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RESULTS OF AN EMAIL BROADCAST ASKING THE DIFFERENCE BETWEEN FOB AND DDP

One of our members was evaluating the bottom line impact of going from DDP to greater volumes of FOB shipping. In AAPN, when we get a question like that, we merely broadcast it to hundreds of our members. Usually, the answers come back in minutes, all seasoned and expert. Here is one example of an email that went out in November 2007.

Wayne Gray, Dickies:  FOB means you take ownership at the closest port, typically,  and you are responsible for getting the freight to its destination. DDP means it is priced and paid for all the way to it’s destination by the manufacturer, normally a distribution center. Theory suggests that if your company is big enough, it can move the freight cheaper and faster. 

Walter Meck, FesslerUSA: There are two other hidden costs to DDP, which are time – yes, it takes longer, because they make money by waiting to consolidate shipments to get the best rate – and risk – whenever you consolidate my goods with other people’s goods (several times in the DDP process), you run the risk of loss, misplacement, or unauthorized “commission (in kind)” fees.

John Strasburger, VF: Common expression in sourcing is "fob" which usually means buying terms are FOB factory. DDP is delivered -duty-paid - which means supplier is responsible for all logistics and costs from factory to buyer's distribution center-margin would only increase with higher percent of FOB if factory is not charging Buyer a competitive price for transportation, freight forwarder/ brokerage fees- etc, etc. As a buyer - If you have staff to handle Logistics you generally can achieve a better gross margin percentage because

(a) suppliers tend to mark -up transportation and other costs to get goods from factory to customer and

(b) customers such as VF – Timberland, Kellwood , etc have more freight volume -and purchasing power - therefore can negotiate lower transportation rates

Marshall Gordon, TradeCard: The importer of record on FOB is the buyer and on DDP is the seller. The shift from DDP to FOB is to capture the following efficiencies the buyer believes he has over the seller:

1. moving and clearing the merchandise through customs, if there is a middleman involved it is likely that the "custom's value" may unnecessarily include intermediate margins and expenses.

2. avoiding a markup on these costs that vendors will expect

3. the cost of capital  -if the vendor offers 30 day terms from FOB versus 30 days from DDP, the additional transit and clearing time is at the seller cost of capital (plus, again, the markup he expects).

4. getting to the actual factory cost on an FOB basis - very few factories have the ability to support DDP financially or from an execution perspective. Often this means the "factory" is really an intermediary acting as a trading company or otherwise. Of course, this means additional expense as well.

5. For a seller to be able to import to US, he has a certain level of overhead to file docs and have recognized legal entities in place - think about all the hassles of CTPAT, etc and now consider this being addressed by a small factory in Asia

    All of this is great for a buyer to strive to capture in his margins but the challenge he faces is whether he has the ability to do some/all of above himself. Questions he would have to ask is:

1. Is he (can he be) dealing with the manufacturing plant itself or are there middlemen involved now? We see retailers refer to "going direct" and they actually mean buying from a trading company versus a branded US firm who happens to offer private label.

2. Is he prepared financially to finance the time it takes to import(3-6 weeks of additional time value of $) and is his cost of capital/credit lower than the vendor's embedded costs?

3. Are his logistics costs lower than the vendors' costs? Is the cost differential from the vendor warrant the shift?

4. How much will he have in overhead costs to manage all of this?

5. If he is shifting to low cost "direct" vendors, does he ability to go there and monitor production and shipments( at least to start)

6. For public US firms, are they prepared to add that inventory to their balance sheet--- that FOB adds for the improved Gross Margin they get in return - we see many retailers targeting ROIC (return on invested capital) and that focus often challenges the use of FOB, as FOB would require more capital to be invested. We've seen many public brands engineer their Incoterms as well to best achieve their balance sheet and income statement goals.

Alfonso Hernandez, Argus Group: FOB vs DDP refers to different modes of PRICING according to modes of DELIVERY, and defines the complexity of your logistics, as well as the inventory carrying costs required of your working capital.  The issue is how much value added can the vendor provide to the customer?   The speed of your cash flow becomes critical at this point because your finished goods inventory is at its highest point of value added.  The quicker you can recover this investment, the more profitable your operation will be.  Unless, of course, you can enhance your profitability by offering your customers an efficient logistics service at an attractive price.