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Tips for tax-efficient supply chains: Integrating SAP and third-party logistics to manage Principal-owned distribution chains

by The Tip Doctor

May 16, 2011

Tip Doctor, Insider Learning Network.

The following tip is taken from the SCM Expert article “Enable a Tax-Efficient Supply Chain in SAP ERP” by Brian Fricke, published in SCM Expert.

To reduce costs when distributing goods internationally, some companies establish a Principal – a legal entity in the lower tax jurisdiction to centrally buy and sell goods to move them through the supply chain in a tax-efficient manner to the end customer. However, the geographic location of the Principal often does not fit in with the optimal physical flow of goods. The result can be complex processes in which the financial flow of goods deviates from the physical flow.

Enabling this type of distribution model can be challenging due to the increased complexity companies are required to manage. However, the financial benefit can be significant.

Companies that distribute goods to a variety of international markets and leverage a financially centralized distribution model often use third-party logistics to manage the physical distribution to their end customers. Because third-party logistics already have established distribution operations, they can provide a company with a relatively fast and cost-effective way to set up distribution in remote markets. Third-party logistics can also be used to manage Principal-owned DCs as d istribution model.

When managing Principal owned distribution chains, here are some things to keep in mind when integrating third-party logistics with your SAP systems:

Even though the inventory is owned by the Principal, third-party logistics can be used to manage the physical inventory as well as the customer order fulfillment process. A challenge to using third-party logistics is often the accompanying systems integration that is required. However, if done correctly, companies can maximize the benefit of using third-party logistics through timely and accurate information exchange.

The size and complexity of the distribution operation will often drive the level of integration complexity. However, typical interfaces companies use when integrating SAP ERP with a third-party logistic include the following:

- Material master (SAP ERP updates third-party logistic)

- Expected receipts/purchase orders (SAP ERP updates third-party logistic)

- Goods receipt confirmation (third-party logistic updates SAP ERP)

- Inventory adjustments (third-party logistic updates SAP ERP)

- Outbound deliveries (SAP ERP updates third-party logistic)

- Outbound delivery confirmation (thirdparty logistic updates SAP ERP)

- Inventory reconciliation (daily comparison between third-party logistic and SAP ERP inventory balances)

A pitfall to watch for when integrating with a third-party logistic is making sure production batch and expiration details are properly tracked at the third-party logistic and kept in synch with SAP. It is tempting to just manage inventory on a quantity basis at a third-party logistic. However, when inventory is batchmanaged with expiration dates, it is a best practice to maintain batch and expiration traceability throughout the whole process with full visibility in your SAP system.

For more SCM resources, visit the SCM Group on Insider Learning Network. To view the entire SCM Expert article by Bryan Fricke, members of Insider Learning Network can access it, along with other free content, in the “Member-only Resources” section on Insider Learning Network.

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