Multinational entities (MNEs) are increasingly grappling with their global value chains (GVCs). Some MNEs are better than others, but current economic developments make it difficult to keep up and implement effective and efficient value chains.
There are many reasons why an MNE should consider its GVC now, but the most common are more complex trade and regulatory landscapes, new digital technologies that are reshaping customer-supplier relationships and the Ukraine conflict, which has disrupted the economic recovery and contributed to high inflation around the world.
There are currently five megatrends that were identified by BDO that are leading MNEs to consider their GVCs:
- Accelerating connectivity, innovation and uncertainty: With the world becoming increasingly connected, no business will be isolated from global events. This will create new opportunities to unlock value, but also increase the risk of supply chain disruption.
- Shifting regulatory environment: Over the next decade, the global regulatory environment will grow more complex as countries implement new policies to achieve a variety of goals. Keeping a finger on the pulse of these ongoing developments will be key to keeping the global supply chain compliant.
- Increasing supply chain transparency and due diligence: The ability to track where all goods are in the supply chain – and where they came from — will be crucial in an era where disruption is common and often unpredictable. Proactive transparency and data sharing will be key tactics in a successful global supply chain strategy.
- Evolving customer expectations: Customer expectations are changing rapidly, which presents risks to those companies unwilling to change and opportunities to those willing to evolve their business models — and supply chains — in line with those expectations. Building authentic relationships will be key to customer loyalty.
- Rising importance of environmental, social, governance (ESG) issues: ESG issues will continue to become increasingly important for businesses due to pressure from many stakeholders. Demonstrating commitment to those issues will be key to long-term success.
From the above, it is no surprise that MNEs – including those with a presence in only a few countries -- are eager to assess their GVCs. Even local value chains can be impacted by the global economic disruption due to global dependencies. Improving a GVC is not just a need, but also an opportunity and no, analysing a GVC does not just consider transfer pricing. But what does a GVC analysis (or as it’s sometimes referred to, a value chain optimisation) really consist of? The following aspects are key to consider when conceptualising an MNE’s global value chain:
- Network optimisation: Align networks and capabilities with the business strategy. This includes identifying opportunities to cut costs, harnessing efficiencies, improving customer service levels and minimising disruptions.
- Sourcing and supplier management: Consider how to develop effective category strategies to guide the business through all stages of procurement, from source selection to ongoing contract and performance management.
- Financial optimisation: Identify proactive opportunities for cost-cutting and profit improvement, while evaluating the value chain redesign’s financial impact and return on investment.
- Total tax liability: Review of the current global tax footprint and evaluation of transfer pricing arrangements, and assessment of the trade and tax consequences of potential changes to the supply chain.
- Digital strategy and enablement: Consider whether the supply chain is in sync with the digital strategy. It may involve implementing digital applications to streamline processes, increase visibility and speed up decision-making.
- Risk management: Consider whether the MNE can restore operations through immediate incident mitigation and strategic risk management for a more flexible and responsive value chain.
- Strategic workforce analysis: Unlock the potential of people across the GVC. This would include optimising the workforce makeup and capabilities based on market demand, productivity and location.
- Site relocation: Identifying the right location for facilities, negotiate incentive packages and help with ongoing compliance to ensure maximum benefits. This would also consider aspects such as on- or near-shoring.
When evaluating a value chain, there is much more to it than simply considering a supplier relationship or whether the logistics function is working properly. What makes this even more complex is that the factors listed above should be considered together, and a change in one of them can impact all the others.
Importantly, even if an MNE is not considering any of the listed trends, or if it’s not currently considering certain aspects that go into a GVC analysis, it may be asking questions such as:
- Is my value chain secure considering the interruptions faced because of the Ukraine conflict?
- Do I have sufficient alternatives if one of my suppliers goes bankrupt or cannot supply me anymore?
- Do I know where all my employees are working from and are they adhering to the established policies, or are they potentially creating new tax presences in other jurisdictions?
- Do I have a blind spot in my global tax compliance?
To answer these questions, an MNE will quickly find itself considering the above-listed aspects and before you know it, you will be doing some sort of GVC analysis.
Analysing a GVC can be complex, but more importantly, it can be rewarding for an MNE. If the above resonated with you and you would like further insights on how to take this forward, reach out.
BDO in South Africa