able to manage some of the risk through transfer pricing, it does subject their profits to different, potentially higher tax rates than what they base their selling prices on.
  • In a number of countries, sales within that country require the use of local currency.  This adds the issue of currency exchange to their risks as the local company will be buying the product at transfer price in their standard currency and will be selling at local currency.
  • The Supplier would be subject to currency exchange rules and taxation on the re-patriation of the profits.

As you can see there may be a number of good reasons why a Supplier may not want to establish a local stocking site. Suppliers that do not have a direct presence in that country may suggest they can do it through a 3rd party such as a local distributor or local logistics operation.  If you purchase the Product through that entity, you are not conducting business with the Supplier and you lose the benefits of your contract. 

There is one solution that can work which is to suggest that it be managed through a free trade zone.  A stocking hub step up in a free trade zone within that country is technically operating outside of the country.  The Supplier could have an agreement with a local logistics provider that has an operation within the free trade zone to stock the materials and release the material to the Buyer upon getting authorization from the Supplier. Orders would still be placed on the Supplier and delivery term would be  FIP (Freight, Insurance Paid) or similar term to that point in the free trade zone. It then becomes the Buyer’s responsibility to clear customs at the port of import and arrange transportation to the use location. 

For stocking hubs in a different state within the same county, many of these issues still apply.
  • You must be legally registered to do business in that location.
  • You become subject to the laws of that location. 
  • The profits you make on that sale will be subject to taxation in that location.
  • In some locations there could also be a tax on inventory held there.
If the Supplier is saying no, always ask why. The reasons may be to save both you and them the cost it would require to meet the requirement.