The impact of tax legislation on inventory management and sourcing strategies

Abstract

Operational Research (OR) provides the methods and techniques by which firms can maximise their profits by taking smart decisions. The OR literature in the area of logistics, however, pays scant attention to the cash flows that the firm needs to fulfill its legal obligations. In particular, the thesis investigates how Value Added Tax (VAT) and Corporate Tax schemes work in the United Kingdom at the current time, and how these schemes interact with the logistics aspects of the firm.

The thesis develops a methodology for constructing models that explicitly account for the impact of tax legislation on a series of classic operational research problems. It does this by expressing the future profits of the firm after tax as the Net Present Value or Annuity Stream Value of the cash-flow function associated with the activity for the firm, including these cash-flows exchanged with relevant third parties and the government that are needed in the context of ensuring compliance with tax legislation.

Using current legislation in the United Kingdom, and also drawing from European Union directives on acquisitions and removals, the thesis established how to explicitly consider Value Added Tax (VAT) scheme, Corporate Tax (CT) scheme, and import duties and tariffs rules into decision models, and how these affect optimal decisions and profitability for a firm. The focus lies on OR decision models within the area of inventory management, including decisions about supplier and product selection, and optimal promotion strategy to influence the timing of demand. In particular, we look at four different aspects for handling tax and inventory management problems: (i) traditional economic order quantity (EOQ) models; (ii) the EOQ method in a context of cross-country supply chain activities; (iii) multi-products sourcing strategy; and, (iv) dynamic lot sizing problems.

This work contributes to the body of OR theory supporting the tax-effective supply chain. Its contribution lies in proposing a method of how to account for UK/EU taxation rules into inventory and sourcing optimisation models by means of the Laplace transform of all relevant cash-flows, including those associated with taxes, and investigating the
impact this has on optimal decisions. By comparison of these models with traditional OR models, it is demonstrated that not only the tax rates but also the tax schemes can be crucial determinants to operational decision making and profitability. To our knowledge, this is the first study to use this approach, and the first study to show the impact of the V.A.T.-scheme on inventory and supply decisions. The tax-adjusted inventory models in particular have a tendency to lead to operational decisions that become more synchronised with the tax points used in these taxation schemes, with savings in net profits that can amount to several percentages.

More information

Identifiers

ORCID for Patrick Beullens: orcid.org/0000-0001-6156-3550

Catalogue record

Export record