Manufacturing in America – The Shareholder Equation

13/10/2011

As simple as it may sound but the fact is that this simple shareholder returns equation rules the decision making process when it comes to locating a manufacturing operation. Here it is…

Profit = Money coming in (Sales) – Money going out (Cost of manufacturing, logistics etc.)

Share holder returns = Profit – taxes on profit

The objective of any CEO is to optimize the shareholder returns. At first glance not all the variables (and there are just three of them) seem to be in control of a CEO. Taxes are something that appears to be an obvious candidate where a company can barely make a dent. So, how does a manufacturing company CEO juggle these three variables for optimal shareholder return?

Let’s take these variables one-by-one and see how they affect the decision to locate a manufacturing plant in America.

The cost side

This is one part of the equation where a CEO can exercise maximum control. It is naturally the most obvious choice for cost and efficiency improvements. Companies spend numerous hours and resources in analyzing their supply chain as it plays the critical role in locating the manufacturing operations.

The topic is lengthy enough and has so many facets that covering it in a paragraph or two will not do it justice. I do not intend to either. Going forward the cost side of shareholder equation would be a major point of exploration. In the meanwhile, remember that it is not just the cost of manufacturing but the total cost of supply chain that matters. The second, like water a well designed and executed supply chain seeks the lowest cost structure in spite of many unknowns and changing nature of external factors during the life cycle of a manufacturing operation.

The money coming in

A manufacturing company has a lot less control on this part of the equation. The competition, where the customers are located, the product shelf life and many other such factors play a significant role in the money coming in or revenues. The location of customers and the type of product, a company is making, also affect the location of the manufacturing operations. After all a fresh chicken breast lasts days while a frozen one last for months if not longer. Selling fresh chicken breasts may require the production plant to be closer to consumers.

Another factor which is less understood but often effective is the role of branding. Does “Made in USA” label fetch higher price in the market place? If so this may play a role in where the product is made. Similarly, the tariffs, duties and other taxes, a favorite tool of policy makers and regulators, affect this part of the equation in a significant manner.

I will present my thoughts on what consumers, companies and policy makers can do to affect the “money coming in” part of the equation. It’s doable and may just be something that can be accomplished easily. The so called low hanging fruit.

Taxes on profit

This is one of the most visible variable. It brings out the emotions and public sentiment. One of the popular policy position is “If we were to lower the taxes on profit for corporations the manufacturing will come back.” We will have to explore this claim further.

On the other side of the debate many believe that if we were only to increase the taxes on profit “the corporate greed” will be checked. They believe that this may just be the trick to bring back manufacturing. Wish it was that simple.

I am not a tax expert. There are lawyers, accountants and others who know this topic inside and out. They are much more qualified to discuss it. I intend to limit my discussion to a sixty thousand foot level to see if we can understand how CEOs think of manufacturing operations and taxes and what policy makers do to make it an effective tool.

There are many other tax components like payroll taxes, indirect taxes (due to regulations etc.). These factors are better discussed with in the context of first two variables of cost and revenue.

In conclusion

Where to from here? Before we take these variables one-by-one and methodically dissect them we need to understand one more concept. The concept of a manufacturing supply chain. It is one element that affects all three variables (cost, revenue and taxes) that none other could come even close to. This topic is also near and dear to me.

In the next article, I will present a simplified version of a manufacturing supply chain model that can help us further frame the discussion of bringing Manufacturing back to America.

There are 2 comments in this article:

  1. 9/12/2014Manufacturing in America – Competitive Advantages: Brand - Mani Agrawal says:

    […] you look at the shareholder returns equation you will see that the revenue is one of the main variable in this equation. Revenue in its […]

  2. 9/12/2014Manufacturing in America – Impact of Taxing the Profit - Mani Agrawal says:

    […] topic of taxes on Manufacturing in America is a vast and complex one. As I mentioned in my earlier post about shareholder returns, I am not a tax expert. But, have dealt enough with taxes as a consultant and as an executive that […]

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