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A Heads-Up for Supply Chain Managers

It is important that supply chain managers become more aware of the implications of political initiatives on supply chain organizations. Industry players need to become more visible and active in policy creation forums and reviews so that industry expertise can be used to make sure that public policy, regulations and legislation don’t result in unintended supply chain consequences.

By David J. Closs

Supply chain and logistics managers have been able to operate in a relatively insulated environment over the past three decades. Sure, transportation providers had to be concerned about regulation, but economic regulation has largely gone away. On the safety and environmental side, however, there continues to be increased regulation in hours of service, emissions, hazardous material, security and delivery limitations. While these issues can have a significant operational impact, most transportation users and providers are experienced enough to keep an eye on legislation and regulations that may impact them.

Over the past three months, I have had the opportunity to observe, however, the evolution of public policy that could have a much broader and pervasive impact on supply chain management. The two items of particular interest are a federal proposal to implement a card-check system for unionization and the imposition by states of use taxes on supply chain services. Use taxes are essentially sales taxes on services.

The card-check system is a bill currently passed by the United States House of Representatives (H.R. 800, 110th Congress) and passed to the Senate, that would authorize the creation of a union at a worksite after valid signatures of more than 50 percent of the eligible workers have been obtained. Under the current labor relations laws, even if more than 50 percent sign initially, the employer has the right to require a secret ballot election. If during that secret ballot more than 50 percent of the workers vote in support of the union, the union becomes the authorized negotiator for the firm’s workforce. If less than 50 percent of the employees indicate support on the secret ballot, the unionization effort fails. The cardcheck bill simplifies the process by removing the requirement for a secret ballot. Opponents of this bill believe that the lack of secrecy may make it easier for a limited group of union proponents to strong-arm their colleagues into signing for the union. On the other hand, as supporters of the bill have pointed out, research indicates that employers have used the time prior to the unionization election to strong-arm employees prior to the secret ballot election.

The second public policy issue of interest is the legislation recently approved by the Michigan legislature and signed by the governor that implements a use tax on warehousing and logistics services (Michigan House Bill 0093 of 2007). The bill was passed in the middle of the night on October 1, 2007, as a means to recover some of the tax revenue that was lost due to the expiration of the Michigan Single Business Tax. The bill mandated the assessment of a 6 percent use tax—essentially a sales tax on contract warehousing, transportation courier services and logistics consulting services. For example, if a contract warehousing operator provided $1 million in services to Michigan clients or in shipments from Michigan, the operator would have to charge clients an additional use tax of $60,000 and remit it to the state. Effectively, the law results in a 6 percent cost increase for many third party logistics services and activities completed in the State of Michigan.

The use tax has significant implications for firms performing manufacturing and supply chain activities in the state because it effectively increases many variable costs by 6 percent. These increases could also be pyramided, because it is a business-to-business (B2B) tax that multiple levels in the supply chain have to charge. The tax would likely result in significant job losses for the state as firms moved these activities outside the state. Part of the rationale cited for the use tax by the legislators was that “other states are beginning to tax warehousing and transportation services so it appeared to be a trend.” Specifically, a survey provided to the legislators indicated that nine states charged service taxes on transportation services and six on warehousing services. A more comprehensive review indicated that while some of the states did tax services, the tax was generally not in the form of a use tax. This illustrates the need for expertise in evaluation regarding how specific tax initiatives will impact services industries.

When the Michigan legislators realized the potential job loss implications of the use tax, they began to look for alternatives. As of press time, strong industry lobbying and some quantitative research completed by Michigan State University under the sponsorship of the International Warehouse Logistics Association has resulted in a recommendation to replace the use tax with a surcharge on the revised Michigan Business Tax. The recommendation has resulted in a bill rescinding the tax which has been approved by the Michigan House and Senate but is awaiting negotiation regarding how the surcharge is to be operationalized. The details are currently being finalized.

My observation of and involvement in this process have highlighted a few considerations that I would like to relay to today’s supply chain management professionals.

First, since job creation and maintenance is a key focus area for politicians, legislators are taking an active role in determining what infrastructure, training and tax incentives can be used to increase district employment. Many nations, provinces, states and cities have used tax policy to attract supply chain activities to their region. Countries such as Ireland and Singapore and states such as Kentucky and Tennessee have successfully demonstrated how these strategies work. State and provincial legislators in North America are asking how they can use the same strategies to enhance their region’s employment. It is likely that such initiatives will expand. It is important that supply chain managers become aware of and appropriately involved in such initiatives as they have significant implications for supply chain activities.

Second, while legislators are interested in attracting supply chain activities to improve local employment, it is also apparent that legislators need help in understanding the role that supply chain activities play in the economy. Specifically, many supply chain activities (i.e., warehousing, transportation and other value-added services) represent derived demand, meaning that the demand must be there before the businesses that provide those services will be successful. For example, establishing a warehouse or a roadway doesn’t create the demand for supply chain services; the demand is derived from the demand for goods to be sold or manufactured. Supply chain industry professionals need to be involved in the discussion and interpretation of policy initiatives regarding what will drive the demand for supply chain services. While supply chain managers are very familiar with this concept of derived demand, legislators and policy analysts typically are not. Simply enhancing supply chain infrastructure or changing tax policy on supply chain activities does not guarantee job expansion.

Third, the shift from a manufacturing to a services economy is driving the need to identify new revenue sources for the provinces and states. In the past, the majority of provincial and state taxes have resulted from the relatively high wages related to manufacturing. With increased offshoring of manufacturing jobs, legislators are seeing an increased need to either decrease government services or develop other sources of revenue. Because decreasing government services is not a popular political strategy, legislators are beginning to consider taxing services. Since over 70 percent of North American jobs now are in the service economy, such taxes have an obvious attraction. It is important that policy makers understand the impact of service taxes, particularly for B2B environments.

Given these considerations, my suggestions are two-fold. First, it is important that supply chain managers become more aware of the implications of political initiatives on supply chain organizations. In the past, relationships with government have been the responsibility of government affairs or lobbying representatives. While these individuals are still very important, the changes in legislation and/or tax laws are often so nuanced that it requires substantial expertise to determine the implications for the firm. In Michigan, the supply chain industry was very surprised when the proposed use tax showed up in legislation to recover revenue lost from the Single Business Tax. Second, and probably more important, I suggest that supply chain professionals become more proactive regarding the initiation, design, and refinement of public policy regarding supply chain infrastructure, resources and constraints. This includes becoming more visible and active in policy creation forums and reviews.

While the legislators and their policy analysts ultimately draft the legislation, supply chain professionals can assist by offering insight regarding the operational nuances and implications. Legislators are looking for more expertise and insight to provide perspective and thus a more balanced political process. Since supply chains don’t have a vote and are not very visible to the typical voter, it is increasingly important that industry expertise be used by policy developers and legislators to make sure that public policy, regulations and legislation don’t result in unintended supply chain consequences.