Northwestern Paper Company

Northwestern Paper Company is a United States-based pulp and paper company with a transfer pricing problem. Two of its subsidiaries, one in Indonesia and one in South Korea, recently submitted competitive bids to supply bleached paperboard to an Australian manufacturer. The South Korean subsidiary of Northwestern was awarded the bid on the basis of price and quality considerations. The South Korean subsidiary had, however, based its bid on pulp supplied by an independent Chilean supplier, while the Indonesian subsidiary had based its bid on more expensive pulp purchased from Northwestern's own U.S. mills. Northwestern's corporate management now wants the South Korean subsidiary to purchase the pulp from the company's own mills, rather than the cheaper independent Chilean supplier. Subsidiary independence, performance measurement, and overall profitability is at stake.