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Tipi Tips #14: What is the transactional net margin method?
Today’s topic is the transactional net margin method.
The transactional net margin method, or TNMM is the method most used in practice. It works best in complex supply chains where a party performs quite a simple function, such as warehousing of a product.
In our case, say we are looking at an apple warehouse in a complex supply chain. This warehouse only stores the apples, and nothing more. The TNMM looks at the profit margin comparable independent apple warehouses make in practice. Once we have found this ‘benchmark’ result in practice, we see how our apple warehouse performed compared to this benchmark. If the results are in line with each other, then we have an arm’s length result.
And that is how the TNMM works.
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