Formation of a strategic manufacturing and distribution network with transfer prices

We propose a profit maximization model for the decision support system of a firm that wishes to establish or rationalize a multinational manufacturing and distribution network to produce and deliver finished goods from sources to consumers. The model simultaneously evaluates all traditional location factors in a manufacturing and distribution network design problem and sets intra-firm transfer prices that take account of tax and exchange rate differentials between countries. Utilizing the generalized Benders decomposition approach, we exploit the partition between the product flow and the cash allocation (i.e., the pricing and revenue assignment) decisions in the supply chain to find near optimal model solutions. Our proposed profit maximizing strategic planning model produces intuitive results. We offer computational experiments to illustrate the potential valuable guidance the model can provide to a firm’s supply chain design strategic planning process. © 2014 Elsevier B.V. All rights reserved.