EXW and DDP are two Incoterms. To put it simply, the former refers to door-to-door delivery while the latter refers to door-to-door delivery. Besides cost and risk, there are deeper considerations when choosing terms.
Some buyers prefer to sign DDP terms of trade with suppliers on the grounds that the buyer needs to bear the least risk. However, we should consider the overall situation, and also pay attention to the total cost and risk control of the supply chain. Today, let’s talk about the stories behind these two terms.
Total supply chain cost difference of EXW and DDP
Let’s look at the first level, the total cost of the supply chain. Under DDP terms, the seller is responsible for shipping and customs clearance costs throughout the process. The seller has the right to select his own forwarder.
Incoterms in-depth analysis, which term to choose, EXW or DDP?
Delivered Duty Paid, appointed destination.
DDP scope of application: suitable for any mode of transport, can also be used for multimodal transport.
What is DDP?
DDP definition: delivery is completed when the seller hands over to the buyer the goods that have been cleared for import and have not been unloaded on the vehicle at the designated destination. The seller bears all costs and risks of transporting the goods to the designated place. The seller shall be responsible for export and import customs clearance of the goods, bear any export and import duties and all relevant customs formalities.
Summary: The term in which the seller bears the greatest liability.
Under DDP terms, the seller will include freight charges in the overall sales quotation. The so-called wool pays the sheep, the buyer will absorb this part of the cost. Although the buyer assumes minimal liability, it also loses an opportunity to reduce costs.
Generally speaking, bulk buyers have the ability to consolidate the entire volume and negotiate with forwarders or even shipping companies to get a lower rate. Therefore, large multinational groups often use EXW terms to sign contracts with sellers.
Buyers can continuously optimize and integrate various logistics operations, including sea, land, air, express, warehousing and customs clearance activities, to achieve cost reduction. Multinational groups can also “squeeze” savings from logistics costs through annual price cuts by suppliers, a model adopted by many companies.
Name: Ex Works, EXW.
EXW scope of application: suitable for any mode of transport or multiple modes of transport.
What is EXW?
Delivery is completed when the seller places the goods at the disposal of the Buyer at its place or other designated place (such as a factory, factory or warehouse) without the seller having to load the goods on any means of transport paid by the Buyer and without having to go through export customs clearance, even if such clearance is applicable. It is advisable for the party to specify the place of delivery, and likewise to specify that the costs and risks of reaching the named place shall be borne by the seller. The Buyer bears all costs and risks of taking delivery of the goods at the agreed place or designated place of delivery.
Summary: Terms in which the seller is least liable.
From the perspective of the total cost of supply chain, the large multinational companies combine all the volumes and use EXW terms to have bargaining chips with logistics suppliers.
With a large number of logistics resources in hand, the headquarters of large companies can implement various logistics operation improvement projects. From the global point of view, continue to optimize the supply chain cost.
DDP and EXW risk control in the supply chain
The difference between DDP and EXW at the second level is supply chain risk control, which is even more important than cost. By definition alone, the buyer bears the least risk under DDP terms, while the buyer bears the greatest risk under EXW terms because the risk is transferred to the buyer after the goods leave the seller’s factory.
It is true that DDP terms carry little risk. But we tend to see only part of the risk and ignore the whole picture. The risk in Incoterms refers to the risk of ownership of goods, which is a part of supply chain risk. Under DDP Incoterm, while the buyer enjoys “zero risk” of goods, it also loses control over the supply chain. When the goods arrive at the destination are completely decided by the seller.
Although the buyer also has requirements on the arrival time, there are always some problems in the actual operation. For example, in order to save the freight, the seller chooses a forwarder with a long shipping time or poor service. At a price of a point of goods, the head of the freight forwarder company charges high, but in the timeliness of the guarantee, and the price of cheap freight forwarder, often poor timeliness, the service level is not good.
The buyer wants to control the seller’s freight forwarder, which is very difficult because there is no contractual relationship between the two. The supplier’s supplier may not be your supplier, and it’s hard to control each other. Once there is an unexpected situation in the transportation process, such as the container needs to be transferred to another ship in a third port, it is very difficult for the buyer to control, and the time of arrival cannot be guaranteed.
Supply chain visibility has grown in importance since the COVID-19 pandemic, moving beyond insights into our internal data to the ready availability of connected data from manufacturer to final product delivery when needed.
Based on the above situations, the EXW clause can help buyers to prevent material shortage risk in the supply chain. Buyers can choose freight forwarders with strong digital capabilities to provide accurate information at every point of logistics operation. These excellent freight forwarders have a strong sense of service and will set up Key Account Managers for these Key customers, who are fully responsible for maintaining daily operation services.
Another positive sign of the EXW clause is to prevent the risk of material shortage in the supply chain. If the seller makes a weekly shipment, the buyer can get a sense of the supply pipeline from the weekly shipment quantity.
If the seller ships less than the quantity in the purchase order during the current week, the buyer can anticipate this in advance. If the door-to-door shipping cycle is six weeks, the buyer will be aware of the shortage six weeks before the shipment arrives.
The buyer can either ask the seller to make up for the shortage in the next shipment or adjust its own production plant. In short, the buyer has enough time to respond, rather than knowing the fact of material shortage after the arrival of the goods.
The buyer extends the supply chain upstream through EXW. If there is any abnormality in the whole supply chain, the buyer can grasp it the first time and take the lowest cost way to mitigate and offset these adverse factors.
This is the most positive effect under EXW. For the buyer, although the EXW clause bears the risk of the goods, it minimizes the risk of the overall supply chain.
When to use EXW Incoterm?
When the seller is unable to export or the buyer wishes to consolidate multiple shipments and export under a single name, most enterprises will choose to use the EXW agreement. Another example where buyers might want to choose EXW is if they ship by air express. Couriers often pick up goods from the seller’s location and incorporate all shipping and export procedures into their service scope. Therefore, buyers who ship goods by Courier may save some money by changing the terms to EXW.
In other cases, mature importers may establish offices in their exporting countries to facilitate the processing of their goods. However, unless the buyer has a valid reason for wanting to use EXW, most sellers experienced in international trade will refer to a different Incoterm.
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