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Production capacity management and transfer pricing economics
For years the mantra of automotive production has been to supply customers with "high quality, low-cost, innovative products." As emerging markets have developed into high quality producers in addition to low-cost centers, automotive OEMs have moved production into these areas in search of more customers and greater cost savings; suppliers have naturally followed.
While OEMs have regularly increased sales volumes for vehicles worldwide, global production capacity growth has continued to outpace customer demand. In recent years the utilization of that global capacity has become the focus of attention. In 2005 there were 6 major plant closings around the world, but 18 new plants came on line during the same period. This trend is expected to continue over the coming years. Production Capacity Management (PCM) is clearly required to ensure that the costs of production enhance the affordability of products.
PCM occurs whenever a new plant opens, or an existing plant expands, contracts or closes. And while PCM begins in operations or strategy departments, finance organizations probably have the most to offer when evaluating the benefits of PCM. Applying the principles of transfer pricing economics, finance organizations can enhance the success of production capacity management movements in the following ways:
- Evaluating and establishing operational infrastructure;
- Developing "new plant" metrics; and
- Tax considerations and other costs.
Transfer pricing economics is a practical combination of micro- and macroeconomics. Properly applied, it lays out the entire value chain of activities of a corporation on a location by location basis, in order to assess the most equitable possible arrangements between disparate entities within a corporation. Then it compares the circumstances of each entity and assigns target profits to each location based on its particular activities, assets, and risks.
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