(477a) Sourcing-Production-Distribution Planning of Global Multi-Product Chemical Manufacturing Processes with Duty Drawback

Over the years, the
forces of globalization have evidently driven manufacturing companies to
procure more raw materials and sell more finished products internationally.
These transactions must invariably travel through a complex maze of
heterogeneous international regulatory measures such as taxes, tariffs,
customs, etc. In our previous work^1,2, we highlighted and
demonstrated the importance of regulatory factors in supply chain management
with a focus on the capacity expansion problem. Duty drawback is a key
regulatory measure that involves full or partial refund of paid import duties,
when the imported merchandise is destroyed, exported, or consumed as a raw
material to produce an exported material. Most countries offer duty drawback
incentives with the primary goal of assisting domestic manufacturers to compete
in foreign markets. However, it is surprising that many manufacturers fail to even
claim duty drawbacks, let alone accounting for duty drawbacks in their
businesses. As a result, they fail to harness a significant cost saving
opportunity despite (1) their extensive international trading activities, (2) widespread
continual effort among manufacturing companies to reduce costs in their supply
chains, and (3) history of duty drawback laws in some of these countries goes
as far back as three centuries ago. In the U.S. alone, it was estimated that up
to US$10 billion worth of duty drawbacks were not claimed by companies in 2001.
The relevance of duty drawback in the world economy and its acceptance by the
global community are clearly illustrated by the World Trade Organization (WTO)
Agreement on Subsidies and Countervailing Measures. This agreement contains
specific provisions that permit WTO members to offer duty drawbacks. In
addition, the International Monetary Fund (IMF) has also recently recommended
duty drawback favorably as one of the indirect tax incentives that developing
nations should employ to attract foreign direct investments.

On the academic
front, it is also astounding to note that only one production-distribution
model³ exists, which incorporates duty drawback computations. Moreover,
this model has a couple of shortcomings that limit its application in the
manufacturing industry. First, it was developed for the computer-maker
companies that generally have single-product manufacturing operations. Since
duty drawback computations for single-product and multi-product manufacturing
operations are different, the aforementioned model is not applicable to all
manufacturing companies, especially to chemical companies with their multi-product
manufacturing processes. Second, the manufacturing drawbacks in their model are
explicitly based on the total import and export quantities over the planning
horizon and do not identify the linkages between the batches of imported
materials and exported finished products. As such, their model solution does
not offer direct details that are crucial for inventory management and duty
drawback claims.

In this paper,
we address a sourcing-production-distribution problem (SPDP) for a global
supply chain network involving multi-product manufacturing processes as
commonly found in the chemical industry. We define multi-product manufacturing
operation explicitly as a manufacturing process that manufactures multiple
products simultaneously. This is to be distinguished from manufacturing
processes that manufacture multiple products sequentially. A normative SPDP for
a supply chain network entails the determination of material sourcing plans,
production plans of manufacturing facilities, and distribution plans of
products across. SPDPs arise mainly because all manufacturing companies,
including those in the chemical industry, are driven by the goal of meeting
customer demands in a most profitable way. In the current intensely competitive
economic era, sound sourcing-production-distribution planning is extremely
crucial to the long term survival of many manufacturing companies. As indicated
in our earlier work, supply chain models and solutions devoid of regulatory
factors can be wholly misleading in this era of global trade. Regulatory
factors accompanied by complex legislative lingo, such as duty drawback,
present unique and complex modeling and solution challenges.

This paper
addresses the neglect of duty drawbacks by industry practitioners and
academicians in three ways. First, it creates a general awareness of duty
drawback through the introduction of key definitions, concepts, and regulations
related to duty drawback and elaboration of duty drawback's importance in
supply chain management. Second, it presents a new linear programming (LP)
model for a deterministic SPDP in the multi-product chemical industry, which
incorporates three main regulatory factors, namely corporate taxes, import duties,
and duty drawbacks to represent. Third, it discusses the distinguishing
features of our new model and presents computational experience on a case study
of industrial scale. It also lists future research opportunities in this area,
which would further enhance the application of our model in the general
manufacturing industry.

References

1.      Oh,
H. C., and Karimi, I. A., Regulatory Factors and Capacity Expansion Planning in
Global Chemical Supply Chains. Industrial & Engineering Chemistry
Research 2004, 43(13), 3364.

2.      Oh,
H. C., and Karimi, I. A., Regulatory Factors and Supply Chain Planning in
Chemical Industry. Presented at AIChE Annual Meeting, 7-12 November
2004, Austin Convention Center, Austin, United States.

3.      Arntzen,
B., Brown, G., Harrison, T., and Trafton, L., Global Supply Chain Management at
Digital Equipment Corporation, Interfaces 1995, 25, 69.